Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below under the heading "Forward Looking Statements" and elsewhere in this report, and under the heading "Risk Factors" in Part I, Item 1A in the Company's Annual Report on Form 10-K for the fiscal year endedJanuary 1, 2022 , filed with theSEC onMarch 1, 2022 and in the Company's other public filings with theSEC .
The following discussion should be read in conjunction with the unaudited consolidated financial statements and related notes thereto contained in this report.
OverviewDarling Ingredients Inc. ("Darling", and together with its subsidiaries, the "Company" or "we," "us" or "our") is a global developer and producer of sustainable natural ingredients from edible and inedible bio-nutrients, creating a wide range of ingredients and customized specialty solutions for customers in the pharmaceutical, food, pet food, feed, industrial, fuel, bioenergy and fertilizer industries. With operations on five continents, the Company collects and transforms all aspects of animal by-product streams into useable and specialty ingredients, such as collagen, edible fats, feed-grade fats, animal proteins and meals, plasma, pet food ingredients, organic fertilizers, yellow grease, fuel feedstocks, green energy, natural casings and hides. The Company also recovers and converts recycled oils (used cooking oil and animal fats) into valuable feed and collects and processes residual bakery products into feed ingredients. In addition, the Company provides environmental services, such as grease trap collection and disposal services to food service establishments. The Company sells its products domestically and internationally and operates within three industry segments: Feed Ingredients, Food Ingredients and Fuel Ingredients. The Feed Ingredients operating segment includes the Company's global activities related to (i) the collection and processing of beef, poultry and pork animal by-products inNorth America andEurope into non-food grade oils and protein meals, (ii) the collection and processing of bakery residuals inNorth America into Cookie Meal®, which is predominantly used in poultry and swine rations, (iii) the collection and processing of used cooking oil inNorth America into non-food grade fats, (iv) the collection and processing of porcine and bovine blood inChina ,Europe ,North America andAustralia into blood plasma powder and hemoglobin, (v) the processing of selected portions of slaughtered animals into a variety of meat products for use in pet food inEurope andNorth America , (vi) the processing of cattle hides and hog skins inNorth America , (vii) the production of organic fertilizers using protein produced from the Company's animal by-products processing activities inNorth America andEurope , (viii) the rearing and processing of black soldier fly larvae into specialty proteins for use in animal feed and pet food inNorth America , and (ix) the provision of grease trap services to food service establishments inNorth America . Non-food grade oils and fats produced and marketed by the Company are principally sold to third parties to be used as ingredients in animal feed and pet food, as an ingredient for the production of renewable diesel and biodiesel, or to the oleo-chemical industry to be used as an ingredient in a wide variety of industrial applications. Protein meals, blood plasma powder and hemoglobin produced and marketed by the Company are sold to third parties to be used as ingredients in animal feed, pet food and aquaculture. The Food Ingredients operating segment includes the Company's global activities related to (i) the purchase and processing of beef and pork bone chips, beef hides, pig skins, and fish skins into collagen inEurope ,China ,South America andNorth America , (ii) the collection and processing of porcine and bovine intestines into natural casings inEurope ,China andNorth America , (iii) the extraction and processing of porcine mucosa into crude heparin inEurope , (iv) the collection and refining of animal fat into food grade fat inEurope , and (v) the processing of bones to bone chips for the collagen industry and bone ash inEurope . Collagens produced and marketed by the Company are sold to third parties to be used as ingredients in the pharmaceutical, nutraceutical, food, pet food and technical (e.g., photographic) industries. Natural casings produced and marketed by the Company are sold to third parties to be used as an ingredient in the production of sausages and other similar food products. The Fuel Ingredients operating segment includes the Company's global activities related to (i) the Company's share of the results of its equity investment inDiamond Green Diesel Holdings LLC , a joint venture with Valero Energy Corporation ("Valero") to convert animal fats, recycled greases, used cooking oil, inedible corn oil, soybean oil, or other feedstocks that become economically and commercially viable into renewable diesel ("DGD" or the "DGD Joint Venture") as described in Note 3 (Investment in Unconsolidated Subsidiaries) to the Company's Consolidated Financial Statements for the period endedApril 2, 2022 included herein, (ii) the conversion of organic sludge and food waste into biogas in 25 --------------------------------------------------------------------------------Europe , (iii) the collection and conversion of fallen stock and certain animal by-products pursuant to applicable E.U. regulations into low-grade energy sources to be used in industrial applications, and (iv) the processing of manure into natural bio-phosphate inEurope .
Corporate Activities principally include unallocated corporate overhead expenses, acquisition-related expenses, interest expense net of interest income, and other non-operating income and expenses.
Economic Conditions and Uncertainties
Global Economic Conditions
We operate globally and have operations in numerous countries. As such, we are exposed to, and impacted by global macroeconomic factors,U.S. and foreign government policies and foreign exchange fluctuations. Global economic conditions continue to be highly volatile due to, among other things, the conflict inUkraine and its impact on volatility in energy and other commodity prices, cost and supply chain pressures and availability, and disruption in banking systems and capital markets. Disturbances in world financial, credit, commodities and stock markets, including inflationary, deflationary and recessionary conditions, could have a negative impact on the Company's results of operations. Any such disturbances or disruptions may also magnify the impact of other risks described in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedJanuary 1, 2022 , as filed with theSEC onMarch 1, 2022 .
Energy Policies of
Prices for our finished products, including those of DGD, may be impacted by worldwide government policies relating to renewable fuels and greenhouse gas emissions ("GHG"). Programs like the National Renewable Fuel Standard Program ("RFS") and low carbon fuel standards ("LCFS") (such as in the state ofCalifornia ) and tax credits for biofuels both inthe United States and abroad may positively impact the demand for our finished products. Legal challenges or changes to, a failure to enforce, reductions in the mandated volumes under, or discontinuing or suspension of any of these programs could have a negative impact on our business and results of operations. However, such rules and the regulatory environment are continuing to evolve and change, and we cannot predict the ultimate effect that such changes may have on our business.
Climate Change
There is a growing global concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency of extreme weather and natural disasters. We are subject to physical, operational, transitional and financial risks associated with climate change and global, regional and local weather conditions, as well as legal, regulatory and market responses to climate change. Certain jurisdictions in which we operate have either imposed, or are considering imposing, new or increasingly stringent legal and regulatory requirements to reduce or mitigate the potential effects of climate change, including regulation and reduction of GHG and potential carbon pricing programs. These new or increasingly stringent legal or regulatory requirements could result in significantly increased costs of compliance and additional investments in facilities and equipment. While we assess climate related regulatory risks as part of our risk management process, we are unable to predict the scope, nature and timing of any new or increasingly stringent environmental laws and regulations and therefore cannot predict the ultimate impact of such laws and regulations on our business or financial results. We continue to monitor existing and proposed laws and regulations in the jurisdictions in which we operate and to consider actions we may take to potentially mitigate the unfavorable impact, if any, of such laws or regulations. Furthermore, there has been increased focus from our stakeholders, including consumers, employees and investors, on corporate environmental, social, and governance ("ESG") practices, including practices related to the causes and impacts of climate change. We expect that stakeholder expectations with respect to ESG expectations will continue to evolve rapidly, which may necessitate additional resources to monitor, report on, and adjust our operations.
COVID-19
Our global operations continue to expose us to risks associated with the COVID-19 pandemic as the potential impacts of COVID-19 resurgences and variants have resulted in continued uncertainty as to the pandemic's further duration and scope. Various measures have been implemented at various times around the world to try to reduce the spread of the virus, including travel bans and restrictions, quarantines, curfews, stay-at-home restrictions and other public health and safety measures. The health and well-being of our employees continues to be a priority for us, and we will continue, as appropriate, to implement operational guidelines in our organization consistent with the applicable governmental and 26 -------------------------------------------------------------------------------- regulatory policies in the geographies we operate intended to protect our employees and prevent the spread of the virus. The extent to which COVID-19 impacts the Company's and DGD's business and financial results will depend on future developments, which are highly uncertain and cannot be predicted and may vary by jurisdiction and market, including the duration and scope of the pandemic, the emergence and spread of new variants of the virus, such as the omicron and delta variants, the likelihood of a resurgence of positive cases, the development, availability and acceptance of effective treatments and vaccines, the speed at which such vaccines are administered, the efficacy of current vaccines against evolving strains or variants of the virus, global economic conditions during and after the pandemic and governmental actions that have been taken or may be taken in the future in response to the pandemic, among others. For additional information on risk factors that could impact our results, please refer to "Risk Factors" in Part I, Item 1A of the Company's Form 10-K for the fiscal year endedJanuary 1, 2022 , as filed with theSEC onMarch 1, 2022 .
Operating Performance Indicators
The Company monitors the performance of its business segments using key financial metrics such as results of operations, non-GAAP measurements (Adjusted EBITDA), segment operating income, raw material processed, gross margin percentage, foreign currency translation, and corporate activities. The Company's operating results can vary significantly due to changes in factors such as the fluctuation in commodity prices and energy prices, weather conditions, crop harvests, government policies and programs, changes in global demand, changes in standards of living, protein consumption, and global production of competing ingredients. Due to these unpredictable factors that are beyond the control of the Company, forward-looking financial or operational estimates are not provided. The Company is exposed to certain risks associated with a business that is influenced by agricultural-based commodities. These risks are further described in Item 1A of Part I, "Risk Factors" included in the Company's Form 10-K for the fiscal year endedJanuary 1, 2022 . The Company's Feed Ingredients segment animal by-products, bakery residuals, used cooking oil recovery, and blood operations are each influenced by prices for agricultural-based alternative ingredients such as corn oil, soybean oil, soybean meal, and palm oil. In these operations, the costs of the Company's raw materials change with, or in certain cases are indexed to, the selling price or the anticipated selling price of the finished goods produced from the acquired raw materials and/or in some cases, the price spread between various types of finished products. The Company believes that this methodology of procuring raw materials generally establishes a relatively stable gross margin upon the acquisition of the raw material. Although the costs of raw materials for the Feed Ingredients segment are generally based upon actual or anticipated finished goods selling prices, rapid and material changes in finished goods prices, including competing agricultural-based alternative ingredients, generally have an immediate, and often times, material impact on the Company's gross margin and profitability resulting from the brief lapse of time between the procurement of the raw materials and the sale of the finished goods. In addition, the volume of raw material acquired, which has a direct impact on the amount of finished goods produced, can also have a material effect on the gross margin reported, as the Company has a substantial amount of fixed operating costs. The Company's Food Ingredients segment collagen and natural casings products are influenced by other competing ingredients including plant-based and synthetic hydrocolloids and artificial casings. In the collagen operation, the cost of the Company's animal-based raw material moves in relationship to the selling price of the finished goods. The processing time for the Food Ingredients segment collagen and casings is generally 30 to 60 days, which is substantially longer than the Company's Feed Ingredients segment animal by-products operations. Consequently, the Company's gross margin and profitability in this segment can be influenced by the movement of finished goods prices from the time the raw materials were procured until the finished goods are sold.
The Company's Fuel Ingredients segment converts fats into renewable diesel, organic sludge and food waste into biogas, and fallen stock into low-grade energy sources. The Company's gross margin and profitability in this segment are impacted by world energy prices for oil, electricity, natural gas and governmental subsidies.
The reporting currency for the Company's financial statements is theU.S. dollar. The Company operates in over 15 countries and therefore, certain of the Company's assets, liabilities, revenues and expenses are denominated in functional currencies other than theU.S. dollar, primarily in the Euro, Brazilian real, Chinese renminbi, Canadian dollar and Polish zloty. To prepare the Company's consolidated financial statements, assets, liabilities, revenues, and expenses must be translated intoU.S. dollars at the applicable exchange rate. As a result, increases or decreases in the value of theU.S. dollar against these other currencies will affect the amount of these items recorded in the Company's consolidated financial statements, even if their value has not changed in the functional currency. This could have a significant impact on 27 --------------------------------------------------------------------------------
the Company's results, if such increase or decrease in the value of the
Results of Operations
Three Months Ended
Operating Performance Metrics
Operating performance metrics which management routinely monitors as an indicator of operating performance include:
•Finished product commodity prices •Segment results •Foreign currency exchange •Corporate activities •Non-U.S. GAAP measures
These indicators and their importance are discussed below.
Finished Product Commodity Prices
Prices for finished product commodities that the Company produces in the Feed Ingredients segment are reported each business day on the Jacobsen Index (the "Jacobsen"), an established North American trading exchange price publisher. The Jacobsen reports industry sales from the prior day's activity by product. Included on the Jacobsen are reported prices for finished products such as protein (primarily meat and bone meal ("MBM"), poultry meal ("PM") and feather meal ("FM")), hides, fats (primarily bleachable fancy tallow ("BFT") and yellow grease ("YG")) and corn, which is a substitute commodity for the Company's bakery by-product ("BBP") as well as a range of other branded and value-added products, which are products of the Company's Feed Ingredients segment. Inthe United States , the Company regularly monitors the Jacobsen for MBM, PM, FM, BFT, YG and corn because it provides a daily indication of the Company'sU.S. revenue performance against business plan benchmarks. InEurope , the Company regularly monitors Thomson Reuters ("Reuters") to track the competing commodities palm oil and soy meal. Although the Jacobsen and Reuters provide useful metrics of performance, the Company's finished products are commodities that compete with other commodities such as corn, soybean oil, palm oil complex, soybean meal and heating oil on nutritional and functional values. Therefore, actual pricing for the Company's finished products, as well as competing products, can be quite volatile. In addition, neither the Jacobsen nor Reuters provides forward or future period pricing for the Company's commodities. The Jacobsen and Reuters 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 and Reuters prices, the Company's actual sales prices for its finished products may vary significantly from the Jacobsen and Reuters because of production and delivery timing differences and because the Company's finished products are delivered to multiple locations in different geographic regions which utilize alternative price indexes. In addition, certain of the Company's premium branded finished products may sell at prices that may be higher than the closest product on the related Jacobsen or Reuters index. During the first quarter of fiscal 2022, the Company's actual sales prices by product trended with the disclosed Jacobsen and Reuters prices. Average Jacobsen and Reuters prices (at the specified delivery point) for the first quarter of fiscal 2022, compared to average Jacobsen and Reuters prices for the first quarter of fiscal 2021 are as follows: 28 --------------------------------------------------------------------------------
Avg. Price Avg. Price 1st Quarter 1st Quarter % 2022 2021 Increase/(Decrease) Increase/(Decrease) Jacobsen: MBM (Illinois)$ 317.22 /ton$ 386.97 /ton$ (69.75) /ton (18.0) % Feed Grade PM (Mid-South)$ 367.03 /ton$ 357.79 /ton$ 9.24 /ton 2.6 % Pet Food PM (Mid-South)$ 761.69 /ton$ 845.08 /ton$ (83.39) /ton (9.9) % Feather meal (Mid-South)$ 525.32 /ton$ 539.02 /ton$ (13.70) /ton (2.5) % BFT (Chicago)$ 71.39 /cwt$ 46.42 /cwt$ 24.97 /cwt 53.8 % YG (Illinois)$ 53.91 /cwt$ 34.45 /cwt$ 19.46 /cwt 56.5 % Corn (Illinois)$ 6.90 /bushel$ 5.56 /bushel$ 1.34 /bushel 24.1 % Reuters: Palm Oil (CIF Rotterdam)$ 1,555.00 /MT$ 1,084.00 /MT$ 471.00 /MT 43.5 % Soy meal (CIF Rotterdam)$ 576.00 /MT$ 535.00 /MT$ 41.00 /MT 7.7 % The following table shows the average Jacobsen and Reuters prices for the first quarter of fiscal 2022, compared to average Jacobsen and Reuters prices for the fourth quarter of fiscal 2021. Avg. Price Avg. Price 1st Quarter 4th Quarter % 2022 2021 Increase/(Decrease) Increase/(Decrease) Jacobsen: MBM (Illinois)$ 317.22 /ton$ 261.79 /ton$ 55.43 /ton 21.2 % Feed Grade PM (Mid-South)$ 367.03 /ton$ 335.07 /ton$ 31.96 /ton 9.5 % Pet Food PM (Mid-South)$ 761.69 /ton$ 650.25 /ton$ 111.44 /ton 17.1 % Feather meal (Mid-South)$ 525.32 /ton$ 444.61 /ton$ 80.71 /ton 18.2 % BFT (Chicago)$ 71.39 /cwt$ 66.15 /cwt$ 5.24 /cwt 7.9 % YG (Illinois)$ 53.91 /cwt$ 44.30 /cwt$ 9.61 /cwt 21.7 % Corn (Illinois)$ 6.90 /bushel$ 5.84 /bushel$ 1.06 /bushel 18.2 % Reuters: Palm Oil (CIF Rotterdam)$ 1,555.00 /MT$ 1,349.00 /MT$ 206.00 /MT 15.3 % Soy meal (CIF Rotterdam)$ 576.00 /MT$ 466.00 /MT$ 110.00 /MT 23.6 % Segment Results Segment operating income for the three months endedApril 2, 2022 was$232.9 million , which reflects an increase of$33.4 million or 16.7% as compared to the three months endedApril 3, 2021 .
(in thousands, except percentages) Feed Ingredients Food Ingredients Fuel Ingredients Corporate Total
Three Months Ended
$ 879,438 $
354,814
645,523 270,312 104,742 - 1,020,577 Gross Margin 233,915 84,502 27,340 - 345,757 Gross Margin % 26.6 % 23.8 % 20.7 % - % 25.3 % Gain on sale of assets (341) (9) (39) - (389) Selling, general and administrative expenses 56,209 26,844 3,920 15,059 102,032 Acquisition and integration costs - - - 3,773 3,773 Depreciation and amortization 54,350 15,450 6,674 2,772 79,246 Equity in net income of Diamond Green Diesel - - 71,804 - 71,804 Segment operating income/(loss) 123,697 42,217 88,589 (21,604) 232,899 Equity in net income of other unconsolidated subsidiaries 1,360 - - - 1,360 Segment income/(loss) 125,057 42,217 88,589 (21,604) 234,259 29
--------------------------------------------------------------------------------
(in thousands, except percentages) Feed Ingredients Food Ingredients Fuel Ingredients Corporate Total
Three Months Ended
$ 651,444 $
298,065
474,581 226,413 71,790 - 772,784 Gross Margin 176,863 71,652 25,417 - 273,932 Gross Margin % 27.1 % 24.0 % 26.1 % - % 26.2 % Loss/(gain) on sale of assets (139) 55 20 - (64) Selling, general and administrative expenses 52,620 25,191 4,867 14,720 97,398 Restructuring and impairment charges - - 778 - 778 Depreciation and amortization 54,609 14,883 6,155 2,887 78,534 Equity in net income of Diamond Green Diesel - - 102,225 - 102,225 Segment operating income/(loss) 69,773 31,523 115,822 (17,607) 199,511 Equity in net income of other unconsolidated subsidiaries 612 - - - 612 Segment income/(loss) 70,385 31,523 115,822 (17,607) 200,123 Feed Ingredients Segment Raw material volume. In the three months endedApril 2, 2022 , the raw material processed by the Company's Feed Ingredients segment totaled approximately 2.31 million metric tons. Compared to the three months endedApril 3, 2021 , overall raw material volume processed in the Feed Ingredients segment increased approximately 3.6%.
Sales. The increase in net sales for the Feed Ingredients segment was primarily due to the following (in millions of dollars):
Used Cooking Fats Proteins Other Rendering Total Rendering Oil Bakery Other Total Net sales three months ended April 3, 2021$ 229.0 $ 255.5 $ 43.0 $ 527.5$ 51.0 $ 63.1 $ 9.8 $ 651.4 Increase in sales volumes 3.7 4.1 - 7.8 4.4 2.9 - 15.1 Increase in finished product prices 138.9 17.1 - 156.0 39.5 12.5 - 208.0 Decrease due to currency exchange rates (3.2) (6.5) (0.4) (10.1) - - - (10.1) Other change - - 14.9 14.9 - - 0.1 15.0 Total change 139.4 14.7 14.5 168.6 43.9 15.4 0.1 228.0 Net sales three months ended April 2, 2022$ 368.4 $ 270.2 $ 57.5 $ 696.1$ 94.9 $ 78.5 $ 9.9 $ 879.4 Margins. In the Feed Ingredients segment for the three months endedApril 2, 2022 , the gross margin percentage decreased to 26.6% as compared to 27.1% for the comparable period of fiscal 2021. The decrease in margin is primarily due to higher overall energy prices as compared to fiscal 2021. Segment operating income. Feed Ingredients operating income for the three months endedApril 2, 2022 was$123.7 million , an increase of$53.9 million or 77.2% as compared to the three months endedApril 3, 2021 . The increase is due to higher overall fat finished product prices and higher raw material volumes as compared to fiscal 2021. Food Ingredients Segment Raw material volume. In the three months endedApril 2, 2022 , the raw material processed by the Company's Food Ingredients segment totaled approximately 278,000 metric tons. Compared to the three months endedApril 3, 2021 , overall raw material volume processed in the Food Ingredients segment increased approximately 1.5%.
Sales. Net sales increased in the Food Ingredients segment primarily due to higher sales prices and volumes in the collagen and edible fat sales markets.
30 -------------------------------------------------------------------------------- Margins. In the Food Ingredients segment for the three months endedApril 2, 2022 , the gross margin percentage decreased to 23.8% as compared to 24.0% for the comparable period of fiscal 2021. The decrease in margin is primarily due to higher overall energy prices as compared to fiscal 2021. Segment operating income. Food Ingredients operating income was$42.2 million for the three months endedApril 2, 2022 , an increase of$10.7 million or 34.0% as compared to the three months endedApril 3, 2021 . The increase is primarily due to higher sales prices and volumes in collagen markets that more than offset higher energy prices as compared to fiscal 2021.
Fuel Ingredients Segment
Raw material volume. In the three months endedApril 2, 2022 , the raw material processed by the Company's Fuel Ingredients segment totaled approximately 340,000 metric tons. Compared to the three months endedApril 3, 2021 , overall raw material volume processed in the Fuel Ingredients segment increased approximately 3.7%.
Sales. Net sales increased in the Fuel Ingredients segment primarily due to
higher sales prices and volumes in
Margins. In the Fuel Ingredients segment (exclusive of the equity contribution from the DGD Joint Venture) for the three months endedApril 2, 2022 , the gross margin percentage decreased to 20.7% as compared to 26.1% for the comparable period of fiscal 2021. The decrease is primarily due to higher raw material costs and higher energy prices as compared to fiscal 2021. Segment operating income. The Company's Fuel Ingredients segment operating income (inclusive of the equity contribution from the DGD Joint Venture) for the three months endedApril 2, 2022 was$88.6 million , a decrease of$27.2 million or (23.5)% as compared to the same period in fiscal 2021. The decrease is primarily attributed to higher raw material costs at DGD, a catalyst turnaround at DGD during the quarter and also attributed to lower values for LCFS credits that more than offset higher blenders tax credits and higher fuel and Renewable Identification Number prices as compared to the same period in fiscal 2021.
Foreign Currency Exchange
During the first quarter of fiscal 2022, the euro weakened against theU.S. dollar as compared to the same period in fiscal 2021. Using actual results for the three months endedApril 2, 2022 and using the prior year's average currency rate for the three months endedApril 3, 2021 , foreign currency translation would result in an increase in operating income of approximately$7.2 million . The average rate assumptions used in this calculation were the actual fiscal average rates for the three months endedApril 2, 2022 of €1.00:$1.12 andC$1 .00:$0.79 as compared to the average rates for the three months endedApril 3, 2021 of €1.00:$1.20 andC$1 .00:$0.79 , respectively.
Corporate Activities
Selling, General and Administrative Expenses. Selling, general and administrative expenses was approximately$15.1 million during the three months endedApril 2, 2022 , compared to approximately$14.7 million during the three months endedApril 3, 2021 , an increase of$0.4 million . The increase is primarily due to higher costs for information technology, travel, legal and insurance premiums that more than offset a decrease in corporate related benefits.
Restructuring and Impairment charges. Restructuring and impairment charges
represents additional costs included in the three months ended
Acquisition and Integration costs. Acquisition and integration costs were approximately$3.8 million during the three months endedApril 2, 2022 . These include costs related to the Company'sMay 2, 2022 acquisition of all the shares of Valley Proteins, the purchase of all the shares of Op de Beeck inFebruary 2022 and other potential acquisitions.
Depreciation and Amortization. Depreciation and amortization charges were
approximately
Interest Expense. Interest expense was$15.6 million during the three months endedApril 2, 2022 , compared to$16.4 million during the three months endedApril 3, 2021 , a decrease of$0.8 million . The decrease is primarily due to lower amortization of deferred loan costs and lower interest on the Term loan B as a result of partial note pay-downs that more than offset an increase in revolver interest due to increased revolver borrowings. 31 -------------------------------------------------------------------------------- Foreign Currency Loss. Foreign currency losses were$1.1 million for the three months endedApril 2, 2022 as compared to foreign currency losses of$0.4 million for the three months endedApril 3, 2021 . The increase is due primarily to increased losses on the revaluation of non-functional currency assets and liabilities as compared to the same period in fiscal 2021. Other Expense, net. Other expense was$0.7 million in the three months endedApril 2, 2022 , compared to other expense of$1.2 million for the three months endedApril 3, 2021 . The decrease in other expense was primarily due to a decrease in the non-service component of pension expense and an increase in interest income as compared to the same period in fiscal 2021. Equity in Net Income in Investment of Other Unconsolidated Subsidiaries. The change in this line item is not significant and primarily represents the Company's pro rata share of the net income from foreign unconsolidated subsidiaries. Income Taxes. The Company recorded income tax expense of$26.1 million for the three months endedApril 2, 2022 , compared to$28.7 million recorded in the three months endedApril 3, 2021 , a decrease of$2.6 million , which is primarily due to an increase in the amount of biofuel tax incentives and discrete tax benefits from stock-based compensation recognized during the three months endedApril 2, 2022 . The effective tax rate for the three months endedApril 2, 2022 andApril 3, 2021 is 12.0% and 15.8%, respectively. The effective tax rate for the three months endedApril 2, 2022 andApril 3, 2021 differs from the federal statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes), biofuel tax incentives, and discrete items, including excess tax benefits from stock-based compensation. The Company's effective tax rate excluding biofuel tax incentives and discrete items is 25.7% for the three months endedApril 2, 2022 , compared to 26.5% for the three months endedApril 3, 2021 . Non-U.S. GAAP Measures Adjusted EBITDA is not a recognized accounting measurement under GAAP; it should not be considered as an alternative to net income, as a measure of operating results, or as an alternative to cash flow as a measure of liquidity. It is presented here not as an alternative to net income, but rather as a measure of the Company's operating performance. Since EBITDA (generally, net income plus interest expense, taxes, depreciation and amortization) is not calculated identically by all companies, the presentation in this report may not be comparable to EBITDA or Adjusted EBITDA presentations disclosed by other companies. Adjusted EBITDA is calculated below and represents for any relevant period, net income/(loss) plus depreciation and amortization, restructuring, acquisition and integration costs, goodwill and long-lived asset impairment, interest expense, (income)/loss from discontinued operations, net of tax, income tax provision, other income/(expense) and equity in net (income)/loss of unconsolidated subsidiary. Management believes that Adjusted EBITDA is useful in evaluating the Company's operating performance compared to that of other companies in its 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. The Company's management uses Adjusted EBITDA as a measure to evaluate performance and for other discretionary purposes. In addition to the foregoing, management also uses or will use Adjusted EBITDA to measure compliance with certain financial covenants under the Company's Senior Secured Credit Facilities, 5.25% Notes and 3.625% Notes that were outstanding atApril 2, 2022 . However, the amounts shown below for Adjusted EBITDA differ from the amounts calculated under similarly titled definitions in the Company's Senior Secured Credit Facilities, 5.25% Notes and 3.625% Notes, as those definitions permit further adjustments to reflect certain other non-recurring costs, non-cash charges and cash dividends from the DGD Joint Venture. Additionally, the Company evaluates the impact of foreign exchange on operating cash flow, which is defined as segment operating income (loss) plus depreciation and amortization. Reconciliation of Net Income to (Non-GAAP) Adjusted EBITDA and (Non-GAAP) Pro Forma Adjusted EBITDA First Quarter 2022 As Compared to First Quarter 2021 32 --------------------------------------------------------------------------------
Three Months Ended April 2, April 3, (dollars in thousands) 2022 2021 Net income attributable to Darling$ 188,053 $ 151,766 Depreciation and amortization 79,246 78,534 Interest expense 15,603 16,428 Income tax expense 26,083 28,708 Restructuring and asset impairment charges - 778 Acquisition and integration costs 3,773 - Foreign currency loss 1,100 410 Other expense, net 742 1,159 Equity in net income of Diamond Green Diesel (71,804) (102,225) Equity in net income of other unconsolidated subsidiaries (1,360) (612) Net income attributable to non-controlling interests 2,678 1,652 Darling's Adjusted EBITDA $
244,114
Foreign currency exchange impact (1) 7,227 -
Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP)
DGD Joint Venture Adjusted EBITDA (Darling's Share) $
86,560
Darling plus Darling's share of DGD Joint Venture Adjusted EBITDA$ 330,674 $ 284,798 (1) The average rates assumption used in this calculation was the actual fiscal average rate for the three months endedApril 2, 2022 of €1.00:$1.12 andC$1 .00:$0.79 as compared to the average rate for the three months endedApril 3, 2021 of €1.00:$1.20 andC$1 .00:$0.79 , respectively.
FINANCING, LIQUIDITY AND CAPITAL RESOURCES
Credit Facilities
Indebtedness
Certain Debt Outstanding atApril 2, 2022 . OnApril 2, 2022 , debt outstanding under the Company's Amended Credit Agreement, the Company's 5.25% Notes and the Company's 3.625% Notes consists of the following (in thousands): Senior Notes: 5.25 % Notes due 2027$ 500,000 Less unamortized deferred loan costs (4,753) Carrying value of 5.25% Notes due 2027$ 495,247
3.625 % Notes due 2026 - Denominated in euros
(4,647) Carrying value of 3.625% Notes due 2026$ 564,325 Amended Credit Agreement: Term Loan B$ 200,000 Less unamortized deferred loan costs (1,774) Carrying value of Term Loan B$ 198,226 Revolving Credit Facility: Maximum availability$ 1,500,000 Ancillary Facilities 50,407 Borrowings outstanding 396,007 Letters of credit issued 3,849 Availability$ 1,049,737 Other Debt$ 59,457 33
-------------------------------------------------------------------------------- During the first three months of fiscal 2022, theU.S. dollar strengthened as compared to the euro and weakened as compared to the Canadian dollar atJanuary 1, 2022 . Using the euro and Canadian based debt outstanding atApril 2, 2022 and comparing the closing balance sheet rate atApril 2, 2022 to the balance sheet rate atJanuary 1, 2022 , theU.S. dollar debt balances of euro based debt decreased by approximately$14.0 million and theU.S. dollar debt balance of Canadian based debt increased approximately$0.2 million , atApril 2, 2022 . The closing balance sheet rate assumption used in this calculation was the actual fiscal closing balance sheet rate atApril 2, 2022 of €1.00:$1.1048 andC$1 .00:$0.800667 as compared to the closing balance sheet rate atJanuary 1, 2022 of €1.00:$1.13200 andC$1 .00:$0.785266 . Senior Secured Credit Facilities. OnJanuary 6, 2014 , Darling,Darling International Canada Inc. ("Darling Canada") andDarling International NL Holdings B.V . ("Darling NL ") entered into a Second Amended and Restated Credit Agreement (as subsequently amended, the "Amended Credit Agreement"), restating its then existing Amended and Restated Credit Agreement datedSeptember 27, 2013 , with the lenders from time to time party thereto,JPMorgan Chase Bank, N.A ., as Administrative Agent, and the other agents from time to time party thereto. EffectiveMarch 2, 2022 , the Company, and certain of its subsidiaries entered into an amendment (the "Eighth Amendment") with its lenders to the Amended Credit Agreement. Among other things, the Eighth Amendment (a) added a new delayed draw incremental term facility (the "term A-2 facility") and new incremental term loans pursuant thereto, in an aggregate principal amount of up to$500.0 million , which is available to the Company for general corporate purposes, including acquisitions and capital expenditures, and will mature onDecember 9, 2026 and (b) updated and modified certain other terms and provisions of the Amended Credit Agreement to reflect the addition of the term A-2 facility to the Amended Credit Agreement. The Amended Credit Agreement provides for senior secured credit facilities in the aggregate principal amount of$2.925 billion comprised of (i) the Company's$525.0 million term loan B facility, (ii) the Company's$400.0 million delayed draw term A-1 loan, (iii) the Company's$500.0 million delayed draw term A-2 loan and (iv) the Company's$1.5 billion five-year revolving loan facility (up to$150.0 million of which will be available for a letter of credit subfacility and$50.0 million of which will be available for a swingline sub-facility) (collectively, the "Senior Secured Credit Facilities"). The Amended Credit Agreement also permits Darling and the other borrowers thereunder to incur ancillary facilities provided by any revolving lender party to the Senior Secured Credit Facilities (with certain restrictions). Up to$1.46 billion of the revolving loan facility is available to be borrowed by Darling, Darling Canada,Darling NL ,Darling Ingredients International Holding B.V . ("Darling BV "),Darling GmbH , and Darling Belgium inU.S. dollars, Canadian dollars, euros, Sterling and other currencies to be agreed and available to each applicable lender. The remaining$40.0 million must be borrowed inU.S. dollars only by Darling. The revolving loan facility will mature onDecember 9, 2026 . The revolving credit facility will be used for working capital needs, general corporate purposes and other purposes not prohibited by the Amended Credit Agreement. •As ofApril 2, 2022 , the Company had availability of$1,049.7 million under the revolving credit facility, taking into account that the Company had$396.0 million in outstanding borrowings,$50.4 million in ancillary facilities and letters of credit issued of$3.8 million . •As ofApril 2, 2022 , the Company had full availability under its delayed draw term A-1 facility commitment of$400.0 million . Under the terms of the delayed draw term A-1 facility, the Company can take up to two years or untilDecember 9, 2023 to borrow under the term A-1 facility commitment inU.S. dollars. Amounts borrowed under the term A-1 facility that are repaid by the Company cannot be reborrowed. The term A-1 facility borrowings are repayable in quarterly installments of 0.25% of the aggregate principle amount of the relevant term A-1 facility on the last day of each March, June, September and December of each year commencing on the last day of such month falling on or after the last day of the first full fiscal quarter following the second anniversary ofDecember 9, 2021 and continuing until the last day of such quarterly period ending immediately prior to the term A-1 facility maturity date ofDecember 9, 2026 and one final installment in the amount of the term A-1 facility then outstanding, due and payable onDecember 9, 2026 . •As ofApril 2, 2022 , the Company had full availability under its delayed draw term A-2 facility commitment of$500.0 million . Under the terms of the delayed draw term A-2 facility, the Company can take up to one year or untilMarch 2, 2023 to borrow under the term A-2 facility commitment inU.S. dollars. Amounts borrowed under the term A-2 facility that are repaid by the Company cannot be reborrowed. The term A-2 facility borrowings are repayable in quarterly installments of 0.625% of the aggregate principle amount of the relevant term A-2 facility on the last day of each March, June, September and December of each year commencing on the last day of such month falling on or after the last day of the first full fiscal quarter following the earlier of term A-2 Commitment termination date or the first anniversary ofMarch 2, 2022 and continuing until the last day of such quarterly period endingMarch 31, 2025 , and quarterly installments of 1.25% of the aggregate principle amount of the relevant term A-2 facility due and payable on the last day of each March, June, September and December of each year commencing on the last day of such month falling on or after the last day of the first full fiscal quarter endingJune 30, 2025 and continuing until the last day of the such quarterly period ending immediately prior to the term 34 -------------------------------------------------------------------------------- A-2 facility maturity date ofDecember 9, 2026 and one final installment in the amount of the term A-2 facility then outstanding, due and payable onDecember 9, 2026 . •As ofApril 2, 2022 , the Company has borrowed all$525.0 million under the terms of the term loan B facility and repaid$325.0 million , which when repaid, cannot be reborrowed. As a result of early payments made by the Company under the term loan B facility only one final installment of the relevant term loan B facility then outstanding is due onDecember 18, 2024 . The term loan B facility will mature onDecember 18, 2024 . •The interest rate applicable to any borrowings under the revolving loan facility will equal the adjusted term secured overnight financing rate (SOFR) forU.S. dollar borrowings or the adjusted euro interbank rate (EURIBOR) for euro borrowings or the adjusted daily simple Sterling overnight index average (SONIA) for British pound borrowings or CDOR for Canadian dollar borrowings plus 1.25% per annum or base rate or the adjusted term SOFR forU.S. dollar borrowings or Canadian prime rate for Canadian dollar borrowings or the adjusted daily simple European short term rate (ESTR) for euro borrowings or the adjusted daily SONIA rate for British pound borrowings plus 0.25% per annum subject to certain step-ups or step-downs based on the Company's total leverage ratio. The interest rate applicable to any borrowing under the delayed draw term A-1 facility will equal the adjusted term SOFR plus a minimum of 1.50% per annum subject to certain step-ups based on the Company's total leverage ratio. The interest rate applicable to any borrowing under the delayed draw term A-2 facility will equal the adjusted term SOFR plus a minimum of 1.00% per annum subject to certain step-ups based on the Company's total leverage ratio. The interest rate applicable to any borrowings under the term loan B facility will equal the base rate plus 1.00% or LIBOR plus 2.00%. 5.25 % Senior Notes due 2027. OnApril 3, 2019 , Darling issued and sold$500.0 million aggregate principal amount of 5.25% Senior Notes due 2027 (the "5.25% Notes"). The 5.25% Notes, which were offered in a private offering, were issued pursuant to a Senior Notes Indenture, dated as ofApril 3, 2019 (the "5.25% Indenture"), among Darling, the subsidiary guarantors party thereto from time to time, andRegions Bank , as trustee. The 5.25% Notes are guaranteed on a senior unsecured basis by Darling and all of Darling's restricted subsidiaries (other than foreign subsidiaries). 3.625% Senior Notes due 2026. OnMay 2, 2018 ,Darling Global Finance B.V . issued and sold €515.0 million aggregate principal amount of 3.625% Senior Notes due 2026 (the "3.625% Notes"). The 3.625% Notes, which were offered in a private offering, were issued pursuant to a Senior Notes Indenture, dated as ofMay 2, 2018 (the "3.625% Indenture"), amongDarling Global Finance B.V ., Darling, the subsidiary guarantors party thereto from time to time,Citibank, N.A .,London Branch, as trustee and principal paying agent, andCitigroup Global Markets Deutschland AG , as principal registrar. The 3.625% Notes are guaranteed on a senior unsecured basis by Darling and all of Darling's restricted subsidiaries (other than any foreign subsidiary or any receivable entity) that guarantee the Senior Secured Credit Facilities.
Other debt consists of
The classification of long-term debt in the Company'sApril 2, 2022 consolidated balance sheet is based on the contractual repayment terms of the 5.25% Notes, the 3.625% Notes and debt issued under the Amended Credit Agreement. OnMay 2, 2022 , the Company acquired Valley Proteins for approximately$1.2 billion in cash. The Company financed this transaction by borrowing all of the Company's delayed draw term A-1 facility of$400.0 million and delayed draw term A-2 facility of$500.0 million and the remainder through revolver borrowings under the Company's Amended Credit Agreement. OnMay 5, 2022 , the Company announced that we entered into a definitive agreement to acquire all the shares of theFASA Group , the largest independent rendering company inBrazil , for approximatelyR$2.8 billion Brazilian Real in cash ($560.0 million USD at the exchange rate in effect on the signing date), subject to post closing adjustments and a contingent payment based on future earnings growth. The Company expects to finance this acquisition with a combination of operating cash flow, revolver borrowings under the Company's Amended Credit Agreement and possible other debt financing resources. As a result of the Company's borrowings under its Amended Credit Agreement, the 5.25% Indenture and the 3.625% Indenture, the Company is highly leveraged. Investors should note that, in order to make scheduled payments on the indebtedness outstanding under the Amended Credit Agreement, the 5.25% Notes and the 3.625% Notes, and otherwise, the Company will rely in part on a combination of dividends, distributions and intercompany loan repayments 35 -------------------------------------------------------------------------------- from the Company's direct and indirectU.S. and foreign subsidiaries. The Company is prohibited under the Amended Credit Agreement, the 5.25% Indenture and the 3.625% Indenture from entering (or allowing such subsidiaries to enter) into contractual limitations on the Company's subsidiaries' ability to declare dividends or make other payments or distributions to the Company. The Company has also attempted to structure the Company's consolidated indebtedness in such a way as to maximize the Company's ability to move cash from the Company's subsidiaries to Darling or another subsidiary that will have fewer limitations on the ability to make upstream payments, whether to Darling or directly to the Company's lenders as a Guarantor. Nevertheless, applicable laws under which the Company's direct and indirect subsidiaries are formed may provide limitations on such dividends, distributions and other payments. In addition, regulatory authorities in various countries where the Company operates or where the Company imports or exports products may from time to time impose import/export limitations, foreign exchange controls or currency devaluations that may limit the Company's access to profits from the Company's subsidiaries or otherwise negatively impact the Company's financial condition and therefore reduce the Company's ability to make required payments under the Amended Credit Agreement, the 5.25% Notes and the 3.625% Notes, or otherwise. In addition, fluctuations in foreign exchange values may have a negative impact on the Company's ability to repay indebtedness denominated inU.S. or Canadian dollars or euros. See "Risk Factors - Our business may be adversely impacted by fluctuations in exchange rates, which could affect our ability to comply with our financial covenants" and "- Our ability to repay our indebtedness depends in part on the performance of our subsidiaries, including our non-guarantor subsidiaries, and their ability to make payments" in the Company's Annual Report on Form 10-K for the fiscal year endedJanuary 1, 2022 as filed with theSEC onMarch 1, 2022 . As ofApril 2, 2022 , the Company believes it is in compliance with all of the financial covenants under the Amended Credit Agreement, as well as all of the other covenants contained in the Amended Credit Agreement, the 5.25% Indenture and the 3.625% Indenture.
Working Capital and Capital Expenditures
OnApril 2, 2022 , the Company had working capital of$445.6 million and its working capital ratio was 1.55 to 1 compared to working capital of$336.3 million and a working capital ratio of 1.45 to 1 onJanuary 1, 2022 . As ofApril 2, 2022 , the Company had unrestricted cash of$99.5 million and funds available under the revolving credit facility of$1,049.7 million , compared to unrestricted cash of$68.9 million and funds available under the revolving credit facility of$1,285.9 million atJanuary 1, 2022 . The Company diversifies its cash investments by limiting the amounts deposited with any one financial institution. Net cash provided by operating activities was$152.2 million for the first three months endedApril 2, 2022 , as compared to net cash provided by operating activities of$138.8 million for the first three months endedApril 3, 2021 , an increase of$13.4 million due primarily to an increase in net income and the effect from equity in net income of the DGD Joint Venture. Additionally, changes in operating assets and liabilities impacted cash provided by operating activities, which includes an approximately$52.0 million decrease in cash provided by accounts receivable, an approximately$15.7 million decrease in cash provided by inventory and prepaid expense, an approximately$72.5 million increase in cash provided by accounts payable and accrued expenses, an approximately$30.4 million decrease in income taxes refundable/payable and an approximately$37.6 million increase in cash provided by other primarily from an increase in hedging activities. Cash used in investing activities was$294.5 million for the first three months endedApril 2, 2022 , compared to$64.3 million for the first three months endedApril 3, 2021 , an increase in cash used in investing activities of$230.2 million , primarily due to capital contributions to the DGD Joint Venture and acquisitions. Net cash provided in financing activities was$180.9 million for the first three months endedApril 2, 2022 , compared to net cash used in financing activities of$81.0 million for the first three months endedApril 3, 2021 , an increase in net cash provided in financing activities of$261.9 million , primarily due to an increase in debt borrowings in the first three months endedApril 2, 2022 compared to the first three months endedApril 3, 2021 . Capital expenditures of$71.6 million were made during the first three months of fiscal 2022, compared to$60.8 million in the first three months of fiscal 2021. The Company expects to incur additional capital expenditures of approximately$268 million for the remainder of fiscal 2022 including compliance and expansion projects. The Company intends to finance these costs using cash flows from operations. Capital expenditures related to compliance with environmental regulations were$6.1 million and$5.5 million during the first three months endedApril 2, 2022 andApril 3, 2021 , respectively.
Based upon the annual actuarial estimate, current accruals and claims paid
during the first three months of fiscal 2022, the Company has accrued
approximately
36 -------------------------------------------------------------------------------- order to meet obligations related to the Company's self insurance reserves and accrued insurance obligations, which are included in current accrued expenses atApril 2, 2022 . The self insurance reserve is composed of estimated liability for claims arising for workers' compensation, auto liability and general liability claims. The self insurance reserve liability is determined annually, based upon a third party actuarial estimate. The actuarial estimate may vary from year to year due to changes in cost of health care, the pending number of claims or other factors beyond the control of management of the Company. Based upon current actuarial estimates, the Company expects to contribute approximately$0.3 million to its domestic pension plans in order to meet minimum pension funding requirements during the next twelve months. In addition, the Company expects to make payments of approximately$3.6 million under its foreign pension plans in the next twelve months. The minimum pension funding requirements are determined annually, based upon a third party actuarial estimate. The actuarial estimate may vary from year to year due to fluctuations in return on investments or other factors beyond the control of management of the Company or the administrator of the Company's pension funds. No assurance can be given that the minimum pension funding requirements will not increase in the future. The Company has made tax deductible discretionary and required contributions to its domestic pension plans for the first three months endedApril 2, 2022 of approximately$0.1 million . Additionally, the Company has made required and tax deductible discretionary contributions to its foreign pension plans for the first three months endedApril 2, 2022 of approximately$0.7 million . TheU.S. Pension Protection Act of 2006 ("PPA") went into effect inJanuary 2008 . The stated goal of the PPA is to improve the funding ofU.S. pension plans.U.S. plans in an under-funded status are required to increase employer contributions to improve the funding level within PPA timelines. Volatility in the world equity and other financial markets, including that associated with the current COVID-19 outbreak and theRussia -Ukraine war, could have a material negative impact onU.S. pension plan assets and the status of required funding under the PPA. The Company participates in variousU.S. multiemployer 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 to meet their pension benefit obligations to their participants. The Company's contributions to each individualU.S. multiemployer plan represent less than 5% of the total contributions to each plan. Based on the most currently available information, the Company has determined that, if a withdrawal were to occur, withdrawal liabilities for two of theU.S. plans in which the Company currently participates could be material to the Company, with one of these material plans certified as critical or red zone under PPA guidelines. With respect to the otherU.S. multiemployer pension plans in which the Company participates and which are not individually significant, five plans have certified as critical or red zone and two have certified as endangered or yellow zone as defined by the PPA. The Company currently has withdrawal liabilities recorded on fourU.S. multiemployer plans in which it participated. As ofApril 2, 2022 , the Company has an aggregate accrued liability of approximately$3.8 million representing the present value of scheduled withdrawal liability payments on the multiemployer plans that have given notice of withdrawal. While the Company has no ability to calculate a possible current liability for under-funded multiemployer plans that could terminate or could require additional funding under the PPA, the amounts could be material.
DGD Joint Venture
InJanuary 2011 , Darling, through a wholly-owned subsidiary, entered into a limited liability company agreement (as subsequently amended, the "DGD LLC Agreement") with Valero to form the DGD Joint Venture. The DGD Joint Venture is owned 50% / 50% with Valero and was formed to design, engineer, construct and operate a renewable diesel plant located adjacent to Valero's refinery inNorco, Louisiana (the "DGD Norco Facility"). The DGD Norco Facility reached mechanical completion and began the production of renewable diesel and certain other co-products in lateJune 2013 . InOctober 2021 , the DGD Joint Venture completed an expansion of the DGD Norco Facility that increased its renewable diesel production capability to up to 750 million gallons per year of renewable diesel, as well as separating renewable naphtha (approximately 30 million gallons) and other light end renewable hydrocarbons for sale into low carbon fuel markets. The expansion of the DGD Norco Facility was completed and became operational inOctober 2021 , at a total cost, including naphtha production and improved logistics capability, of approximately$1.1 billion , which was substantially funded by DGD Joint Venture cash flow. Additionally, inJanuary 2021 , we and our DGD Joint Venture partner approved the construction of a new facility to be located next to Valero'sPort Arthur Refinery inPort Arthur, Texas , capable of producing 470 million gallons per year of renewable diesel and 20 million gallons per year of renewable naphtha and having similar logistics flexibilities as those of the DGD Norco Facility. Construction is underway, and the new plant is anticipated to commence operations in the fourth quarter of 2022, with the total cost of the expansion project estimated to be approximately$1.45 billion . Once operational, the new plant is expected to increase the DGD Joint Venture's total renewable diesel production capacity to approximately 1.2 billion gallons per year. Based on forecasted margins as of the date of this report, the remaining capital expenditures at thePort Arthur expansion project are expected to be primarily funded by DGD Joint Venture cash flow; however, if the DGD Joint Venture cash flow is not sufficient to 37 -------------------------------------------------------------------------------- fund the remaining project costs, the DGD Joint Venture may need to borrow funds or the joint venture partners may be required to contribute additional funds to complete the project. OnMay 1, 2019 , Darling, through its wholly owned subsidiaryDarling Green Energy LLC , ("Darling Green"), andDiamond Alternative Energy, LLC , a wholly owned subsidiary of Valero ("Diamond Alternative" and together with Darling Green, the "DGD Lenders") entered into a revolving loan agreement (the "DGD Loan Agreement") with the DGD Joint Venture. The DGD Lenders have committed to make loans available to the DGD Joint Venture in the total amount of$50.0 million with each lender committed to$25.0 million of the total commitment. Any borrowings by the DGD Joint Venture under the DGD Loan Agreement are at the applicable annum rate equal to the sum of (a) the LIBO Rate (meaning Reuters BBA Libor Rates Page 3750) on such day plus (b) 2.50%. The DGD Loan Agreement matures onApril 29, 2023 , unless extended by agreement of the parties. During the fourth quarter of fiscal 2021, the DGD Joint Venture borrowed all$50.0 million available under the DGD Loan Agreement, including the Company's full$25.0 million commitment and paid interest to the Company for the three months endedApril 2, 2022 of approximately$0.2 million . As ofApril 2, 2022 ,$25.0 million was owed to Darling Green under the DGD Loan Agreement. OnMarch 30, 2021 , the DGD Joint Venture entered into a$400.0 million senior, unsecured revolving credit facility, with CoBank ACB acting as lead arranger and the administrative agent for the lending group, which is comprised ofFarm Credit System institutions. The revolving credit facility maturesMarch 30, 2024 and is non-recourse to the joint venture partners. As ofApril 2, 2022 , the DGD Joint Venture has borrowings outstanding of$165.0 million under this unsecured revolving credit facility. Based on the sponsor support agreements executed in connection with the initial construction of the DGD Norco Facility, the Company contributed a total of approximately$111.7 million for initial completion of the DGD Norco Facility including the Company's portion of cost overruns and working capital funding. In fiscal year 2021, each joint partner contributed a total of approximately$189.0 million and in the three months endedApril 2, 2022 , each joint venture partner made additional capital contributions of approximately$164.75 million to the DGD Joint Venture. As ofApril 2, 2022 , under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately$1,528.7 million included on the consolidated balance sheet. The Company's original investment in DGD has expanded since 2011 to the point that it is now integral to how Darling operates its business. Darling traditionally collected and converted used cooking oil and animal fats into feed ingredients which were sold on a caloric value to feed animals as well as for industrial technical uses. Over the past decade, the world's increasing focus on climate change and greenhouse gas has provided a new finished market for the Company's finished fats ingredients. With Darling's significant fats ownership, this has and continues to transform how Darling operates. In 2021, a large portion of Darling's totalU.S. finished fats products were sold to the DGD Norco Facility as feedstock for renewable diesel. In 2021, DGD was Darling's largest finished product customer in terms of net sales, with Darling recording sales of approximately$521.7 million to DGD or 11% of total net sales. From a procurement, production and distribution standpoint, DGD has become integral to Darling's base business. DGD is integrated to the Company's operations via the combined vertical operating structure from collecting raw fats, to processing collected fats at Darling facilities nationwide to transporting the refined fats to the DGD Norco Facility as feedstock. The Darling supply chain has become more efficient and sustainable with transparency for verification to obtain full value to low carbon intensity markets. The development of the low carbon markets inNorth America andEurope has influenced how Darling operates its core business and has also been a driver for the recent DGD expansions, which are making DGD much more relevant to Darling's earnings. Since 2011 when construction began on DGD, Darling has invested substantially to increase itsU.S. railcar fleet to efficiently manage nationwide transportation of Darling fats to DGD. Additionally, Darling acquired anIowa location on theMississippi River that further enhances the ability of the Company's Midwest network of facilities to collect and deliver feedstocks to DGD via water, rail or truck from a centralized location. Darling has also stepped up collection efforts by providing indoor used cooking oil collection units in exchange for extended collection contracts at eating establishments and has moved to more of a centralized digital marketing effort with restaurant chains and franchise groups and invested in internet search engine key words to improve visibility with restaurants. The Company also includes DGD in marketing efforts to emphasize environmental sustainability that restaurants participate in when their used cooking oil is collected by Darling. From a production standpoint, Darling now isolates used cooking oil from other fats to preserve identification to qualify for a higher carbon intensity value. As a result, the Company includes its equity in net income of the DGD Joint Venture as operating income. 38 --------------------------------------------------------------------------------
Financial Impact of Significant Debt Outstanding
The Company has a substantial amount of indebtedness, which could make it more difficult for the Company to satisfy its obligations to its financial lenders and its contractual and commercial commitments, limit the Company's ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements on commercially reasonable terms or at all, require the Company to use a substantial portion of its cash flows from operations to pay principal and interest on its indebtedness instead of other purposes, thereby reducing the amount of the Company's cash flows from operations available for working capital, capital expenditures, acquisitions and other general corporate purposes, increase the Company's vulnerability to adverse economic, industry and business conditions, expose the Company to the risk of increased interest rates as certain of the Company's borrowings are at variable rates of interest, limit the Company's flexibility in planning for, or reacting to, changes in the Company's business and the industry in which the Company operates, place the Company at a competitive disadvantage compared to other, less leveraged competitors, and/or increase the Company's cost of borrowing.
Cash Flows and Liquidity Risks
Management believes that the Company's cash flows from operating activities, unrestricted cash and funds available under the Amended Credit Agreement, will be sufficient to meet the Company's working capital needs and maintenance and compliance-related capital expenditures, scheduled debt and interest payments, income tax obligations, and other contemplated needs through the next twelve months. Numerous factors could have adverse consequences to the Company that cannot be estimated at this time, such as negative impacts from the current COVID-19 outbreak and theRussia -Ukraine war and those other factors discussed below under the heading "Forward Looking Statements". These factors, coupled with volatile prices for natural gas and diesel fuel, currency exchange fluctuations, general performance of theU.S. and global economies, disturbances in world financial, credit, commodities and stock markets, and any decline in consumer confidence, including the inability of consumers and companies to obtain credit due to lack of liquidity in the financial markets, among others, could negatively impact the Company's results of operations in fiscal year 2022 and thereafter. The Company reviews the appropriate use of unrestricted cash periodically. As of the date of this report, other than the Company's previously announced acquisition ofFASA Group for approximatelyR$2.8 billion Brazilian Real in cash ($560.0 million USD at the exchange rate in effect on the signing date), subject to post closing adjustments and a contingent payment based on future earnings growth, no decision has been made as to non-ordinary course material cash usages at this time; however, potential usages could include: opportunistic capital expenditures and/or acquisitions and joint ventures; investments relating to the Company's renewable energy strategy, including, without limitation, potential required funding obligations with respect to the DGD Joint Venture expansion project or potential investments in additional renewable diesel and/or biofuel projects; investments in response to governmental regulations relating to climate change, human and animal food safety or other regulations; unexpected funding required by the legislation, regulation or mass termination of multiemployer plans; and paying dividends or repurchasing stock, subject to limitations under the Amended Credit Agreement, the 5.25% Notes and the 3.625% Notes, as well as suitable cash conservation to withstand adverse commodity cycles. The Company's Board of Directors has approved a share repurchase program of up to an aggregate of$500.0 million of the Company's Common Stock depending on market conditions. The repurchases may be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. The program runs throughAugust 13, 2024 , unless further extended or shortened by the Board of Directors. During the first three months of fiscal 2022, the Company has repurchased approximately$17.2 million of its common stock in the open market. As ofApril 2, 2022 , the Company had approximately$482.8 million remaining in its share repurchase program. Each of the factors described above has the potential to adversely impact the Company's 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, potential impairment charges and/or higher operating costs. Sales prices for the principal products that the Company sells are typically influenced by sales prices for agricultural-based alternative ingredients, 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 decline in raw material availability, a decline in agricultural-based alternative ingredients prices, increases in energy prices or the impact ofU.S. and foreign regulation (including, without limitation,China ), changes in foreign exchange rates, imposition of currency controls and currency devaluations has the potential to adversely impact the Company's liquidity. A decline in commodities prices, a rise in energy prices, a slowdown in theU.S. or international economy or other factors could cause the Company to fail to meet management's expectations or could cause liquidity concerns. 39 --------------------------------------------------------------------------------
OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Based upon the underlying purchase agreements, the Company has commitments to purchase$252.6 million of commodity products consisting of approximately$104.5 million of finished products, approximately$126.2 million of natural gas and diesel fuel and approximately$21.9 million of other commitments during the next five years, which are not included in liabilities on the Company's balance sheet atApril 2, 2022 . The Company intends to take physical delivery of the commodities under the forward purchase agreements and accordingly, these contracts are not subject to the requirements of fair value accounting because they qualify as normal purchases. The commitments will be recorded on the balance sheet of the Company when delivery of these commodities or products occurs and ownership passes to the Company during the remainder of fiscal 2022 and through fiscal 2024, in accordance with accounting principles generally accepted inthe United States .
The following table summarizes the Company's other commercial commitments,
including both on- and off-balance sheet arrangements that are part of the
Company's Amended Credit Agreement and other foreign bank guarantees that are
not a part of the Company's Amended Credit Agreement at
Other commercial commitments: Standby letters of credit$ 3,849
Standby letters of credit (ancillary facility) 27,400 Foreign bank guarantees
11,805 Total other commercial commitments:$ 43,054
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 the Company's Annual Report on Form 10-K for the fiscal year endedJanuary 1, 2022 , filed with theSEC onMarch 1, 2022 .
NEW ACCOUNTING PRONOUNCEMENTS
See Note 22, "New Accounting Pronouncements," to the consolidated financial statements for a description of new accounting pronouncements.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking" statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements. Statements that are not statements of historical facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as "estimate," "project," "planned," "contemplate," "potential," "possible," "proposed," "intend," "believe," "anticipate," "expect," "may," "will," "would," "should," "could," and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts included in this report are forward looking statements, including, without limitation, the statements under the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and located elsewhere herein regarding industry prospects, the Company's financial position and the Company's use of cash. Forward-looking statements are based on the Company's current expectations and assumptions regarding its business, the economy and other future conditions. The Company cautions readers that any such forward-looking statements it makes are not guarantees of future performance and that actual results may differ materially from anticipated results or expectations expressed in its forward-looking statements as a result of a variety of factors, including many that are beyond the Company's control. In addition to those factors discussed elsewhere in this report and in the Company's other public filings with theSEC , important factors that could cause actual results to differ materially from the Company's expectations include: existing and unknown future limitations on the ability of the Company's direct and indirect subsidiaries to make their cash flow available to the Company for payments on the Company's indebtedness or other purposes; global demands for bio-fuels and grain and oilseed commodities, which have exhibited volatility, and can impact the cost of feed for cattle, hogs and poultry, thus affecting available rendering feedstock and selling prices for the Company's products; 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, reduced consumer demand or other factors, reduced volume from food service establishments, or 40
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otherwise; reduced demand for animal feed; reduced finished product prices, including a decline in fat and used cooking oil finished product prices; changes to worldwide government policies relating to renewable fuels and greenhouse gas ("GHG") emissions that adversely affect programs like theU.S. government's renewable fuel standard, low carbon fuel standards ("LCFS") and tax credits for biofuels both inthe United States and abroad; possible product recall resulting from developments relating to the discovery of unauthorized adulterations to food or food additives; the occurrence of 2009 H1N1 flu (initially known as "Swine Flu"), highly pathogenic strains of avian influenza (collectively known as "Bird Flu"), severe acute respiratory syndrome ("SARS"), bovine spongiform encephalopathy (or "BSE"), porcine epidemic diarrhea ("PED") or other diseases associated with animal origin inthe United States or elsewhere, such as the outbreak of ASF inChina and elsewhere; the occurrence of pandemics, epidemics or disease outbreaks, such as the current COVID-19 outbreak; unanticipated costs and/or reductions in raw material volumes related to the Company's compliance with the existing or unforeseen newU.S. or foreign (including, without limitation,China ) regulations (including new or modified animal feed, Bird Flu, SARS, PED, BSE or ASF or similar or unanticipated regulations) affecting the industries in which the Company operates or its value added products; risks associated with the DGD Joint Venture, including possible unanticipated operating disruptions and issues relating to the ongoing expansion project; risks and uncertainties relating to international sales and operations, including imposition of tariffs, quotas, trade barriers and other trade protections imposed by foreign countries; difficulties or a significant disruption in the Company's information systems or failure to implement new systems and software successfully; risks relating to possible third party claims of intellectual property infringement; increased contributions to the Company's pension and benefit plans, including multiemployer and employer-sponsored defined benefit pension plans as required by legislation, regulation or other applicableU.S. or foreign law or resulting from aU.S. mass withdrawal event; bad debt write-offs; loss of or failure to obtain necessary permits and registrations; continued or escalated conflict in theMiddle East ,North Korea ,Ukraine or elsewhere, including theRussia -Ukraine war; uncertainty regarding the exit of theU.K. from theEuropean Union ; and/or unfavorable export or import markets. These factors, coupled with volatile prices for natural gas and diesel fuel, climate conditions, currency exchange fluctuations, general performance of theU.S. and global economies, disturbances in world financial, credit, commodities and stock markets, and any decline in consumer confidence and discretionary spending, including the inability of consumers and companies to obtain credit due to lack of liquidity in the financial markets, among others, could cause actual results to vary materially from the forward-looking statements included in this report or negatively impact the Company's results of operations. 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's announced share repurchase program may be suspended or discontinued at any time and purchases of shares under the program are subject to market conditions and other factors, which are likely to change from time to time. For more detailed discussion of these factors see the Risk Factors discussion in Item 1A of Part I of the Company's Annual Report on Form 10-K for the fiscal year endedJanuary 1, 2022 . 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.
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