Attached files
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
______________________________________
FORM 10-K
(Mark
One)
X
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ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
|
For
the fiscal year ended January 2,
2010
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OR
TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
||
For
the transition period from _______________ to
_______________
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Commission
File Number
001-13323
DARLING INTERNATIONAL
INC.
(Exact
name of registrant as specified in its charter)
Delaware
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36-2495346
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
of
incorporation or organization)
|
Identification
No.)
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251 O'Connor Ridge Blvd., Suite
300
|
|
Irving,
Texas
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75038
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(Address of
principal executive offices)
|
(Zip
Code)
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Registrant's
telephone number, including area code: (972) 717-0300
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each Class
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Name
of Exchange on Which Registered
|
|
Common
Stock $0.01 par value per share
|
New
York Stock Exchange ("NYSE")
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if
the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
Yes X No
____
Indicate by check mark
if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes ___ No
X
Indicate by check mark whether
the Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was 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 Website, 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 if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the Registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K.
X
Page
1
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
Act).
Yes
____ No X
As of the last day of the Registrant’s most recently completed second fiscal
quarter, the aggregate market value of the shares of common stock held by
nonaffiliates of the Registrant was approximately $524,387,000 based upon the
closing price of the common stock as reported on the NYSE on that day. (In
determining the market value of the Registrant’s common stock held by
non-affiliates, shares of common stock beneficially owned by directors, officers
and holders of more than 10% of the Registrant’s common stock have been
excluded. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.)
There were 82,226,690 shares of common
stock, $0.01 par value, outstanding at February 24, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
Selected designated portions of the
Registrant’s definitive Proxy Statement in connection with the Registrant’s 2010
Annual Meeting of stockholders are incorporated by reference into Part III of
this Annual Report.
Page
2
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 2, 2010
TABLE
OF CONTENTS
Page No.
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PART
I.
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||
Item
1.
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BUSINESS
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4
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Item
1A.
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RISK
FACTORS
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9
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Item
1B.
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UNRESOLVED
STAFF COMMENTS
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16
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Item
2.
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PROPERTIES
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16
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Item
3.
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LEGAL
PROCEEDINGS
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18
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Item
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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18
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PART
II.
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||
Item
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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19
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Item
6.
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SELECTED
FINANCIAL DATA
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22
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Item
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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24
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Item
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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48
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Item
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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50
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Item
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
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92
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Item
9A.
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CONTROLS
AND PROCEDURES
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92
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Item
9B.
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OTHER
INFORMATION
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93
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PART
III.
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||
Item
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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94
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Item
11.
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EXECUTIVE
COMPENSATION
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94
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Item
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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94
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Item
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
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94
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Item
14.
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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94
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PART
IV.
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||
Item
15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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95
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SIGNATURES
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99
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Page 3
PART
I
ITEM
1. BUSINESS
GENERAL
Founded by the Swift meat packing interests and the Darling family in 1882,
Darling International Inc. (“Darling”) was incorporated in Delaware in 1962
under the name “Darling-Delaware Company, Inc.” On December 28, 1993,
Darling changed its name from “Darling- Delaware Company, Inc.” to “Darling
International Inc.” The address of Darling’s principal executive
office is 251 O’Connor Ridge Boulevard, Suite 300, Irving, Texas, 75038, and its
telephone number at this address is (972) 717-0300.
Darling
is a leading provider of rendering, recycling and recovery solutions to the
nation’s food industry. Darling collects and recycles animal
by-products and used cooking oil from food service establishments and provides
grease trap cleaning services to many of the same establishments. In
fiscal 2006, Darling, through its wholly-owned subsidiary Darling National LLC,
a Delaware limited liability company (“Darling National”), completed the
acquisition of substantially all of the assets of National By-Products, LLC, an
Iowa limited liability company (“NBP”). Darling and its subsidiaries,
including Darling National, are collectively referred to herein as the
“Company”. The Company processes raw materials at 45 facilities
located throughout the United States into finished products such as protein
(primarily meat and bone meal, “MBM”), tallow (primarily bleachable fancy
tallow, “BFT”), yellow grease (“YG”) and hides. The Company sells
these products nationally and internationally, primarily to producers of
livestock feed, oleo-chemicals, bio-fuels, soaps, pet foods and leather goods
for use as ingredients in their products or for further processing.
Commencing
in 1998, as part of an overall strategy to better commit financial resources,
the Company’s operations were organized into two segments. These
are: 1) Rendering, the core business of turning inedible food
by-products from meat and poultry processors, butcher shops, grocery stores and
food service establishments into high quality feed ingredients and fats for
other industrial applications; and 2) Restaurant Services, a group focused on
growing the grease collection business and grease collection equipment sales
while expanding the line of services, which includes grease trap servicing, and
the National Service Center (“NSC”), offered to food service establishments and
food processors. The NSC schedules services such as fat and bone and
used cooking oil collection as well as trap cleaning for contracted customers
using the Company’s resources or third party providers. For the
financial results of the Company’s business segments, see Note 18 of Notes to
Consolidated Financial Statements.
The Company’s net external sales from
continuing operations by operating segment were as follows (in
thousands):
Fiscal
2009
|
Fiscal
2008
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Fiscal
2007
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Continuing
operations:
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|||||||||||
Rendering
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$458,573
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76.7%
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$585,108
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72.5%
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$464,468
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72.0%
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|||||
Restaurant
Services
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139,233
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23.3
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222,384
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27.5
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180,845
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28.0
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|||||
Total
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$597,806
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100.0%
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$807,492
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100.0%
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$645,313
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100.0%
|
PROCESSING
OPERATIONS
The Company
creates finished products primarily through the drying, grinding, separating and
blending of its various raw materials. The process starts with the
collection of animal processing by-products (fat, bones, feathers and offal)
from meat processors, grocery stores, butcher shops, meat markets and food
service establishments, as well as used cooking oil from food service
establishments and grocery stores.
The animal processing by-products are
ground and heated to extract water and separate oils from animal tissue as well
as to make the material suitable as an ingredient for animal
feed. Protein is separated from the cooked material by pressing the
material, then grinding and sifting it through screens. The separated
tallow is centrifuged and/or refined for purity. The primary finished
products derived from the processing of animal by-products are tallow and
protein. Other by-products include feather meal and blood
meal. Used cooking oil from food service establishments is processed
under a separate procedure that involves heat processing and settling, as well
as refining, resulting in derived yellow grease, feed-grade animal fat or
oleo-chemical feedstocks.
Page 4
PURCHASE
AND COLLECTION OF RAW MATERIALS
The Company operates a fleet of approximately1,000 trucks and tractor-trailers
to collect raw materials from approximately 110,000 food service establishments,
butcher shops, grocery stores and independent meat and poultry
processors. The raw materials collected are manufactured into the
finished products sold by the Company. The Company replaces or
upgrades its vehicle fleet as needed to maintain efficient
operations.
Rendering
materials are collected in one of two manners. Certain large
suppliers, such as large meat processors and poultry processors, are furnished
with bulk trailers in which the raw material is loaded. The Company
transports these trailers directly to a processing facility. Certain
of the Company’s rendering facilities are highly dependent on one or a few
suppliers. Should any of these suppliers choose alternate methods of
disposal, cease their operations, have their operations interrupted by casualty
or otherwise cease using the Company’s collection services, these operating
facilities would be materially and adversely affected. The Company
provides the remaining suppliers, primarily grocery stores and butcher shops,
with containers in which to deposit the raw material. The containers
are picked up by or emptied into Company trucks on a periodic
basis. The type and frequency of service is determined by individual
supplier requirements, the volume of raw material generated by the supplier,
supplier location and weather, among other factors.
Used cooking
oil from food service establishments is placed in various sizes and types of
containers which are supplied by the Company. In some instances,
these containers are loaded directly onto the trucks, while in other instances
the oil is pumped through a vacuum hose into the truck. The Company
also sells a container for used cooking oil collection to food service
establishments called CleanStar®,
which is a proprietary self-contained collection system that is housed either
inside or outside the establishment, with the used cooking oil pumped directly
into collection vehicles via an outside valve. The frequency of all
forms of raw material collection is determined by the volume of oil generated by
the food service establishment.
The raw
materials collected by the Company are transported either directly to a
processing plant or to a transfer station where materials from several
collection routes are loaded into trailers and transported to a processing
plant. Collections of animal processing by-products generally are
made during the day, and materials are delivered to plants for processing within
24 hours of collection to deter spoilage. Collection of used cooking
oil can be made at any time of the day or night, depending on supplier
preference; these materials may be held for longer periods of time before
processing. Depending on market conditions, the Company either
charges a collection fee to offset a portion of the expense incurred in
collecting raw material or will pay for the raw material.
During the
2009 fiscal year, the Company’s largest single supplier accounted for
approximately 5% of the total raw material processed by the Company, and the 10
largest raw materials suppliers accounted for approximately 25% of the total raw
material processed by the Company. For a discussion of the Company’s
competition for raw materials, see “Competition.” Many of the
Company’s suppliers supply raw material under supplier
agreements. While the Company does not anticipate problems in the
availability or supply of raw material in the future, a significant decrease in
raw material volume could materially and adversely affect the Company’s business
and results of operations.
RAW
MATERIALS PRICING
The Company
has two primary pricing arrangements with its raw materials
suppliers. Approximately 53% of the Company's annual volume of raw
materials is acquired on a "formula" basis. Under a formula
arrangement, the charge or credit for raw materials is tied to published
finished product commodity prices after deducting a fixed processing
fee. The Company acquires the remaining annual volume of raw material
under "non-formula" arrangements whereby suppliers are either paid a fixed
price, are not paid, or are charged a collection fee, depending on various
economic and competitive factors.
Page 5
The credit received or amount charged
for raw material under both formula and non-formula arrangements is based on
various factors, including the type of raw materials, the expected value of the
finished product to be produced, the anticipated yields, the volume of material
generated by the supplier and processing and transportation
costs. Competition among processors to procure raw materials also
affects the price paid for raw materials. See "Competition."
Formula prices are generally adjusted
on a weekly, monthly or quarterly basis while non-formula prices or charges are
adjusted as needed to respond to changes in finished product prices or related
operating costs.
FINISHED
PRODUCTS
The finished
products that result from processing of animal by-products are oils, primarily
BFT and YG; MBM, a protein; and hides. Oils are used as ingredients
in the production of pet food, animal feed, soaps and as a substitute for
traditional fuels. Oleo-chemical producers use these oils as
feedstocks to produce specialty ingredients used in paint, rubber, paper,
concrete, plastics and a variety of other consumer and industrial
products. MBM is used primarily as a high protein additive in pet
food and animal feed. Hides are sold to leather distributors and
manufacturers for the production of leather goods.
Predominantly
all of the Company's finished products are commodities that compete with other
commodities such as corn, soybean oil and soybean meal. While the
Company's finished products are generally sold at prices prevailing at the time
of sale, the Company’s ability to deliver large quantities of finished products
from multiple locations and to coordinate sales from a central location enables
the Company to occasionally receive a premium over the then-prevailing market
price.
MARKETING,
SALES AND DISTRIBUTION OF FINISHED PRODUCTS
The Company
sells its finished products worldwide. Commodity sales are primarily
managed through the Company's commodity trading department which is
headquartered in Irving, Texas. The Company also maintains a sales
office in Des Moines, Iowa for the sale and distribution of selected
products. This sales force is in contact with several hundred
customers daily and coordinates the sale and assists in the distribution of most
finished products produced at the Company's processing plants. The
Company sells its finished products internationally through commodities brokers,
Company agents and directly to customers, in various
countries.
The Company
has no material foreign operations, but exports a portion of its products to
customers in various foreign countries or regions including Asia, the European
Union, the Pacific Rim, North Africa, Mexico and South America. Total
export sales were $70.8 million, $132.2 million and $171.6 million for the years
ended January 2, 2010, January 3, 2009 and December 29, 2007,
respectively. The level of export sales varies from year to year
depending on the relative strength of domestic versus overseas
markets. The Company obtains payment protection for most of its
foreign sales by requiring payment before shipment or by requiring bank letters
of credit or guarantees of payment from U.S. government agencies. The
Company ordinarily is paid for its products in U.S. dollars and has not
experienced any material currency translation losses or any material foreign
exchange control difficulties. See Note 18 of Notes to Consolidated
Financial Statements for a breakdown of the Company’s sales by domestic and
foreign customers.
Following
diagnosis of the first U.S. case of bovine spongiform encephalopathy (“BSE”) on
December 23, 2003, many countries banned imports of U.S.-produced
beef and beef products, including MBM and initially BFT, though this initial ban
on tallow was relaxed to permit imports of U.S.-produced tallow with less than
0.15% impurities. As of February 24, 2010, most foreign markets that
were closed to U.S. beef following the discovery of the first U.S. case of BSE
had been reopened to U.S beef, although some countries only accept boneless beef
or beef from cattle less than 30 months of age. Japan is more
restrictive and only permits imports of U.S. beef from cattle that are age
verified to be 20 months of age or younger at slaughter. Export
markets for MBM containing beef material produced in the U.S. have remained
closed with the exception of the Indonesia market.
Page
6
The Company’s management monitors
market conditions and prices for its finished products on a daily
basis. If market conditions or prices were to significantly change,
the Company’s management would evaluate and implement any measures that it may
deem necessary to respond to the change in market conditions. For
larger formula-based pricing suppliers, the indexing of finished product price
to raw material cost effectively fixes the gross margin on finished product
sales at a stable level, providing some protection to the Company from price
declines.
Finished
products produced by the Company are shipped primarily FOB plant by truck and
rail from the Company's plants shortly following production. While
there are some temporary inventory accumulations at various port locations for
export shipments, inventories rarely exceed three weeks’ production and,
therefore, the Company uses limited working capital to carry inventories and
reduces its exposure to fluctuations in commodity prices. Other
factors that influence competition, markets and the prices that the Company
receives for its finished products include the quality of the Company's finished
products, consumer health consciousness, worldwide credit conditions and U.S.
government foreign aid. From time to time, the Company enters into
arrangements with its suppliers of raw materials pursuant to which these
suppliers buy back the Company’s finished products.
COMPETITION
Management of
the Company believes that the most competitive aspect of the business is the
procurement of raw materials rather than the sale of finished
products. During the last ten plus years, pronounced consolidation
within the meat processing industry has resulted in bigger and more efficient
slaughtering operations, the majority of which utilize “captive” processors
(rendering operations integrated with the meat or poultry packing
operation). Simultaneously, the number of small meat processors,
which have historically been a dependable source of supply for non-captive
processors, has decreased significantly. The slaughter rates in the
meat processing industry have declined, and as a result the availability,
quantity and quality of raw materials available to the independent processors
from these sources have all decreased. These factors have been
offset, in part, however, by increasing environmental
consciousness. The need for food service establishments to comply
with environmental regulations concerning the proper disposal of used restaurant
cooking oil should continue to provide a growth area for this raw material
source. The rendering and restaurant services industries are highly
fragmented and very competitive. The Company competes with other
rendering and restaurant services businesses and alternative methods of disposal
of animal processing by-products and used restaurant cooking oil provided by
trash haulers, waste management companies and bio-diesel companies, as well as
the alternative of illegal disposal. Major competitors for the
collection of raw material include: Baker Commodities in the West and
Griffin Industries in Texas and the Southeast. Each of these
businesses competes in both the Rendering and Restaurant Services
segments. Another major competitor in the restaurant services
business is Restaurant Technologies, Inc.
In marketing
its finished products domestically and abroad, the Company faces competition
from other processors and from producers of other suitable
commodities. Tallows and greases are, in certain instances,
substitutes for soybean oil and palm stearine, while MBM is a substitute for
soybean meal. Consequently, the prices of BFT, YG and MBM correlate
with these substitute commodities. The markets for finished products
are impacted mainly by the worldwide supply of and demand for fats, oils,
proteins and grains.
SEASONALITY
The amount of
raw materials made available to the Company by its suppliers is relatively
stable on a weekly basis except for those weeks which include major holidays,
during which the availability of raw materials declines because major meat and
poultry processors are not operating. Weather is also a
factor. Extremely warm weather adversely affects the ability of the
Company to make higher quality products because the raw material deteriorates
more rapidly than in cooler weather, while extremely cold weather, in certain
instances, can hinder the collection of raw materials. Weather can
vary significantly from one year to the next and may impact comparability of
operating results of the Company between periods.
Page 7
INTELLECTUAL
PROPERTY
The Company
maintains valuable trademarks, service marks, copyrights, trade names, trade
secrets, proprietary technologies and similar intellectual property, and
considers its intellectual property to be of material value. The
Company has registered or applied for registration of certain of its
intellectual property, including the tricolor triangle used in the Company’s
signage and logos and the names "Darling," "Darling Restaurant Services" and
"CleanStar." The Company’s policy generally is to pursue intellectual
property protection considered necessary or advisable.
EMPLOYEES
AND LABOR RELATIONS
As of January
2, 2010, the Company employed approximately 1,820 persons
full-time. Approximately 45% of the total number of employees are
covered by collective bargaining agreements; however, the Company has no
national or multi-plant union contracts. Management believes that the
Company’s relations with its employees and their representatives are
good. There can be no assurance, however, that new agreements will be
reached without union action or will be on terms satisfactory to the
Company.
REGULATIONS
The Company is subject to the rules and
regulations of various federal, state and local governmental
agencies. Material rules and regulations and the applicable agencies
include:
·
|
The Food and Drug
Administration (“FDA”), which regulates food and feed
safety. Effective August 1997, the FDA promulgated a rule
prohibiting the use of mammalian proteins, with some exceptions, in feeds
for cattle, sheep and other ruminant animals (21 CFR 589.2000, referred to
herein as the “BSE Feed Rule”) to prevent further spread of BSE, commonly
referred to as “mad cow disease.” On April 25, 2008, the FDA 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. These
changes became effective on October 26, 2009. Company
management believes the Company is in compliance with the provisions of
these rules.
|
See Item
1A “Risk Factors – The Company’s business may be affected by the impact of BSE
and other food safety issues,” for more information regarding certain FDA rules
that affect the Company’s business, including changes to the BSE Feed
Rule.
·
|
The
United States Department
of Agriculture (“USDA”), which regulates collection and production
methods. Within the USDA, two agencies exercise direct
regulatory oversight of the Company’s
activities:
|
|
–
Animal and Plant Health
Inspection Service (“APHIS”) certifies facilities and claims made
for exported materials; establishes and enforces import requirements for
live animals and animal products,
and
|
|
–
Food Safety Inspection
Service (“FSIS”) regulates sanitation and food safety
programs.
|
On
December 30, 2003, the Secretary of Agriculture announced new beef
slaughter/meat processing regulations to assure consumers of the safety of the
meat supply. These regulations prohibit non-ambulatory animals from
entering the food chain, require removal of specific risk materials at slaughter
and prohibit carcasses from cattle tested for BSE from entering the food chain
until the animals are shown negative for BSE.
On
November 19, 2007, APHIS implemented revised import regulations that allowed
Canadian cattle over 30 months of age and born after March 1, 1999 and bovine
products derived from such cattle to be imported into the U.S. for any use.
Imports of Canadian cattle younger than 30 months of age have been allowed since
March 2005. Imports of SRM from Canadian born cattle slaughtered in Canada are
not permitted.
·
|
The
Environmental Protection
Agency (“EPA”), which regulates air and water discharge
requirements, as well as local and state agencies governing air and water
discharge.
|
Page 8
·
|
State Departments of
Agriculture, which regulate animal by-product collection and
transportation procedures and animal feed
quality.
|
·
|
The
United States Department
of Transportation (“USDOT”), as well as local and state agencies,
which regulate the operation of the Company’s commercial
vehicles.
|
·
|
The
Securities and Exchange
Commission (“SEC”), which regulates securities and information
required in annual and quarterly reports filed by publicly traded
companies.
|
These
material rules and regulations and other rules and regulations promulgated by
other agencies may influence the Company’s operating results at one or more
facilities.
AVAILABLE
INFORMATION
Under the
Securities Exchange Act of 1934, the Company is required to file annual,
quarterly and special reports, proxy statements and other information with the
SEC, which can be read and/or copies made at the SEC’s Public Reference Room at
100 F Street N.E., Room 1580, Washington D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information about the Public Reference
Room. The SEC maintains a web site at http://www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The Company
files electronically with the SEC.
The Company
makes available, free of charge, through its investor relations web site, its
reports on Forms 10-K,
10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable
after they are filed with, or
furnished to, the SEC pursuant to Section 13(a) or 15(d) of the Exchange
Act.
The Company’s
website is http://www.darlingii.com
and the address for the Company’s investor relations web site is http://www.darlingii.com/investors.aspx.
ITEM
1A. RISK FACTORS
Any
investment in the Company will be subject to risks inherent to the Company’s
business. Before making an investment decision in the Company, you
should carefully consider the risks described below together with all of the
other information included in or incorporated by reference into this
report. If any of the events described in the following risk factors
actually occurs, the Company’s business, financial condition, prospects or
results of operations could be materially and adversely affected. If
any of these events occurs, the trading price of the Company’s securities could
decline and you may lose all or part of your investment.
The
Company’s results of operations and cash flow may be reduced by decreases in the
market price of its products.
The Company’s
finished products are commodities, the prices of which are quoted on established
commodity markets. Accordingly, the Company’s results of operations
will be affected by fluctuations in the prevailing market prices of these
finished products. A significant decrease in the market price of the
Company’s products would have a material adverse effect on the Company’s results
of operations and cash flow. In addition, the Company’s principal
products are not future exchange trading commodities.
Page 9
The
most competitive aspect of the Company’s business is the procurement of raw
materials.
The Company’s
management believes that the most competitive aspect of the Company’s business
is the procurement of raw materials rather than the sale of finished
products. Pronounced consolidation within the meat packing industry
has resulted in bigger and more efficient slaughtering operations, the majority
of which utilize “captive” processors. Simultaneously, the number of
small meat processors, which have historically been a dependable source of
supply for non-captive processors, such as the Company, has decreased
significantly. The slaughter rates in the meat processing industry
have declined, and as a result the availability, quantity and quality of raw
materials available to the independent processors from these sources have all
decreased. In addition, the Company has seen an increase in the use
of restaurant grease in the production of bio-diesel. Furthermore,
the general performance of the U.S. economy, declining U.S. consumer confidence
and the inability of consumers and companies to obtain credit due to the current
lack of liquidity in the financial markets, could have a negative impact on the
Company’s raw material volume, such as through the forced closure of raw
material suppliers. A significant decrease in available raw materials
or a closure of a raw material supplier could materially and adversely affect
the Company’s business and results of operations including the carrying value of
the Company’s assets.
The rendering
and restaurant services industry is highly fragmented and very
competitive. The Company competes with other rendering and restaurant
services businesses and alternative methods of disposal of animal processing
by-products and used restaurant cooking oil provided by trash haulers, waste
management companies and bio-diesel companies, as well as the alternative of
illegal disposal. In addition, restaurants experience theft of used
cooking oil. Depending on market conditions, the Company either
charges a collection fee to offset a portion of the cost incurred in collecting
raw material or will pay for the raw material. To the extent
suppliers of raw materials look to alternate methods of disposal, whether as a
result of the Company’s collection fees being deemed too expensive or otherwise,
the Company’s raw material supply will decrease and the Company’s collection fee
revenues will decrease, which could materially and adversely affect the
Company’s business and results of operations.
The
Company is highly dependent on natural gas and diesel fuel.
The Company’s
operations are highly dependent on the use of natural gas and diesel
fuel. The Company consumes significant volumes of natural gas to
operate boilers in its plants to generate steam to heat raw
material. Natural gas prices represent a significant cost of factory
operation included in cost of sales. The Company also consumes
significant volumes of diesel fuel to operate its fleet of tractors and trucks
used to collect raw material. Diesel fuel prices represent a
significant component of cost of collection expenses included in cost of
sales. The Company continually manages these
costs. Although prices for natural gas and diesel fuel remained
relatively low during fiscal 2009 as compared to recent history, these prices
can be volatile and there can be no assurance that these prices will not
increase in the near future, thereby representing an ongoing challenge to the
Company’s operating results for future periods. A material increase
in energy prices for natural gas and diesel fuel over a sustained period of time
could materially adversely affect the Company’s business, financial condition
and results of operations. See Item 7, “Management’s Discussion and
Analysis,” for a recent history of natural gas pricing.
Certain
of the Company’s 45 operating facilities are highly dependent upon a few
suppliers.
Certain of
the Company’s rendering facilities are highly dependent on one or a few
suppliers. Should any of these suppliers choose alternate methods of
disposal, cease their operations, have their operations interrupted by casualty
or otherwise cease using the Company’s collection services, these operating
facilities may be materially and adversely affected, which could materially and
adversely affect the Company’s business, earnings, balance sheet and/or cash
flows.
The
Company’s business may be affected by worldwide government energy
policies.
Pursuant to
the requirements established by the Energy Independence and Security Act of 2007
on February 3, 2010 the EPA finalized regulations for the National Renewable
Fuel Standard Program (RFS2). The regulation mandates the domestic
use of biomass-based diesel (biodiesel or renewable diesel) of 1.15 billion
gallons in 2010, 0.8 billion gallons in 2011 and 1.0 billion gallons in
2012. Beyond 2012 the regulation requires a minimum of 1.0 billion
gallons of biomass-based diesel for each year thru 2022, which amount is subject
to increase by the EPA Secretary. Biomass-based diesel also qualifies
to fulfill the non-specified portion of the advanced biofuel
requirement. In order to qualify as a “renewable fuel” each type of
fuel from each type of feedstock is required to lower greenhouse gas emissions
(GHG) by levels specified in the regulation. The EPA has determined
that biofuels (either biodiesel or renewable diesel) produced from waste oils,
fats and greases result in an 86% reduction in GHG emissions exceeding the 50%
requirement established by the regulation. Prices for the Company’s
finished products may be impacted by worldwide government policies relating to
renewable fuels and greenhouse gas emissions. Programs like RFS2 and
tax credits for biofuels both in the U.S. and abroad may positively impact the
demand for the Company’s finished products. Accordingly, changes to
or discontinuing of these programs could have a negative impact on the Company’s
business and results of operations.
Page 10
The
Company may incur material costs and liabilities in complying with government
regulations.
The Company is subject to the rules and
regulations of various federal, state and local governmental
agencies. Material rules and regulations and the applicable agencies
include:
·
|
The
FDA, which regulates food and feed
safety;
|
·
|
The
USDA, including its agencies APHIS and FSIS, which regulates collection
and production methods;
|
·
|
The
EPA, which regulates air and water discharge requirements, as well as
local and state agencies governing air and water
discharge;
|
·
|
State
Departments of Agriculture, which regulate animal by-product collection
and transportation procedures and animal feed
quality;
|
·
|
The
USDOT, as well as local and state transportation agencies, which regulate
the operation of the Company’s commercial vehicles;
and
|
·
|
The
SEC, which regulates securities and information required in annual and
quarterly reports filed by publicly traded
companies.
|
The applicable rules and regulations promulgated by these agencies may influence
the Company’s operating results at one or more facilities. Furthermore, the loss
of or failure to obtain necessary federal, state or local permits and
registrations at one or more of the Company’s facilities could halt or curtail
operations at impacted facilities, which could adversely affect the Company’s
operating results. The Company’s failure to comply with applicable
rules and regulations could subject it to: 1) administrative penalties and
injunctive relief; 2) civil remedies, including fines, injunctions
and product recalls; and 3) adverse publicity. There can
be no assurance that the Company will not incur material costs and liabilities
in connection with these rules and regulations.
The
Company is and may continue to be adversely affected by the ongoing world
financial crisis.
The continuing turmoil existing in
world financial, credit, commodities and stock markets may have a significant
negative effect on the Company’s business. The Company’s forward view
into the possible effects of this turmoil is limited. Among other
things, the Company may be adversely impacted because its domestic and
international customers and suppliers may not be able to access sufficient
capital to continue to operate their businesses, or to operate them at prior
levels. A decline in consumer confidence or changing patterns in the
availability and use of disposable income by consumers can negatively affect
both the Company’s suppliers and customers. Declining discretionary consumer
spending or the loss or impairment of a meaningful number of the Company’s
suppliers or customers could lead to a dislocation in either raw material
availability or customer demand. Tightened credit supply could
negatively affect the Company’s customers’ ability to pay for the Company’s
products on a timely basis or at all, and could result in a requirement for
additional bad debt reserves. Although many of the Company’s customer
contracts are formula-based, continued volatility in the commodities markets
could negatively impact the Company’s revenues and overall
profits. Counter party risk on finished product sales can also impact
revenue and operating profits when customers either are unable to obtain credit
or refuse to take delivery of finished product due to market price
declines. If the existing financial and credit crisis negatively
impacts a lender in the Company’s credit facility, the ability of that lender to
fund its portion of the commitment could be impaired. The inability
of a lender to fund its committed portion of the facility does not excuse other
lenders from funding their portions of the commitment.
Page 11
Multi-employer
defined benefit pension plans to which the Company contributes may be
under-funded.
The
Company contributes to several multi-employer defined benefit pension plans
based on obligations arising under collective bargaining agreements covering
union-represented employees. The Company does not manage these
multi-employer plans. Based upon the most currently available
information from plan administrators, some of which information is more than a
year old, the Company believes that some of these multi-employer plans are
under-funded due partially to a decline in the value of the assets supporting
these plans, a reduction in the number of actively participating members for
whom employer contributions are required and the level of benefits provided by
the plans. In addition, the Pension Protection Act, enacted in August
2006, went into effect in January 2008 and requires under-funded pension plans
to improve their funding ratios within prescribed intervals based on the level
of their under-funding. As a result, the Company’s required
contributions to these plans may increase in the
future. Furthermore, under current law regarding multi-employer
defined benefit plans, any of a plan’s termination, the Company’s voluntary
withdrawal from any under-funded plan, or the mass withdrawal of all
contributing employers from any under-funded multi-employer defined benefit
plan, would require the Company to make payments to the plan for the Company’s
proportionate share of the multi-employer plan’s unfunded vested
liabilities. Moreover, if a multi-employer defined benefit plan fails
to satisfy certain minimum funding requirements, the Internal Revenue Service
may impose a nondeductible excise tax of 5% on the amount of the accumulated
funding deficiency for those employers contributing to the
fund. Requirements to pay increased contributions, withdrawal
liability and excise taxes could negatively impact the Company’s liquidity and
results of operations.
The
Company’s business may be affected by the impact of BSE and other food safety
issues.
Effective
August 1997, the FDA promulgated the BSE Feed Rule in an effort to prevent the
spread of BSE. Detection of the first case of BSE in the U.S. in December 2003
resulted in additional U.S. government regulations, finished product export
restrictions by foreign governments, market price fluctuations for the Company’s
finished products and reduced demand for beef and beef products by
consumers. Even though the export markets for U.S. beef have been
significantly re-opened, most of these markets remain closed to MBM derived from
U.S. beef. Continued concern about BSE in the U.S. may result in
additional regulatory and market related challenges that may affect the
Company’s operations or increase the Company’s operating costs.
The
following are recent developments and recent regulatory history with respect to
BSE in the U.S.:
·
|
Enforcement
of the rule “Substances
Prohibited From Use in Animal Food or Feed” (the “Final BSE Rule”),
which FDA published on April 25, 2008, began on October 26,
2009. The Final BSE Rule amended 21 CFR 589.2000 and added 21
CFR 589.2001 to prohibit the use of certain cattle materials in all feed
and food for animals. Such prohibited cattle materials include:
(1) the entire carcass of cattle positive for BSE; (2) brain and spinal
cord from cattle aged 30 months and older; (3) the entire carcass of
cattle aged 30 months and older that were not inspected and passed for
human consumption and from which the brain and spinal cord were not or
cannot be “effectively” removed; and (4) tallow derived from the listed
prohibited cattle materials unless such tallow contains no more than 0.15%
insoluble impurities. The Final BSE Rule also prohibits the use of tallow
derived from any cattle materials in feed for cattle and other ruminant
animals, if such tallow contains more than 0.15% insoluble
impurities. Except for these new restrictions on tallow,
materials derived from cattle younger than 30 months of age and not
positive for BSE are not affected by the Final BSE Rule and may still be
used in feed and food for animals pursuant to 21 CFR
589.2000. The insoluble impurity restrictions for tallow,
however, do not affect its use in feed for poultry, pigs and other
non-ruminant animals, unless such tallow was derived from the cattle
materials prohibited by the Final BSE Rule. After completing
previously published drafts, the FDA finalized its 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 to be compliant with the Final BSE Rule at all of its
operations. Based on the foregoing, while the Company
acknowledges that unanticipated issues may arise as the FDA implements the
Final BSE Rule and conducts compliance inspections, 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.
|
Page 12
The
occurrence of BSE in the U.S. may result in additional finished product export
restrictions by foreign governments, market price fluctuations for the Company’s
finished products and/or reduced demand for beef and beef products by
consumers. Legislative and regulatory efforts to address BSE concerns
and preempt adulterations of feed ingredients, may result in additional U.S.
government regulations and/or increase the Company’s operating
costs.
The
following are recent developments with respect to human food, pet food and
animal feed safety:
·
|
The
Food and Drug Administration Amendments Act of 2007 (“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, which was implemented on
September 8, 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”. Stakeholder comments and questions
about the Reportable Food Registry that were submitted to the docket or
during public meetings were incorporated into a second draft guidance,
which was published on September 8, 2009. In this most recent
draft 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 its guidance and clarifies certain interpretive and
enforcement issues pertaining to the treatment of animal feed and pet food
under the Act. As of February 24, 2010, the FDA’s guidance for
compliance to the Reportable Food Registry had not been
finalized. 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 strategies the FDA proposes to use for improving
food and animal feed safety and the additional resources and authorities
that, in the FDA’s opinion, are needed to implement the 2007 Plan for
imported and domestically produced ingredients and
products. 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 February 24,
2010.
|
Restrictions
imposed by the Company’s credit agreement and future debt agreements may limit
its ability to finance future operations or capital needs or engage in other
business activities that may be in the Company’s interest.
The Company’s credit agreement
currently, and future debt agreements may, restrict its ability to:
·
|
incur
additional indebtedness;
|
·
|
pay
dividends and make other
distributions;
|
·
|
make
restricted payments;
|
·
|
create
liens;
|
·
|
merge,
consolidate or acquire other
businesses;
|
·
|
sell
or otherwise dispose of assets;
|
·
|
make
investments, loans and advances;
|
·
|
guarantee
indebtedness or other obligations;
|
·
|
enter
into operating leases or sale-leaseback, synthetic leases, or similar
transactions;
|
·
|
make
changes to its capital structure;
and
|
·
|
engage
in new lines of business unrelated to the Company’s current
businesses.
|
Page 13
These terms may negatively impact the Company’s ability to finance future
operations, implement its business strategy, fund its capital needs or engage in
other business activities that may be in its interest. In addition,
the Company’s credit agreement requires, and future indebtedness may require,
the Company to maintain compliance with specified financial
ratios. Although the Company is currently in compliance with the
financial ratios and does not plan on engaging in transactions that may cause
the Company not to be in compliance with the ratios, its ability to comply with
these ratios may be affected by events beyond its control, including the risks
described in the other risk factors and elsewhere in this report.
A breach of
any restrictive covenant or the Company’s inability to comply with any required
financial ratio could result in a default under the credit
agreement. In the event of a default under the credit agreement, the
lenders under the credit agreement may elect to declare all borrowings
outstanding, together with accrued and unpaid interest and other fees, to be
immediately due and payable.
The lenders
will also have the right in these circumstances to terminate any commitments
they have to provide further financing, including under the revolving credit
facility.
If the
Company is unable to repay these borrowings when due, whether as a result of
acceleration of the debt or otherwise, the lenders under the credit agreement
will have the right to proceed against the collateral, which consists of
substantially all of the Company’s assets, including real property and
cash. If the indebtedness under the credit agreement were
accelerated, the Company’s assets may be insufficient to repay this indebtedness
in full under those circumstances. Any future credit agreements or
other agreement relating to the Company’s indebtedness to which the Company may
become a party may include the covenants described above and other restrictive
covenants.
The
Company’s business may be negatively impacted by the occurrence of any disease
correctly or incorrectly linked to animals.
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. Another such animal disease is avian influenza
(“H5N1”), or Bird Flu, which is a highly contagious disease affecting chickens
and other poultry species throughout Asia and Europe. The H5N1 strain
is highly pathogenic, which has caused concern that a pandemic could occur if
the disease migrates from birds to humans. This highly pathogenic
strain has not been detected in North or South America as of February 24, 2010,
but low pathogenic strains that are not a threat to human health have occurred
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
Company’s success is dependent on the Company’s key personnel.
The Company’s
success depends to a significant extent upon a number of key employees,
including members of senior management. The loss of the services of
one or more of these key employees could have a material adverse effect on the
Company’s results of operations and prospects. The Company believes
that its future success will depend in part on its ability to attract, motivate
and retain skilled technical, managerial, marketing and sales
personnel. Competition for these types of skilled personnel is
intense and there can be no assurance that the Company will be successful in
attracting, motivating and retaining key personnel. The failure to
hire and retain these personnel could materially adversely affect the Company’s
business and results of operations.
Page 14
In
certain markets the Company is highly dependent upon the continued and
uninterrupted operation of a single operating facility.
Darling’s facilities are subject to
various federal, state and local environmental and other permitting
requirements, depending on their locations. Periodically, these
permits may be reviewed and subject to amendment or
withdrawal. Applications for an extension or renewal of various
permits may be subject to challenge by community and environmental activists and
others. In the event of a casualty, condemnation, work stoppage,
permitting withdrawal or delay or other unscheduled shutdown involving one of
the Company’s facilities, in a majority of the Company’s markets the Company
would utilize a nearby operating facility to continue to serve its customers in
the affected market. In certain markets, however, the Company does
not have alternate operating facilities. In the event of a casualty,
condemnation, work stoppage, permitting withdrawal or delay or other unscheduled
shutdown in these markets, the Company may experience an interruption in its
ability to service its customers and to procure raw materials. This
may materially and adversely affect the Company’s business and results of
operations in those markets. In addition, after an operating facility
affected by a casualty, condemnation, work stoppage, permitting withdrawal or
delay or other unscheduled shutdown is restored, there could be no assurance
that customers who in the interim choose to use alternative disposal services
would return to use the Company’s services.
The
market price of the Company’s common stock could be volatile.
The market
price of the Company’s common stock has been subject to volatility and, in the
future, the market price of the Company’s common stock could fluctuate widely in
response to numerous factors, many of which are beyond the Company’s
control. These factors include, among other things, fluctuations in
commodities prices, actual or anticipated variations in the Company’s operating
results, earnings releases by the Company, changes in financial estimates by
securities analysts, sales of substantial amounts of the Company’s common stock,
performance of joint venture investments, market conditions in the industry and
the general state of the securities markets, governmental legislation or
regulation, currency and exchange rate fluctuations, as well as general economic
and market conditions, such as recessions.
The
Company’s ability to pay any dividends on its common stock may be
limited.
The Company
has not paid any dividends on its common stock since January 3,
1989. The Company’s current financing arrangements permit the Company
to pay cash dividends on its common stock within limitations defined in its
credit agreement. Any future determination to pay cash dividends on
the Company’s common stock will be at the discretion of the Company’s board of
directors and will be based upon the Company’s financial condition, operating
results, capital requirements, plans for expansion, restrictions imposed by any
financing arrangements, and any other factors that the board of directors
determines are relevant. Furthermore, the Company’s ability to pay
any cash or non-cash dividends on its common stock is subject to applicable
provisions of state law and to the terms of its credit
agreement.
The
Company may issue additional common stock or preferred stock, which could dilute
shareholder interests.
The Company’s
certificate of incorporation, as amended, does not limit the issuance of
additional common stock or the issuance of preferred stock. As of
February 24, 2010, the Company has available for issuance 17,370,030 authorized
but unissued shares of common stock and 1,000,000 authorized but unissued shares
of preferred stock that may be issued in series.
Page 15
The
Company could incur a material weakness in its internal control over financial
reporting that requires remediation.
The
Company’s disclosure controls and procedures were deemed to be effective in
fiscal 2009. However, any future failures by the Company to maintain
the effectiveness of its disclosure controls and procedures, including its
internal control over financial reporting, could subject the Company to a loss
of public confidence in its internal control over financial reporting and in the
integrity of the Company’s public filings and financial statements and could
harm the Company’s operating results or cause the Company to fail to timely meet
its regulatory reporting obligations. Consequences of a material
weakness such as those listed in the foregoing sentence could have a negative
effect on the trading price of the Company’s stock.
Terrorist
attacks or acts of war may cause damage or disruption to the Company and its
employees, facilities, information systems, security systems, suppliers and
customers, which could significantly impact the Company’s net sales, costs and
expenses and financial condition.
Terrorist
attacks, such as those that occurred on September 11, 2001, have contributed to
economic instability in the U.S., and further acts of terrorism, bioterrorism,
violence or war could affect the markets in which the Company operates, the
Company’s business operations, the Company’s expectations and other
forward-looking statements contained or incorporated in this report. The
threat of terrorist attacks in the U.S. since September 11, 2001 continues to
create many economic and political uncertainties. The potential for future
terrorist attacks, the U.S. and international responses to terrorist attacks and
other acts of war or hostility, including the ongoing war in Iraq, may cause
greater uncertainty and cause the Company’s business to suffer in ways that
cannot currently be predicted. Events such as those referred to above could
cause or contribute to a general decline in investment valuations, which in turn
could reduce the market value of shareholder investments. In addition,
terrorist attacks, particularly acts of bioterrorism, that directly impact the
Company’s facilities or those of the Company’s suppliers or customers could have
an impact on the Company’s sales, supply chain, production capability and costs
and the Company’s ability to deliver its finished products.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
The Company’s
corporate headquarters is located at 251 O’Connor Ridge Boulevard, Suite 300,
Irving, Texas, in an office facility where the Company leases approximately
27,000 square feet.
As of January
2, 2010, the Company’s 45 operating facilities consisted of 25 full service
rendering plants, eight yellow grease/trap plants, four blending plants, three
trap plants, one edible meat plant, one technical tallow plant, one hide plant,
one pet food plant and one specialty rendering plant. All of these
facilities are owned except for six leased facilities, one of which was under
lease when acquired, but has subsequently been purchased prior to the filing of
this report on Form 10-K. In addition, the Company owns or leases 36
transfer stations in the U.S., some of which also process yellow grease and
trap. These transfer stations serve as collection points for routing
raw material to the processing plants set forth below. Some locations
service a single business segment while others service both business
segments. The following is a listing of the Company’s operating
facilities by business segment:
Page 16
LOCATION
|
DESCRIPTION
|
Combined Rendering and
Restaurant Services Business Segments
Bellevue,
NE
|
Rendering/Yellow
Grease
|
Berlin,
WI
|
Rendering/Yellow
Grease
|
Blue
Earth, MN
|
Rendering/Yellow
Grease
|
Boise,
ID
|
Rendering/Yellow
Grease
|
Clinton,
IA
|
Rendering/Yellow
Grease
|
Coldwater,
MI
|
Rendering/Yellow
Grease
|
Collinsville,
OK
|
Rendering/Yellow
Grease
|
Dallas,
TX
|
Rendering/Yellow
Grease
|
Denver,
CO
|
Rendering/Yellow
Grease
|
Des
Moines, IA
|
Rendering/Yellow
Grease
|
Detroit,
MI
|
Rendering/Yellow
Grease/Trap
|
E.
St. Louis, IL
|
Rendering/Yellow
Grease/Trap
|
Fresno,
CA
|
Rendering/Yellow
Grease
|
Houston,
TX
|
Rendering/Yellow
Grease/Trap
|
Kansas
City, KS
|
Rendering/Yellow
Grease/Trap
|
Los
Angeles, CA
|
Rendering/Yellow
Grease/Trap
|
Mason
City, IL
|
Rendering/Yellow
Grease
|
Newark,
NJ
|
Rendering/Yellow
Grease/Trap
|
San
Francisco, CA *
|
Rendering/Yellow
Grease/Trap
|
Sioux
City, IA
|
Rendering/Yellow
Grease
|
Tacoma,
WA *
|
Rendering/Yellow
Grease/Trap
|
Turlock,
CA
|
Rendering/Yellow
Grease
|
Wahoo,
NE
|
Rendering/Yellow
Grease
|
Wichita,
KS
|
Rendering/Yellow
Grease/Trap
|
Rendering Business
Segment
Denver,
CO
|
Edible
Meat and Tallow
|
Fairfax,
MO
|
Protein
Blending
|
Grand
Island, NE *
|
Pet
Food
|
Kansas
City, KS
|
Protein
Blending
|
Kansas
City, MO
|
Hides
|
Kendallville,
IN
|
Specialty
Rendering
|
Lynn
Center, IL
|
Protein
Blending
|
Omaha,
NE
|
Rendering
|
Omaha,
NE
|
Protein
Blending
|
Omaha,
NE
|
Technical
Tallow
|
Restaurant Services Business
Segment
Alma,
GA
|
Yellow
Grease/Trap
|
Calhoun,
GA
|
Yellow
Grease/Trap
|
Chicago,
IL
|
Yellow
Grease/Trap
|
Cleveland,
OH **
|
Yellow
Grease/Trap
|
Ft.
Lauderdale, FL
|
Yellow
Grease/Trap
|
Indianapolis,
IN
|
Yellow
Grease/Trap
|
No.
Las Vegas, NV
|
Yellow
Grease/Trap
|
San
Diego, CA *
|
Trap
|
Santa
Ana, CA *
|
Trap
|
Smyrna,
GA
|
Trap
|
Tampa,
FL
|
Yellow
Grease/Trap
|
|
*
Property is leased. Rent expense for these leased properties
was $1.0 million in the aggregate in fiscal
2009.
|
|
**
Property was under lease when acquired on December 31, 2009, but has
subsequently been purchased.
|
Substantially
all assets of the Company, including real property, are either pledged or
mortgaged as collateral for borrowings under the Company’s credit
agreement.
Page 17
ITEM
3. LEGAL PROCEEDINGS
The Company
is a party to several lawsuits, claims and loss contingencies arising in the
ordinary course of its business, including assertions by certain regulatory 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
these claims are paid by the Company.
As a result
of the matters discussed above, the Company has established loss reserves for
insurance, environmental and litigation matters. At January 2, 2010
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 potential insurance recoveries
were approximately $15.6 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 these lawsuits and claims that may not be covered by insurance would have a
material effect on the financial statements.
Lower Passaic River
Area. 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, has entered
into a joint defense agreement with many of the other third-party defendants and
intends to defend itself vigorously. Additionally, in December 2009,
the Company, along with numerous other entities, received notice from the United
States Environmental Protection Agency (EPA) that the Company (as
successor-in-interest to Standard Tallow Company) is considered a potentially
responsible party with respect to alleged contamination in the lower Passaic
River area which is part of the Diamond Alkali Superfund Site located in Newark,
New Jersey. In the letter, EPA requested that the Company join a
group of other parties in funding a remedial investigation and feasibility study
at the site. As of the date of this report, the Company has not
agreed to participate in the funding group. The Company’s ultimate
liability for investigatory costs, remedial costs and/or natural resource
damages in connection with the lower Passaic River area cannot be determined at
this time; however, as of the date of this report, there is nothing that leads
the Company to believe that these matters will have a material effect on the
Company’s financial position or results of operation.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No matters
were submitted to a vote of security holders during the quarter ended January 2,
2010.
Page 18
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s
common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol
“DAR”. The following table sets forth, for the quarters indicated,
the high and low closing sales prices per share for the Company’s common stock
as reported on the NYSE.
Market
Price
|
Fiscal
Quarter
|
High
|
Low
|
||
2009:
|
||||
First
Quarter
|
$ 6.39
|
$ 2.94
|
||
Second
Quarter
|
$ 8.24
|
$ 4.14
|
||
Third
Quarter
|
$ 8.13
|
$ 6.33
|
||
Fourth
Quarter
|
$ 8.39
|
$ 6.80
|
||
2008:
|
||||
First
Quarter
|
$14.29
|
$
10.16
|
||
Second
Quarter
|
$17.29
|
$
12.33
|
||
Third
Quarter
|
$17.15
|
$
10.79
|
||
Fourth
Quarter
|
$11.11
|
$ 3.53
|
||
On February 24, 2010, the closing sales price of the Company’s common stock on
the NYSE was $8.31. The Company has been notified by its stock
transfer agent that as of February 24, 2010, there were 120 holders of record of
the common stock.
The Company
has not paid any dividends on its common stock since January 3, 1989 and does
not expect to pay cash dividends in 2010. The Company’s current
financing arrangements permit the Company to pay cash dividends on its common
stock within limitations defined in its credit agreement. Any future
determination to pay cash dividends on the Company’s common stock will be at the
discretion of the Company’s board of directors and will be based upon the
Company’s financial condition, operating results, capital requirements, plans
for expansion, restrictions imposed by any financing arrangements, and any other
factors that the board of directors determines are relevant.
Set forth
below is a line graph comparing the change in the cumulative total stockholder
return on the Company’s common stock with the cumulative total return of the
Russell 3000 Index, the Dow Jones US Waste and Disposal Service Index, and the
CSFB-Agribusiness Index for the period from January 1, 2005 to January 2, 2010,
assuming the investment of $100 on January 1, 2005 and the reinvestment of
dividends.
The stock
price performance shown on the following graph only reflects the change in the
Company’s stock price relative to the noted indices and is not necessarily
indicative of future price performance.
Page 19
EQUITY
COMPENSATION PLANS
The following table sets forth certain information as of January 2, 2010 with
respect to the Company’s equity compensation plans (including individual
compensation arrangements) under which the Company’s equity securities are
authorized for issuance, aggregated by i) all compensation plans previously
approved by the Company’s security holders, and ii) all compensation plans not
previously approved by the Company’s security holders. The table
includes:
·
|
the
number of securities to be issued upon the exercise of outstanding
options;
|
·
|
the
weighted-average exercise price of the outstanding options;
and
|
·
|
the
number of securities that remain available for future issuance under the
plans.
|
Page 20
Plan
Category
|
(a)
Number
of securities
to
be issued upon
exercise
of
outstanding
options,
warrants
and
rights
|
(b)
Weighted-average
exercise
price of
outstanding
options,
warrants
and
rights
|
(c)
Number
of securities
remaining
available
for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected
in column (a))
|
Equity
compensation plans approved by
security holders
|
810,205 (1)
|
$3.75
|
2,906,738
|
Equity
compensation plans not approved
by security holders
|
–
|
–
|
–
|
Total
|
810,205
|
$3.75
|
2,906,738
|
(1)
|
Includes
shares underlying options that have been issued pursuant to the Company’s
2004 Omnibus Incentive Plan (the “2004 Plan”) as approved by the Company’s
stockholders. See Note 12 of Notes to Consolidated Financial
Statements for information regarding the material features of the 2004
Plan.
|
Page 21
ITEM
6. SELECTED FINANCIAL DATA
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents selected
consolidated historical financial data for the periods indicated. The
selected historical consolidated financial data set forth below should be read
in conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and the Consolidated Financial Statements of the
Company for the three years ended January 2, 2010, January 3, 2009, and December
29, 2007, and the related notes thereto.
Fiscal 2009
|
Fiscal 2008
|
Fiscal 2007
|
Fiscal 2006
|
Fiscal 2005
|
|
Fifty-two
Weeks
Ended
January
2,
2010
(i)
|
Fifty-three
Weeks
Ended
January
3,
2009
(h)
|
Fifty-two
Weeks
Ended
December
29,
2007
|
Fifty-two
Weeks
Ended
December
30,
2006
(g)
|
Fifty-two
Weeks
Ended
December
31,
2005
|
(dollars in thousands, except per share data)
Statement
of Operations Data:
|
||||||||||||||||||||
Net
sales
|
$ | 597,806 | $ | 807,492 | $ | 645,313 | $ | 406,990 | $ | 308,867 | ||||||||||
Cost
of sales and operating expenses
|
440,111 | 614,708 | 483,453 | 321,416 | 241,707 | |||||||||||||||
Selling,
general and administrative expenses (a)
|
61,530 | 59,761 | 57,999 | 45,649 | 35,240 | |||||||||||||||
Depreciation
and amortization
|
25,226 | 24,433 | 23,214 | 20,686 | 15,787 | |||||||||||||||
Goodwill
impairment(b)
|
- | 15,914 | - | - | - | |||||||||||||||
Operating
income
|
70,939 | 92,676 | 80,647 | 19,239 | 16,133 | |||||||||||||||
Interest
expense
|
3,105 | 3,018 | 5,045 | 7,184 | 6,157 | |||||||||||||||
Other
(income)/expense, net (c)
|
955 | (258 | ) | 570 | 4,682 | (903 | ) | |||||||||||||
Income
from continuing operations before income taxes
|
66,879 | 89,916 | 75,032 | 7,373 | 10,879 | |||||||||||||||
Income
tax expense
|
25,089 | 35,354 | 29,499 | 2,266 | 3,184 | |||||||||||||||
Income
from continuing operations
|
41,790 | 54,562 | 45,533 | 5,107 | 7,695 | |||||||||||||||
Income/(loss)
from discontinued operations,
net of tax
|
- | - | - | - | 46 | |||||||||||||||
Net
Income
|
$ | 41,790 | $ | 54,562 | $ | 45,533 | $ | 5,107 | $ | 7,741 | ||||||||||
Basic
earnings per common share (d)
|
$ | 0.51 | $ | 0.67 | $ | 0.56 | $ | 0.07 | $ | 0.12 | ||||||||||
Diluted
earnings per common share (d)
|
$ | 0.51 | $ | 0.66 | $ | 0.56 | $ | 0.07 | $ | 0.12 | ||||||||||
Weighted
average shares outstanding (d)
|
82,142 | 81,685 | 81,091 | 74,310 | 63,929 | |||||||||||||||
Diluted
weighted average shares outstanding (d)
|
82,475 | 82,246 | 81,916 | 75,259 | 64,525 | |||||||||||||||
Other
Financial Data:
|
||||||||||||||||||||
Adjusted
EBITDA (e)
|
$ | 96,165 | $ | 133,023 | $ | 103,861 | $ | 39,925 | $ | 31,920 | ||||||||||
Depreciation
|
21,398 | 19,266 | 18,332 | 16,134 | 11,903 | |||||||||||||||
Amortization
|
3,828 | 5,167 | 4,882 | 4,552 | 3,884 | |||||||||||||||
Capital
expenditures (f)
|
23,638 | 31,006 | 15,552 | 11,800 | 21,406 | |||||||||||||||
Balance
Sheet Data:
|
||||||||||||||||||||
Working
capital
|
$ | 75,100 | $ | 67,446 | $ | 34,385 | $ | 17,865 | $ | 40,407 | ||||||||||
Total
assets
|
426,171 | 394,375 | 351,338 | 320,806 | 190,772 | |||||||||||||||
Current
portion of long-term debt
|
5,009 | 5,000 | 6,250 | 5,004 | 5,026 | |||||||||||||||
Total
long-term debt less current portion
|
27,539 | 32,500 | 37,500 | 78,000 | 44,502 | |||||||||||||||
Stockholders’
equity
|
284,877 | 236,578 | 200,984 | 151,325 | 73,680 | |||||||||||||||
(a)
|
Included
in selling, general and administrative expenses is a loss on a legal
settlement of approximately $2.2 million offset by a gain on a separate
legal settlement of approximately $1.0 million in fiscal
2007.
|
(b)
|
Includes
a goodwill impairment charge of $15.9 million in the fourth quarter of
fiscal 2008.
|
(c)
|
Included
in other (income)/expense in fiscal 2006 is a write-off of deferred loan
costs of approximately $2.6 million and early retirement fees of
approximately $1.9 million for the early retirement of senior subordinated
notes and termination of the previous senior credit
agreement.
|
(d)
|
The
Company has prepared the current period earnings per share computations
and retrospectively only revised the Company’s comparative prior period
computations for fiscal 2008 and 2007 to include in basic and diluted
earnings per share non-vested and restricted share awards considered
participating securities as a result of the Company’s January 4, 2009
adoption of the provisions of the Financial Accounting Standards Board’s
(“FASB”) Accounting Standards Codification™ (ASC) Topic 260, Earnings Per Share
pertaining 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.
|
Page 22
(e)
|
Adjusted
EBITDA is presented here not as an alternative to net income, but rather
as a measure of the Company’s operating performance and is not intended to
be a presentation in accordance with generally accepted accounting
principles (GAAP). Since EBITDA is not calculated identically
by all companies, the presentation in this report may not be comparable to
those disclosed by other companies.
|
|
Adjusted
EBITDA is calculated below and represents, for any relevant period, net
income/(loss) plus depreciation and amortization, goodwill and long-lived
asset impairment, interest expense, (income)/loss from discontinued
operations, net of tax, income tax provision and other
income/(expense). The Company believes adjusted EBITDA is a
useful measure for investors because it is frequently used by securities
analysts, investors and other interested parties in the evaluation of
companies in our industry. In addition, management believes
that adjusted EBITDA is useful in evaluating our operating performance
compared to that of other companies in our industry because the
calculation of adjusted EBITDA generally eliminates the effects of
financing, income taxes and certain non-cash and other items that may vary
for different companies for reasons unrelated to overall operating
performance. As a result, the Company’s management uses
adjusted EBITDA as a measure to evaluate performance and for other
discretionary purposes. However, adjusted EBITDA is not a
recognized measurement under U.S. GAAP, should not be considered as an
alternative to net income as a measure of operating results or to cash
flow as a measure of liquidity, and is not intended to be a presentation
in accordance with GAAP. Also, since adjusted EBITDA is not
calculated identically by all companies, the presentation in this report
may not be comparable to those disclosed by other
companies.
|
|
In
addition to the foregoing, management also uses or will use adjusted
EBITDA to measure compliance with certain financial covenants under the
Company’s credit agreement. The amounts shown below for
adjusted EBITDA differ from the amounts calculated under similarly titled
definitions in the Company’s credit agreement, as those definitions permit
further adjustment to reflect certain other non-cash
charges.
|
Reconciliation
of Net Income to Adjusted EBITDA
(dollars
in thousands)
|
January
2,
2010
|
January
3,
2009
|
December
29,
2007
|
December
30,
2006
|
December
31,
2005
|
Net
income
|
$ | 41,790 | $ | 54,562 | $ | 45,533 | $ | 5,107 | $ | 7,741 | ||||||||||
Depreciation
and amortization
|
25,226 | 24,433 | 23,214 | 20,686 | 15,787 | |||||||||||||||
Goodwill
impairment
|
- | 15,914 | - | - | - | |||||||||||||||
Interest
expense
|
3,105 | 3,018 | 5,045 | 7,184 | 6,157 | |||||||||||||||
(Income)/loss
from discontinued operations,
net of tax
|
- | - | - | - | (46 | ) | ||||||||||||||
Income
tax expense
|
25,089 | 35,354 | 29,499 | 2,266 | 3,184 | |||||||||||||||
Other
(income)/expense
|
955 | (258 | ) | 570 | 4,682 | (903 | ) | |||||||||||||
Adjusted
EBITDA
|
$ | 96,165 | $ | 133,023 | $ | 103,861 | $ | 39,925 | $ | 31,920 | ||||||||||
(f)
|
Excludes
the capital assets acquired as part of acquiring substantially all of the
assets of NBP of approximately $51.9 million in fiscal 2006 and API
Recycling’s used cooking oil collection business of $3.4 million in fiscal
2008. Also excludes the capital assets acquired in fiscal 2009
from Boca Industries, Inc. and Sanimax USA, Inc. of approximately $8.0
million.
|
(g)
|
Fiscal
2006 includes 33 weeks of contribution from the acquired NBP
assets.
|
(h)
|
Fiscal
2008 includes 19 weeks of contribution from the API Recycling used cooking
oil collection business.
|
(i)
|
Fiscal
2009 includes 45 weeks of contribution from the acquired assets of Boca
Industries, Inc. and does not include any contribution from assets
acquired from Sanimax USA, Inc. as the acquisition occurred on December
31, 2009.
|
Page 23
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following Management’s Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company’s actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth in Item 1A of this report under the
heading “Risk Factors.”
The following discussion should be read in conjunction with the historical
consolidated financial statements and notes thereto included in Item 8 of this
report. The Company is organized along two operating business
segments, Rendering and Restaurant Services. See Note 18 of Notes to
Consolidated Financial Statements.
Overview
The Company is a leading provider of rendering, recycling and recovery solutions
to the nation’s food industry. The Company collects and recycles animal
by-products and used cooking oil from food service establishments and provides
grease trap cleaning services to many of the same establishments. The
Company processes raw materials at 45 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,
bio-fuels, soaps, pet foods and leather goods for use as ingredients in their
products or for further processing. All of the Company’s finished
products are commodities and are priced relative to competing commodities,
primarily corn, soybean oil and soybean meal. Finished product prices
will track as to nutritional and industry value to the ultimate customer’s use
of the product. For additional information on the Company’s business,
see Item 1, “Business,” and for additional information on the Company’s
segments, see Note 18 of Notes to Consolidated Financial
Statements.
In fiscal 2009, the Company endured many challenges. Earnings
stabilized after a volatile fourth quarter of fiscal 2008 resulting in the third
best year in the Company’s 127 year history. Driving this performance
were improved and historically high finished product values for
MBM. Raw material tonnage declined significantly year over year
driven by lower cattle, hog and poultry slaughters. Restaurant grease
volumes declined as well driven by continued economic challenges in the
U.S. The continued weak U.S. and world economy and resulting decline
in consumer confidence has reduced meat consumption, leading the Company's
suppliers to curtail slaughters. On a positive note, the Company saw a
significant reduction in its energy input costs for both natural gas and
diesel. Additionally, the Company was able to take effective cost
cutting measures to offset the lower raw material tonnage.
Operating income decreased by $21.8 million in fiscal 2009 compared to fiscal
2008. The continuing challenges faced by the Company indicate
there can be no assurance that operating results achieved by the Company in
fiscal 2009 are indicative of future operating performance of the
Company.
Summary of Critical Issues
Faced by the Company during Fiscal 2009
·
|
Lower
raw material volumes were collected from suppliers during fiscal 2009 as
compared to fiscal 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
year. The Company’s decline in raw material volume was impacted
by the closure of smaller meat processor operations and the reduced
overrun volume and production cutbacks from larger integrated processors,
which has occurred as a result of the current challenging economic
environment. The financial impact of lower raw material volumes
is summarized below in Results of
Operations.
|
·
|
Energy
prices for natural gas and diesel fuel declined during fiscal 2009 as
compared to fiscal 2008, as overall lower energy costs continued to
decline in response to a decline in the general performance of the U.S.
and global 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.
|
Page
24
·
|
Lower
finished product prices for BFT and YG as compared to fiscal 2008 are a
result of the decline in both corn and soybean oil prices over the same
period, as well as continuing instability in the U.S. economy and world
economy. Finished product prices for MBM and soybean meal, its
principal competing commodity product, were comparable to the prior
period due to good export demand for proteins. 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 for BFT, YG and
MBM, the Company's principal products, as derived from the Jacobsen
index, an established trading exchange publisher used by management, is
listed below in Summary of Key
Indicators.
|
Summary of Critical Issues
and Known Trends Faced by the Company in Fiscal 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 volumes during fiscal
2009. If this volume 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 for natural gas and diesel fuel remained
relatively low during fiscal 2009 as compared to recent history, these
prices can be volatile and there can be no assurance that these prices
will not increase in the near future, thereby representing an ongoing
challenge to the Company’s operating results for future
periods. A material increase in energy prices for natural gas
and diesel fuel over a sustained period of time could materially adversely
affect the Company’s business, financial condition and results of
operations.
|
·
|
Finished
product prices for BFT and YG commodities decreased during fiscal 2009 as
compared to fiscal 2008. No assurance can be given that this
decrease in commodity prices for BFT and YG will not continue in the
future. Finished product prices for MBM and other competing
proteins during fiscal 2009 were relatively flat as compared to fiscal
2008; however, no assurance can be given that protein prices will continue
at the same level in future periods. A future decrease in
commodity prices, coupled with a further decline of the general
performance of the U.S. economy and the inability of some 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 fiscal 2010 and into future
periods.
|
Worldwide Government Energy
Policies
·
|
As
previously noted, prices for the Company’s finished products may be
impacted by worldwide government policies relating to renewable fuels and
greenhouse gas emissions, and programs such as RFS2 and tax credits for
biofuels both in the U.S. and abroad may positively impact the demand for
the Company’s finished products. See the risk factor entitled
“The Company’s business may be affected by worldwide government energy
policies,” on page 10, for more information regarding RFS2 and how changes
to these worldwide government policies could have a negative impact on the
Company’s business and results of
operations.
|
Other Food Safety and
Regulatory Issues
·
|
Effective
August 1997, the FDA promulgated the BSE Feed Rule prohibiting the use of
mammalian proteins, with some exceptions, in feeds for cattle, sheep and
other ruminant animals. The intent of this rule is to prevent the spread
of BSE, commonly referred to as “mad cow disease.” As
previously noted, the FDA has amended the BSE Feed Rule, which the FDA
began enforcing on October 26, 2009. Management has followed
this proposed amendment throughout its history in order to assess and
minimize the impact of its implementation on the Company. See
the risk factor entitled “The Company’s business may be affected by the
impact of BSE and other food safety issues,” beginning on page 12, for
more information about BSE, including the Final BSE Rule, and other food
safety issues and their potential effects on the Company, including the
effects of potential additional government regulations, finished product
export restrictions by foreign governments, market price fluctuations for
finished goods, reduced demand for beef and beef products by consumers and
increases in operating costs resulting from BSE-related
concerns.
|
Page
25
Even
though the export markets for U.S. beef have been significantly re-opened, most
of these markets remain closed to MBM derived from U.S.
beef. Continued concern about BSE in the U.S. may result in
additional regulatory and market related challenges that may affect the
Company’s operations and/or increase the Company’s operating costs.
These challenges indicate there can be
no assurance that fiscal 2009 operating results are indicative of future
operating performance of the Company.
Results
of Operations
Fifty-two
Week Fiscal Year Ended January 2, 2010 (“Fiscal 2009”) Compared to Fifty-three
Week Fiscal Year Ended January 3, 2009 (“Fiscal 2008”)
Fiscal
2008 includes an additional week of operations which occurs every five to six
years. In Fiscal 2008 the additional week increased both net sales
and costs by approximately $10 million with an immaterial effect on operating
income and net income.
Summary of Key Factors
Impacting Fiscal 2009 Results:
Principal factors that contributed to a
$21.8 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.
|
These decreases to operating income
were partially offset by:
·
|
Lower
raw material costs,
|
·
|
Lower
energy costs, primarily related to natural gas and diesel fuel,
and
|
·
|
Prior
year goodwill impairment.
|
Summary of Key Indicators of
Fiscal 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.
Page
26
Finished Product Commodity
Prices. Prices for finished product commodities that the
Company produces are reported each business day on the Jacobsen index, an
established trading exchange price publisher. The Jacobsen index
reports industry sales from the prior day’s activity by product. The
Jacobsen index includes reported prices for MBM and BFT (which are end products
of the Company’s Rendering Segment) and YG (which is an end product of the
Company’s Restaurant Services Segment). The Company regularly
monitors Jacobsen index reports on MBM, BFT and YG because they provide a daily
indication of the Company’s revenue performance against business plan
benchmarks. Although the Jacobsen index provides one useful metric of
performance, the Company’s finished products are commodities that
compete with other commodities such as corn, soybean oil and soybean meal on
nutritional and functional values and therefore actual pricing for the Company’s
finished products, as well as competing products, can be quite
volatile. In addition, the Jacobsen index does not provide forward or
future period pricing. The Jacobsen prices quoted below are for
delivery of the finished product at a specified location. Although
the Company’s prices generally move in concert with reported Jacobsen prices,
the Company’s actual sales prices for its finished products may vary
significantly from the Jacobsen index because of delivery timing differences and
because the Company’s finished products are delivered to multiple locations in
different geographic regions which utilize different price
indexes. Average Jacobsen prices (at the specified delivery point)
for Fiscal 2009, compared to average Jacobsen prices for Fiscal 2008
follow:
Avg.
Price
Fiscal
2009
|
Avg.
Price
Fiscal
2008
|
Increase/
(Decrease)
|
%
Increase/
(Decrease)
|
|
Rendering
Segment:
|
||||
MBM
(Illinois)
|
$338.09/ton
|
$333.17
/ton
|
$4.92/ton
|
1.5%
|
BFT
(Chicago)
|
$ 25.21/cwt
|
$ 34.21
/cwt
|
$ (9.00)/cwt
|
(26.3)%
|
Restaurant
Services Segment:
|
||||
YG
(Illinois)
|
$ 20.73/cwt
|
$ 27.75
/cwt
|
$ (7.02)/cwt
|
(25.3)%
|
The
overall decrease in average prices for BFT and YG 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. Raw material volume represents the quantity (pounds)
of raw material collected from Rendering Segment suppliers, such as butcher
shops, grocery stores and independent beef, pork and poultry processors, and
from Restaurant Services Segment suppliers, such as food service
establishments. Raw material volumes from the Company’s Rendering
Segment suppliers provide an indication of the future production of MBM and BFT
finished products, and raw material volumes from the Company’s Restaurant
Services Segment suppliers provide an indication of the future production of YG
finished products.
Production Volume and Related Yield of Finished
Product. Finished product production volumes are the end
result of the Company’s production processes, and directly impact goods
available for sale, and thus become an important component of sales
revenue. In addition, physical inventory turn-over is impacted by
both 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. The quantities of
finished products produced varies depending on the mix of raw materials used in
production. For example, raw material from cattle yields more fat and
protein than raw material from pork or poultry. Accordingly, the mix
of finished products produced by the Company can vary from quarter to quarter
depending on the type of raw material being received by the
Company. The Company cannot increase the production of protein or fat
based on demand since the type of raw material will dictate the yield of each
finished product.
Energy
Prices for Natural Gas quoted on the NYMEX Index and Diesel
Fuel. 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.
Page
27
Collection Fees and Collection Operating Expense. The Company
charges collection fees which are included in net sales. Each month
the Company monitors both the collection fee charged to suppliers, which is
included in net sales, and collection expense, which is included in cost of
sales. The importance of monitoring collection fees and collection
expense is that they provide an indication of achievement of the Company’s
business plan. Furthermore, management monitors collection fees and
collection expense so that the Company can consider implementing measures to
mitigate against unforeseen increases in these expenses.
Factory Operating
Expenses. 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. Furthermore, when unforeseen expense
increases occur, the Company can consider implementing measures to mitigate such
increases.
Net
Sales. The Company collects and processes animal by-products
(fat, bones and offal), including hides, and used restaurant cooking oil to
principally produce finished products of MBM, BFT, YG and
hides. Sales are significantly affected by finished goods prices,
quality and mix of raw material, and volume of raw material. Net
sales include the sales of produced finished goods, collection fees, fees for
grease trap services, and finished goods purchased for resale.
During Fiscal 2009, net sales were
$597.8 million as compared to $807.5 million during Fiscal 2008. The
decrease in Rendering Segment sales of $126.5 million and the decrease in
Restaurant Services Segment sales of $83.2 million accounted for the $209.7
million decrease in sales. The decrease in net sales was primarily
due to the following (in millions of dollars):
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
Decrease
in finished product prices
|
$ | (59.0 | ) | $ | (40.5 | ) | $ | – | $ | (99.5 | ) | |||||
Decrease
in raw material volume
|
(64.3 | ) | (9.8 | ) | – | (74.1 | ) | |||||||||
Other
sales (decreases)/increases
|
(24.6 | ) | 4.7 | – | (19.9 | ) | ||||||||||
Purchases
of finished product for resale
|
(8.7 | ) | (2.1 | ) | – | (10.8 | ) | |||||||||
Decrease
in yield
|
(4.5 | ) | (0.9 | ) | – | (5.4 | ) | |||||||||
Product
transfers
|
34.6 | (34.6 | ) | – | – | |||||||||||
$ | (126.5 | ) | $ | (83.2 | ) | $ | – | $ | (209.7 | ) |
Further
detail regarding the $126.5 million decrease in sales in the Rendering Segment
and the $83.2 million decrease in sales in the Restaurant Services Segment is as
follows:
Rendering
Finished Product
Prices: Lower prices in the overall commodity market for corn
and soybean oil, which are competing fats to BFT, negatively impacted the
Company’s finished product prices. $59.0 million of the decrease in
Rendering Segment sales is due to a market-wide decrease in BFT prices (fat)
offset slightly by a market-wide increase in MBM prices
(protein). The market declines were due to changes in supply/demand
in both the domestic and export markets for commodity fats, including
BFT.
Raw Material
Volume: Production cutbacks from integrated processors and
closures of mid-sized processor operations as a result of difficult economic
conditions for consumers generally and in the food service industry resulted in
lower raw material available to process. The lower raw material from
Rendering Segment suppliers, which is processed into MBM and BFT finished
products, decreased sales by $64.3 million. As noted
elsewhere, MBM and BFT are derived principally from bones, fat and offal from
the Rendering Segment’s suppliers. The proportions of bones, fat and
offal are relatively stable, but will vary from production run to production run
based on the source and whether the material is principally beef, pork or
poultry material. The Company has no ability to alter the proportion
of bones, fat and offal offered to the Company by the Company’s suppliers and
therefore we cannot meaningfully alter the mix of MBM and BFT resulting from the
Company’s rendering process. During Fiscal 2009, the Company’s
suppliers in the Rendering Segment were negatively impacted by the continued
weak economy and decline in consumer confidence, resulting in a reduction in
meat consumption and a corresponding reduction in the supply of raw materials
available to the Company.
Page 28
Other
Sales: The $24.6 million decrease in other Rendering Segment
sales was primarily due to lower prices and volumes on hides. Hide
volumes were down due to lower dead stock volume and lower slaughter rates at
beef processors, as well as the Company’s decision not to skin as many hides
since the cost to process the hides was more than the value of the finished
product. Prices were impacted by difficult economic conditions and
decreased demand for leather goods. The lower dead stock volume was
due primarily to unseasonably good weather in Fiscal 2009.
Purchases of Finished
Product for Resale: The Company purchased less finished
product for resale from third party suppliers in Fiscal 2009 compared to the
same period in Fiscal 2008 by $8.7 million. Lower domestic and export
demand for finished products reduced the need to source third party
product.
Yield: The
raw material processed in Fiscal 2009 compared to the same period of Fiscal 2008
yielded less finished product for sale and reduced sales by $4.5
million. The reduction in cattle kills by the packing industry during
the year impacted yields since cattle offal is a higher yielding material than
pork and poultry offal.
Product
Transfers: Depending on the Company’s customers’ finished
product quality specifications and the quality of raw material the Company
receives from meat processors and other sources, from time to time BFT material
must be downgraded and sold as YG. Generally, product transfers
occur when BFT is downgraded and the product is reclassified as YG, which is a
Restaurant Services Segment product. Product transfers from the
Rendering Segment to the Restaurant Services Segment were less in Fiscal 2009
compared to the same period in Fiscal 2008. When less product is
transferred from the Rendering Segment to the Restaurant Services Segment, more
BFT is available for sale by the Rendering Segment and YG sales will decrease
correspondingly. The increased BFT available in Fiscal 2009 compared
to Fiscal 2008 resulted in an increase in Rendering Segment sales of $34.6
million.
Restaurant
Services
Finished Product
Prices: Lower prices in the commodity markets for competing
fats and corn negatively impacted the Company’s YG finished product prices. The
$40.5 million decrease in Restaurant Services Segment sales was due to a
significant decrease in prices for YG and competing commodity
products. The market declines were due to weaker demand in both the
domestic and export markets for YG.
Raw Material
Volume: Difficult economic conditions in the food service
industry impacted the volume of raw material available for
collection. Lower raw material volume from used cooking oil suppliers
decreased YG sales by $9.8 million. As noted
elsewhere, YG is produced by the Company’s Restaurant Services Segment as a
result of refining used cooking oil collected from the Company’s food service
establishment suppliers. During Fiscal 2009, the Company’s suppliers
in the Restaurant Services Segment were negatively impacted by the continued
weak economy and decline in consumer confidence, resulting in reduced patronage
of restaurants, longer usage by restaurants of cooking oil and a corresponding
reduction in the supply of used cooking oil available to the
Company.
Other
Sales: The $4.7 million increase in other sales was primarily
from the current year acquisitions in the Restaurant Services
Segment.
Purchases of Finished
Product for Resale: The $2.1 million decrease in sales
resulted from the Company purchasing less finished product for resale from third
party suppliers in Fiscal 2009 as compared to the same period in Fiscal
2008. With less demand for finished products, the Company’s need to
source additional third party product for sales decreased.
Yield: The
Company believes that YG yields have declined because of the current economic
environment in the U.S. that has caused the food service industry to use their
current oil longer, which decreases the volumes and quality of cooking oil
picked up from suppliers. This lowers yields and lowers the amount of
finished product available for sale resulting in reduced sales of $0.9
million.
Product
Transfers: Product transfers from the Rendering Segment to the
Restaurant Services Segment were less in Fiscal 2009 as compared to the same
period in Fiscal 2008. The reduction in product transfers was a
result of less BFT (a Rendering Segment product) being downgraded and
transferred to the Restaurant Services Segment to be sold as YG in Fiscal 2009
compared to Fiscal 2008. As a result, Restaurant Services Segment
sales were reduced by $34.6 million in Fiscal 2009.
Page 29
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 Fiscal 2009, cost of sales and
operating expenses were $440.1 million as compared to $614.7 million during
Fiscal 2008. Decreases in Rendering Segment cost of sales and
operating expenses of $108.5 million and the decrease in Restaurant Services
Segment cost of sales and operating expenses of $67.0 million accounted for a
majority of the $174.6 million decrease in cost of sales and operating
expenses. The decrease in cost of sales and operating expenses was
primarily due to the following (in millions of dollars):
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
Decrease
in raw material costs
|
$ | (56.4 | ) | $ | (25.6 | ) | $ | – | $ | (82.0 | ) | |||||
Decreases
in energy costs, primarily natural gas and
diesel fuel
|
(24.4 | ) | (3.1 | ) | (0.3 | ) | (27.8 | ) | ||||||||
Other
expense (decreases)/increases
|
(28.8 | ) | 0.9 | 1.2 | (26.7 | ) | ||||||||||
Decrease
in raw material volume
|
(19.7 | ) | (2.8 | ) | – | (22.5 | ) | |||||||||
Purchases
of finished product for resale
|
(10.6 | ) | (1.8 | ) | – | (12.4 | ) | |||||||||
Multi-employer
pension plans mass withdrawal termination
|
(3.2 | ) | – | – | (3.2 | ) | ||||||||||
Product
transfers
|
34.6 | (34.6 | ) | – | – | |||||||||||
$ | (108.5 | ) | $ | (67.0 | ) | $ | 0.9 | $ | (174.6 | ) |
Further
detail regarding the $108.5 million decrease in cost of sales and operating
expenses in the Rendering Segment and the $67.0 million decrease in the
Restaurant Services Segment is as follows:
Rendering
Raw Material
Costs: In Fiscal 2009 approximately 53% of the Company’s
annual volume of raw material was acquired on a “formula”
basis. Under a formula arrangement, the cost of raw material is tied
to the finished product market for MBM and BFT. Since finished
product prices were lower in Fiscal 2009 as compared to Fiscal 2008, the raw
material costs decreased by $56.4 million.
Energy
Costs: Both natural gas and diesel fuel are major components
of collection and factory operating costs to the Rendering
Segment. The lower energy costs of $24.4 million reflect the lower
cost of natural gas and diesel fuel during Fiscal 2009 as compared to Fiscal
2008.
Other
Expense: Other expense decreased $28.8 million in cost of
sales and operating expenses principally due to lower hide prices and
volumes. Hide volumes were down due to lower dead stock volumes and
lower slaughter rates at beef processors, as well as the Company’s decision not
to skin as many hides since the cost to process the hides was more than the
value of the finished product. Prices were impacted by difficult
economic conditions and decreased demand for leather goods. The lower
dead stock volume was due primarily to unseasonably good weather in Fiscal
2009.
Raw Material
Volume: Production cutbacks from integrated processors and
closures of mid-sized processor operations resulted in lower raw material
available to be processed. The lower raw material reduced the cost of
sales by $19.7 million.
Page 30
Purchases of Finished
Product for Resale: The Company purchased less finished
product for resale from third party suppliers in Fiscal 2009 compared to the
same period in Fiscal 2008 by $10.6 million.
Product
Transfers: In Fiscal 2009, less BFT failed to meet customer
finished product quality specifications than in Fiscal 2008, and therefore less
BFT was downgraded to YG value and transferred from the Rendering Segment to the
Restaurant Services Segment. Since the Rendering Segment had
relatively more BFT available for sale in Fiscal 2009, cost of sales related to
product transfers increased $34.6 million.
Restaurant
Services
Raw Material
Costs: YG finished product prices were lower in the Fiscal
2009 as compared to Fiscal 2008, which caused the raw material costs to decrease
by $25.6 million.
Raw Material
Volume: Difficult economic conditions in the food service
industry impacted the volume of raw material available to
collect. Lower raw material volume from used cooking oil suppliers
decreased cost of sales by $2.8 million.
Energy
Costs: Diesel fuel and natural gas are major components of
collection and operating costs to the Restaurant Services
Segment. The lower energy costs of $3.1 million reflect the lower
cost of diesel fuel and natural gas during Fiscal 2009 as compared to the same
period in Fiscal 2008.
Other
Expense: The $0.9 million increase in other expense was
primarily due to current year acquisitions in the Restaurant Services Segment
that more than offset efforts by the operations groups to reduce collection
expense.
Purchases of Finished
Product for Resale: The $1.8 million decrease in cost of sales
is from purchasing less finished product for resale from third party
suppliers.
Product
Transfers: Because less BFT was downgraded for failure to meet
customer specifications and subsequently sold by the Restaurant Services Segment
as YG in Fiscal 2009 compared to Fiscal 2008, the cost of sales was reduced by
$34.6 million year over year.
Selling,
General and Administrative Expenses. Selling, general
and administrative expenses were $61.5 million during Fiscal 2009, a $1.7
million increase (2.8%) from $59.8 million during 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 (decreases)/increases
|
$ | (0.2 | ) | $ | (0.2 | ) | $ | 2.0 | $ | 1.6 | ||||||
Consulting
fees
|
– | – | 0.7 | 0.7 | ||||||||||||
Payroll
and related benefits expense
|
0.8 | 0.8 | (1.1 | ) | 0.5 | |||||||||||
Bad
debt expense (decreases)/ increases
|
(0.8 | ) | (0.5 | ) | 0.2 | (1.1 | ) | |||||||||
$ | (0.2 | ) | $ | 0.1 | $ | 1.8 | $ | 1.7 |
Depreciation and Amortization. Depreciation and
amortization charges increased $0.8 million (3.3%) to $25.2 million during
Fiscal 2009 as compared to $24.4 million during 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 $3.1 million during Fiscal
2009 compared to $3.0 million during Fiscal 2008, an increase of $0.1 million,
primarily due to an increase in fees from the amended credit agreement that was
partially offset by a decrease in outstanding balance related to the Company’s
debt.
Other
Income/Expense. Other expense was $1.0 million in Fiscal
2009, a $1.3 million increase from other income of $0.3 million in Fiscal
2008. The increase in other expense is primarily due to a decrease in
interest income on the Company’s interest bearing accounts due to lower rates
and increases in other non-operating expenses, which includes approximately $0.5
million of costs associated with the expected renewable diesel joint venture
project.
Psge
31
Income Taxes. The
Company recorded income tax expense of $25.1 million for Fiscal 2009, compared
to income tax expense of $35.4 million recorded in Fiscal 2008, a decrease of
$10.3 million, primarily due to a decrease in pre-tax earnings of the Company in
Fiscal 2009. The effective tax rate for Fiscal 2009 and Fiscal 2008
is 37.5 % and 39.3%, respectively. The difference from the federal
statutory rate of 35% in Fiscal 2009 and Fiscal 2008 is primarily due to state
taxes.
Results
of Operations
Fifty-three
Week Fiscal Year Ended January 3, 2009 (“Fiscal 2008”) Compared to Fifty-two
Week Fiscal Year Ended December 29, 2007 (“Fiscal 2007”)
Fiscal
2008 includes an additional week of operations which occurs every five to six
years. In Fiscal 2008 the additional week increased both net sales
and costs by approximately $10 million with an immaterial effect on operating
income and net income.
Summary of Key Factors
Impacting Fiscal 2008 Results:
Principal factors that contributed to a
$12.1 million increase in operating income, which are discussed in greater
detail in the following section, were:
·
|
Higher
finished product prices.
|
These increases to operating income
were partially offset by:
·
|
Higher
raw material costs,
|
·
|
Goodwill
impairment,
|
·
|
Higher
energy costs, primarily related to natural gas and diesel fuel,
and
|
·
|
Higher
payroll and incentive-related
benefits.
|
Summary of Key Indicators of
Fiscal 2008 Performance:
Principal indicators that management
routinely monitors and compares to previous periods as an indicator of problems
or improvements in operating results include:
·
|
Finished
product commodity prices,
|
·
|
Raw
material volume,
|
·
|
Production
volume and related yield of finished product,
|
·
|
Energy
prices for natural gas quoted on the NYMEX index and diesel
fuel,
|
·
|
Collection
fees and collection operating expense, and
|
·
|
Factory
operating expenses.
|
These
indicators and their importance are discussed below in greater
detail.
Finished Product Commodity
Prices. Prices for finished product commodities that the
Company produces are reported each business day on the Jacobsen index, an
established trading exchange price publisher. The Jacobsen index
reports industry sales from the prior day’s activity by product. The
Jacobsen index includes reported prices for MBM and BFT (which are end products
of the Company’s Rendering Segment) and YG (which is an end product of the
Company’s Restaurant Services Segment). The Company regularly
monitors Jacobsen index reports on MBM, BFT and YG because they provide a daily
indication of the Company’s revenue performance against business plan
benchmarks. Although the Jacobsen index provides one useful metric of
performance, the Company’s finished products are commodities that compete with
other commodities such as corn, soybean oil and soybean meal on nutritional and
functional values and therefore actual pricing for the Company’s finished
products, as well as competing products, can be quite volatile. In
addition, the Jacobsen index does not provide forward or future period
pricing. The Jacobsen prices quoted below are for delivery of the
finished product at a specified location. Although the Company’s
prices generally move in concert with reported Jacobsen prices, the Company’s
actual sales prices for its finished products may vary significantly from the
Jacobsen index because of delivery timing differences and because the Company’s
finished products are delivered to multiple locations in different geographic
regions which utilize different price indexes. Average Jacobsen
prices (at the specified delivery point) for Fiscal 2008, compared to average
Jacobsen prices for Fiscal 2007 follow:
Psge
32
Avg.
Price
Fiscal
2008
|
Avg.
Price
Fiscal
2007
|
Increase
|
%
Increase
|
|
Rendering
Segment:
|
||||
MBM
(Illinois)
|
$333.17/ton
|
$233.51
/ton
|
$99.66/ton
|
42.7%
|
BFT
(Chicago)
|
$ 34.21/cwt
|
$ 27.89
/cwt
|
$ 6.32/cwt
|
22.7%
|
Restaurant
Services Segment:
|
||||
YG
(Illinois)
|
$ 27.75/cwt
|
$ 21.62
/cwt
|
$ 6.13/cwt
|
28.4%
|
The increase in average prices of the finished products the Company sells had a
favorable impact on revenue that was partially offset by a negative impact to
the Company’s raw material cost resulting from formula pricing arrangements,
which compute raw material cost based upon the price of finished
product.
The global economic environment in the fourth quarter caused the Company’s
finished product commodity prices to decline significantly subsequent to the
third quarter of Fiscal 2008 as commodity prices remained
volatile. The following table shows the average Jacobsen index for
the fourth quarter of Fiscal 2008 for MBM, BFT and YG as compared to Fiscal
2007.
Avg.
Price
4th
Quarter
2008
|
Avg.
Price
4th
Quarter
2007
|
Decrease
|
%
Decrease
|
|
Rendering
Segment:
|
||||
MBM
(Illinois)
|
$261.56/ton
|
$270.77
/ton
|
$ (9.21/ton)
|
(3.4%)
|
BFT
(Chicago)
|
$ 17.59/cwt
|
$ 30.68
/cwt
|
$(13.09/cwt)
|
(42.7%)
|
Restaurant
Services Segment:
|
||||
YG
(Illinois)
|
$ 14.76/cwt
|
$ 23.45
/cwt
|
$ (8.69/cwt)
|
(37.1%)
|
Raw Material
Volume. Raw material volume represents the quantity (pounds)
of raw material collected from Rendering Segment suppliers, such as butcher
shops, grocery stores and independent beef, pork and poultry processors, and
from Restaurant Services Segment suppliers, such as food service
establishments. Raw material volumes from the Company’s Rendering
Segment suppliers provide an indication of the future production of MBM and BFT
finished products, and raw material volumes from the Company’s Restaurant
Services Segment suppliers provide an indication of the future production of YG
finished products.
Production Volume and Related Yield of Finished
Product. Finished product production volumes are the end
result of the Company’s production processes, and directly impact goods
available for sale, and thus become an important component of sales
revenue. In addition, physical inventory turn-over is impacted by
both 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. The quantities of
finished products produced varies depending on the mix of raw materials used in
production. For example, raw material from cattle yields more fat and
protein than raw material from pork or poultry. Accordingly, the mix
of finished products produced by the Company can vary from quarter to quarter
depending on the type of raw material being received by the
Company. The Company cannot increase the production of protein or fat
based on demand since the type of raw material will dictate the yield of each
finished product.
Energy
Prices for Natural Gas quoted on the NYMEX Index and Diesel
Fuel. 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.
Page 33
Collection Fees and Collection
Operating Expense. The Company charges collection fees which
are included in net sales. Each month the Company monitors both the
collection fee charged to suppliers, which is included in net sales, and
collection expense, which is included in cost of sales. The
importance of monitoring collection fees and collection expense is that they
provide an indication of achievement of the Company’s business
plan. Furthermore, management monitors collection fees and collection
expense so that the Company can consider implementing measures to mitigate
against unforeseen increases in these expenses.
Factory Operating
Expenses. 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. Furthermore, when unforeseen expense
increases occur, the Company can consider implementing measures to mitigate such
increases.
Net
Sales. The Company collects and processes animal by-products
(fat, bones and offal), including hides, and used restaurant cooking oil to
principally produce finished products of MBM, BFT, YG and
hides. Sales are significantly affected by finished goods prices,
quality and mix of raw material, and volume of raw material. Net
sales include the sales of produced finished goods, collection fees, fees for
grease trap services, and finished goods purchased for resale.
During Fiscal 2008, net sales were
$807.5 million as compared to $645.3 million during Fiscal 2007. The
increases in Rendering Segment sales of $120.7 million and the increase in
Restaurant Services Segment sales of $41.5 million accounted for the $162.2
million increase in sales. The increase in net sales was primarily
due to the following (in millions of dollars):
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
Higher
finished product prices
|
$ | 148.4 | $ | 39.7 | $ | – | $ | 188.1 | ||||||||
Purchases
of finished product for resale
|
(10.4 | ) | 1.0 | – | (9.4 | ) | ||||||||||
Decrease
in yield
|
(5.0 | ) | (2.7 | ) | – | (7.7 | ) | |||||||||
Decrease
in other sales
|
(3.5 | ) | (2.1 | ) | – | (5.6 | ) | |||||||||
Decrease
in raw material volume
|
(0.1 | ) | (3.1 | ) | – | (3.2 | ) | |||||||||
Product
transfers
|
(8.7 | ) | 8.7 | – | – | |||||||||||
$ | 120.7 | $ | 41.5 | $ | – | $ | 162.2 |
Further
detail regarding the $120.7 million increase in sales in the Rendering Segment
and the $41.5 million increase in sales in the Restaurant Services Segment is as
follows:
Rendering
Finished Product
Prices: Higher prices for Fiscal 2008 in the overall commodity
market for corn, soybean oil and soybean meal, which are competing proteins and
fats to MBM and BFT, positively impacted the Company’s finished product
prices. $148.4 million of the increase in Rendering sales is due to a
market-wide increase in MBM prices (protein) and in BFT prices
(fat). The market increases were due to changes in supply/demand as a
result of new demand for bio-fuels and growing consumption for commodity
proteins and fats, including MBM and BFT.
Raw Material
Volume: The lower raw material from Rendering Segment
suppliers, which is processed into MBM and BFT finished products decreased sales
by $0.1 million.
Other
Sales: The $3.5 million decrease in other Rendering sales was
primarily due to lower prices and volumes on hides. Hide volumes were
down due to lower dead stock volume and lower slaughter rates at beef
processors. Prices were impacted by difficult economic conditions and
decreased demand for leather goods.
Purchases of Finished
Product for Resale: The Company purchased less finished
product for resale from third party suppliers in Fiscal 2008 compared to the
same period in Fiscal 2007 by $10.4 million. Lower domestic and
export demand for finished products reduced the need to source third party
product.
Page 34
Yield: The
raw material processed in Fiscal 2008 compared to the same period of Fiscal 2009
yielded less finished product for sale and reduced sales by $5.0
million. The reduction in cattle kills by the meat processing
industry during the year impacted yields since cattle offal is a higher yielding
material than pork and poultry offal.
Product
Transfers: Depending on the Company’s customers’ finished
product quality specifications and the quality of raw material the Company
receives from meat processors and other sources, from time to time BFT material
must be downgraded and sold as YG. Generally, product transfers occur
when BFT is downgraded and the product is reclassified as YG, which is a
Restaurant Services Segment product. Product transfers from the
Rendering Segment to the Restaurant Services Segment were more in Fiscal 2008
compared to the same period in Fiscal 2007. When more product is
transferred from the Rendering Segment to the Restaurant Services Segment, less
BFT is available for sale by the Rendering Segment and YG sales will increase
correspondingly. The decreased BFT available in Fiscal 2008 compared
to Fiscal 2007 resulted in a decrease in Rendering Segment sales of $8.7
million.
Restaurant
Services
Finished Product
Prices: Higher prices in the commodity markets for competing
fats and corn positively impacted the Company’s YG finished product prices. The
$39.7 million increase in Restaurant Services sales was due to a significant
increase in prices for YG and competing commodity products. The
market increases were due to stronger demand for bio-fuels and growing
consumption for YG.
Raw Material
Volume: Difficult economic conditions in the food service
industry impacted the volume of raw material available for
collection. Lower raw material volume from used cooking oil suppliers
decreased YG sales by $3.1 million.
Other
Sales: The $2.1 million decrease in other sales was primarily
from a decrease in collection fees as a result of the higher market price for
YG.
Purchases of Finished
Product for Resale: The $1.0 million increase in sales
resulted from the Company purchasing more finished product for resale from third
party suppliers in Fiscal 2008 as compared to the same period in Fiscal
2007. With more demand for YG finished products, the Company’s need
to source additional third party product for sales increased in order to meet
the Company’s customers’ needs.
Yield: The
Company believes that YG yields have declined because of the current economic
environment in the U.S. that has caused the food service industry to use their
current oil longer, which decreases the volumes and quality of cooking oil
picked up from suppliers. This lowers yields and lowers the amount of
finished product available for sale resulting in reduced sales of $2.7
million.
Product
Transfers: Product transfers from the Rendering Segment to the
Restaurant Services Segment were more in Fiscal 2008 as compared to the same
period in Fiscal 2007. The increase in product transfers was a result
of more BFT (a Rendering Segment product) being downgraded and transferred to
the Restaurant Services Segment to be sold as YG in Fiscal 2008 compared to
Fiscal 2007. As a result, Restaurant Services Segment sales were
increased by $8.7 million in Fiscal 2008.
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.
Page 35
During Fiscal 2008, cost of sales and
operating expenses were $614.7 million as compared to $483.5 million during
Fiscal 2007. The increases in Rendering Segment cost of sales and
operating expenses of $89.2 million and the increase in Restaurant Services
Segment cost of sales and operating expenses of $42.2 million accounted for a
majority of the $131.2 million increase in cost of sales and operating
expenses. The increase in cost of sales and operating expenses was
primarily due to the following (in millions of dollars):
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
Higher
raw material costs
|
$ | 81.2 | $ | 25.1 | $ | – | $ | 106.3 | ||||||||
Higher
energy costs, primarily natural gas and diesel
fuel
|
13.6 | 3.0 | – | 16.6 | ||||||||||||
Payroll
and related benefits
|
6.0 | 2.2 | – | 8.2 | ||||||||||||
Increase/(decrease)
in other expenses
|
3.6 | 2.1 | (0.2 | ) | 5.5 | |||||||||||
Multi-employer
pension plans mass withdrawal termination
|
2.4 | – | – | 2.4 | ||||||||||||
Sale
of judgment
|
1.2 | – | – | 1.2 | ||||||||||||
Purchases
of finished product for resale
|
(10.1 | ) | 1.1 | – | (9.0 | ) | ||||||||||
Product
transfers
|
(8.7 | ) | 8.7 | – | – | |||||||||||
$ | 89.2 | $ | 42.2 | $ | (0.2 | ) | $ | 131.2 |
Further
detail regarding the $89.2 million increase in cost of sales and operating
expenses in the Rendering Segment and the $42.2 million increase in the
Restaurant Services Segment is as follows:
Rendering
Raw Material
Costs: In Fiscal 2008 approximately 58% of the Company’s
annual volume of raw material was acquired on a “formula”
basis. Under a formula arrangement, the cost of raw material is tied
to the finished product market for MBM and BFT. Since finished
product prices were higher in the Fiscal 2008 as compared to Fiscal 2007, the
raw material costs increased by $81.2 million.
Energy
Costs: Both natural gas and diesel fuel are major components
of collection and factory operating costs to the Rendering
Segment. The higher energy costs of $13.6 million reflect higher cost
of natural gas and diesel fuel costs during Fiscal 2008 as compared to Fiscal
2007.
Other
Expense: Other expense including payroll and related benefits
increased $9.6 million in cost of sales and operating
expenses. Increases in overall payroll wages and employee benefits,
including increased medical costs in Fiscal 2008 as compared to Fiscal 2007 were
the primary causes of the increase in other expense.
Purchases of Finished
Product for Resale: The Company purchased less finished
product for resale from third party suppliers in Fiscal 2008 compared to the
same period in Fiscal 2007 by $10.1 million.
Product
Transfers: In Fiscal 2008, more BFT failed to meet customer
finished product quality specifications than in Fiscal 2007, and therefore more
BFT was downgraded to YG value and transferred from the Rendering Segment to the
Restaurant Services Segment. Since the Rendering Segment had
relatively less BFT available for sale in Fiscal 2008, cost of sales related to
product transfers decreased $8.7 million.
Restaurant
Services
Raw Material
Costs: YG finished product prices were significantly higher in
the Fiscal 2008 as compared to Fiscal 2007, which caused the raw material costs
to increase by $25.1 million.
Energy
Costs: Diesel fuel and natural gas are major components of
collection and operating costs to the Restaurant Services
Segment. The higher energy costs of $3.0 million reflect the higher
cost of diesel fuel and natural gas during Fiscal 2008 as compared to the same
period in Fiscal 2007.
Page 36
Other
Expense: Other expense including payroll and related benefits
increased $4.3 million in cost of sales and operating expenses. The
primary cause of the increase in other expense is due to increases in overall
payroll wages and employee benefits, including medical costs and current year
acquisitions in the Restaurant Service Segment.
Purchases of Finished
Product for Resale: The $1.1 million increase in cost of sales
is from purchasing more finished product from third party suppliers for resale
in order to meet customer demand.
Product
Transfers: Because more BFT was downgraded for failure to meet
customer specifications and subsequently sold by the Restaurant Services Segment
as YG in Fiscal 2008 compared to Fiscal 2007, the cost of sales was increased by
$8.7 million year over year.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses
were $59.8 million during Fiscal 2008, a $1.8 million increase (3.1%) from $58.0
million during Fiscal 2007. The Company increased its provision for
bad debt based on general credit conditions and delinquent accounts
receivable. The increase in selling, general and administrative
expenses is primarily due to the following (in millions of
dollars):
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
Increase
in other expenses
|
$ | 0.1 | $ | 0.6 | $ | 1.3 | $ | 2.0 | ||||||||
Payroll
and related benefits expense
|
0.6 | 0.5 | 0.5 | 1.6 | ||||||||||||
Increase
in bad debt expense
|
0.6 | 0.6 | (0.1 | ) | 1.1 | |||||||||||
Decrease
in legal expense
|
– | – | (1.7 | ) | (1.7 | ) | ||||||||||
Decrease
in legal settlements
|
– | – | (1.2 | ) | (1.2 | ) | ||||||||||
$ | 1.3 | $ | 1.7 | $ | (1.2 | ) | $ | 1.8 |
Depreciation and Amortization. Depreciation and
amortization charges increased $1.2 million (5.2%) to $24.4 million during
Fiscal 2008 as compared to $23.2 million during Fiscal 2007. The
increase in depreciation and amortization is primarily due to an overall
increase in capital expenditures.
Goodwill
Impairment. The Company recorded a goodwill impairment
charge of $15.9 million in the fourth quarter of Fiscal 2008 as a result of its
annual impairment test. This impairment charge relates to the loss of
certain large raw material suppliers in the fourth quarter of Fiscal
2008.
Interest
Expense. Interest expense was $3.0 million during Fiscal
2008 compared to $5.0 million during Fiscal 2007, a decrease of $2.0 million
(40.0%), primarily due to a decrease in outstanding balance related to the
Company’s debt.
Other
Income/Expense. Other income was $0.3 million in Fiscal
2008, a $0.9 million increase from other expense of $0.6 million in Fiscal
2007. The increase in other income is primarily due to more cash
included in interest bearing accounts and decreases in other non-operating
expenses.
Income Taxes. The
Company recorded income tax expense of $35.4 million for Fiscal 2008, compared
to income tax expense of $29.5 million recorded in Fiscal 2007, an increase of
$5.9 million, primarily due to increased pre-tax earnings of the Company in
Fiscal 2008. The effective tax rate for Fiscal 2008 and Fiscal 2007
is 39.3%. The difference from the federal statutory rate of 35% in
Fiscal 2008 and Fiscal 2007 is primarily due to state taxes.
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.
|
Page
37
·
|
The
$125.0 million revolving credit facility has a term that matures on April
7, 2013.
|
·
|
As
of January 2, 2010, 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 with a balloon
payment of $22.5 million on April 7, 2012. The Company has
reduced the term loan facility by quarterly payments totaling $17.5
million, for an aggregate of $32.5 million principal outstanding under the
term loan facility at January 2,
2010.
|
·
|
Alternative
base rate loans under the Credit Agreement bear interest at a rate per
annum equal to the greatest of (a) the prime rate (b) the federal funds
effective rate (as defined in the Credit Agreement) plus ½ of 1% and (c)
the adjusted LIBOR for a one month interest period plus 1%, plus in each
case, a margin determined by reference to a pricing grid under the Credit
Agreement 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 “2008
Amendment”) with its lenders under its Credit Agreement. The
2008 Amendment increases the Company’s flexibility to make investments in
third parties. Pursuant to the 2008 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 2008 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.
|
·
|
On
September 30, 2009, the Company, entered into an amendment (the “2009
Amendment”) with its lenders under the Credit Agreement. The
2009 Amendment (i) extends the maturity date of the revolving facility
from April 7, 2011 to April 7, 2013, (ii) revises the pricing schedule
with respect to letter of credit fees and interest rates payable by the
Company and amends certain definitions in connection therewith, (iii)
permits the issuance of new unsecured indebtedness and amends and adds
certain definitions in connection therewith, and (iv) amends certain
provisions with respect to the defaulting lender concept in the Credit
Agreement. Pursuant to the 2009 Amendment, the Company can
issue new unsecured indebtedness provided that (i) no default under the
Credit Agreement exists or would result from the incurrence of such new
unsecured indebtedness, (ii) the amount of such new unsecured indebtedness
does not exceed $150 million at any time outstanding, and (iii) after
giving pro forma effect to such incurrence of new unsecured indebtedness,
the Company is in compliance with the fixed charge coverage ratio and the
leverage ratio (as determined in accordance with the terms of the Credit
Agreement).
|
·
|
The
Credit Agreement contains restrictive covenants that are customary for
similar credit arrangements and requires the maintenance of certain
minimum financial ratios. The Credit Agreement also requires
the Company to make certain mandatory prepayments of outstanding
indebtedness using the net cash proceeds received from certain
dispositions of property, casualty or condemnation, any sale or issuance
of equity interests in a public offering or in a private placement,
unpermitted additional indebtedness incurred by the Company and excess
cash flow under certain
circumstances.
|
The
Company’s Credit Agreement consists of the following elements at January 2, 2010
(in thousands):
Credit
Agreement:
|
|
Term
Loan
|
$ 32,500
|
Revolving
Credit Facility:
|
|
Maximum
availability
|
$
125,000
|
Borrowings
outstanding
|
–
|
Letters
of credit issued
|
15,852
|
Availability | $ 109,148 |
Page 38
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 January 2, 2010, 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 Company’s January 2, 2010 consolidated balance sheet is based on the
contractual repayment terms of the debt issued under the Credit
Agreement.
On
January 2, 2010, the Company had working capital of $75.1 million and its
working capital ratio was 2.05 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 cash
equivalents. At January 2, 2010, the Company had unrestricted cash of
$68.2 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. The Company diversifies its cash investments by limiting the
amounts located at any one financial institution and invests primarily in
government-backed securities.
Net cash
provided by operating activities was $79.2 million and $92.0 million for the
fiscal years ended January 2, 2010 and January 3, 2009, respectively, a decrease
of $12.8 million due to a decrease in net income of approximately $12.8
million. Cash used by investing activities was $55.7 million during
Fiscal 2009, compared to $52.4 million in Fiscal 2008, an increase of $3.3
million, primarily due to an increase in acquisition activity of approximately
$18.1 million, which was offset by a decrease in capital expenditures of
approximately $7.4 million and a decrease in route and other intangible activity
of approximately $6.6 million. Net cash used by financing activities
was $6.1 million in the year ended January 2, 2010 an increase of cash used of
$1.0 million as compared to $5.1 million at January 3, 2009, principally due to
less excess tax benefits from stock-based compensation in 2009, which was
partially offset by lower term debt repayments in 2009.
Capital
expenditures of $23.6 million were made during Fiscal 2009 as compared to $31.0
million in Fiscal 2008, a decrease of $7.4 million (23.9%). 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 an overall decrease in capital expenditures in Fiscal
2009 as compared to Fiscal 2008. Additionally, the Company spent
approximately $1.5 million related to the Final BSE Rule in Fiscal
2009. Capital expenditures related to compliance with environmental
regulations were $1.6 million in Fiscal 2009, $1.1 million in Fiscal 2008 and
$1.8 million in Fiscal 2007.
Based
upon the underlying terms of the Credit Agreement, approximately $5.0 million in
current debt, which is included in current liabilities on the Company’s balance
sheet at January 2, 2010, will be due during the next twelve months, which
includes scheduled quarterly installment payments of $1.25 million.
Based
upon the annual actuarial estimate, current accruals, and claims paid during
Fiscal 2009, the Company has accrued approximately $4.5 million it expects will
become due during the next twelve months in order to meet obligations related to
the Company’s self insurance reserves and accrued insurance obligations, which
are included in current accrued expenses at January 2, 2010. The self
insurance reserve is composed of estimated liability for claims arising for
workers’ compensation and for auto liability and general liability
claims. The self insurance reserve liability is determined annually,
based upon a third party actuarial estimate. The actuarial estimate
may vary from year to year, due to changes in costs of health care, the pending
number of claims and other factors beyond the control of management of the
Company. No assurance can be given that the Company’s funding
obligations under its self insurance reserve will not increase in the
future.
Based
upon current actuarial estimates, the Company expects to make payments of
approximately $1.0 million in order to meet minimum pension funding requirements
during fiscal 2010. The minimum pension funding requirements are
determined annually, based upon a third party actuarial estimate. The
actuarial estimate may vary from year to year, due to fluctuations in return on
investments or other factors beyond the control of management of the Company or
the administrator of the Company’s pension funds. No assurance can be
given that the minimum pension funding requirements will not increase in the
future. Additionally, the Company has made required and tax
deductible discretionary contributions to its pension plans in Fiscal 2009 and
Fiscal 2008 of approximately $14.9 million and $6.5 million,
respectively.
Page 39
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 given a notice of redetermination liability in
December 2009 and as a result the Company’s accrued liability at January 2, 2010
has not increased from the original amount as this remains the Company’s best
estimate of the liability based on the most recent information that is probable
and estimable for the plan. Another of the underfunded multi-employer
plans in which the Company participates has given notification of “Critical
Status” under the PPA; however, as of January 2, 2010, 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 January 2, 2010, 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. As
of January 2, 2010, this alternative federal tax credit program has expired and
has not been extended or reinstituted as of February 24, 2010. Even
though bipartisan support for such an extension has been expressed in the U.S.
Senate, the Company cannot guarantee that the Alternative Fuel Mixture Credits
will be included in any tax credit extender package that may be passed by the
U.S. Congress. The Company will, therefore 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.
In
September 2009, the Company announced that it has joined with a subsidiary of
Valero Energy Corporation (“Valero”) to take initial steps towards the formation
of a joint venture to build a facility capable of producing over 10,000 barrels
per day or 135 million gallons per year of renewable diesel on a site adjacent
to Valero’s St. Charles refinery near Norco, Louisiana (the “Joint Venture
Project”). The proposed facility is expected to convert grease,
primarily animal fats and used cooking oil supplied by the Company, and
potentially other feedstocks that become economically and commercially viable
into renewable diesel. The Company and Valero have applied for and
are jointly seeking a loan guarantee for the proposed Joint Venture Project from
the U.S. Department of Energy (the “DOE”) under the Energy Policy Act of 2005
(together with the regulations promulgated thereunder, the “Energy Act”), which
makes $8.5 billion of debt financing guarantees available for projects that
employ innovative energy efficiency, renewable energy and advanced transmission
and distribution technologies (the “DOE Loan Program”). On November
3, 2009, the DOE notified the Company and Valero that it had completed its
review of the initial application for the Joint Venture Project and approved the
project for further evaluation under the DOE Loan Program. In
addition, the DOE informed the Company that the Joint Venture Project may
constitute a “1705 Eligible Project” (as defined in the Energy Act), which
designation would entitle the joint venture entity to have certain of its loan
costs paid for under the DOE loan program. Accordingly, the Company
and Valero submitted to the DOE the more detailed Part II submission required to
continue in the application process for inclusion of the Joint Venture Project
in the DOE Loan Program. The Company and Valero are splitting the
costs and expenses related to the Joint Venture Project and the preparation and
filing of the application under the DOE Loan Program, which as of the date of
this Report have not been significant in amount. The Company and
Valero have not yet entered into a joint venture operating agreement with
respect to the Joint Venture Project; however, once the joint venture operating
agreement has been entered into, certain of the costs and expenses associated
with the Joint Venture Project could be incurred in the form of capital
contributions to the joint venture entity. The ultimate cost of the
Joint Venture Project to the Company cannot be determined until, among other
things, further detailed engineering reports and studies have been completed and
the amount of funding, if any, approved under the DOE Loan Program is
known. It is currently contemplated that the Company and Valero would
move forward with the more detailed engineering reports and studies for the
Joint Venture Project only if the DOE notifies them following its review of the
Part II submission that the Joint Venture Project has been approved for the next
phase of the loan approval process, which could occur as early as the first
quarter of fiscal 2010. Completion of the Joint Venture Project is
contingent, among other things, on (i) the DOE’s approval of the loan
application for inclusion in the DOE Loan Program at a sufficient funding level
for the parties to agree to proceed with the Joint Venture Project, (ii) the
total cost estimate for the Joint Venture Project and (iii) the final approval
of the Company’s Board of Directors. Furthermore, even if the Joint
Venture Project is accepted in the DOE Loan Program, there is no assurance that
the parties will be able to negotiate a loan agreement on acceptable
terms. Accordingly, the Company can provide no assurance that the
Joint Venture Project will be completed.
Page 40
The
Company’s management believes that cash flows from operating activities
consistent with the level generated in 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,
continued funding of the Joint Venture Project 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: 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; a further reduction in finished
product prices; changes to worldwide government policies relating to
renewable fuels and greenhouse gas emissions that adversely effect programs like
RFS2 and tax credits for biofuels both in the U.S. and
abroad; 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; 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, 2009 H1N1 flu, 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 2010 and thereafter. The
Company cannot provide assurance that the cash flows from operating activities
generated in 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. Except for the potential contributions to the Joint
Venture Project, 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 additional 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 materials availability, reduced finished product prices, reduced sales,
potential inventory buildup, increased bad debt reserves and/or higher operating
costs.
Page
41
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 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.
CONTRACTUAL
OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The
following table summarizes the Company’s expected material contractual payment
obligations, including both on- and off-balance sheet arrangements at January 2,
2010 (in thousands):
Total
|
Less
than
1
Year
|
1 –
3
Years
|
3 – 5
Years
|
More
than
5
Years
|
|||||
Contractual
obligations(a):
|
|||||||||
Long-term
debt obligations (b)
|
$
32,500
|
$ 5,000
|
$27,500
|
$ –
|
$ –
|
||||
Operating
lease obligations (c)
|
43,561
|
10,520
|
15,322
|
6,732
|
10,987
|
||||
Estimated
interest payable (d)
|
3,197
|
1,303
|
1,779
|
115
|
–
|
||||
Purchase
commitments (e)
|
6,886
|
6,886
|
–
|
–
|
–
|
||||
Derivative
obligations (f)
|
2,476
|
1,487
|
989
|
–
|
–
|
||||
Pension
funding obligation (g)
|
1,029
|
1,029
|
–
|
–
|
–
|
||||
Other
obligations
|
48
|
9
|
19
|
20
|
–
|
||||
Total
|
$ 89,697
|
$26,234
|
$45,609
|
$ 6,867
|
$10,987
|
(a)
|
The
above table does not reflect uncertain tax positions of approximately $0.1
million because the timing of the cash settlement cannot be reasonably
estimated.
|
(b)
|
See
Note 9 to the consolidated financial
statements.
|
(c)
|
See
Note 8 to the consolidated financial
statements.
|
(d)
|
Interest
payable was calculated using the current rate for term debt and current
rates on other liabilities.
|
(e)
|
Purchase
commitments were determined based on specified contracts for natural gas,
diesel fuel and finish product
purchases.
|
(f)
|
Represents
liabilities for interest rate swap contracts and inventory swap contracts
that were valued at January 2, 2010. The ultimate settlement
amounts of these swap contracts are unknown because they are subject to
continuing market risk until the derivatives are
settled.
|
(g)
|
Pension
funding requirements are determined annually based upon a third party
actuarial estimate. The Company expects to make approximately
$1.0 million in required contributions to its pension plan in fiscal
2010. The Company is not able to estimate pension funding
requirements beyond the next twelve months. The accrued pension benefit
liability was approximately $19.1 million at the end of Fiscal
2009. The Company knows that one of the multi-employer pension
plans that has not terminated to which it contributes and which is not
administered by the Company was under-funded as of the latest available
information, and while the Company has no ability to calculate a possible
current liability for the under-funded multi-employer plan to which the
Company contributes, the amounts could be
material.
|
The Company’s off-balance sheet contractual obligations and commercial
commitments as of January 2, 2010 relate to operating lease obligations, letters
of credit, forward purchase agreements, and employment
agreements. The Company has excluded these items from the balance
sheet in accordance with accounting principles generally accepted in the
U.S.
The following table summarizes the Company’s other commercial commitments,
including both on- and off-balance sheet arrangements at January 2, 2010 (in
thousands):
Other
commercial commitments:
|
|
Standby
letters of credit
|
$ 15,852
|
Total
other commercial commitments:
|
$
15,852
|
Page
42
OFF
BALANCE SHEET OBLIGATIONS
Based
upon the underlying purchase agreements, the Company has commitments to purchase
$6.9 million of commodity products, consisting of approximately $1.8 million of
finished products and approximately $5.1 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 January 2, 2010. 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 2010, in accordance with accounting principles
generally accepted in the U.S.
Based
upon underlying lease agreements, the Company expects to pay approximately $10.5
million in operating lease obligations during fiscal 2010 which are not included
in liabilities on the Company’s balance sheet at January 2,
2010. These lease obligations are included in cost of sales or
selling, general and administrative expense on the Company’s Statement of
Operations as the underlying lease obligation comes due, in accordance with
accounting principles generally accepted in the U.S.
CRITICAL
ACCOUNTING POLICIES
The Company follows certain significant accounting policies when preparing its
consolidated financial statements. A complete summary of these
policies is included in Note 1 to the Consolidated Financial
Statements.
Certain of the policies require management to make significant and subjective
estimates or assumptions that may deviate from actual results. In
particular, management makes estimates regarding valuation of inventories,
estimates of useful life of long-lived assets related to depreciation and
amortization expense, estimates regarding fair value of the Company’s reporting
units and future cash flows with respect to assessing potential impairment of
both long-lived assets and goodwill, self-insurance, environmental and
litigation reserves, pension liability, estimates of income tax expense, and
estimates of expense related to stock options granted. Each of these
estimates is discussed in greater detail in the following
discussion.
Inventories
The Company’s
inventories are valued at the lower of cost or market. Finished
product manufacturing cost is calculated using the first-in, first-out (FIFO)
method, based upon the Company’s raw material costs, collection and factory
production operating expenses, and depreciation expense on collection and
factory assets. Market values of inventory are estimated at each
plant location, based upon either: 1) the backlog of unfilled sales orders at
the balance sheet date; or 2) unsold inventory, calculated using
regional finished product prices quoted in the Jacobsen index at the balance
sheet date. Estimates of market value, based upon the backlog of
unfilled sales orders or upon the Jacobsen index, assume that the inventory held
by the Company at the balance sheet date will be sold at the estimated market
finished product sales price, subsequent to the balance sheet
date. Actual sales prices received on future sales of inventory held
at the end of a period may vary from either the backlog unfilled sales order
price or the Jacobsen index quotation at the balance sheet
date. These variances could cause actual sales prices realized on
future sales of inventory to be different than the estimate of market value of
inventory at the end of the period. Inventories were approximately
$19.1 million and $22.2 million at January 2, 2010 and January 3, 2009,
respectively.
Long-Lived
Assets, Depreciation and Amortization Expense and Valuation
The Company’s property, plant and equipment are recorded at cost when
acquired. Depreciation expense is computed on property, plant and
equipment based upon a straight line method over the estimated useful life of
the assets, which is based upon a standard classification of the asset
group. Buildings and improvements are depreciated over a useful life
of 15 to 30 years, machinery and equipment are depreciated over a useful life of
3 to 10 years and vehicles are depreciated over a life of 2 to 6
years. These useful life estimates have been developed based upon the
Company’s historical experience of asset life utility, and whether the asset is
new or used when placed in service. The actual life and utility of
the asset may vary from this estimated life. Useful lives of the
assets may be modified from time to time when the future utility or life of the
asset is deemed to change from that originally estimated when the asset was
placed in service. Depreciation expense was approximately $21.4
million, $19.3 million and $18.3 million in fiscal years ending January 2, 2010,
January 3, 2009 and December 29, 2007, respectively.
Page 43
The
Company’s intangible assets, including permits, routes, non-compete agreements
and royalty and consulting agreements are recorded at fair value when
acquired. Amortization expense is computed on these intangible assets
based upon a straight line method over the estimated useful life of the assets,
which is based upon a standard classification of the asset group. Collection
routes are amortized over a useful life of 8 to 20 years; non-compete agreements
are amortized over a useful life of 4 to 7 years; royalty and consulting
agreements are amortized over the term of the agreement; and permits are
amortized over a useful life of 20 years. The actual economic life
and utility of the asset may vary from this estimated life. Useful
lives of the assets may be modified from time to time when the future utility or
life of the asset is deemed to change from that originally estimated when the
asset was placed in service. Intangible asset amortization expense
was approximately $3.8 million, $5.2 million and $4.9 million in fiscal years
ending January 2, 2010, January 3, 2009 and December 29, 2007,
respectively.
The Company reviews the carrying value of long-lived assets for impairment when
events or changes in circumstances indicate that the carrying amount of an
asset, or related asset group, may not be recoverable from estimated future
undiscounted cash flows. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset or asset group to
estimated undiscounted future cash flows expected to be generated by the asset
or asset group. If the carrying amount of the asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the
asset. During the fourth quarter of Fiscal 2008, due to lower
commodity markets and the loss of certain large raw material suppliers, the
Company performed testing of all its long-lived assets for impairment based on
future undiscounted cash flows and has determined during this testing process
that no impairment exists for its long-lived assets. In Fiscal 2009,
no triggering event occurred requiring that the Company perform testing of all
of its long-lived assets for impairment.
The net book value of property, plant and equipment was approximately $152.0
million and $143.3 million at January 2, 2010 and January 3, 2009,
respectively. The net book value of intangible assets was
approximately $40.3 million and $36.0 million at January 2, 2010 and January 3,
2009, respectively.
Goodwill
Valuation
The Company reviews the carrying value of goodwill on a regular basis, including
at the end of each fiscal year, for indications of impairment at each reporting
unit that has recorded goodwill as an asset. Impairment is indicated
whenever the carrying value of a reporting unit exceeds the estimated fair value
of a reporting unit. For purposes of evaluating impairment of
goodwill, the Company estimates fair value of a reporting unit, based upon
future discounted net cash flows. In calculating these estimates,
actual historical operating results and anticipated future economic factors,
such as future business volume, future finished product prices, and future
operating costs and expenses are evaluated and estimated as a component of the
calculation of future discounted cash flows for each reporting unit with
recorded goodwill. The estimates of fair value of these reporting
units and of future discounted net cash flows from operation of these reporting
units could change if actual volumes, prices, costs or expenses vary from these
estimates.
Based on the Company’s annual impairment testing at the end of the fourth
quarter of Fiscal 2008, it was determined that goodwill was impaired due to
lower commodity markets and the loss of certain large raw material suppliers in
the fourth quarter of Fiscal 2008, which resulted in the Company recording an
impairment charge of approximately $15.9 million based on future discounted net
cash flows. In addition, a future reduction of earnings in the
reporting units with recorded goodwill could result in future impairment charges
because the estimate of fair value would be negatively impacted by a reduction
of earnings at those reporting units. Based on the Company’s annual
impairment testing at the end of the fourth quarter of Fiscal 2009, the fair
values of the Company’s reporting units containing goodwill exceeded the related
carrying value. Goodwill was approximately $79.1 million and $61.1
million at January 2, 2010 and January 3, 2009, respectively.
Page
44
Self
Insurance, Environmental and Legal Reserves
The Company’s workers compensation, auto and general liability policies contain
significant deductibles or self insured retentions. The Company estimates and
accrues for its expected ultimate claim costs related to accidents occurring
during each fiscal year and carries this accrual as a reserve until these claims
are paid by the Company. In developing estimates for self insured losses, the
Company utilizes its staff, a third party actuary and outside counsel as sources
of information and judgment as to the expected undiscounted future costs of the
claims. The Company accrues reserves related to environmental and litigation
matters based on estimated undiscounted future costs. With respect to the
Company’s self insurance, environmental and litigation reserves, estimates of
reserve liability could change if future events are different than those
included in the estimates of the actuary, consultants and management of the
Company. The reserve for self insurance, environmental and litigation
contingencies included in accrued expenses and other non-current liabilities for
which there are no potential insurance recoveries was approximately $15.6
million and $17.3 million at January 2, 2010 and January 3, 2009,
respectively.
Pension
Liability
The Company provides retirement benefits to employees under separate final-pay
noncontributory pension plans for salaried and hourly employees (excluding those
employees covered by a union-sponsored plan), who meet service and age
requirements. Benefits are based principally on length of service and
earnings patterns during the five years preceding retirement. Pension
expense and pension liability recorded by the Company is based upon an annual
actuarial estimate provided by a third party administrator. Factors
included in estimates of current year pension expense and pension liability at
the balance sheet date include estimated future service period of employees,
estimated future pay of employees, estimated future retirement ages of
employees, and the projected time period of pension benefit
payments. Two of the most significant assumptions used to calculate
future pension obligations are the discount rate applied to pension liability
and the expected rate of return on pension plan assets. These
assumptions and estimates are subject to the risk of change over time, and each
factor has inherent uncertainties which neither the actuary nor the Company is
able to control or to predict with certainty. See Note 13 of Notes to
Consolidated Financial Statements for summaries of pension plans.
The discount rate applied to the Company’s pension liability is the interest
rate used to calculate the present value of the pension benefit
obligation. The weighted average discount rate was 5.90% and 6.10% at
January 2, 2010 and January 3, 2009, respectively. The net periodic
benefit cost for fiscal 2010 would increase by approximately $0.8 million if the
discount rate was 0.5% lower at 5.40%. The net periodic benefit cost
for fiscal 2010 would decrease by approximately $0.7 million if the discount
rate was 0.5% higher at 6.40%.
The expected rate of return on the Company’s pension plan assets is the interest
rate used to calculate future returns on investment of the plan
assets. The expected return on plan assets is a long-term assumption
whose accuracy can only be assessed over a long period of time. The
weighted average expected return on pension plan assets was 8.10% for Fiscal
2009 and Fiscal 2008, respectively. During Fiscal 2009, the Company’s
actual return on pension plan assets was a gain of $12.8 million or
approximately 21% of pension plan assets as compared to Fiscal 2008 where the
Company’s actual return on pension plan assets was a loss of $22.9 million or
approximately 28% of pension plan assets.
The Company has recorded a pension liability of approximately $19.1 million and
$36.3 million at January 2, 2010 and January 3, 2009,
respectively. The Company’s net pension cost was approximately $6.3
million, $0.4 million and $3.0 million for the fiscal years ending January 2,
2010, January 3, 2009 and December 29, 2007, respectively. The
projected net periodic pension expense for fiscal 2010 is expected to decrease
by approximately $2.4 million as compared to Fiscal 2009.
Page
45
Income
Taxes
In
calculating net income, the Company includes estimates in the calculation of
income tax expense, the resulting tax liability and in future realization of
deferred tax assets that arise from temporary differences between financial
statement presentation and tax recognition of revenue and
expense. The Company’s deferred tax assets include a net operating
loss carry-forward which is limited to approximately $0.7 million per year in
future utilization due to the change in control resulting from the May 2002
recapitalization of the Company. Valuation allowances for deferred tax assets
are recorded when it is more likely than not that deferred tax assets will not
be realized. Based upon the Company’s evaluation of these matters, a
portion of the Company’s net operating loss carry-forwards will expire
unused. The valuation allowance established to provide a reserve
against these deferred tax assets was approximately $0.2 million at January 2,
2010 and January 3, 2009, respectively.
Stock
Option Expense
The calculation of expense of stock
options issued utilizes the Black-Scholes mathematical model which estimates the
fair value of the option award to the holder and the compensation expense to the
Company, based upon estimates of volatility, risk-free rates of return at the
date of issue and projected vesting of the option grants. The Company
recorded compensation expense related to stock options expense for the year
ended January 2, 2010, January 3, 2009 and December 29, 2007 of approximately
$0.1 million, $0.2 million and $0.4 million, respectively.
NEW
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the FASB issued revised guidance under ASC Topic 805, Business Combinations (“ASC
805”). The
new provisions of ASC 805 apply to all transactions and other events in which
one entity obtains control over one or more other businesses. ASC 805
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 the
pre-codification SFAS 141 whereby the cost of an acquisition was allocated to
the individual assets acquired and liabilities assumed based on their estimated
fair value. ASC 805 requires acquirers to expense acquisition related
costs as incurred rather than allocating these costs to assets acquired and
liabilities assumed, as was done under the pre-codification SFAS
141. The new provisions of ASC 805 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 fiscal 2009 the
Company did have acquisition activity as discussed in Note 2 Acquisitions and
Dispositions. The adoption of ASC 805 did not have a material impact
on the determination or reporting of the Company’s financial results for the
period ended January 2, 2010.
In
December 2007, the FASB issued guidance under ASC Topic 810, Consolidation (“ASC
810”). These new provisions of ASC 810 establishes 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. ASC 810 was adopted by the Company on January 4, 2009
on a prospective basis. The adoption of these new provisions of ASC
810 did not have an impact to the consolidated financial statements of the
Company.
In March
2008, the FASB issued guidance under ASC Topic 815, Derivatives and Hedging ("ASC
815"). These new provisions of ASC 815 are 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. These new provisions apply to all derivative instruments
within the scope of ASC 815 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. The Company adopted these new provisions of ASC 815
effective January 4, 2009. The adoption of this new guidance did not
have a material effect to the consolidated financial statements of the
Company.
Page
46
In April
2008, the FASB issued guidance under ASC Topic 350, Intangibles-Goodwill and Other
(“ASC 350”). The new provisions of ASC 350 amend the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. ASC 350
was adopted on January 4, 2009. The adoption of ASC 350 did not have
a material effect to the consolidated financial statements of the
Company.
In
December 2008, the FASB issued guidance under ASC Topic 715, Compensation – Retirement
Benefits (“ASC 715”) 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 ASC 715 are effective for fiscal years
ending after December 15, 2009, with earlier application
permitted. Upon initial application, the provisions of ASC 715 are
not required for earlier periods that are presented for comparative
purposes. The adoption of these new provisions of ASC 715 did not
have a material effect to the consolidated financial statement of the
Company.
In April
2009, the FASB issued guidance under ASC Topic 805, Business
Combinations. This new guidance amends and clarifies ASC 805
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 new guidance did not have a material impact on the determination or
reporting of the Company’s financial results for the period ended January 2,
2010.
In April
2009, the FASB issued guidance under ASC Topic 825, Financial Instruments (“ASC
825”). ASC 825 requires disclosures about fair value of financial
instruments for interim reporting periods as well as in annual financial
statements. ASC 825 is effective for interim reporting periods ending
after June 15, 2009. The Company’s adoption of ASC 825 did not have a
material impact on the consolidated financial statements of the
Company.
In May
2009, the FASB issued ASC Topic 855, Subsequent Events (“ASC 855”)
effective for interim or annual periods ending after June 15,
2009. The objective of ASC 855 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. ASC 855 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 ASC 855 did not have a material
effect to the consolidated financial statements of the Company.
In June
2009, the FASB issued ASU 2009-01, Topic 105, Generally Accepted Accounting
Policies (“ASC 105”). ASC 105 established the ASC 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. ASC
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. ASC is effective for
interim and annual periods ending after September 15, 2009. The
adoption of ASC 105 has changed how the Company references various elements of
U.S GAAP when preparing the Company’s financial statement disclosures, but did
not have an impact on the consolidated financial statements of the
Company.
In
December 2009, the FASB issued ASU 2009-17 which codifies SFAS No. 167, Amendments to FASB Interpretation
46(R) issued in
June 2009. ASU 2009-17 changes how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. ASU 2009-17 requires
additional disclosures about a company’s involvement with variable interest
entities and any significant changes in risk exposure due to that
involvement. The Company is required to adopt ASU 2009-17 on January
3, 2010 and is currently evaluating the impact of adopting this new
standard.
FORWARD
LOOKING STATEMENTS
This Annual Report on Form 10-K includes “forward-looking” statements that
involve risks and uncertainties. The words “believe,”
“anticipate,” “expect,” “estimate,” “intend,” and similar expressions identify
forward-looking statements. All statements other than statements of
historical facts included in the Annual Report on Form 10-K, including, without
limitation, the statements under the sections entitled “Business,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
“Legal Proceedings” and located elsewhere herein regarding industry prospects
and the Company’s financial position are forward-looking
statements. Actual results could differ materially from those
discussed in the forward-looking statements as a result of certain factors,
including many that are beyond the control of the Company. Although
the Company believes that the expectations reflected in these forward-looking
statements are reasonable, it can give no assurance that these expectations will
prove to be correct.
Page 47
In addition to those factors discussed
under the heading “Risk Factors” in Item 1A of this report and elsewhere in this
report, and in the Company’s other public filings with the SEC, important
factors that could cause actual results to differ materially from the Company’s
expectations include: the Company’s continued ability to obtain
sources of supply for its rendering operations; general economic
conditions in the American, European and Asian markets; a decline in
consumer confidence; prices in the competing commodity markets which
are volatile and are beyond the Company’s control; energy
prices; changes to worldwide government policies relating to
renewable fuels and greenhouse gas emissions; the implementation of
the Final BSE Feed Rule; BSE and its impact on finished product
prices, export markets, energy prices and government regulations, which are
still evolving and are beyond the Company’s control; the occurrence
of Bird Flu in the U.S.; possible product recall resulting from
developments relating to the discovery of unauthorized adulterations (such as
melamine) to food additives; and increased contributions to the Company’s
multi-employer defined benefit pension plans as required by the PPA. Among other
things, future profitability may be affected by the Company’s ability to grow
its business, which faces competition from companies that may have substantially
greater resources than the Company. The Company cautions readers that
all forward-looking statements speak only as of the date made, and the Company
undertakes no obligation to update any forward-looking statements, whether as a
result of changes in circumstances, new events or otherwise.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market
risks affecting the Company are exposures to changes in prices of the finished
products the Company sells, interest rates on debt, availability of raw material
supply and the price of natural gas and diesel fuel used in the Company’s
plants. Raw materials available to the Company are impacted by
seasonal factors, including holidays, when raw material volume
declines; warm weather, which can adversely affect the quality of raw
material processed and finished products produced; and cold weather,
which can impact the collection of raw material. Predominantly all of
the Company’s finished products are commodities that are generally sold at
prices prevailing at the time of sale.
The
Company makes limited use of derivative instruments to manage cash flow risks
related to interest expense, natural gas usage, diesel fuel 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. Heating oil swaps
are entered into with the intent of managing the overall cost of diesel fuel
usage by reducing the potential impact of seasonal weather demands on diesel
fuel that increases diesel fuel prices. Inventory swaps are entered
into with the intent of managing seasonally high concentrations of protein, BFT
and YG inventories by reducing the potential impact of decreasing
prices. The interest rate swaps and the natural gas swaps are subject
to the requirements of ASC 815. Some of the Company’s natural gas and
diesel fuel instruments are not subject to the requirements of ASC 815, because
some of the natural gas and diesel fuel instruments qualify as normal purchases
as defined in the ASC 815. 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 ASC 815. Under the terms of these swap agreements,
beginning June 30, 2006, the cash flows from the Company’s $50.0 million
floating-rate term loan facility under the Credit Agreement have been exchanged
for fixed rate contracts that bear interest, payable quarterly. The
first swap agreement for $25.0 million matures April 7, 2012 and bears interest
at 5.42%, which does not include the borrowing spread per the Credit Agreement,
with amortizing payments that mirror the term loan facility. The
second swap agreement for $25.0 million matures April 7, 2012 and bears interest
at 5.415%, which does not include the borrowing spread per the Credit Agreement,
with amortizing payments that mirror the term loan facility. The
Company’s receive rate on each swap agreement is based on three-month
LIBOR. At January 2, 2010, the fair value of these interest swap
agreements was $2.5 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.
Page
48
On
November 13, 2009, the Company entered into natural gas swap contracts that are
considered cash flow hedges according to ASC 815. Under the terms of
the natural gas swap contracts the Company fixed the expected purchase cost of
480,000 mmbtu’s of natural gas representing a portion of its plants expected
usage for the months of January 2010 through March 2010 at a fixed rate of $4.84
per mmbtu. At January 2, 2010, the fair value of these natural gas
swap contracts was $0.2 million and is included in other current assets on the
balance sheet, with an offset recorded to accumulated other comprehensive income
for the effective portion and other expense for the ineffective
portion.
Additionally,
the Company had heating oil swaps and inventory swaps that are marked to market
because they did not qualify for hedge accounting at January 2,
2010. The heating oil swaps had a fair value of approximately $0.1
million and are included in other current assets at January 2,
2010. The inventory swaps did not have a material effect on the
Company’s consolidated financial statements at January 2, 2010.
As of
January 2, 2010, the Company had forward purchase agreements in place for
purchases of approximately $5.1 million of natural gas and diesel fuel in fiscal
2010. As of January 2, 2010, the Company had forward purchase
agreements in place for purchases of approximately $1.8 million of finished
product in fiscal 2010.
Interest
Rate Sensitivity
The Company’s obligations subject to
fixed or variable interest rates include (in thousands, except interest
rates):
Total
|
Less
than
1
Year
|
1 –
3
Years
|
3 –
5
Years
|
More
than
5
Years
|
|||||
Long-term
debt:
|
|||||||||
Fixed
rate
|
$ 48
|
$ 9
|
$
19
|
$ 20
|
$ – | ||||
Average
interest rate
|
5.75%
|
5.75%
|
5.75%
|
5.75%
|
– | ||||
Variable
rate
|
32,500
|
5,000
|
27,500
|
–
|
–
|
||||
Average
interest rate
|
2.81%
|
2.81%
|
2.81%
|
2.81%
|
–
|
||||
Total
|
$
32,548
|
$ 5,009
|
$
27,519
|
$ 20
|
$
–
|
The Company has $32.5 million in
variable rate debt, which is made up of the Company’s term debt whose interest
risk is hedged by interest rate swaps discussed above and represents the balance
outstanding at January 2, 2010 under the Credit Agreement. The
Company estimates that if the debt was not hedged under the interest rate swap a
1% increase in interest rates would increase the Company’s interest expense by
approximately $0.3 million in fiscal 2009.
Page
49
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Page
|
||
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial Statements
|
51
|
|
Report
of Independent Registered Public Accounting Firm on Internal Control
Over Financial
Reporting
|
52
|
|
Consolidated
Balance Sheets -
|
||
January
2, 2010 and January 3, 2009
|
53
|
|
Consolidated
Statements of Operations -
|
||
Three
years ended January 2, 2010
|
54
|
|
Consolidated
Statements of Stockholders’ Equity
|
||
and
Comprehensive Income(Loss) -
|
||
Three
years ended January 2, 2010
|
55
|
|
Consolidated
Statements of Cash Flows -
|
||
Three
years ended January 2, 2010
|
57
|
|
Notes
to Consolidated Financial Statements
|
58
|
|
Financial
Statement Schedule:
|
||
II
- Valuation and Qualifying Accounts -
|
||
Three
years ended January 2, 2010
|
91
|
|
All other
schedules are omitted since the required information is not present or is not
present in amounts sufficient to require submission of the schedule, or because
the information required is included in the consolidated financial statements
and notes thereto.
Page
50
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
Report of Independent
Registered Public Accounting Firm
The Board
of Directors and Stockholders
Darling
International Inc.:
We have
audited the consolidated financial statements of Darling International Inc.
and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Darling International Inc.
and subsidiaries as of January 2, 2010 and January 3, 2009, and the results of
their operations and their cash flows for each of the years in the three-year
period ended January 2, 2010, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Darling International Inc.’s internal control
over financial reporting as of January 2, 2010, based on criteria established in
Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 3, 2010 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
(signed)
KPMG LLP
Dallas,
Texas
March 3,
2010
Page
51
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
Report of Independent
Registered Public Accounting Firm
The Board
of Directors and Stockholders
Darling
International Inc.:
We have
audited Darling International Inc.’s internal control over financial reporting
as of January 2, 2010, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Darling International Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Darling International Inc. maintained, in all material respects,
effective internal control over financial reporting as of January 2, 2010, based
on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements of
Darling International Inc. and subsidiaries as listed in the accompanying index,
and our report dated March 3, 2010 expressed an unqualified opinion on those
consolidated financial statements.
(signed)
KPMG LLP
Dallas,
Texas
March 3,
2010
Page
52
DARLING INTERNATIONAL INC. AND
SUBSIDIARIES
Consolidated
Balance Sheets
January
2, 2010 and January 3, 2009
(in
thousands, except share and per share data)
ASSETS
|
January
2,
2010
|
January
3,
2009
|
||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 68,182 | $ | 50,814 | ||||
Restricted cash
|
397 | 449 | ||||||
Accounts
receivable, less allowance for bad debts of $2,148
at
January 2, 2010 and $2,313 at January 3, 2009
|
45,572 | 40,424 | ||||||
Inventories
|
19,057 | 22,182 | ||||||
Income
taxes refundable
|
605 | 11,248 | ||||||
Other
current assets
|
5,348 | 6,696 | ||||||
Deferred
income taxes
|
7,216 | 6,656 | ||||||
Total
current assets
|
146,377 | 138,469 | ||||||
Property,
plant and equipment, net
|
151,982 | 143,291 | ||||||
Intangible
assets, less accumulated amortization of $51,109
|
||||||||
at
January 2, 2010 and $47,281 at January 3, 2009
|
40,298 | 35,982 | ||||||
Goodwill
|
79,085 | 61,133 | ||||||
Other
assets
|
8,429 | 6,623 | ||||||
Deferred
income taxes
|
– | 8,877 | ||||||
$ | 426,171 | $ | 394,375 | |||||
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Current
portion of long-term debt
|
$ | 5,009 | $ | 5,000 | ||||
Accounts
payable, principally trade
|
18,746 | 16,243 | ||||||
Accrued
expenses
|
47,522 | 49,780 | ||||||
Total
current liabilities
|
71,277 | 71,023 | ||||||
Long-term
debt, net of current portion
|
27,539 | 32,500 | ||||||
Other
noncurrent liabilities
|
36,143 | 54,274 | ||||||
Deferred
income taxes
|
6,335 | – | ||||||
Total
liabilities
|
141,294 | 157,797 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity:
|
||||||||
Common
stock, $.01 par value; 100,000,000 shares
authorized,
|
||||||||
82,629,970 and 82,169,076
shares issued
|
||||||||
at January 2, 2010 and January
3, 2009, respectively
|
826 | 822 | ||||||
Additional
paid-in capital
|
157,343 | 156,899 | ||||||
Treasury stock, at cost; 403,280
and 401,094 shares at
January 2, 2010 and January 3,
2009, respectively
|
( 3,855 | ) | ( 3,848 | ) | ||||
Accumulated
other comprehensive loss
|
( 23,782 | ) | ( 29,850 | ) | ||||
Accumulated
earnings
|
154,345 | 112,555 | ||||||
Total
stockholders’ equity
|
284,877 | 236,578 | ||||||
$ | 426,171 | $ | 394,375 |
The
accompanying notes are an integral part of these
consolidated
financial statements.
Page
53
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
Three
years ended January 2, 2010
(in
thousands, except per share data)
January
2,
2010
|
January
3,
2009
|
December
29,
2007
|
||||||||||
Net
sales
|
$ | 597,806 | $ | 807,492 | $ | 645,313 | ||||||
Costs
and expenses:
|
||||||||||||
Cost
of sales and operating expenses
|
440,111 | 614,708 | 483,453 | |||||||||
Selling,
general and administrative expenses
|
61,530 | 59,761 | 57,999 | |||||||||
Depreciation
and amortization
|
25,226 | 24,433 | 23,214 | |||||||||
Goodwill
impairment
|
– | 15,914 | – | |||||||||
Total costs and
expenses
|
526,867 | 714,816 | 564,666 | |||||||||
Operating income
|
70,939 | 92,676 | 80,647 | |||||||||
Other
income/(expense):
|
||||||||||||
Interest
expense
|
( 3,105 | ) | ( 3,018 | ) | ( 5,045 | ) | ||||||
Other,
net
|
(955 | ) | 258 | ( 570 | ) | |||||||
Total other
income/(expense)
|
( 4,060 | ) | ( 2,760 | ) | ( 5,615 | ) | ||||||
Income
from operations before
income
taxes
|
66,879 | 89,916 | 75,032 | |||||||||
Income
taxes
|
25,089 | 35,354 | 29,499 | |||||||||
Net
income
|
$ | 41,790 | $ | 54,562 | $ | 45,533 | ||||||
Net
income per share:
|
||||||||||||
Basic
|
$ | 0.51 | $ | 0.67 | $ | 0.56 | ||||||
Diluted
|
$ | 0.51 | $ | 0.66 | $ | 0.56 | ||||||
The
accompanying notes are an integral part
of these
consolidated financial statements.
Page
54
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income(Loss)
Three
years ended January 2, 2010
(in
thousands, except share data)
Common
Stock
|
|||||||||
Number
of
Outstanding
Shares
|
$.01
par
Value
|
Additional
Paid-In
Capital
|
Treasury
Stock
|
Accumulated
Other
Compre-
hensive
Loss
|
Retained
Earnings
|
Total
Stockholders’
Equity
|
Balances
at December 30, 2006
|
80,854,453 | $ | 809 | $ | 150,045 | $ | (172 | ) | $ | (11,733 | ) | $ | 12,376 | $ | 151,325 | |||||||||||||
Net
income
|
– | – | – | – | – | 45,533 | 45,533 | |||||||||||||||||||||
Unrecognized
net actuarial
loss
of defined benefit plans:
|
||||||||||||||||||||||||||||
Pension liability
adjustments,
net of tax
|
– | – | – | – | 3,870 | – | 3,870 | |||||||||||||||||||||
Interest
rate swap derivative
adjustment,
net of tax
|
– | – | – | – | (735 | ) | – | (735 | ) | |||||||||||||||||||
Total
comprehensive income
|
– | – | – | – | – | – | 48,668 | |||||||||||||||||||||
Adjustment
for uncertain tax
position
adoption
|
– | – | – | – | – | 141 | 141 | |||||||||||||||||||||
Stock-based
compensation
|
– | – | 365 | – | – | – | 365 | |||||||||||||||||||||
Tax
benefits associated with
stock-based
compensation
|
– | – | 1,223 | – | – | – | 1,223 | |||||||||||||||||||||
Treasury
stock
|
(161,366 | ) | – | – | (1,375 | ) | – | – | (1,375 | ) | ||||||||||||||||||
Issuance
of common stock
|
669,013 | 6 | 631 | – | – | – | 637 | |||||||||||||||||||||
Balances
at December 29, 2007
|
81,362,100 | $ | 815 | $ | 152,264 | $ | (1,547 | ) | $ | (8,598 | ) | $ | 58,050 | $ | 200,984 | |||||||||||||
Net
income
|
– | – | – | – | – | 54,562 | 54,562 | |||||||||||||||||||||
Unrecognized
net actuarial
loss
of defined benefit plans:
|
||||||||||||||||||||||||||||
Pension liability
adjustments,
net of tax
|
– | – | – | – | (20,386 | ) | – | (20,386 | ) | |||||||||||||||||||
Interest
rate swap derivative
adjustment,
net of tax
|
– | – | – | – | (937 | ) | – | (937 | ) | |||||||||||||||||||
Total
comprehensive income
|
– | – | – | – | – | – | 33,239 | |||||||||||||||||||||
Adjustment
effect of actuarially
determined
pension liabilities
measurement
adoption,
net
of tax
|
– | – | – | – | 71 | (57 | ) | 14 | ||||||||||||||||||||
Issuance
of non-vested stock
|
50,558 | 1 | 702 | – | – | – | 703 | |||||||||||||||||||||
Stock-based
compensation
|
– | – | (127 | ) | – | – | – | (127 | ) | |||||||||||||||||||
Tax
benefits associated with
stock-based
compensation
|
– | – | 2,308 | – | – | – | 2,308 | |||||||||||||||||||||
Treasury
stock
|
(218,728 | ) | – | – | (2,301 | ) | – | – | (2,301 | ) | ||||||||||||||||||
Issuance
of common stock
|
574,052 | 6 | 1,752 | – | – | – | 1,758 | |||||||||||||||||||||
Balances
at January 3, 2009
|
81,767,982 | $ | 822 | $ | 156,899 | $ | (3,848 | ) | $ | (29,850 | ) | $ | 112,555 | $ | 236,578 |
Page 55
DARLING INTERNATIONAL INC. AND
SUBSIDIARIES
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income(Loss)
(Continued)
Three
years ended January 2, 2010
(in
thousands, except share data)
Common
Stock
|
|||||||||
Number
of
Outstanding
Shares
|
$.01
par
Value
|
Additional
Paid-In
Capital
|
Treasury
Stock
|
Accumulated
Other
Compre-
hensive
Loss
|
Retained
Earnings
|
Total
Stockholders’
Equity
|
Net
income
|
– | – | – | – | – | 41,790 | 41,790 | |||||||||||||||||||||
Unrecognized
net actuarial
loss
of defined benefit plans:
|
||||||||||||||||||||||||||||
Pension liability
adjustments,
net of tax
|
– | – | – | – | 5,229 | – | 5,229 | |||||||||||||||||||||
Interest
rate swap derivative
adjustment,
net of tax
|
– | – | – | – | 702 | – | 702 | |||||||||||||||||||||
Natural
gas swap derivative
adjustment,
net of tax
|
– | – | – | – | 137 | – | 137 | |||||||||||||||||||||
Total
comprehensive income
|
– | – | – | – | – | – | 47,858 | |||||||||||||||||||||
Issuance
of non-vested stock
|
307,558 | 3 | 901 | – | – | – | 904 | |||||||||||||||||||||
Stock-based
compensation
|
– | – | (720 | ) | – | – | – | (720 | ) | |||||||||||||||||||
Tax
benefits associated with
stock-based
compensation
|
– | – | (39 | ) | – | – | – | (39 | ) | |||||||||||||||||||
Treasury
stock
|
(2,186 | ) | – | – | (7 | ) | – | – | (7 | ) | ||||||||||||||||||
Issuance
of common stock
|
153,336 | 1 | 302 | – | – | – | 303 | |||||||||||||||||||||
Balances
at January 2, 2010
|
82,226,690 | $ | 826 | $ | 157,343 | $ | (3,855 | ) | $ | (23,782 | ) | $ | 154,345 | $ | 284,877 |
The
accompanying notes are an integral part
of
these consolidated financial statements.
Page
56
DARLING INTERNATIONAL INC. AND
SUBSIDIARIES
Consolidated
Statements of Cash Flows
Three
years ended January 2, 2010
(in
thousands)
January
2,
2010
|
January
3,
2009
|
December
29,
2007
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ | 41,790 | $ | 54,562 | $ | 45,533 | ||||||
Adjustments
to reconcile net income to net cash provided by
operating
activities:
|
||||||||||||
Depreciation
and amortization
|
25,226 | 24,433 | 23,214 | |||||||||
Deferred
income taxes
|
14,652 | ( 12,428 | ) | 5,616 | ||||||||
Gain
on sale of assets
|
( 294 | ) | ( 141 | ) | ( 5 | ) | ||||||
Increase/(decrease)
in long-term pension liability
|
( 11,974 | ) | 6,784 | ( 5,664 | ) | |||||||
Stock-based
compensation expense
|
768 | 800 | 1,235 | |||||||||
Goodwill
impairment
|
– | 15,914 | – | |||||||||
Changes
in operating assets and liabilities, net
of
effects from acquisitions:
|
||||||||||||
Restricted
cash
|
52 | ( 16 | ) | 47 | ||||||||
Accounts
receivable
|
( 5,148 | ) | 18,977 | ( 17,020 | ) | |||||||
Income taxes
refundable
|
10,643 | ( 11,248 | ) | – | ||||||||
Inventories
and prepaid expenses
|
4,286 | ( 398 | ) | ( 7,728 | ) | |||||||
Accounts
payable and accrued expenses
|
( 369 | ) | ( 6,884 | ) | 18,916 | |||||||
Other
|
( 446 | ) | 1,595 | 1,563 | ||||||||
Net
cash provided by operating activities
|
79,186 | 91,950 | 65,707 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Capital
expenditures
|
( 23,638 | ) | ( 31,006 | ) | ( 15,552 | ) | ||||||
Acquisitions
|
( 33,987 | ) | ( 15,876 | ) | – | |||||||
Gross
proceeds from sale of property, plant and equipment
and
other assets
|
1,913 | 1,101 | 217 | |||||||||
Payments
related to routes and other intangibles
|
– | ( 6,609 | ) | (262 | ) | |||||||
Net
cash used in investing activities
|
( 55,712 | ) | ( 52,390 | ) | ( 15,597 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Proceeds
from long-term debt
|
48 | – | 42,500 | |||||||||
Payments
on long-term debt
|
( 5,000 | ) | ( 6,250 | ) | ( 81,754 | ) | ||||||
Contract
payments
|
( 72 | ) | ( 176 | ) | ( 167 | ) | ||||||
Deferred
loan costs
|
( 946 | ) | ( 67 | ) | – | |||||||
Issuance
of common stock
|
11 | 303 | 517 | |||||||||
Minimum
withholding taxes paid on stock awards
|
( 108 | ) | ( 1,199 | ) | ( 1,375 | ) | ||||||
Excess
tax benefits from stock-based compensation
|
( 39 | ) | 2,308 | 1,223 | ||||||||
Net
cash used in financing activities
|
( 6,106 | ) | ( 5,081 | ) | ( 39,056 | ) | ||||||
Net
increase in cash and cash equivalents
|
17,368 | 34,479 | 11,054 | |||||||||
Cash
and cash equivalents at beginning of year
|
50,814 | 16,335 | 5,281 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 68,182 | $ | 50,814 | $ | 16,335 | ||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Cash
paid during the year for:
|
||||||||||||
Interest
|
$ | 2,687 | $ | 3,016 | $ | 5,151 | ||||||
Income
taxes, net of refunds
|
$ | 2,244 | $ | 44,246 | $ | 26,307 | ||||||
The
accompanying notes are an integral part
of these
consolidated financial statements.
Page
57
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
1.
|
GENERAL
|
(a)
|
NATURE
OF OPERATIONS
Darling
International Inc., a Delaware corporation (the “Company”), is a recycler
of food and animal by-products and provides grease trap services to food
service establishments. Darling collects and recycles animal
by-products and used cooking oil from food service
establishments. Darling processes raw materials at 45
facilities located throughout the United States into finished products
such as protein (primarily meat and bone meal, “MBM”), tallow (primarily
bleachable fancy tallow, “BFT”), yellow grease (“YG”) and
hides. The Company sells these products nationally and
internationally, primarily to producers of oleo-chemicals, soaps, pet
foods, leather goods, livestock feed and bio-fuels for use as ingredients
in their products or for further processing. The Company’s
operations are currently organized into two segments: Rendering and
Restaurant Services. For additional information on the
Company’s segments, see Note
18.
|
(b)
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
In
June 2009, the Financial Accounting Standards Board (“FASB”) issued a
standard that establishes the FASB Accounting Standard’s Codification ™
(“ASC”) and amended the hierarchy of generally accepted accounting
principles (“GAAP”) such that the ASC became the single source of
authoritative nongovernmental U.S. GAAP. All accounting
standard references to GAAP included within the consolidated financial
statements are in accordance with the FASB standards codification as
adopted effective October 3, 2009.
|
(1)
|
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and
transactions have been eliminated in
consolidation.
|
(2)
|
Fiscal
Year
The
Company has a 52/53 week fiscal year ending on the Saturday nearest
December 31. Fiscal years for the consolidated financial
statements included herein are for the 52 weeks ended January 2, 2010, the
53 weeks ended January 3, 2009, and the 52 weeks ended December 29,
2007.
|
(3)
|
Cash
and Cash Equivalents
The
Company considers all short-term highly liquid instruments, with an
original maturity of three months or less, to be cash
equivalents.
|
(4)
|
Accounts
Receivable and Allowance for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from customers’ non-payment of trade accounts receivable owed to
the Company. These trade receivables arise in the ordinary
course of business from sales of raw material, finished product or
services to the Company’s customers. The estimate of allowance
for doubtful accounts is based upon the Company’s bad debt experience,
prevailing market conditions, and aging of trade accounts receivable,
among other factors. If the financial condition of the
Company’s customers deteriorates, resulting in the customers’ inability to
pay the Company’s receivables as they come due, additional allowances for
doubtful accounts may be required.
|
(5)
|
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO)
method.
|
Page
58
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
(6)
|
Long
Lived Assets
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Depreciation is
computed by the straight-line method over the estimated useful lives of
assets: 1) Buildings and improvements, 15 to 30 years;
2)
Machinery and equipment, 3 to 10 years; and 3) Vehicles, 2 to 6
years.
Maintenance
and repairs are charged to expense as incurred and expenditures for major
renewals and improvements are capitalized.
|
|
Intangible
Assets
Intangible
assets subject to amortization consist of: 1) collection routes
which are made up of groups of suppliers of raw materials in similar
geographic areas from which the Company derives collection fees and a
dependable source of raw materials for processing into finished
products; 2) permits that represent licensing of operating
plants that have been acquired, giving those plants the ability to
operate; 3) non-compete agreements that represent contractual arrangements
with former competitors whose businesses were acquired; and 4)
royalty and consulting agreements. Amortization expense is
calculated using the straight-line method over the estimated useful lives
of the assets ranging from: 8-20 years for collection routes;
20 years for permits; and 4-7 years for non-compete
covenants. Royalty and consulting agreements are amortized over
the term of the agreement.
|
(7)
|
Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed of
The
Company follows FASB ASC Topic 360, Property, Plant, and
Equipment for impairment of long-lived assets and long-lived assets
to be disposed of. The Company reviews the carrying value of
long-lived assets for impairment when events or changes in circumstances
indicate that the carrying amount of an asset, or related asset group, may
not be recoverable from estimated future undiscounted cash
flows. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset or asset group to
estimated undiscounted future cash flows expected to be generated by the
asset or asset group. If the carrying amount of the asset
exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. During the fourth quarter of
fiscal 2008, due to lower commodity markets and the loss of certain large
raw material suppliers, the Company performed testing of all its
long-lived assets for impairment based on future undiscounted cash flows
and concluded that its long-lived assets were not impaired. In
fiscal 2009 no triggering event occurred requiring that the Company
perform testing of all of it’s long-lived assets for
impairment.
|
(8)
|
Goodwill
Goodwill
is tested for impairment annually or more frequently if events or changes
in circumstances indicate that the asset might be
impaired. FASB ASC Topic 350, Intangibles-Goodwill and
Other (“ASC 350”) requires a two-step process for testing
impairment. First, the fair value of each reporting unit is
compared to its carrying value to determine whether an indication of
impairment exists. If impairment is indicated, then the fair
value of the reporting unit’s goodwill is determined by allocating the
unit’s fair value of its assets and liabilities (including any
unrecognized intangible assets) as if the reporting unit had been acquired
in a business combination. The amount of impairment for
goodwill is measured as the excess of its carrying value over its implied
fair value.
In
fiscal 2008, the fair value of the Company’s reporting units containing
goodwill did not exceed the related carrying values; consequently, the
Company recorded an impairment of approximately $15.9 million for the year
ended January 3, 2009. In Fiscal 2009, the fair values of the
Company’s reporting units containing goodwill exceeded the related
carrying value. Goodwill was approximately $79.1 million and
$61.1 million at January 2, 2010 and January 3, 2009,
respectively. See Note 6 for further information on the
Company’s goodwill.
|
Page 59
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
(9)
|
Environmental
Expenditures
Environmental
expenditures incurred to mitigate or prevent environmental impacts that
have yet to occur and that otherwise may result from future operations are
capitalized. Expenditures that relate to an existing condition
caused by past operations and that do not contribute to current or future
revenues are expensed or charged against established environmental
reserves. Reserves are established when environmental impacts
have been identified which are probable to require mitigation and/or
remediation and the costs are reasonably
estimable.
|
(10)
|
Income
Taxes
The
Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
|
(11)
|
Earnings
per Share
On
January 4, 2009, the Company adopted the provisions of FASB ASC Topic 260,
Earnings Per
Share (“ASC 260”), which 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. 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 ASC 260. 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 the new guidance in
ASC 260 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.
|
Page
60
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
Net Income per Common Share (in thousands)
January
2,
|
January 3, |
December 29,
|
||||||||||||
2010 | 2009 | 2007 | ||||||||||||
Income
|
Shares |
Per-
Share
|
Income
|
Shares |
Per-
Share
|
Income | Shares |
Per-
Share
|
||||||
Basic:
|
||||||||||||||
Net
income
|
$41,790
|
82,142
|
$0.51
|
$54,562
|
81,685
|
$0.67
|
$45,533
|
81,091
|
$0.56
|
|||||
Diluted:
|
||||||||||||||
Effect
of dilutive securities
|
||||||||||||||
Add:
Option shares in the money and
|
||||||||||||||
dilutive effect of restricted stock
|
–
|
778
|
–
|
–
|
969
|
–
|
–
|
1,473
|
–
|
|||||
Less:
Pro-forma treasury shares
|
–
|
(445)
|
–
|
–
|
(408)
|
–
|
–
|
(648)
|
–
|
|||||
Diluted:
|
||||||||||||||
Net
income
|
$41,790
|
82,475
|
$0.51
|
$54,562
|
82,246
|
$0.66
|
$45,533
|
81,916
|
$0.56
|
|||||
For
fiscal 2009, 2008 and 2007, respectively, 32,000, 24,000 and 5,187 outstanding
stock options were excluded from
diluted income per common share as the effect was antidilutive.
(12)
|
Stock
Based Compensation
FASB
ASC Topic 718, Compensation-Stock
Compensation (“ASC 718”) requires all entities to recognize
compensation expense in an amount equal to the fair value of the
share-based payments (e.g., stock options and non-vested and restricted
stock) granted to employees or by incurring liabilities to an employee or
other supplier (a) in amounts based, at least in part, on the price of the
entity’s shares or other equity instruments, or (b) that require or may
require settlement by issuing the entity’s equity shares or other equity
instruments.
Total
stock-based compensation recognized under ASC 718 in the statements of
operations for the years ended January 2, 2010, January 3, 2009 and
December 29, 2007 was approximately $1.2 million, $1.1 million and $1.4
million, respectively, which is included in selling, general and
administrative costs, and the related income tax benefit recognized was
approximately $0.5 million, $0.3 million and $0.4 million,
respectively. See Note 12 for further information on the
Company’s stock-based compensation plans.
ASC
718 requires the benefits of tax deductions in excess of recognized
compensation cost are reported as a financing cash flow. For
the year ended January 2, 2010 the Company recognized less than $0.1
million of such tax expenses, which were recorded as a decrease in
financing cash flows. For the year ended January 3, 2009 and
December 29, 2007, the Company recognized $2.3 million and $1.2 million,
respectively in such tax deductions, which were recorded as an increase in
financing cash flows and a reduction in operating cash
flows.
|
(13)
|
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those
estimates.
|
Page
61
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
If
it is at least reasonably possible that the estimate of the effect on the
financial statements of a condition, situation, or set of circumstances
that exist at the date of the financial statements will change in the near
term due to one or more future confirming events and the effect of the
change would be material to the financial statements, the Company will
disclose the nature of the uncertainty and include an indication that it
is at least reasonably possible that a change in the estimate will occur
in the near term. If the estimate involves certain loss
contingencies covered by FASB ASC Topic 450, Contingencies, the
disclosure will also include an estimate of the probable loss or range of
loss or state that an estimate cannot be
made.
|
(14)
|
Financial
Instruments
The
carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates fair value due to the
short maturity of these instruments. Based on rates the Company
believes it would pay for debt of the same remaining maturity the
Company’s outstanding term loan described in Note 9 has a fair value of
approximately $30.2 million and $33.2 million compared to a carrying
amount of $32.5 million and $37.5 million at January 2, 2010 and January
3, 2009, respectively. The fair value was determined using a
level three input under the fair value hierarchy. The carrying
amount for the Company’s other debt is not deemed to be significantly
different than the amount recorded and all other financial instruments
have been recorded at fair value as disclosed in Note
15.
|
(15)
|
Derivative
Instruments
The
Company makes limited use of derivative instruments to manage cash flow
risks related to interest expense, natural gas usage, diesel fuel 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. Heating oil swaps are entered into with the
intent of managing the overall cost of diesel fuel usage by reducing the
potential impact of seasonal weather demands on diesel fuel that increases
diesel fuel prices. Inventory swaps are entered into with the
intent of managing seasonally high concentrations of MBM, BFT and YG
inventories by reducing the potential impact of decreasing
prices. The Company does not use derivative instruments for
trading purposes. At January 2, 2010, the Company had natural
gas swaps and two interest rate swaps outstanding that qualified and were
designated for hedge accounting as well as heating oil swaps and inventory
swaps that did not qualify and were not designated for hedge
accounting.
Under
FASB ASC Topic 815, Derivatives and Hedging
(“ASC 815”), 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 is reported in
earnings immediately. If the derivative instrument is not designated as a
hedge, the gain or loss is recognized in earnings in the period of
change.
|
(16)
|
Comprehensive
Income
The
Company follows the provisions FASB ASC Topic 220, Comprehensive Income
(“ASC 220”). ASC 220 establishes standards for reporting and
presentation of comprehensive income and its components. In
accordance with ASC 220, the Company has presented the components of
comprehensive income in its consolidated statements of stockholders’
equity and comprehensive income(loss).
|
Page
62
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
(17)
|
Revenue
Recognition
The
Company recognizes revenue on sales when products are shipped and the
customer takes ownership and assumes risk of loss. Certain customers
may be required to prepay prior to shipment in order to maintain payment
protection against certain foreign and domestic sales. These amounts
are recorded as unearned revenue and recognized when the products have
shipped and the customer takes ownership and assumes risk of loss.
The Company has formula arrangements with certain suppliers whereby the
charge or credit for raw materials is tied to published finished product
commodity prices after deducting a fixed processing fee incorporated into
the formula and is recorded as a cost of sale by line of business.
The Company recognizes revenue related to grease trap servicing in the
month the trap service occurs.
|
(18)
|
Reclassification
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
|
(19)
|
Subsequent
Events
The
Company has evaluated subsequent events from the end of the most recent
fiscal year through the date the consolidated financial statements were
issued.
|
NOTE
2.
|
ACQUISITIONS
AND DISPOSITIONS
|
On
December 31, 2009, the Company acquired certain rendering, grease collection and
trap servicing business assets from Sanimax USA Inc. for approximately $19
million. The purchase was accounted for as an asset purchase pursuant
to the terms of the asset purchase agreement between the Company and Sanimax USA
Inc. and affiliated companies (the “Sanimax Transaction”). The assets
acquired in the Sanimax Transaction will increase the Company’s national
footprint and better serve the Company’s customers within the rendering
segment.
Effective
December 31, 2009, the Company began including the operations of the Sanimax
Transaction into the Company’s consolidated financial statements. The
Company paid approximately $19 million in cash for assets and assumed
liabilities consisting of property, plant and equipment of $4.7 million,
intangible assets of $4.8 million, goodwill of $9.6 million and accrued
liabilities of $0.1 million on the closing date. The goodwill from
the Sanimax Transaction was assigned to the rendering segment and is expected to
be deductible for tax purposes and the identifiable intangibles have a weighted
average life of eight years.
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. 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 from the Boca Transaction 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.
The
Company notes these acquisitions are not considered related businesses,
therefore are not required to be treated as a single business combination.
Pro forma results of operations have not been presented because the effect of
each acquisition individually is not deemed material to revenues and net income
of the Company for any fiscal period presented.
Page 63
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
On August
25, 2008, Darling completed the acquisition of substantially all of the assets
of API Recycling’s used cooking oil collection business (the “API
Transaction”). API Recycling is a division of American Proteins,
Inc. The purchase was accounted for as an asset purchase pursuant to
the terms of the asset purchase agreement between the Company and American
Proteins, Inc. The assets acquired in the API Transaction will
increase the Company’s capabilities to grow revenues and continue the Company’s
strategy of broadening its restaurant services segment.
Effective
August 25, 2008, the Company began including the operations of the API
Transaction into the Company’s consolidated financial statements. Pro
forma results of operations have not been presented because the effect of the
acquisition is not deemed material to revenues and net income of the Company for
fiscal 2008. The Company paid cash of $15.9 million and recorded a
receivable of approximately $1.5 million for a net purchase price for the API
Transaction of approximately $14.4 million, which consists of property, plant
and equipment of $3.4 million, intangible assets of $5.5 million, goodwill of
$5.2 million and other of $0.3 million. The receivable was recorded
as a reduction of goodwill due to certain raw material volumes during the 91
days following the closing date not being achieved per the asset purchase
agreement. The $1.5 million receivable is recorded as a long term
other asset on the balance sheet at January 3, 2009. In addition, the
Company could be required to pay additional consideration, which the Company
does not expect to be material, if certain average market prices are achieved
over the next three anniversaries of the closing of the API Transaction less, on
a pro rata basis, the long-term receivable of $1.5 million. During the third
quarter of fiscal 2009, the Company recorded additional consideration of $2.5
million recorded as goodwill less approximately $0.5 million representing a
reduction of the long term receivable. The additional consideration
was paid in the fourth quarter of fiscal 2009.
The $7.7
million of goodwill from the API Transaction was assigned to the restaurant
services segment and is expected to be deductible for tax
purposes. Identifiable intangibles in the API Transaction include
$5.5 million in routes with a weighted average useful life of nine
years.
On
September 11, 2009, the Company sold its Little Rock, Arkansas grease/trap plant
to a third party for cash and other consideration of approximately $1.6
million. Effective September 11, 2009, the consolidated financial
statements do not include the operations of the Little Rock
plant. The disclosure of the Little Rock plant as discontinued
operations and the pro forma presentation of the Little Rock plant have not been
made because the Company has determined that the historical revenues and net
income are not material to the Company for fiscal 2009 and 2008.
NOTE
3.
|
INVENTORIES
|
A summary
of inventories follows (in thousands):
January
2,
2010
|
January
3,
2009
|
|||||||
Finished
product
|
$ | 16,211 | $ | 19,380 | ||||
Supplies
and other
|
2,846 | 2,802 | ||||||
$ | 19,057 | $ | 22,182 |
Page
64
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
NOTE
4.
|
PROPERTY,
PLANT AND EQUIPMENT
|
A summary
of property, plant and equipment follows (in thousands):
January
2,
2010
|
January
3,
2009
|
|||||||
Land
|
$ | 18,386 | $ | 17,826 | ||||
Buildings
and improvements
|
52,059 | 48,623 | ||||||
Machinery
and equipment
|
244,962 | 217,450 | ||||||
Vehicles
|
56,221 | 54,656 | ||||||
Construction
in process
|
3,919 | 16,042 | ||||||
375,547 | 354,597 | |||||||
Accumulated
depreciation
|
(223,565 | ) | (211,306 | ) | ||||
$ | 151,982 | $ | 143,291 |
NOTE
5.
|
INTANGIBLE
ASSETS
|
The gross
carrying amount of intangible assets subject to amortization include (in
thousands):
|
January
2,
2010
|
January
3,
2009
|
||||||
Intangible
Assets:
|
||||||||
Routes
|
$ | 68,028 | $ | 60,009 | ||||
Permits
|
20,500 | 20,500 | ||||||
Non-compete
agreements
|
2,491 | 2,366 | ||||||
Royalty
and consulting agreements
|
388 | 388 | ||||||
91,407 | 83,263 | |||||||
Accumulated
Amortization:
|
||||||||
Routes
|
(44,731 | ) | (42,037 | ) | ||||
Permits
|
(3,725 | ) | (2,700 | ) | ||||
Non-compete
agreements
|
(2,329 | ) | (2,240 | ) | ||||
Royalty
and consulting agreements
|
(324 | ) | (304 | ) | ||||
(51,109 | ) | (47,281 | ) | |||||
Intangible
assets, less accumulated
amortization
|
$ | 40,298 | $ | 35,982 |
Gross
intangible routes and non-compete agreements increased in fiscal 2009 by
approximately $8.1 million consisting of approximately $4.8 million from the
Sanimax Transaction and $3.3 million from the Boca Transaction as discussed in
Note 2. Amortization expense for the three years ended January 2,
2010, January 3, 2009 and December 29, 2007, was approximately $3.8 million,
$5.2 million and $4.9 million, respectively. Amortization expense for the next
five fiscal years is estimated to be $4.3 million, $4.1 million, $4.0 million,
$3.8 million and $3.8 million.
Bage
65
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
NOTE
6.
|
GOODWILL
|
Changes
in the carrying amount of goodwill (in thousands):
Rendering
|
Restaurant
Services
|
Total
|
||||||||||
Balance
at January 3, 2009
|
||||||||||||
Goodwill
|
$ | 55,930 | $ | 21,117 | $ | 77,047 | ||||||
Accumulated impairment
losses
|
(13,864 | ) | (2,050 | ) | (15,914 | ) | ||||||
42,066 | 19,067 | 61,133 | ||||||||||
Goodwill acquired during
year
|
9,627 | 8,325 | 17,952 | |||||||||
Impairment
losses
|
– | – | – | |||||||||
Balance
at January 2, 2010
|
||||||||||||
Goodwill
|
65,557 | 29,442 | 94,999 | |||||||||
Accumulated impairment
losses
|
(13,864 | ) | (2,050 | ) | (15,914 | ) | ||||||
$ | 51,693 | $ | 27,392 | $ | 79,085 |
Certain
of the Company’s rendering facilities are highly dependent on one or few
suppliers. It is reasonably possible that certain of those suppliers
could cease their operations or choose a competitor’s services which could have
a significant impact on these facilities.
Based on
the Company’s annual impairment testing at the end of the fourth quarter of
fiscal 2008 it was determined that goodwill was impaired due to lower commodity
markets and the loss of certain large raw material suppliers in the fourth
quarter of fiscal 2008, which resulted in the Company recording an impairment
charge of approximately $15.9 million based on future discounted net cash
flows.
The
process of evaluating goodwill for impairment involves the determination of the
fair value of the Company’s reporting units. In step one, the Company
determined based on the discounted cash flows that one of the Company’s
reporting unit’s carrying value exceeded its fair value in fiscal
2008. In step two the Company is required to compute the implied fair
value of the reporting unit’s goodwill and compare it against the actual
carrying amount of goodwill for that reporting unit. This was
determined in the same manner that goodwill recognized in a business combination
is determined. That is the fair value of the reporting unit was
allocated to all of the individual assets and liabilities of the reporting unit
including any intangible assets, as if the reporting unit had been acquired in a
business combination and the fair value of the reporting unit determined in the
first step was the price paid to acquire the reporting unit.
In fiscal
2009, the fair values of the Company’s reporting units containing goodwill
exceeded the related carrying value.
NOTE
7.
|
ACCRUED
EXPENSES
|
Accrued
expenses consist of the following (in thousands):
January
2,
2010
|
January
3,
2009
|
|||||||
Compensation
and benefits
|
$ | 17,159 | $ | 18,838 | ||||
Utilities
and sewage
|
3,781 | 5,293 | ||||||
Accrued
income, ad valorem, and franchise taxes
|
3,233 | 1,120 | ||||||
Reserve
for self insurance, litigation, environmental
and
tax matters (Note 17)
|
5,087 | 5,513 | ||||||
Medical
claims liability
|
4,230 | 4,982 | ||||||
Other
accrued expense
|
14,032 | 14,034 | ||||||
$ | 47,522 | $ | 49,780 |
Page
66
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
NOTE
8.
|
LEASES
|
The Company leases six plants and storage locations, three office
locations and a portion of its transportation equipment under operating
leases. Leases are noncancellable and expire at various times
through the year 2028. Minimum rental commitments under noncancellable
leases as of January 2, 2010, are as follows (in
thousands):
|
Period Ending Fiscal
|
Operating Leases
|
|
2010
|
$
10,520
|
|
2011
|
9,093
|
|
2012
|
6,229
|
|
2013
|
4,295
|
|
2014
|
2,437
|
|
Thereafter
|
10,987
|
|
Total
|
$
43,561
|
Rent
expense for the fiscal years ended January 2, 2010, January 3, 2009 and December
29, 2007 was $9.4 million, $8.6 million and $7.8 million,
respectively.
NOTE
9.
|
DEBT
|
|
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 January 2, 2010, 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 seven-year
term ending April 7, 2013. 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, (b) the
federal funds effective rate (as defined in the Credit Agreement) plus 1/2 of 1%
and (c) the adjusted London Inter-Bank Offer Rate (“LIBOR”) for a one month
interest period plus 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 LIBOR rate multiplied by the statutory reserve rate plus
a margin determined by reference to a pricing grid and adjusted according to the
Company’s adjusted leverage ratio. At January 2, 2010 under the
Credit Agreement, the interest rate for the $32.5 million of the term loan that
was outstanding was based on LIBOR plus a margin of 2.5% per annum for a total
of 2.8125% per annum. At January 2, 2010 there were no outstanding
borrowings under the Company’s revolving facility.
Page
67
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
On
October 8, 2008, the Company entered into an amendment (the “2008 Amendment”)
with its lenders under its Credit Agreement. The 2008 Amendment
increases the Company’s flexibility to make investments in third parties.
Pursuant to the 2008 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 2008 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.
On
September 30, 2009, the Company, entered into an amendment (the “2009
Amendment”) with its lenders under the Credit Agreement. The 2009
Amendment (i) extends the maturity date of the revolving facility from April 7,
2011 to April 7, 2013, (ii) revises the pricing schedule with respect to letter
of credit fees and interest rates payable by the Company and amends certain
definitions in connection therewith, (iii) permits the issuance of new unsecured
indebtedness and amends and adds certain definitions in connection therewith,
and (iv) amends certain provisions with respect to the defaulting lender
concept in the Credit Agreement. Pursuant to the 2009 Amendment, the
Company can issue new unsecured indebtedness provided that (i) no default under
the Credit Agreement exists or would result from the incurrence of such new
unsecured indebtedness, (ii) the amount of such new unsecured indebtedness does
not exceed $150 million at any time outstanding, and (iii) after giving pro
forma effect to such incurrence of new unsecured indebtedness, the Company is in
compliance with the fixed charge coverage ratio and the leverage ratio (as
determined in accordance with the terms of the Credit Agreement).
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 January 2, 2010 and
January 3, 2009, respectively (in thousands):
January
2,
2010
|
January
3,
2009
|
|||||||
Credit
Agreement:
|
||||||||
Term
Loan
|
$ | 32,500 | $ | 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 January 2, 2010, 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.
Page 68
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
Debt
consists of the following (in thousands):
January
2,
2010
|
January
3,
2009
|
|||||||
Credit
Agreement:
|
||||||||
Revolving
Credit Facility
|
$ | – | $ | – | ||||
Term
Loan
|
32,500 | 37,500 | ||||||
Other
Notes
|
48 | – | ||||||
32,548 | 37,500 | |||||||
Less
Current Maturities
|
5,009 | 5,000 | ||||||
$ | 27,539 | $ | 32,500 |
Maturities
of long-term debt at January 2, 2010 follow (in thousands):
Contractual
Debt
Payment
|
||||
2010
|
$ | 5,009 | ||
2011
|
5,009 | |||
2012
|
22,510 | |||
2013
|
10 | |||
2014
|
10 | |||
$ | 32,548 |
As of
January 2, 2010, current maturities of debt of $5.0 million will be due during
fiscal 2010, which include scheduled term loan principal payments of $1.25
million due each quarter.
NOTE
10.
|
OTHER
NONCURRENT LIABILITIES
|
|
Other
noncurrent liabilities consist of the following (in
thousands):
|
January
2,
2010
|
January
3,
2009
|
|||||||
|
||||||||
Accrued
pension liability (Note 13)
|
$ | 19,060 | $ | 36,263 | ||||
Reserve
for self insurance, litigation, environmental
and tax matters (Note 17)
|
14,610 | 14,418 | ||||||
Other
|
2,473 | 3,593 | ||||||
$ | 36,143 | $ | 54,274 |
NOTE
11.
|
INCOME
TAXES
|
The
FASB issued guidance under ASC 740, which prescribes accounting for and
disclosure of uncertain tax positions (“UTP”). ASC 740 requires
application of a more likely than not threshold to the recognition and
de-recognition of UTP. ASC 740 permits recognition of the
amount of tax benefit that has a greater than 50 percent likelihood of
being realized upon settlement. A change in judgment related to
the expected ultimate resolution of UTP is recognized in earnings in the
quarter of change. Effective December 31, 2006 the Company
adopted these provisions of ASC 740 resulting in a reduction in the
Company’s existing reserves for uncertain state and federal income tax
positions of approximately $0.1 million. This reduction was
recorded as a cumulative effect adjustment to retained
earnings. At the adoption date of December 31, 2006, the
Company had $0.7 million of gross unrecognized tax benefits. If
the Company recognized such tax benefits, the net impact on the Company’s
effective tax rate would be $0.6 million, which includes the effect of the
reversal of the $0.1 million deferred tax asset. At January 2,
2010 and January 3, 2009, the Company had $0.1 million and $0.5 million,
respectively of gross unrecognized tax benefits; if recognized, the net
impact on the Company’s effective tax rate would be less than $0.1 million
and $0.4 million, respectively, which includes the effect of the reversal
of $0.1 million in deferred tax asset. The Company recognizes
accrued interest and penalties, as appropriate, related to unrecognized
tax benefits as a component of income tax expense.
|
Page 69
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
The following table shows a
reconciliation of the change in the unrecognized tax benefit balance for
federal, state and foreign taxes (in thousands).
January
2,
|
January
3,
|
|||||||
2010
|
2009
|
|||||||
Balance
beginning of year
|
$ | 465 | $ | 543 | ||||
Additions
for tax positions related to prior years
|
17 | 35 | ||||||
Settlements
|
(47 | ) | (8 | ) | ||||
Lapses
in statutes of limitations
|
(303 | ) | (105 | ) | ||||
Balance
end of year
|
$ | 132 | $ | 465 | ||||
The
Company’s major taxing jurisdictions include the U.S. (federal and
state). The Company is no longer subject to federal examinations on
years prior to fiscal 2005. The number of years open for state tax
audits varies, depending on the tax jurisdiction, but is generally from three to
five years. Currently, 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 fiscal 2010.
Income
tax expense/(benefit) attributable to income from continuing operations before
income taxes consists of the following (in thousands):
January
2,
2010
|
January
3,
2009
|
December
29,
2007
|
||||||||||
Current:
|
||||||||||||
Federal
|
$ | 11,741 | $ | 29,193 | $ | 22,418 | ||||||
State
|
2,702 | 5,152 | 3,301 | |||||||||
Deferred:
|
||||||||||||
Federal
and State
|
10,646 | 1,009 | 3,780 | |||||||||
$ | 25,089 | $ | 35,354 | $ | 29,499 |
Income
tax expense for the years ended January 2, 2010, January 3, 2009 and December
29, 2007, differed from the amount computed by applying the statutory U.S.
federal income tax rate to income from continuing operations before income taxes
as a result of the following (in thousands):
Page
70
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
January
2,
2010
|
January
3,
2009
|
December
29,
2007
|
||||||||||
Computed
“expected” tax expense
|
$ | 23,408 | $ | 31,471 | $ | 26,261 | ||||||
State
income taxes
|
2,491 | 3,436 | 2,827 | |||||||||
Section
199 deduction
|
(744 | ) | (1,257 | ) | (832 | ) | ||||||
Non-deductible
employee compensation
|
201 | 993 | 500 | |||||||||
Tax
credits
|
(441 | ) | (128 | ) | (49 | ) | ||||||
Reversal
of reserve for taxes
|
(212 | ) | (19 | ) | (51 | ) | ||||||
Other,
net
|
386 | 858 | 843 | |||||||||
$ | 25,089 | $ | 35,354 | $ | 29,499 | |||||||
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at January 2, 2010 and January
3, 2009 are presented below (in thousands):
January
2,
2010
|
January
3,
2009
|
|||||||
Deferred
tax assets:
|
||||||||
Net operating loss
carryforwards
|
$ | 2,196 | $ | 2,529 | ||||
Loss contingency
reserves
|
7,330 | 7,877 | ||||||
Employee
benefits
|
3,070 | 2,484 | ||||||
Pension
liability
|
14,088 | 17,396 | ||||||
Intangible assets
amortization, including taxable goodwill
|
552 | 1,684 | ||||||
Other
|
4,290 | 3,471 | ||||||
Total gross deferred tax
assets
|
31,526 | 35,441 | ||||||
Less valuation
allowance
|
(175 | ) | (220 | ) | ||||
Net deferred tax
assets
|
31,351 | 35,221 |
Deferred
tax liabilities:
|
||||||||
Intangible assets
amortization, including taxable goodwill
|
– | – | ||||||
Property, plant and equipment
depreciation
|
(21,788 | ) | (15,459 | ) | ||||
Other
|
(8,682 | ) | (4,229 | ) | ||||
Total gross deferred tax
liabilities
|
(30,470 | ) | (19,688 | ) | ||||
$ | 881 | $ | 15,533 |
At
January 2, 2010, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $5.4 million expiring through
2020. The availability of the net operating loss carryforwards to
reduce future taxable income is subject to various limitations. As a
result of the change in ownership which occurred pursuant to the May 2002
recapitalization, utilization of the net operating loss carryforwards is limited
to approximately $0.7 million per year for the remaining life of the net
operating losses.
The net
change in the total valuation allowance was a decrease of less than $0.1 million
for the year ended January 2, 2010 due to the expiration of net operating loss
carryforwards. The Company has assessed that it is more likely than
not that it will generate sufficient taxable income in future periods to realize
its deferred income tax assets.
Page
71
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
NOTE
12.
|
STOCKHOLDERS’
EQUITY AND STOCK-BASED COMPENSATION
|
On May
11, 2005, the shareholders approved the 2004 Plan. The 2004 Plan
replaced both the 1994 Employee Flexible Stock Option Plan and the Non-Employee
Directors Stock Option Plan and thus broadens the array of equity alternatives
available to the Company. Under the 2004 Plan, the Company is allowed
to grant stock options, stock appreciation rights, non-vested and restricted
stock (including performance stock), restricted stock units (including
performance units), other stock-based awards, non-employee director awards,
dividend equivalents and cash-based awards. There are up to 6,074,969
common shares available under the 2004 Plan which may be granted to any
participant in any plan year as defined in the 2004 Plan. Some of
those shares are subject to outstanding awards as detailed in the tables
below. To the extent these outstanding awards are forfeited or expire
without exercise, the shares will be returned to and available for future grants
under the 2004 Plan. The 2004 Plan’s purpose is to attract, retain
and motivate employees, directors and third party service providers of the
Company and to encourage them to have a financial interest in the
Company. The 2004 Plan is administered by the Compensation Committee
(the “Committee”) of the Board of Directors. The Committee has the
authority to select plan participants, grant awards, and determine the terms and
conditions of such awards as defined in the 2004 Plan. The Company’s
stock options granted under the 2004 Plan generally terminate 10 years after
date of grant. At January 2, 2010, the number of equity awards
available for issuance under the 2004 Plan was 2,906,738.
The
following is a summary of stock-based compensation granted during the years
ended January 2, 2010, January 3, 2009 and December 29, 2007.
Nonqualified Stock
Options. On May 8, 2007, the Company granted 8,000
nonqualified stock options in the aggregate to two non-employee directors
following their initial election to the board by the
stockholders. The exercise price for the May 8, 2007 stock options
was $8.03 per share (fair market value at grant date). On February
27, 2008, the Company granted 20,000 nonqualified stock options in the aggregate
to the non-employee directors. The exercise price for February 27,
2008 stock options was $13.55 per share (fair market value at grant
date). On May 6, 2008 following a new director’s initial election to
the board by the stockholders, the Company granted 4,000 nonqualified stock
options to the most recent non-employee director. The exercise price
for the May 6, 2008 stock options was $16.20 per share (fair market value at
grant date). On March 10, 2009, the Company granted 24,000
nonqualified stock options in the aggregate to the non-employee
directors. The exercise price for March 10, 2009 stock options was
$2.94 per share (fair market value at grant date). All of the
non-employee director stock options vest 25 percent six months after the grant
date and 25 percent on each of the first three anniversary dates
thereafter.
Incentive Stock
Options. For fiscal 2009, 2008 and 2007 the Company did not issue any
incentive stock options.
A summary
of stock option activity as of January 2, 2010 and changes during the year ended
is presented below.
Number
of shares
|
Weighted-avg.
exercise
price
per
share
|
Weighted-avg.
remaining
contractual
life
|
|
Options
outstanding at January 3, 2009
|
796,205
|
3.74
|
|
Granted
|
24,000
|
2.94
|
|
Exercised
|
(10,000)
|
1.12
|
|
Forfeited
|
–
|
N/A
|
|
Expired
|
–
|
N/A
|
|
Options
outstanding at January 2, 2010
|
810,205
|
3.75
|
4.9
years
|
Options
exercisable at January 2, 2010
|
778,205
|
3.60
|
4.8
years
|
Page 72
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
The
fair value of each stock option grant under the Company’s stock option
plan was estimated on the date of grant using the Black Scholes
option-pricing model with the following weighted average assumptions and
results for fiscal 2009, 2008 and
2007.
|
Weighted
Average
|
2009
|
2008
|
2007
|
|
Expected
dividend yield
|
0.0%
|
0.0%
|
0.0%
|
|
Risk-free
interest rate
|
2.31%
|
3.24%
|
4.57%
|
|
Expected
term
|
5.80
years
|
5.80
years
|
5.75
years
|
|
Expected
volatility
|
58.4%
|
42.0%
|
52.1%
|
|
Fair
value of options granted
|
$1.76
|
$6.23
|
$4.30
|
The
expected lives for options granted during fiscal 2009, 2008 and 2007 were
computed using the simplified method as prescribed by Staff Accounting Bulletin
No. 107.
At
January 2, 2010, $2.3 million of total future equity-based compensation expense
(determined using the Black-Scholes option pricing model) related to outstanding
non-vested options and stock awards is expected to be recognized over a weighted
average period of 1.7 years.
For the
year ended January 2, 2010 the amount of cash received from the exercise of
options and the related tax benefits were insignificant. For the year
ended January 3, 2009 and December 29, 2007, the amount of cash received from
the exercise of options was approximately $0.3 million and $0.5 million,
respectively and the related tax benefits were approximately $2.3 million and
$1.2 million, respectively. The total intrinsic value of options
exercised for the years ended January 2, 2010, January 3, 2009 and December 29,
2007 was approximately $0.1 million, $6.4 million and $2.5 million,
respectively. The fair value of shares vested for the years ended
January 2, 2010, January 3, 2009 and December 29, 2007 was approximately $0.7
million, $0.6 million and $0.6 million, respectively. At January 2,
2010, the aggregate intrinsic value of options outstanding was approximately
$3.9 million and the aggregate intrinsic value of options exercisable was
approximately $3.8 million.
Non-Vested Stock
Awards. On March 3, 2008, the Company’s board of directors
granted 67,411 shares of stock under the Company’s long term incentive
awards. At the grant date 16,853 shares vested immediately and the
remaining stock awards vest over the next three anniversary dates of the grant
in equal installments. On March 10, 2009, the Company’s board of
directors granted 410,076 shares of stock, 366,326 shares were under the
Company’s long term incentive awards and 43,750 shares were granted as a
one-time issuance to other employees not part of the Company’s long term
incentive award program. At the March 10, 2009 grant date 102,518
shares vested immediately and the remaining stock awards vest over the next
three anniversary dates of the grants in equal installments.
A summary
of the Company’s non-vested stock awards as of January 2, 2010, and changes
during the year ended is as follows:
Non-Vested
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
||||
Stock
awards outstanding January 3, 2009
|
50,558
|
$
13.90
|
|||
Shares
granted
|
410,076
|
2.94
|
|||
Shares
vested
|
(119,373
|
)
|
4.49
|
||
Shares
forfeited
|
–
|
–
|
|||
Stock
awards outstanding January 2, 2010
|
341,261
|
$ 4.02
|
Page 73
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
Restricted Stock
Awards. On March 9, 2006, the Company's Board of Directors
approved a Non-Employee Director Restricted Stock Award Plan (as subsequently
amended, the "Director Restricted Stock Plan") pursuant to and in accordance
with the 2004 Plan in order to attract and retain highly qualified persons to
serve as non-employee directors and to more closely align such directors'
interests with the interests of the stockholders of the Company by providing a
portion of their compensation in the form of Company common stock.
Under the
Director Restricted Stock Plan, $20,000 in restricted Company common stock (the
"Restricted Stock") will be awarded to each non-employee director on the fourth
business day after the Company releases its earnings for its prior completed
fiscal year (the "Date of Award"). The amount of restricted stock to
be issued will be calculated using the closing price of the Company’s common
stock on the third business day after the Company releases its
earnings. The Restricted Stock will be subject to a right of
repurchase at $0.01 per share upon termination of the holder as a member of the
Company's board of directors for cause and will not be transferable. These
restrictions will lapse with respect to 100% of the Restricted Stock upon the
earliest to occur of (i) ten years after the Date of Award, (ii) a Change of
Control (as defined in the 2004 Plan), and (iii) termination of the non-employee
director's service with the Company, other than for "cause" (as defined in the
Director Restricted Stock Plan). On March 10, 2009, the Company
issued 40,818 shares of restricted stock in the aggregate to its non-employee
directors under the Director Restricted Stock Plan. On March 3, 2008
and March 11, 2008, the Company issued 7,190 and 1,509 shares of restricted
stock in the aggregate to its non-employee directors under the Director
Restricted Stock Plan. On March 20, 2007, the Company issued 20,232
shares of restricted stock in the aggregate to its non-employee directors under
the Director Restricted Stock Plan.
A summary
of the Company’s directors’ restricted stock awards as of January 2, 2010, and
changes during the year ended is as follows:
Restricted
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
||||
Stock
awards outstanding January 3, 2009
|
38,714
|
$
7.23
|
|||
Restricted
shares granted
|
40,818
|
2.94
|
|||
Restricted
shares where the restriction lapsed
|
–
|
N/A
|
|||
Restricted
shares forfeited
|
–
|
N/A
|
|||
Stock
awards outstanding January 2, 2010
|
79,532
|
$
5.03
|
Long-Term
Incentive Opportunity Awards. The Committee has adopted a Long-Term
Incentive Plan (the “LTIP”) for the Company’s key employees, as a subplan under
the terms of the 2004 Plan. The principal purpose of the LTIP is to
encourage the Company’s executives to enhance the value of the Company and,
hence, the price of the Company’s stock and the stockholders’
return. In addition, the LTIP is designed to create retention
incentives for the individual and to provide an opportunity for increased equity
ownership by executives. The Committee awarded dollar value
performance based restricted stock and stock option opportunities under the LTIP
for fiscal 2009 to certain of the Company’s officers, including the Chief
Executive Officer and the Executive Vice Presidents of Finance and
Administration, Operations, Commodities, Legal, and Sales and Services (the
“2009 Restricted Stock and Option Awards”). The restricted stock and
stock options underlying the 2009 Restricted Stock and Option Awards are issued
only if a predetermined financial objective is met by the
Company. The Company met the financial objective for fiscal
2009. Accordingly, in accordance with the terms of the 2009
Restricted Stock and Option Awards, it is anticipated that the restricted stock
representing 75% of the award and stock options representing 25% of the award
will be granted and issued to the executives on the fourth business day after
the Company releases its annual financial results for fiscal
2009. The amount of restricted stock to be issued will be calculated
using the closing price of the Company’s common stock on the third business day
after the Company releases its annual financial results for fiscal
2009. The stock options will have an exercise price equal to the fair
market value of the Company’s common stock on the third business day after the
Company releases its annual financial results. These awards vest in
four equal installments, with the first installment vesting immediately upon the
grant date and the remaining three installments vesting on the next three
anniversary dates of the grant. The award is treated as a liability
until the grant date when the number of shares and options to be issued is
known, and then it becomes equity-classified. At January 2, 2010 and
January 3, 2009 the Company recorded a liability of approximately $1.8 million
and $1.1 million on the balance sheet for the long-term incentive
opportunities.
Page 74
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
NOTE
13.
|
EMPLOYEE
BENEFIT PLANS
|
The
Company has retirement and pension plans covering substantially all of its
employees. Most retirement benefits are provided by the Company under
separate final-pay noncontributory and contributory defined benefit and defined
contribution plans for all salaried and hourly employees (excluding those
covered by union-sponsored plans) who meet service and age requirements. Defined
benefits are based principally on length of service and earnings patterns during
the five years preceding retirement.
Effective
January 1, 2008, the Darling National LLC Pension Retirement Plan was merged
into the Darling International Inc. Hourly Employees’ Retirement Plan, which
plan was then amended and restated. Employees from both plans are
entitled to their accrued benefit as of December 31, 2007 under their prior plan
design, plus benefit accruals after January 1, 2008 using the new benefit of $20
for each year of service with no cap on service years with no effect on
accumulated benefits. Previously, these hourly employees had been
accruing $20-$30 per year of service, depending on location of
employment.
Also
effective January 1, 2008, the Darling International Inc. Salaried Employees’
Retirement Plan, a defined benefit plan, was amended. Effective
January 1, 2008, all of the Company’s eligible salaried employees participate in
this plan, including all former Darling National salaried employees who did not
have a defined benefit plan prior to January 1, 2008. All eligible
salaried employees are entitled to their accrued benefit as of December 31,
2007, which accrued benefit is an amount equal to 1.8% times years of service
(up to 25 years) times final average pay plus 0.5% for each additional service
year beyond 25 years, with a total service year cap of 40 years with no effect
on accumulated benefits. Effective January 1, 2008, for service years
earned going forward, the benefit accrual will be 0.25% times years of service
times final average pay.
Also
effective January 1, 2008, the Darling National LLC Retirement Savings Plan was
amended and restated to, among other things, update the plan for the Economic
Growth and Tax Relief Reconciliation Act and change the name of the plan to the
Darling International Inc. Hourly 401(k) Savings Plan. Effective
January 1, 2008, all of the Company’s hourly employees are eligible to
participate in this plan, which allows for elective deferrals, an employer match
equal to 100% of the first $10 per pay period deferred by a participant, with a
maximum of $520 per year, and an employer contribution equal to $520 per
year. Previously, certain of the Company’s hourly employees were only
given the opportunity to make deferrals. The $520 employer
contribution will be a new contribution for all participating hourly
employees. This plan accepted the transfer of assets and liabilities
of the hourly employees that had account balances in the Darling International
Inc. 401(k) Savings Plan which existed prior to January 1, 2008. The
Company’s matching portion to the Darling International Inc. Hourly 401(k)
Savings plan for fiscal 2009 and 2008 was approximately $0.7 million and $0.6
million, respectively.
Effective
January 1, 2008, the Darling International Inc. 401(k) Savings Plan, a defined
contribution plan, was amended and restated and became the Darling International
Inc. Salaried 401(k) Savings Plan and now includes all eligible salaried
employees. This plan received the assets and liabilities of
participating salaried employees under the Darling National LLC Retirement
Savings Plan. Effective January 1, 2008, the Darling International
Inc. Salaried 401(k) Savings Plan includes an employer contribution based on age
(ranging from 2-5% of compensation per year), and will continue to allow for
employee deferrals. Previously, only the Darling National employees
received an employer match, which was equal to 100% of the first $10 per pay
period deferred by a participant, with a maximum of $520 per
year. The Company’s matching portion to the Darling International
Inc. Salaried 401(k) Savings Plan for fiscal 2009 and 2008 was approximately
$1.5 million and $1.4 million, respectively. The Company’s match in
fiscal 2007 for the previous Darling National plan was approximately $0.2
million.
Page 75
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
FASB ASC
Topic 715, Compensation –
Retirement Benefits (“ASC 715”) requires that the Company recognize the
over-funded or under-funded status of the Company’s defined benefit
post-retirement plans as an asset or liability in the Company’s balance sheet,
with changes in the funded status recognized through comprehensive income in the
year in which they occur. In addition, ASC 715 requires that
companies using a measurement date other than the fiscal year end change to a
fiscal year end measurement date effective for years ending after December 15,
2008. The Company adopted the measurement date provision in 2008 the
impact of which was not material.
The
following table sets forth the plans’ funded status and amounts recognized in
the Company’s consolidated balance sheets based on the measurement date (January
2, 2010 and January 3, 2009) (in thousands):
January
2,
2010
|
January
3,
2009
|
|||||||
Change
in projected benefit obligation:
|
||||||||
Projected
benefit obligation at beginning of period
|
$ | 96,539 | $ | 90,742 | ||||
Service
cost
|
984 | 1,328 | ||||||
Interest
cost
|
5,767 | 6,773 | ||||||
Actuarial
loss
|
3,768 | 2,529 | ||||||
Benefits
paid
|
(3,914 | ) | (4,990 | ) | ||||
Other
|
15 | 157 | ||||||
Projected
benefit obligation at end of period
|
103,159 | 96,539 | ||||||
Change
in plan assets:
|
||||||||
Fair
value of plan assets at beginning of period
|
60,276 | 81,578 | ||||||
Actual
return on plan assets
|
12,812 | (22,857 | ) | |||||
Employer
contribution
|
14,925 | 6,545 | ||||||
Benefits
paid
|
(3,914 | ) | (4,990 | ) | ||||
Fair
value of plan assets at end of period
|
84,099 | 60,276 | ||||||
Funded
status
|
(19,060 | ) | (36,263 | ) | ||||
Post-measurement
date contributions
|
– | – | ||||||
Net
amount recognized
|
$ | (19,060 | ) | $ | (36,263 | ) | ||
Amounts
recognized in the consolidated balance
sheets
consist of:
|
||||||||
Non-current
liability
|
$ | (19,060 | ) | $ | (36,263 | ) | ||
Net
amount recognized
|
$ | (19,060 | ) | $ | (36,263 | ) | ||
Amounts
recognized in accumulated other
comprehensive
loss consist of:
|
||||||||
Net
actuarial loss
|
$ | 35,866 | $ | 44,277 | ||||
Prior
service cost
|
375 | 503 | ||||||
Net
amount recognized (a)
|
$ | 36,241 | $ | 44,780 | ||||
(a)
|
Amounts
do not include deferred taxes of $13.7 million and $17.0 million at
January 2, 2010 and January 3, 2009,
respectively.
|
Page 76
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
January
2,
2010
|
January
3,
2009
|
||
Projected
benefit obligation
|
$
103,159
|
$
96,539
|
|
Accumulated
benefit obligation
|
96,082
|
90,143
|
|
Fair
value of plan assets
|
84,099
|
60,276
|
Net
pension cost includes the following components (in thousands):
January
2,
2010
|
January
3,
2009
|
December
29,
2007
|
||||||||||
Service
cost
|
$ | 984 | $ | 1,067 | $ | 2,328 | ||||||
Interest
cost
|
5,767 | 5,442 | 5,011 | |||||||||
Expected
return on plan assets
|
(4,811 | ) | (6,603 | ) | (5,636 | ) | ||||||
Net
amortization and deferral
|
4,321 | 472 | 1,269 | |||||||||
Net
pension cost
|
$ | 6,261 | $ | 378 | $ | 2,972 | ||||||
Amounts
recognized in accumulated other comprehensive income (loss) for the year ended
(in thousands):
2009
|
2008
|
|||||||
Actuarial
gains recognized:
|
||||||||
Reclassification
adjustments
|
$ | 2,558 | $ | 213 | ||||
Actuarial
(loss)/gain recognized during the
period
|
2,592 | (20,578 | ) | |||||
Measurement
date adoption adjustment
|
– | 52 | ||||||
Prior
service (cost) credit recognized:
|
||||||||
Reclassification
adjustments
|
88 | 75 | ||||||
Prior
service cost arising during the period
|
(9 | ) | (96 | ) | ||||
Measurement
date adoption adjustment
|
– | 19 | ||||||
$ | 5,229 | $ | (20,315 | ) | ||||
The estimated amount that will be amortized from accumulated other comprehensive
loss into net periodic pension cost in fiscal 2010 is as follows (in
thousands):
2010
|
||||
Net
actuarial loss
|
$ | 3,131 | ||
Prior
service cost
|
111 | |||
$ | 3,242 |
Weighted
average assumptions used to determine benefit obligations were:
January
2,
2010
|
January
3,
2009
|
December
29,
2007
|
|
Discount
rate
|
5.90%
|
6.10%
|
6.00%
|
Rate
of compensation increase
|
4.08%
|
4.08%
|
4.10%
|
Page
77
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
Weighted
average assumptions used to determine net periodic benefit cost for the employee
benefit pension plans were:
January
2,
2010
|
January
3,
2009
|
December
29,
2007
|
|
Discount
rate
|
6.10%
|
6.00%
|
5.75%
|
Rate
of increase in future compensation levels
|
4.08%
|
4.10%
|
4.08%
|
Expected
long-term rate of return on assets
|
8.10%
|
8.10%
|
8.25%
|
Consideration
was made to the long-term time horizon for the plans’ benefit obligations as
well as the related asset class mix in determining the expected long-term rate
of return. Historical returns are also considered, over the long-term
time horizon, in determining the expected return. Considering the
overall asset mix of approximately 60% equity and 40% fixed income, several
years in the last ten years (except for 2008) having strong double digit returns
as well as several years of single digit losses, the Company believes it is
reasonable to expect a long-term rate of return of 8.10% for the plans’
investments as a whole.
Plan
Assets
The
Company’s pension plan weighted-average asset allocations at January 2, 2010 and
January 3, 2009, by asset category, are as follows:
Plan
Assets at
|
||||
Asset Category
|
January
2,
2010
|
January
3,
2009
|
||
Equity
Securities
|
61.1%
|
55.6%
|
||
Debt
Securities
|
38.9%
|
44.2%
|
||
Other
|
–%
|
0.2%
|
||
Total
|
100.0%
|
100.0%
|
The
investment objectives have been established in conjunction with a comprehensive
review of the current and projected financial requirements. The
primary investment objectives are: 1) to have the ability to pay all
benefit and expense obligations when due; 2) to maximize investment returns
within reasonable and prudent levels of risk in order to minimize contributions;
and 3) to maintain flexibility in determining the future level of
contributions.
Investment
results are the most critical element in achieving funding objectives, while
reliance on contributions is a secondary element.
The
investment guidelines are based upon an investment horizon of greater than ten
years; therefore, interim fluctuations are viewed with this
perspective. The strategic asset allocation is based on this
long-term perspective. However, because the participants’ average age
is somewhat older than the typical average plan age, consideration is given to
retaining some short-term liquidity. Analysis of the cash flow
projections of the plans indicates that benefit payments will continue to exceed
contributions. The results of a thorough asset-liability study
completed during 2008 reinforced the appropriateness of the Company’s target
asset allocation ranges described herein.
Based
upon the plans’ time horizon, risk tolerances, performance expectations, asset
class constraints and asset-liability study results, target asset allocation
ranges are as follows:
Fixed
Income
|
35%
- 45%
|
Domestic
Equities
|
45%
- 55%
|
International
Equities
|
7%
- 13%
|
Page 78
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
The fixed
income asset allocation may be invested in corporate and government bonds
denominated in U.S. dollars, private and publicly traded mortgages, private
placement debt, and cash equivalents. The average maturity of the
asset class will not exceed ten years. The portfolio is expected to
be well diversified.
The
domestic equity allocation is invested in stocks traded on one of the U.S. stock
exchanges. Securities convertible into such stocks, convertible bonds
and preferred stock, may also be purchased. The majority of the
domestic equities are invested in large, mid, and small cap index accounts that
are well diversified. These index accounts utilize the Standard & Poor’s
(“S&P”) 500, S&P 400 and S&P 600, respectively. By
definition, small cap investments carry greater risk, but also are expected to
create greater returns over time. The plans target approximately 7.5%
of the total asset mix to small cap. American Depository Receipts
(“ADR’s”) may not account for more than 3% of the holdings. Small
company stocks may not exceed 15% of the plans’ assets. Small company
definitions fluctuate with market levels, but generally will be considered
companies with market capitalizations less than $1.5 billion. The
portfolio will be diversified in terms of individual company securities and
industries. No individual equity or individual fixed income
instrument comprises more than 1.5% of the defined benefit plans’ total assets
(excluding U.S. government issues).
The
international equity allocation is invested in companies whose stock is traded
outside the U.S. and/or companies that conduct the major portion of their
business outside of the U.S. The portfolio may invest in
ADR’s. The emerging market portion of the international equity
investment is held below 20% due to greater volatility in the asset
class. The portfolio is expected to be diversified in terms of
companies, industries and countries.
All
investment objectives are expected to be achieved over a market cycle
anticipated to be a period of five to seven years. Reallocations are
performed at a minimum of twice a year to retain target asset allocation
ranges.
The
following table presents fair value measurements for the Company’s defined
benefit plans’ assets as of January 2, 2010 categorized using the fair value
hierarchy under ASC 820 (in thousands):
Quoted
Prices in
|
Significant
Other
|
Significant
|
||||||||||||||
Fair
Value
|
Active
Markets for
|
Observable
|
Unobservable
|
|||||||||||||
January
2,
|
Identical
Assets
|
Inputs
|
Inputs
|
|||||||||||||
(In
thousands of dollars)
|
2010
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||
Fixed
Maturities:
|
||||||||||||||||
Long-term bonds
|
$ | 29,879 | $ | — | $ | 29,879 | $ | — | ||||||||
U.S. Government bonds
|
2,193 | — | 2,193 | — | ||||||||||||
Equity
Securities:
|
||||||||||||||||
Common stocks
|
50,527 | — | 50,527 | — | ||||||||||||
Other equity interests
|
1,500 | — | 1,500 | — | ||||||||||||
$ | 84,099 | $ | — | $ | 84,099 | $ | — |
The
defined benefit plans’ assets are 100% comprised of purchased units of pooled
separate accounts (“PSA”). The net assets values of the PSA’s are not
publicly-quoted in an active market. The net assets value of each PSA
is based on the market value of the underlying investments.
Contributions
The
Company's funding policy for employee benefit pension plans is to contribute
annually not less than the minimum amount required nor more than the maximum
amount that can be deducted for federal income tax
purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
Page 79
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
Based on
current actuarial estimates, the Company expects to make payments of
approximately $1.0 million to meet funding requirements for its pension plans in
fiscal 2010.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
Year Ending
|
Pension Benefits
|
|
2010
|
$
4,340
|
|
2011
|
4,470
|
|
2012
|
4,590
|
|
2013
|
4,730
|
|
2014
|
5,210
|
|
Years
2015 – 2019
|
31,040
|
The
Company participates in several multi-employer pension plans which provide
defined benefits to certain employees covered by labor
contracts. These plans are not administered by the Company and
contributions are determined in accordance with provisions of negotiated labor
contracts. Current information with respect to the Company's
proportionate share of the over-and under-funded status of all actuarially
computed value of vested benefits over these pension plans’ net assets is not
available. The Company’s portion of contributions to these plans
amounted to $2.8 million, $2.8 million and $2.6 million for the years ended
January 2, 2010, January 3, 2009 and December 29, 2007,
respectively.
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 was probable and
estimable for this plan. The plan has given a notice of
redetermination liability in December 2009 and as a result, the Company’s
accrued liability at January 2, 2010 has not increased from the original amount
as this remains the Company’s best estimate of the liability based on the most
recent information that is probable and estimable for the
plan. 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 January 2, 2010, 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.
NOTE
14.
|
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. Heating oil swaps
are entered into with the intent of managing the overall cost of diesel fuel
usage by reducing the potential impact of seasonal weather demands on diesel
fuel that increases diesel fuel prices. Inventory swaps are entered
into with the intent of managing seasonally high concentrations of MBM, BFT and
YG inventories by reducing the potential impact of decreasing
prices. The Company does not use derivative instruments for trading
purposes. At January 2, 2010, the Company had natural gas swaps and
two interest rate swaps outstanding that qualified and were designated for hedge
accounting as well as heating oil swaps and inventory swaps that did not qualify
and were not designated for hedge accounting.
Page 80
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
In
accordance with ASC 815 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 ASC 815. 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 were
considered cash flow hedges according to ASC 815. 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. As of January 2, 2010 these cash flow hedges have
expired and settled according to the contracts.
On
November 13, 2009, the Company entered into natural gas swap contracts that are
considered cash flow hedges according to ASC 815. Under the terms of
the natural gas swap contracts the Company fixed the expected purchase cost of
480,000 mmbtu’s of natural gas representing a portion of its plants expected
usage for the months of January 2010 through March 2010 at a fixed rate of $4.84
per mmbtu.
The
Company estimates the amount that will be reclassified from accumulated other
comprehensive loss at January 2, 2010 into earnings over the next 12 months will
be approximately $1.3 million. No gains or losses have been
reclassified into earnings as a result of the discontinuance of cash flow
hedges.
Page 81
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
The
following table presents the fair value of the Company’s derivative instruments
under ASC 815 as of January 2, 2010 and January 3, 2009 (in
thousands):
Derivatives
Designated
|
Balance
Sheet
|
Asset
Derivatives Fair Value
|
||||||
as
Hedges
|
Location
|
January
2, 2010
|
January
3, 2009
|
|||||
Natural
gas swaps
|
Other
current assets
|
$ 228
|
$ –
|
|||||
Total
derivatives designated as hedges
|
$ 228
|
$ –
|
||||||
Derivatives
not
Designated
as
Hedges
|
||||||||
Heating
oil swaps
|
Other
current assets
|
$ 84
|
$ –
|
|||||
Total
derivatives not designated as hedges
|
$ 84
|
$ –
|
||||||
Total
asset derivatives
|
$ 312
|
$ –
|
Derivatives
Designated
|
Balance
Sheet
|
Liability
Derivatives Fair Value
|
||||
as
Hedges
|
Location
|
January
2, 2010
|
January
3, 2009
|
|||
Interest
rate swaps
|
Other
noncurrent liabilities
|
$ 2,473
|
$ 3,593
|
|||
Total
derivatives designated as hedges
|
$ 2,473
|
$ 3,593
|
||||
Derivatives
not
Designated
as
Hedges
|
||||||
Inventory
swaps
|
Accrued
Expenses
|
$ 3
|
$ –
|
|||
Total
derivates not designated as hedges
|
$ 3
|
$ –
|
||||
Total
liability derivatives
|
$ 2,476
|
$ 3,593
|
||||
The
effect of the Company’s derivative instruments on the consolidated statement of
operations for the fiscal years ended January 2, 2010 and January 3, 2009 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
|
$
(2,251)
|
$
(3,398)
|
$
(1,629)
|
$ (777)
|
$ (27)
|
$ (195)
|
||||||
Natural
gas swaps
|
223
|
–
|
(409)
|
–
|
5
|
–
|
||||||
Total
|
$
(2,028)
|
$
(3,398)
|
$
(2,038)
|
$ (777)
|
$ (22)
|
$ (195)
|
||||||
Page
82
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
(a)
|
Amount
recognized in accumulated OCI (effective portion) is reported as
accumulated other comprehensive loss of approximately $2.0 million and
approximately $3.4 million recorded net of taxes of approximately $0.8
million and approximately $1.3 million for the year ended January 2, 2010
and January 3, 2009, 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.
|
At
January 2, 2010, the Company had forward purchase agreements in place for
purchases of approximately $5.1 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 ASC 815
because they qualify as normal purchases as defined in the
standard.
NOTE
15.
|
FAIR
VALUE MEASUREMENT
|
In
accordance with FASB ASC Topic 820, Fair Value Measurements and
Disclosures (“ASC 820”), which defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements including guidance related to nonrecurring measurements
of nonfinancial assets and liabilities.
The
following table presents the Company’s financial instruments that are measured
at fair value on a recurring basis as of January 2, 2010 and are categorized
using the fair value hierarchy under ASC 820. The fair value
hierarchy has three levels based on the reliability of the inputs used to
determine the fair value.
Fair
Value Measurements at January 2, 2010 Using
|
|||||||
Quoted
Prices in
|
Significant
Other
|
Significant
|
|||||
Active
Markets for
|
Observable
|
Unobservable
|
|||||
Identical
Assets
|
Inputs
|
Inputs
|
|||||
(In
thousands of dollars)
|
Total
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||
Derivative
assets
|
$
312
|
$ —
|
$ 312
|
$ —
|
|||
Derivative
liabilities
|
(2,476)
|
—
|
(2,476)
|
—
|
|||
Total
|
$(2,164)
|
$ —
|
$(2,164)
|
$ —
|
Derivative
assets consist of the Company’s natural gas swap and heating oil swap contracts,
which represents the difference between the observable market rates of commonly
quoted intervals for similar assets and liabilities in active markets and the
fixed swap rate considering the instruments term, notional amount and credit
risk.
Derivative
liabilities mostly consist of the Company’s interest rate swap contracts, which
represent the present value of yield curves observable at commonly quoted
intervals for similar assets and liabilities in active markets considering the
instrument’s term, notional amount, discount rate and credit risk.
Page
83
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
The
following table presents the Company’s nonfinancial assets that are measured at
fair value on a nonrecurring basis as of January 2, 2010 and are categorized
using the fair value hierarchy under ASC 820.
Fair
Value Measurements at January 2, 2010 Using
|
|||||||
Quoted
Prices in
|
Significant
Other
|
Significant
|
|||||
Active
Markets for
|
Observable
|
Unobservable
|
|||||
Identical
Assets
|
Inputs
|
Inputs
|
|||||
(In
thousands of dollars)
|
Total
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||
Assets:
|
|||||||
Identifiable
Intangibles
|
$ 4,826
|
$ —
|
$ —
|
$ 4,826
|
|||
Goodwill
|
9,627
|
—
|
—
|
9,627
|
|||
$
14,453
|
$ —
|
$ —
|
$
14,453
|
Identifiable
intangible assets and goodwill represent the fair value of amounts recognized as
a result of the Sanimax Transaction as discussed in Note 2 Acquisitions and
Dispositions. Significant unobservable inputs were used to determine
the fair value of the identifiable intangible assets based on the income
approach valuation model whereby the present worth and anticipated future
benefits of the identifiable intangible assets were discounted back to their net
present value. Goodwill represents the difference between the
enterprise value/cash paid less the fair value of all recognized asset fair
values including the identifiable intangible asset values.
NOTE
16.
|
CONCENTRATION
OF CREDIT RISK
|
Concentration
of credit risk is limited due to the Company’s diversified customer base and the
fact that the Company sells commodities. No single customer accounted
for more than 10% of the Company’s net sales in fiscal years 2009, 2008 and
2007.
NOTE
17.
|
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
these claims are paid by the Company.
As a
result of the matters discussed above, the Company has established loss reserves
for insurance, environmental and litigation matters. At January 2,
2010 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 potential insurance
recoveries were approximately $15.6 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 these lawsuits and claims that may not be covered
by insurance would have a material effect on the financial
statements.
Page 84
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
Lower Passaic River
Area. 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, has entered
into a joint defense agreement with many of the other third-party defendants and
intends to defend itself vigorously. Additionally, in December 2009,
the Company, along with numerous other entities, received notice from the United
States Environmental Protection Agency (EPA) that the Company (as
successor-in-interest to Standard Tallow Company) is considered a potentially
responsible party with respect to alleged contamination in the lower Passaic
River area which is part of the Diamond Alkali Superfund Site located in Newark,
New Jersey. In the letter, EPA requested that the Company join a
group of other parties in funding a remedial investigation and feasibility study
at the site. As of the date of this report, the Company has not
agreed to participate in the funding group. The Company’s ultimate
liability for investigatory costs, remedial costs and/or natural resource
damages in connection with the lower Passaic River area cannot be determined at
this time; however, as of the date of this report, there is nothing that leads
the Company to believe that these matters will have a material effect on the
Company’s financial position or results of operation.
In July
2007, a judgment was entered in a litigation matter involving a contract dispute
in which the Company was a party. The judgment required the Company
to convey an unused parcel of property recorded on the books for approximately
$500,000 to the counterparty for that amount. In December 2007, a
judgment was entered in the matter awarding the counterparty approximately $2.6
million in attorneys’ fees and costs. The Company filed appeals of
both judgments. The Company settled this matter during the first
quarter of fiscal 2008. Pursuant to the terms of the settlement, the
Company transferred the property to the counterparty for a purchase price of
$500,000, paid the counterparty approximately $2.2 million towards attorneys’
fees and costs and agreed to dismiss its pending appeals with
prejudice. In addition, the parties exchanged mutual
releases. The Company recorded a charge of $2.2 million for the
attorneys’ fees and costs in the fourth quarter of 2007, which is included in
selling, general and administrative expenses.
In June
2006, the Company was awarded damages of approximately $7.4 million as a result
of a service provider’s failure to provide steam under a service agreement to
one of the Company’s plants. At the time the damages were awarded,
collectibility of such damages was uncertain; however on October 12, 2006, the
Company entered into an agreement to sell its rights to such damages to a third
party for $2.2 million in cash. The agreement was made subject to
certain conditions which were satisfied on March 1, 2007. On March 8,
2007, the Company received $2.2 million and transferred its damage award to the
third party. The Company recorded a gain with the receipt of the $2.2
million in proceeds in the first quarter of 2007.
Page
85
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
NOTE
18.
|
BUSINESS
SEGMENTS
|
The
Company sells its products domestically and internationally and operates within
two industry segments: Rendering and Restaurant
Services. The measure of segment profit (loss) includes all revenues,
operating expenses (excluding certain amortization of intangibles), and selling,
general and administrative expenses incurred at all operating locations and
excludes general corporate expenses.
Included
in corporate activities are general corporate expenses and the amortization of
intangibles. Assets of corporate activities include cash, unallocated prepaid
expenses, deferred tax assets, prepaid pension, and miscellaneous other
assets.
Rendering
Rendering
consists of the collection and processing of animal by-products, including
hides, from butcher shops, grocery stores, food service industry and meat and
poultry processors, converting these principally into useable oils and proteins
utilized by the agricultural, leather and oleo-chemical
industries. These finished products are MBM and BFT.
Restaurant
Services
Restaurant
Services consists of the collection of used cooking oils from food service
establishments and recycling them into similar products such as high-energy
animal feed ingredients and industrial oils. This finished product is
YG. Restaurant Services also provides grease trap
servicing. Included in restaurant services is the National Service
Center (“NSC”). The NSC schedules services such as fat and bone and
used cooking oil collection as well as trap cleaning for contracted customers
using the Company’s resources or third party providers.
Business Segment Net
Revenues (in thousands):
Year
Ended
|
|||
January
2,
2010
|
January 3,
2009
|
December
29,
2007
|
Rendering:
|
||||||||||||
Trade
|
$ | 458,573 | $ | 585,108 | $ | 464,468 | ||||||
Intersegment
|
16,216 | 50,832 | 42,095 | |||||||||
474,789 | 635,940 | 506,563 | ||||||||||
Restaurant
Services:
|
||||||||||||
Trade
|
139,233 | 222,384 | 180,845 | |||||||||
Intersegment
|
13,126 | 10,118 | 5,311 | |||||||||
152,359 | 232,502 | 186,156 | ||||||||||
Eliminations
|
(29,342 | ) | (60,950 | ) | (47,406 | ) | ||||||
Total
|
$ | 597,806 | $ | 807,492 | $ | 645,313 |
Included
in corporate activities are general corporate expenses and the amortization of
intangibles related to “Fresh Start Reporting.”
Page 86
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
Business Segment
Profit/(Loss) (in thousands):
Year
Ended
|
||||||||||||
January
2,
2010
|
January
3,
2009
|
December
29,
2007
|
||||||||||
Rendering
|
$ | 94,446 | $ | 101,439 | $ | 85,654 | ||||||
Restaurant
services
|
15,251 | 29,896 | 34,953 | |||||||||
Corporate
activities
|
(64,802 | ) | (73,755 | ) | (70,029 | ) | ||||||
Interest
expense
|
(3,105 | ) | (3,018 | ) | (5,045 | ) | ||||||
Net
income
|
$ | 41,790 | $ | 54,562 | $ | 45,533 |
Certain
assets are not attributable to a single operating segment but instead relate to
multiple operating segments operating out of individual
locations. These assets are utilized by both the Rendering and
Restaurant Services business segments and are identified in the category
Combined Rendering/Restaurant Services. Depreciation of Combined
Rendering/Restaurant Services assets is allocated based upon an estimate of the
percentage of corresponding activity attributed to each
segment. Additionally, although intangible assets are allocated to
operating segments, the amortization related to the adoption of “Fresh Start
Reporting” in 1993 is not considered in the measure of operating segment
profit/(loss) and is included in Corporate Activities.
As
discussed in Note 17, the Company received proceeds of $2.2 million during the
first quarter of fiscal 2007 as a result of a service provider’s failure to
provide steam under a service agreement to one of the Company’s
plants. The Company recorded approximately $1.2 million of the
proceeds as a reduction of cost of sales in the Company’s rendering segment and
approximately $1.0 million as a reduction of selling and general and
administrative costs in the corporate segment.
Business Segment
Assets (in thousands):
January
2,
2010
|
January
3,
2009
|
|||||||
Rendering
|
$ | 171,005 | $ | 158,190 | ||||
Restaurant
Services
|
65,184 | 47,386 | ||||||
Combined
Rendering/Restaurant Services
|
100,173 | 96,317 | ||||||
Corporate
Activities
|
89,809 | 92,482 | ||||||
Total
|
$ | 426,171 | $ | 394,375 |
Business Segment Property,
Plant and Equipment (in thousands):
January
2,
2010
|
January
3,
2009
|
December
29,
2007
|
||||||||||
Depreciation
and amortization:
|
||||||||||||
Rendering
|
$ | 16,648 | $ | 14,270 | $ | 13,509 | ||||||
Restaurant
Services
|
5,284 | 4,310 | 3,881 | |||||||||
Corporate
Activities
|
3,294 | 5,853 | 5,824 | |||||||||
Total
|
$ | 25,226 | $ | 24,433 | $ | 23,214 | ||||||
Capital
expenditures:
|
||||||||||||
Rendering
|
$ | 5,071 | $ | 11,723 | $ | 2,880 | ||||||
Restaurant
Services
|
1,211 | 610 | 538 | |||||||||
Combined Rendering/Restaurant
Services
|
13,384 | 15,776 | 10,609 | |||||||||
Corporate
Activities
|
3,972 | 2,897 | 1,525 | |||||||||
Total
(a)
|
$ | 23,638 | $ | 31,006 | $ | 15,552 |
(a)
|
Excludes
the capital assets acquired as part of the acquisition of assets related
to the Sanimax Transaction and Boca Transaction in fiscal 2009 of
approximately $8.0 million and the API Transaction in fiscal 2008 of
approximately $3.4 million.
|
Page
87
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
The
Company has no material foreign operations, but exports a portion of its
products to customers in various foreign countries.
Geographic Area Net Trade
Revenues (in thousands):
January
2,
2010
|
January
3,
2009
|
December
29,
2007
|
||||||||||
Domestic | $ | 526,975 | $ | 675,257 | $ | 473,694 | ||||||
Foreign | 70,831 | 132,235 | 171,619 | |||||||||
Total | $ | 597,806 | $ | 807,492 | $ | 645,313 | ||||||
The
Company attributes revenues from external customers to individual foreign
countries based on the destination of the Company’s shipments. For
fiscal 2009, 2008 and 2007, no individual foreign country comprised more than 5%
of the Company’s consolidated revenue.
NOTE
19.
|
QUARTERLY
FINANCIAL DATA (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE
AMOUNTS):
|
Year
Ended January 2, 2010
|
||||||||||||||||
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
Net
sales
|
$ | 133,000 | $ | 155,298 | $ | 159,936 | $ | 149,572 | ||||||||
Operating
income
|
8,763 | 20,276 | 25,396 | 16,504 | ||||||||||||
Income
from operations before
income taxes
|
7,868 | 19,274 | 24,819 | 14,918 | ||||||||||||
Net
income
|
4,810 | 11,699 | 16,073 | 9,208 | ||||||||||||
Basic
earnings per share
|
0.06 | 0.14 | 0.20 | 0.11 | ||||||||||||
Diluted
earnings per share
|
0.06 | 0.14 | 0.19 | 0.11 |
Year
Ended January 3, 2009
|
||||||||||||||||
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter (a)
|
|||||||||||||
Net
sales
|
$ | 201,956 | $ | 220,858 | $ | 236,227 | $ | 148,451 | ||||||||
Operating
income/(loss)
|
35,167 | 39,735 | 37,312 | (19,538 | ) | |||||||||||
Income/(loss)
from operations before
income taxes
|
34,489 | 39,093 | 36,695 | (20,361 | ) | |||||||||||
Net
income/(loss)
|
21,461 | 24,079 | 22,994 | (13,972 | ) | |||||||||||
Basic
earnings per share
|
0.26 | 0.30 | 0.28 | (0.17 | ) | |||||||||||
Diluted
earnings per share
|
0.26 | 0.29 | 0.28 | (0.17 | ) |
(a)
|
Included
in operating loss in the fourth quarter of fiscal 2008 is a charge for
goodwill impairment of approximately $15.9 million and an estimated
accrued liability of approximately $3.2 million related to a
multi-employer pension plan where the Company is seeking a mass withdrawal
termination. In addition, the fourth quarter of fiscal 2008
includes an additional week of operations that did not have a material
impact on results.
|
Page
88
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
NOTE
20.
|
NEW
ACCOUNTING PRONOUNCEMENTS
|
In
December 2007, the FASB issued revised guidance under ASC Topic 805, Business Combinations (“ASC
805”). The
new provisions of ASC 805 applies to all transactions and other events in which
one entity obtains control over one or more other businesses. ASC 805
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 the
pre-codification SFAS 141 whereby the cost of an acquisition was allocated to
the individual assets acquired and liabilities assumed based on their estimated
fair value. ASC 805 requires acquirers to expense acquisition related
costs as incurred rather than allocating these costs to assets acquired and
liabilities assumed, as was done under the pre-codification SFAS
141. The new provisions of ASC 805 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 fiscal 2009 the
Company did have acquisition activity as discussed in Note 2 Acquisitions and
Dispositions. The adoption of ASC 805 did not have a material impact
on the determination or reporting of the Company’s financial results for the
period ended January 2, 2010.
In
December 2007, the FASB issued guidance under ASC Topic 810, Consolidation (“ASC
810”). These new provisions of ASC 810 establishes 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. ASC 810 was adopted by the Company on January 4, 2009
on a prospective basis. The adoption of these new provisions of ASC
810 did not have an impact to the consolidated financial statements of the
Company.
In March
2008, the FASB issued guidance under ASC Topic 815, Derivatives and
Hedging. These new provisions of ASC 815 are 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. These new provisions apply to all derivative instruments
within the scope of ASC 815 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. The Company adopted these new provisions of ASC 815
effective January 4, 2009. The adoption of this new guidance did not
have a material effect to the consolidated financial statements of the
Company.
In April
2008, the FASB issued guidance under ASC Topic 350, Intangibles-Goodwill and
Other. The new provisions of ASC 350 amend the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. ASC 350
was adopted on January 4, 2009. The adoption of ASC 350 did not have
a material effect to the consolidated financial statements of the
Company.
In
December 2008, the FASB issued guidance under ASC Topic 715, Compensation – Retirement
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 ASC 715 are effective for fiscal years ending after December 15,
2009, with earlier application permitted. Upon initial application,
the provisions of ASC 715 are not required for earlier periods that are
presented for comparative purposes. The adoption of these new
provisions of ASC 715 did not have a material effect to the consolidated
financial statement of the Company.
Page
89
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
In April
2009, the FASB issued guidance under ASC Topic 805, Business
Combinations. This new guidance amends and clarifies ASC 805
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 new guidance did not have a material impact on the determination or
reporting of the Company’s financial results for the period ended January 2,
2010.
In April
2009, the FASB issued guidance under ASC Topic 825, Financial Instruments (“ASC
825”). ASC 825 requires disclosures about fair value of financial
instruments for interim reporting periods as well as in annual financial
statements. ASC 825 is effective for interim reporting periods ending
after June 15, 2009. The Company’s adoption of ASC 825 did not have a
material impact on the consolidated financial statements of the
Company.
In May
2009, the FASB issued ASC Topic 855, Subsequent Events (“ASC 855”)
effective for interim or annual periods ending after June 15,
2009. The objective of ASC 855 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. ASC 855 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 ASC 855 did not have a material
effect to the consolidated financial statements of the Company.
In June
2009, the FASB issued ASU 2009-01, Topic 105, Generally Accepted Accounting
Policies (“ASC 105”). ASC 105 established the ASC 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. ASC
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. ASC is effective for
interim and annual periods ending after September 15, 2009. The
adoption of ASC 105 has changed how the Company references various elements of
U.S GAAP when preparing the Company’s financial statement disclosures, but did
not have an impact on the consolidated financial statements of the
Company.
In
December 2009, the FASB issued ASU 2009-17 which codifies SFAS No. 167, Amendments to FASB Interpretation
46(R) issued in
June 2009. ASU 2009-17 changes how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. ASU 2009-17 requires
additional disclosures about a company’s involvement with variable interest
entities and any significant changes in risk exposure due to that
involvement. The Company is required to adopt ASU 2009-17 on January
3, 2010 and is currently evaluating the impact of adopting this new
standard.
Page 90
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
SCHEDULE
II
Valuation
and Qualifying Accounts
(In
thousands)
Additions
Charged to:
|
|
||||
Description
|
Balance
at Beginning of Period |
Costs
and
Expenses
|
Other
|
Deductions
(a)
|
Balance
at End of Period |
Reserve
for bad debts:
|
|||||||||
Year
ended January 2, 2010
|
$ 2,313
|
$ 488
|
$ –
|
$ 653
|
$ 2,148
|
||||
Year
ended January 3, 2009
|
$ 1,466
|
$ 1,506
|
$ –
|
$ 659
|
$ 2,313
|
||||
Year
ended December 29, 2007
|
$ 1,639
|
$ 407
|
$ –
|
$ 580
|
$ 1,466
|
||||
Deferred
tax valuation allowance:
|
|||||||||
Year
ended January 2, 2010
|
$ 220
|
$ –
|
$ –
|
$ 45
|
$ 175
|
||||
Year
ended January 3, 2009
|
$ 4,793
|
$ –
|
$ –
|
$ 4,573
|
$ 220
|
||||
Year
ended December 29, 2007
|
$ 9,416
|
$ –
|
$ –
|
$ 4,623
|
$ 4,793
|
|
(a)
|
Deductions
consist of write-offs of uncollectible accounts receivable and reductions
of the deferred tax valuation
allowance.
|
Page
91
PART
II
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
|
|
None.
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
|
Evaluation
of Disclosure Controls and Procedures.
As required by Exchange Act Rule
13a-15(b), the Company’s management, including the Chief Executive Officer and
Chief Financial Officer, conducted an evaluation, as of the end of the period
covered by this report, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures. As defined in Exchange
Act Rules 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls
and procedures are controls and other procedures of the Company that are
designed to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports it files or submits under the
Exchange Act is accumulated and communicated to the Company’s management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
Based on management’s evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of the end of the period
covered by this report.
Internal
Control over Financial Reporting.
(a) Management’s
Annual Report on Internal Control over Financial
Reporting. Management of the Company is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange
Act. Those rules define internal control over financial reporting as
a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
•
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
•
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
•
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of January 2, 2010. In making
this assessment, the Company’s management used the criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Page 92
Based on their assessment, management
has concluded that the Company’s internal control over financial reporting was
effective at the reasonable assurance level as of January 2, 2010.
KPMG LLP,
the registered public accounting firm that audited the Company’s financial
statements, has issued an audit report on management’s assessment of the
Company’s internal control over financial reporting, which report is included
herein.
(b) Attestation Report of the Registered
Public Accounting Firm. The attestation report called for by
Item 308(b) of Regulation S-K is incorporated herein by reference to Report of
Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting, included in Part II, Item 8, “Financial Statements and Supplementary
Data” of this report.
(c) Changes in Internal Control over
Financial Reporting. As required by Exchange Act Rule
13a-15(d), the Company’s management, including the Chief Executive Officer and
Chief Financial Officer, also conducted an evaluation of the Company’s internal
control over financial reporting to determine whether any change occurred during
the last fiscal quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting. Based on that evaluation, there has
been no change in the Company’s internal control over financial reporting during
the last fiscal quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
ITEM
9B.
|
OTHER
INFORMATION
|
|
None.
Page
93
PART
III
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
|
The information required by this Item with respect to Items 401, 405 and 407 of
Regulation S-K will appear in the sections entitled “Election of Directors,”
“Executive Officers and Directors,” “Section 16(a) Beneficial Ownership
Reporting Compliance” and “Corporate Governance-Committees of the Board-Audit
Committee” included in the Company’s definitive Proxy Statement relating to the
2010 Annual Meeting of Stockholders, which information is incorporated herein by
reference.
The Company has adopted the Darling
International Inc. Code of Business Conduct (“Code of Business Conduct”), which
is applicable to all of the Company’s employees, including its senior financial
officers, the Chief Executive Officer, Chief Financial Officer, Controller,
Treasurer and General Counsel. The Company has not granted any
waivers to the Code of Business Conduct to date. A copy of the
Company’s Code of Business Conduct has been posted on the “Investor” portion of
our web site, at www.darlingii.com. Shareholders
may request a free copy of our Code of Business Conduct from:
Brad
Phillips
Darling
International Inc.
251
O’Connor Ridge Blvd, Suite 300
Irving,
Texas 75038
Phone: 972-717-0300
Fax: 972-717-1588
Email: bphillips@darlingii.com
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
|
The information required by this Item
will appear in the sections entitled “Executive Compensation,” “Compensation
Committee Report” and “Corporate Governance-Compensation Committee Interlocks
and Insider Participation” included in the Company’s definitive Proxy Statement
relating to the 2010 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
|
|
The information required by this Item
with respect to Item 201(d) of Regulation S-K appears in Item 5 of this
report.
The information required by this Item
with respect to Item 403 of Regulation S-K will appear in the section entitled
“Security Ownership of Certain Beneficial Owners and Management” included in the
Company’s definitive Proxy Statement relating to the 2010 Annual Meeting of
Stockholders, which information is incorporated herein by
reference.
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
|
|
The information required by this Item
will appear in the sections entitled “Transactions with Related Persons,
Promoters and Certain Control Persons” and “Corporate Goverance-Independent
Directors” included in the Company’s definitive Proxy Statement relating to the
2010 Annual Meeting of Stockholders, which information is incorporated herein by
reference.
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
|
The information required by this Item will appear in the section entitled
“Independent Auditors” included in the Company’s definitive Proxy Statement
relating to the 2010 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
Page 94
PART
IV
ITEM
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
|
Page
|
||
(a)
|
Documents
filed as part of this report:
|
(1)
|
The
following consolidated financial statements are included in Item
8.
|
||
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial Statements
|
51
|
||
Report
of Independent Registered Public Accounting Firm on Internal Control
Over Financial
Reporting
|
52
|
||
Consolidated
Balance Sheets
|
|||
January
2, 2010 and January 3, 2009
|
53
|
||
Consolidated
Statements of Operations-
|
|||
Three
years ended January 2, 2010
|
54
|
||
Consolidated
Statements of Stockholders’ Equity
|
|||
and
Comprehensive Income(Loss) -
|
|||
Three
years ended January 2, 2010
|
55
|
||
Consolidated
Statements of Cash Flows -
|
|||
Three
years ended January 2, 2010
|
57
|
||
Notes
to Consolidated Financial Statements
|
58
|
||
(2)
|
The
following financial statement schedule is included in Item
8.
|
||
Schedule II
– Valuation and Qualifying Accounts
|
|||
Three
years ended January 2, 2010
|
91
|
All other
schedules are omitted since the required information is not present or is not
present in amounts sufficient to require submission of the schedule, or because
the information required is included in the consolidated financial statements
and notes thereto.
Page 95
(3)
|
Exhibits.
|
Exhibit
No.
|
Document
|
3.1
|
Restated
Certificate of Incorporation of the Company, as amended (filed as Exhibit
3.1 to the Company’s Registration Statement on Form S-1 filed May 23, 2002
and incorporated herein by reference).
|
3.2
|
Amended
and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed December 12, 2008 and incorporated herein
by reference).
|
4.1
|
Specimen
Common Stock Certificate (filed as Exhibit 4.1 to the Company’s
Registration Statement on Form S-1 filed May 27, 1994 and incorporated
herein by reference).
|
4.2
|
Certificate
of Designation, Preference and Rights of Series A Preferred Stock (filed
as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed
May 23, 2002 and incorporated herein by reference).
|
10.1
|
Recapitalization
Agreement, dated as of March 15, 2002, among Darling International Inc.,
each of the banks or other lending institutions which is a signatory
thereto or any successor or assignee thereof, and Credit Lyonnais New York
Branch, individually as a bank and as agent (filed as Annex C to the
Company’s Definitive Proxy Statement filed on April 29, 2002, and
incorporated herein by reference).
|
10.2
|
First
Amendment to Recapitalization Agreement, dated as of April 1, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Annex D to the Company’s
Definitive Proxy Statement filed on April 29, 2002, and incorporated
herein by reference).
|
10.3
|
Second
Amendment to Recapitalization Agreement, dated as of April 29, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Exhibit 10.3 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
10.4
|
Registration
Rights Agreement, dated as of December 29, 1993, between Darling
International Inc., and the signatory holders identified therein (filed as
Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed on
May 27, 1994, and incorporated herein by reference).
|
10.5
|
Registration
Rights Agreement, dated as of May 10, 2002, between Darling International
Inc., and the holders identified therein (filed as Exhibit 10.6 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
10.6
*
|
Form
of Indemnification Agreement (filed as Exhibit 10.7 to the Company’s
Registration Statement on Form S-1 filed on May 27, 1994, and incorporated
herein by reference).
|
10.7
|
Credit
Agreement, dated as of April 7, 2006, among Darling International Inc.,
various lending institutions party thereto and JPMorgan Chase Bank, N.A.
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
10.8
|
Second
Amendment to Credit Agreement dated as of October 8, 2008, by and among
Darling International Inc., as borrower, various lending institutions
party thereto and JPMorgan Chase Bank, N.A. (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed October 10, 2008 and
incorporated herein by reference).
|
10.9
|
Third
Amendment to Credit Agreement, dated as of September 30, 2009, by and
among Darling International Inc., as borrower, various lending
institutions party thereto and JPMorgan Chase Bank, N.A. (filed as Exhibit
10.1 to the Company’s Current Report on Form 8-K filed October 2, 2009 and
incorporated herein by reference).
|
Page
96
10.10
|
First
Amendment to Note Purchase Agreement, dated as of April 7, 2006, among
Darling International Inc. and the securities purchasers party thereto
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
10.11
|
Leases,
dated July 1, 1996, between the Company and the City and County of San
Francisco (filed pursuant to temporary hardship exemption under cover of
Form SE).
|
10.12
|
Lease,
dated November 24, 2003, between Darling International Inc. and the Port
of Tacoma (filed as Exhibit 10.3 to the Company’s Annual Report on Form
10-K filed March 29, 2004, and incorporated herein by
reference).
|
10.13
*
|
1994
Employee Flexible Stock Option Plan (filed as Exhibit 2 to the Company’s
Revised Definitive Proxy Statement filed on April 20, 2001, and
incorporated herein by reference).
|
10.14
*
|
Non-Employee
Directors Stock Option Plan (filed as Exhibit 10.13 to the Company’s
Registration Statement on Form S-1/A filed on June 5, 2002, and
incorporated herein by reference).
|
10.15
*
|
Darling
International Inc. 2004 Omnibus Incentive Plan (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed May 11, 2005, and
incorporated herein by reference).
|
10.16*
|
Amendment
to Darling International Inc. 2004 Omnibus Incentive Plan (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 22,
2007 and incorporated herein by reference).
|
10.17
*
|
Darling
International Inc. Compensation Committee Long-Term Incentive Program
Policy Statement (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed June 22, 2005, and incorporated herein by
reference).
|
10.18
*
|
Darling
International Inc. Compensation Committee Executive Compensation Program
Policy Statement adopted January 15, 2009 (filed as Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed January 21, 2009 and
incorporated herein by reference).
|
10.19
*
|
Darling
International Inc. Compensation Committee Amended and Restated Executive
Compensation Program Policy Statement adopted January 8, 2010 (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 14,
2010 and incorporated herein by reference).
|
10.20*
|
Integration
Success Incentive Award Plan (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed March 15, 2006 and incorporated herein by
reference).
|
10.21*
|
Non-Employee
Director Restricted Stock Award Plan (filed as Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed March 15, 2006 and incorporated
herein by reference).
|
10.22*
|
Amendment
No. 1 to Non-Employee Director Restricted Stock Award Plan, effective as
of January 15, 2009 (filed as Exhibit 10.4 to the Company’s Current Report
on Form 8-K filed January 21, 2009 and incorporated herein by
reference).
|
10.23*
|
Notice
of Amendment to Grants and Awards, dated as of October 10, 2006 (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 10,
2006 and incorporated herein by reference).
|
10.24
*
|
Amended
and Restated Employment Agreement, dated as of January 1, 2009, between
Darling International Inc. and Randall C. Stuewe (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed January 21, 2009, and
incorporated herein by reference).
|
Page
97
10.25
*
|
Form
of Senior Executive Termination Benefits Agreement (filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed November 29, 2007 and
incorporated herein by reference).
|
10.26
*
|
Form
of Addendum to Senior Executive Termination Benefits Agreement (filed as
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December
12, 2008 and incorporated herein by reference).
|
10.27
*
|
Amended
and Restated Senior Executive Termination Benefits Agreement dated, as of
January 15, 2009, between Darling International Inc. and John O. Muse
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
January 21, 2009 and incorporated herein by reference).
|
10.28
*
|
First
Addendum to Amended and Restated Senior Executive Termination Benefits
Agreement dated as of December 8, 2009 by and between Darling
International Inc. and John O. Muse (filed as Exhibit 10.4 to the
Company’s Current Report on Form 8-K filed December 14, 2009 and
incorporated herein by reference).
|
10.29
*
|
Separation
and Consulting Agreement dated October 26, 2009, between Darling
International Inc. and Mark A. Myers (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed October 29, 2009 and
incorporated herein by reference).
|
10.30*
|
Form
of Indemnification Agreement between Darling International Inc. and its
directors and executive officers (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed February 25, 2008, and incorporated
herein by reference).
|
14
|
Darling
International Inc. Code of Business Conduct applicable to all employees,
including senior executive officers (filed as Exhibit 14 to the Company’s
Current Report on Form 8-K filed February 25, 2008, and incorporated
herein by reference).
|
21
|
Subsidiaries
of the Registrant (filed as Exhibit 21.1 to the Company’s Registration
Statement on Form S-4 filed on February 2, 2006, and incorporated herein
by reference).
|
23
|
Consent
of KPMG LLP (filed herewith).
|
31.1
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of Randall C. Stuewe, the Chief Executive Officer of the
Company (filed herewith).
|
31.2
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of John O. Muse, the Chief Financial Officer of the Company
(filed herewith).
|
32
|
Written
Statement of Chief Executive Officer and Chief Financial Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) (filed herewith).
|
The
Exhibits are available upon request from the Company.
|
|
*
|
Management
contract or compensatory plan or
arrangement.
|
Page
98
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
By: | /s/ Randall C. Stuewe | ||
Randall C. Stuewe | |||
Chairman of the Board and | |||
|
Chief Executive Officer
|
||
Date: | March 3, 2010 | ||
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE | TITLE | DATE | ||
/ s
/
|
Randall C. Stuewe | Chairman of the Board and | March 3, 2010 | |
|
Randall C. Stuewe |
Chief Executive Officer
|
||
(Principal Executive Officer) |
/ s
/
|
John O. Muse | Executive Vice President - | March 3, 2010 | |
|
John O. Muse |
Finance
and Administration
|
||
(Principal Financial and Accounting Officer) |
/ s
/
|
O. Thomas Albrecht | Director | March 3, 2010 | |
|
O. Thomas Albrecht |
|
||
/ s
/
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C. Dean Carlson | Director | March 3, 2010 | |
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C, Dean Carlson |
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/ s
/
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Marlyn Jorgensen | Director | March 3, 2010 | |
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Marlyn Jorgensen |
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/ s
/
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Charles Macaluso | Director | March 3, 2010 | |
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Charles Macaluso |
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/ s
/
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John D. March | Director | March 3, 2010 | |
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John D. March |
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/ s
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Michael Urbut | Director | March 3, 2010 | |
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Michael Urbut |
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Page
99
INDEX
TO EXHIBITS
3.1
|
Restated
Certificate of Incorporation of the Company, as amended (filed as Exhibit
3.1 to the Company’s Registration Statement on Form S-1 filed May 23, 2002
and incorporated herein by reference).
|
|
3.2
|
Amended
and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed December 12, 2008 and incorporated herein
by reference).
|
|
4.1
|
Specimen
Common Stock Certificate (filed as Exhibit 4.1 to the Company’s
Registration Statement on Form S-1 filed May 27, 1994 and incorporated
herein by reference).
|
|
4.2
|
Certificate
of Designation, Preference and Rights of Series A Preferred Stock (filed
as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed
May 23, 2002 and incorporated herein by reference).
|
|
10.1
|
Recapitalization
Agreement, dated as of March 15, 2002, among Darling International Inc.,
each of the banks or other lending institutions which is a signatory
thereto or any successor or assignee thereof, and Credit Lyonnais New York
Branch, individually as a bank and as agent (filed as Annex C to the
Company’s Definitive Proxy Statement filed on April 29, 2002, and
incorporated herein by reference).
|
|
10.2
|
First
Amendment to Recapitalization Agreement, dated as of April 1, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Annex D to the Company’s
Definitive Proxy Statement filed on April 29, 2002, and incorporated
herein by reference).
|
|
10.3
|
Second
Amendment to Recapitalization Agreement, dated as of April 29, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Exhibit 10.3 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
|
10.4
|
Registration
Rights Agreement, dated as of December 29, 1993, between Darling
International Inc., and the signatory holders identified therein (filed as
Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed on
May 27, 1994, and incorporated herein by reference).
|
|
10.5
|
Registration
Rights Agreement, dated as of May 10, 2002, between Darling International
Inc., and the holders identified therein (filed as Exhibit 10.6 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
|
10.6
|
*
|
Form
of Indemnification Agreement (filed as Exhibit 10.7 to the Company’s
Registration Statement on Form S-1 filed on May 27, 1994, and incorporated
herein by reference).
|
10.7
|
Credit
Agreement, dated as of April 7, 2006, among Darling International Inc.,
various lending institutions party thereto and JPMorgan Chase Bank, N.A.
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
|
10.8
|
Second
Amendment to Credit Agreement dated as of October 8, 2008, by and among
Darling International Inc., as borrower, various lending institutions
party thereto and JPMorgan Chase Bank, N.A. (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed October 10, 2008 and
incorporated herein by reference).
|
|
10.9
|
Third
Amendment to Credit Agreement, dated as of September 30, 2009, by and
among Darling International Inc., as borrower, various lending
institutions party thereto and JPMorgan Chase Bank, N.A. (filed as Exhibit
10.1 to the Company’s Current Report on Form 8-K filed October 2, 2009 and
incorporated herein by reference).
|
|
10.10
|
First
Amendment to Note Purchase Agreement, dated as of April 7, 2006, among
Darling International Inc. and the securities purchasers party thereto
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by
reference).
|
Page
100
10.11
|
Leases,
dated July 1, 1996, between the Company and the City and County of San
Francisco (filed pursuant to temporary hardship exemption under cover of
Form SE).
|
|
10.12
|
Lease,
dated November 24, 2003, between Darling International Inc. and the Port
of Tacoma (filed as Exhibit 10.3 to the Company’s Annual Report on Form
10-K filed March 29, 2004, and incorporated herein by
reference).
|
|
10.13
|
*
|
1994
Employee Flexible Stock Option Plan (filed as Exhibit 2 to the Company’s
Revised Definitive Proxy Statement filed on April 20, 2001, and
incorporated herein by reference).
|
10.14
|
*
|
Non-Employee
Directors Stock Option Plan (filed as Exhibit 10.13 to the Company’s
Registration Statement on Form S-1/A filed on June 5, 2002, and
incorporated herein by reference).
|
10.15
|
*
|
Darling
International Inc. 2004 Omnibus Incentive Plan (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed May 11, 2005, and
incorporated herein by reference).
|
10.16
|
*
|
Amendment
to Darling International Inc. 2004 Omnibus Incentive Plan (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 22,
2007 and incorporated herein by reference).
|
10.17
|
*
|
Darling
International Inc. Compensation Committee Long-Term Incentive Program
Policy Statement (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed June 22, 2005, and incorporated herein by
reference).
|
10.18
|
*
|
Darling
International Inc. Compensation Committee Executive Compensation Program
Policy Statement adopted January 15, 2009 (filed as Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed January 21, 2009 and
incorporated herein by reference).
|
10.19
|
*
|
Darling
International Inc. Compensation Committee Amended and Restated Executive
Compensation Program Policy Statement adopted January 8, 2010 (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 14,
2010 and incorporated herein by reference).
|
10.20
|
*
|
Integration
Success Incentive Award Plan (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed March 15, 2006 and incorporated herein by
reference).
|
10.21
|
*
|
Non-Employee
Director Restricted Stock Award Plan (filed as Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed March 15, 2006 and incorporated
herein by reference).
|
10.22
|
*
|
Amendment
No. 1 to Non-Employee Director Restricted Stock Award Plan, effective as
of January 15, 2009 (filed as Exhibit 10.4 to the Company’s Current Report
on Form 8-K filed January 21, 2009 and incorporated herein by
reference).
|
10.23
|
*
|
Notice
of Amendment to Grants and Awards, dated as of October 10, 2006 (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 10,
2006 and incorporated herein by reference).
|
10.24
|
*
|
Amended
and Restated Employment Agreement, dated as of January 1, 2009, between
Darling International Inc. and Randall C. Stuewe (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed January 21, 2009, and
incorporated herein by reference).
|
10.25
|
*
|
Form
of Senior Executive Termination Benefits Agreement (filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed November 29, 2007 and
incorporated herein by reference).
|
10.26
|
*
|
Form
of Addendum to Senior Executive Termination Benefits Agreement (filed as
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December
12, 2008 and incorporated herein by
reference).
|
Page 101
10.27
|
*
|
Amended
and Restated Senior Executive Termination Benefits Agreement dated, as of
January 15, 2009, between Darling International Inc. and John O.
Muse(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed January 21, 2009 and incorporated herein by
reference).
|
|
10.28
|
*
|
First
Addendum to Amended and Restated Senior Executive Termination Benefits
Agreement dated as of December 8, 2009 by and between Darling
International Inc. and John O. Muse (filed as Exhibit 10.4 to the
Company’s Current Report on Form 8-K filed December 14, 2009 and
incorporated herein by reference).
|
|
10.29
|
*
|
Separation
and Consulting Agreement dated October 26, 2009, between Darling
International Inc. and Mark A. Myers (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed October 29, 2009 and
incorporated herein by reference).
|
|
10.30
|
*
|
Form
of Indemnification Agreement between Darling International Inc. and its
directors and executive officers (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed February 25, 2008, and incorporated
herein by reference).
|
|
14
|
Darling
International Inc. Code of Business Conduct applicable to all employees,
including senior executive officers (filed as Exhibit 14 to the Company’s
Current Report on Form 8-K filed February 25, 2008, and incorporated
herein by reference).
|
||
21
|
Subsidiaries
of the Registrant (filed as Exhibit 21.1 to the Company’s Registration
Statement on Form S-4 filed on February 2, 2006, and incorporated herein
by reference).
|
||
23
|
Consent
of KPMG LLP (filed herewith).
|
||
31.1
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of Randall C. Stuewe, the Chief Executive Officer of the
Company (filed herewith).
|
||
31.2
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of John O. Muse, the Chief Financial Officer of the Company
(filed herewith).
|
||
32
|
Written
Statement of Chief Executive Officer and Chief Financial Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) (filed herewith).
|
||
*
|
Management
contract or compensatory plan or
arrangement.
|
Page
102