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Darling International 10-K 2009 Documents found in this filing:UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
______________________________________
FORM 10-K>
(Mark
One)
OR
Commission
File Number
0-24620
(Exact
name of registrant as specified in its charter)
Registrant's
telephone number, including area code: (972) 717-0300
Securities
registered pursuant to Section 12(b) of the Act:
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 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 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.
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.
Page 1
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange 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
$1,345,157,000 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 81,767,982 shares
of common stock, $0.01 par value, outstanding at February 23, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE
Selected designated portions of the
Registrant’s definitive Proxy Statement in connection with the Registrant’s 2009
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 3, 2009
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 (the “Transaction”) 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 43 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, bio-fuels, soaps, pet foods, leather goods and livestock feed
for use as ingredients in their products or for further
processing. The Company’s business and operations in fiscal 2008 and
2007 include a full year of contribution from the assets acquired in the
Transaction, as compared to 33 weeks of contribution from these assets in fiscal
2006.
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 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):
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 packers, 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 approximately 960 trucks and tractor-trailers to collect raw
materials from approximately 116,000 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 charges a
collection fee to offset a portion of the expense incurred in collecting raw
material.
During the
2008 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 27% 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 long-term 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 58% 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 service
charge. 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 for the expense of collection,
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 or are priced relative to
these commodities. 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 sales
offices in Des Moines, Iowa and Los Angeles, California 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 Pacific
Rim, North Africa, Mexico and South America. Total export sales were
$132.2 million, $171.6 million and $112.7 million for the years ended
January 3, 2009, December 29, 2007 and December 30, 2006,
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 23, 2009, 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 distributed primarily 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 packing 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 packers, which
have historically been a dependable source of supply for non-captive processors,
has decreased significantly. Although the total amount of
slaughtering may be flat or only moderately increasing, 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 is offering 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
3, 2009, the Company employed approximately 1,870 persons
full-time. Approximately 45.9% 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:
Page 8
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.
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 packers, which have historically been a dependable source of supply
for non-captive processors, such as the Company, has decreased
significantly. Although the total amount of slaughtering may be flat
or only moderately increasing, 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.
Page 9
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 charges a
collection fee to offset a portion of the cost incurred in collecting 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.
Certain
of the Company’s 43 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 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
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 highly dependent on natural gas and diesel fuel.
The Company’s
operations are highly dependent on the use of natural gas and diesel
fuel. Energy prices for natural gas and diesel fuel are expected to
remain volatile throughout 2009. 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. Though the Company will continue to manage these costs and
attempt to minimize these expenses, prices are expected to remain volatile in
fiscal 2009 and represent 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.
Page 10
The
Company is and may continue to be adversely affected by the ongoing world
financial crisis.
The
unprecedented 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.
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, will require under-funded pension plans to improve their funding ratios
within prescribed intervals based on the level of their under-funding beginning
as early as 2008. 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.
Page 11
The following
are recent developments and recent regulatory history with respect to BSE in the
U.S.:
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:
Page 12
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:
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 a significant outbreak of avian
influenza (“Bird Flu”) in the U.S.
Avian
influenza (“H5N1”), or Bird Flu, a highly contagious disease that affects
chickens and other poultry species, has spread throughout Asia and
Europe. The H5N1 strain is highly pathogenic, which has caused
concern that a pandemic could occur if the disease migrates from birds to
humans. This highly pathogenic strain has not been detected in North
or South America as of February 23, 2009, but low pathogenic strains that are
not a threat to human health were reported in the U.S. and Canada in recent
years, with the most recent U.S. incidence confirmed in an Arkansas poultry
flock in June 2008. 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.
Page 13
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.
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,
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.
Page 14
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 23, 2009, the Company has available for issuance 17,830,924
authorized but unissued shares of common stock and 1,000,000 authorized but
unissued shares of preferred stock that may be issued in series.
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
2008. 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 3,
2009, the Company’s 43 operating facilities consist of 25 full service rendering
plants, seven yellow grease/trap plants, four blending plants, three trap
plants, one edible meat plant, one technical tallow plant, one hide plant and
one pet food plant. Except for five leased facilities, all of these facilities
are owned by the Company. 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 15
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 16
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 agencies related to 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 3, 2009 and December 29, 2007, 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 $17.3
million and $17.1 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.
The Company has been named as a third
party defendant in a lawsuit pending in the Superior Court of New Jersey, Essex
County, styled New Jersey
Department of Environmental Protection, The Commissioner of the New Jersey
Department of Environmental Protection Agency and the Administrator of the New
Jersey Spill Compensation Fund, as Plaintiffs, vs. Occidental Chemical
Corporation, Tierra Solutions, Inc., Maxus Energy Corporation, Repsol YPF, S.A.,
YPF, S.A., YPF Holdings, Inc., and CLH Holdings, as Defendants (Docket
No. L-009868-05) (the “Tierra/Maxus Litigation”). In the Tierra/Maxus
Litigation, which was filed on December 13, 2005, the plaintiffs seek to recover
from the defendants past and future cleanup and removal costs, as well as
unspecified economic damages, punitive damages, penalties and a variety of other
forms of relief, purportedly arising from the alleged discharges into the
Passaic River of a particular type of dioxin and other unspecified hazardous
substances. The damages being sought by the plaintiffs from the
defendants are likely to be substantial. On February 4, 2009, two of
the defendants, Tierra Solutions, Inc. (“Tierra”) and Maxus Energy Corporation
(“Maxus”), filed a third party complaint against over 300 entities, including
the Company, seeking to recover all or a proportionate share of cleanup and
removal costs, damages or other loss or harm, if any for which Tierra or Maxus
may be held liable in the Tierra/Maxus Litigation. Tierra and Maxus
allege that Standard Tallow Company, an entity that the Company acquired in
1996, contributed to the discharge of the hazardous substances that are the
subject of this case while operating a former plant site located in Newark, New
Jersey. The Company is investigating these allegations and intends to
defend itself vigorously. As of the date of this report, there is
nothing that leads the Company to believe that this matter will have a material
effect on the Company’s financial position or results of operation.
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 3, 2009.
Page 17
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY
SECURITIES
Effective October 24, 2007, the Company
transferred its common stock listing to the New York Stock Exchange
(“NYSE”) from the American Stock Exchange (“AMEX”) 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 and AMEX, as appropriate.
On February 23, 2009, the closing sales
price of the Company’s common stock on the NYSE was $4.04. The
Company has been notified by its stock transfer agent that as of February 23,
2009, there were 123 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 2009. 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 3, 2004 to January 3, 2009,
assuming the investment of $100 on January 3, 2004 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 18
 EQUITY
COMPENSATION PLANS
The following table sets forth certain
information as of January 3, 2009 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:
Page 19
Page 20
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 3, 2009,
December 29, 2007, and December 30, 2006, and the related notes
thereto.
(dollars
in thousands, except per share data)
Page 21
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
Page 22
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 43
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
oleo-chemicals, bio-fuels, soaps, pet foods, leather goods and livestock feed
for use as ingredients in their products or for further
processing. In fiscal 2006 the Company acquired substantially all of
the assets (the “Transaction”) of National By-Products, LLC
(“NBP”). The Company’s results for fiscal 2008 and 2007 include
a full year of contribution from the assets acquired in the Transaction, as
compared to 33 weeks of contribution from these assets in fiscal
2006. 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.
As an agricultural-based commodity
processing and service business, the Company is subject to a variety of market
factors which affect the Company’s operating results. While fiscal
2008 had record earnings performance that was fueled by tightening global grain
and oilseed supplies, record high crude oil, increasing bio-fuel demand and
strong slaughter, fiscal 2008 will undoubtedly be remembered for the global
economic downturn experienced during the fourth quarter. Improved
global crop outlooks coupled with significant demand collapse caused by global
economic uncertainty, and other factors contributed to a sharp decline in the
Company’s results during the fourth quarter. Finished product prices
declined to near historical lows during the fourth quarter while inventory
quantities increased substantially. Raw material volumes for both
segments declined continuously throughout the year. Manufacturing and
collection costs were negatively impacted as energy prices for both natural gas
and diesel fuel reached historical highs during the year. The Company
continues to face challenges relating to volatile commodity markets; however, as
of February 23, 2009 finished product prices and energy prices had returned to
more historical relationships.
Operating income increased by $12.1
million in fiscal 2008 compared to fiscal 2007. The continuing
challenges faced by the Company indicate there can be no assurance that
operating results achieved by the Company in fiscal 2008 are indicative of
future operating performance of the Company.
Summary of Critical Issues
Faced by the Company during Fiscal 2008
Page 23
Summary of Critical Issues
and Known Trends Faced by the Company in Fiscal 2008 and
Thereafter
BSE and Other Food Safety
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 published the Final BSE Rule which amended the BSE Feed Rule and becomes
effective April 27, 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 11, 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.
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.
Other Critical Issues and
Challenges
Page 24
These challenges indicate there can be
no assurance that fiscal 2008 operating results are indicative of future
operating performance of the Company.
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:
These increases to operating income
were partially offset by:
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:
These
indicators and their importance are discussed below in greater
detail.
Prices
for finished product commodities that the Company produces are quoted each
business day on the Jacobsen index, an established trading exchange price
publisher. These finished products are MBM, BFT and
YG. The prices quoted are for delivery of the finished product at a
specified location. These prices are relevant because they provide an
indication of a component of revenue and achievement of business plan benchmarks
on a daily basis. The Company’s actual sales prices for its finished products
may vary significantly from the Jacobsen index because the Company’s finished
products are delivered to multiple locations in different geographic regions
which utilize different price indexes. Average Jacobsen prices (at
the specified delivery point) for Fiscal 2008, compared to average Jacobsen
prices for Fiscal 2007 follow:
Page 25
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.
Raw
material volume represents the quantity (pounds) of raw material collected from
suppliers, including beef, pork, poultry and used cooking oils. Raw
material volumes provide an indication of future production of finished products
available for sale and are a component of potential future revenue.
Finished product production volumes are
the end result of the Company’s production processes, and directly impact goods
available for sale, and thus become an important component of sales
revenue. In addition, physical inventory turn-over is impacted by
both credit availability and market demand which can lower finished product
inventory values. Yield on production is a ratio of production volume
(pounds) divided by raw material volume (pounds) and provides an indication of
effectiveness of the Company’s production process. Factors impacting
yield on production include quality of raw material and warm weather during
summer months, which rapidly degrades raw material.
Natural gas and heating oil commodity
prices are quoted each day on the NYMEX exchange for future months of delivery
of natural gas and diesel fuel. The prices are important to the
Company because natural gas and diesel fuel are major components of factory
operating and collection costs and natural gas and diesel fuel prices are an
indicator of achievement of the Company’s business plan.
The Company charges collection fees
which are included in net sales in order to offset a portion of the expense
incurred in collecting raw material. Each month the Company monitors
both the collection fee charged to suppliers, which is included in net sales,
and collection expense, which is included in cost of sales. The
importance of monitoring collection fees and collection expense is that they
provide an indication of achievement of the Company’s business
plan.
The
Company incurs factory operating expenses which are included in cost of
sales. Each month the Company monitors factory operating
expense. The importance of monitoring factory operating expense is
that it provides an indication of achievement of the Company’s business
plan.
Net Sales. The
Company collects and processes animal by-products (fat, bones and offal),
including hides, and used restaurant cooking oil to principally produce finished
products of MBM, BFT, 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.
Page 26
During Fiscal 2008, net sales increased
by $162.2 million (25.1%) to $807.5 million as compared to $645.3 million during
Fiscal 2007. The increase in net sales was primarily due to the
following increases/(decreases) (in millions of dollars):
Cost of Sales and Operating
Expenses. Cost of sales and
operating expenses include the cost of raw material, the cost of product
purchased for resale and the cost to collect raw material, which includes diesel
fuel and processing costs including natural gas. The Company utilizes both fixed
and formula pricing methods for the purchase of raw materials. Fixed prices are
adjusted where possible for changes in competition and significant changes in
finished goods market conditions impact finished product inventory values, while
raw materials purchased under formula prices are correlated with specific
finished goods prices. Energy costs, particularly diesel fuel and
natural gas, are significant components of the Company’s cost
structure. The Company has the ability to burn alternative fuels at a
majority of its plants to help manage the Company’s price exposure to volatile
energy markets.
During Fiscal 2008, cost of sales and
operating expenses increased $131.2 million (27.1%) to $614.7 million as
compared to $483.5 million during Fiscal 2007. The increase in cost
of sales and operating expenses was primarily due to the following (in millions
of dollars):
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 is selling, general and
administrative expenses is primarily due to the following (in millions of
dollars):
Page 27
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 one reporting unit that experienced the loss of large customers 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.
Results
of Operations
Fifty-two
Week Fiscal Year Ended December 29, 2007 (“Fiscal 2007”) Compared to Fifty-two
Week Fiscal Year Ended December 30, 2006 (“Fiscal 2006”)
Summary of Key Factors
Impacting Fiscal 2007 Results:
Principal factors that contributed to a
$61.4 million increase in operating income, which are discussed in greater
detail in the following section, were:
These increases to operating income
were partially offset by:
Summary of Key Indicators of
Fiscal 2007 Performance:
Principal indicators that management
routinely monitors and compares to previous periods as an indicator of problems
or improvements in operating results include:
These
indicators and their importance are discussed below in greater
detail.
Page 28
Prices
for finished product commodities that the Company produces are quoted each
business day on the Jacobsen index, an established trading exchange price
publisher. These finished products are MBM, BFT and
YG. The prices quoted are for delivery of the finished product at a
specified location. These prices are relevant because they provide an
indication of a component of revenue and achievement of business plan benchmarks
on a daily basis. The Company’s actual sales prices for its finished products
may vary significantly from the Jacobsen index because the Company’s finished
products are delivered to multiple locations in different geographic regions
which utilize different price indexes. Average Jacobsen prices (at
the specified delivery point) for Fiscal 2007, compared to average Jacobsen
prices for Fiscal 2006 follow:
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. Additionally, some U.S. exports of MBM from the West Coast
of the U.S. resumed in the first quarter of 2007. As a result, the
MBM prices for the West Coast have increased significantly as indicated
above.
Raw material volume represents the
quantity (pounds) of raw material collected from suppliers, including beef,
pork, poultry and used cooking oils. Raw material volumes provide an
indication of future production of finished products available for sale and are
a component of potential future revenue.
Finished product production volumes are
the end result of the Company’s production processes, and directly impact goods
available for sale, and thus become an important component of sales
revenue. Yield on production is a ratio of production volume (pounds)
divided by raw material volume (pounds) and provides an indication of
effectiveness of the Company’s production process. Factors impacting
yield on production include quality of raw material and warm weather during
summer months, which rapidly degrades raw material.
Natural gas and heating oil commodity
prices are quoted each day on the NYMEX exchange for future months of delivery
of natural gas and diesel fuel. The prices are important to the
Company because natural gas and diesel fuel are major components of factory
operating and collection costs and natural gas and diesel fuel prices are an
indicator of achievement of the Company’s business plan.
The Company charges collection fees
which are included in net sales in order to offset a portion of the expense
incurred in collecting raw material. Each month the Company monitors
both the collection fee charged to suppliers, which is included in net sales,
and collection expense, which is included in cost of sales. The
importance of monitoring collection fees and collection expense is that they
provide an indication of achievement of the Company’s business
plan.
The
Company incurs factory operating expenses which are included in cost of
sales. Each month the Company monitors factory operating
expense. The importance of monitoring factory operating expense is
that it provides an indication of achievement of the Company’s business
plan.
Net Sales. The Company
collects and processes animal by-products (fat, bones and offal), including
hides, and used restaurant cooking oil to principally produce finished products
of MBM, BFT, 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 2007, net sales increased
by $238.3 million (58.6%) to $645.3 million as compared to $407.0 million during
Fiscal 2006. The increase in net sales was primarily due to the
following increases/(decreases) (in millions of dollars):
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
and significant changes in finished goods market conditions, 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 2007, cost of sales and
operating expenses increased $162.1 million (50.4%) to $483.5 million as
compared to $321.4 million during Fiscal 2006. The increase in cost
of sales and operating expenses was primarily due to the following (in millions
of dollars):
Selling, General and Administrative
Expenses. Selling, general and
administrative expenses were $58.0 million during Fiscal 2007, a $12.4 million
increase (27.2%) from $45.6 million during Fiscal 2006. The increase
is primarily due to the following (in millions of dollars):
Page 30
Depreciation and
Amortization. Depreciation and
amortization charges increased $2.5 million (12.1%) to $23.2 million during
Fiscal 2007 as compared to $20.7 million during Fiscal 2006. The increase
is primarily due to the acquisition of capital assets from NBP in the
Transaction.
Interest
Expense. Interest expense was $5.0 million during Fiscal
2007 compared to $7.2 million during Fiscal 2006, a decrease of $2.2 million
(30.6%), primarily due to a decrease in rates and outstanding balance related to
the Company’s outstanding debt.
Other
Income/Expense. Other expense was $0.6 million in Fiscal 2007, a
$4.1 million decrease from other expense of $4.7 million in Fiscal
2006. The decrease in other expense in Fiscal 2007 is primarily due
to the following (in millions of dollars):
During
the second quarter of 2006, the Company retired its subordinated debt and
incurred charges of $1.9 million for prepayment fees and $1.1 million to write
off deferred loan costs. In addition, the Company entered into a new
revolving credit facility during the second quarter of 2006 which resulted in a
charge of $1.5 million to write off deferred loan costs related to the previous
revolving credit facility.
Income Taxes. The
Company recorded income tax expense of $29.5 million for Fiscal 2007, compared
to income tax expense of $2.3 million recorded in Fiscal 2006, an increase of
$27.2 million, primarily due to increased pre-tax earnings of the Company in
Fiscal 2007. The effective tax rate of 39.3% for 2007 differed from
the statutory rate of 35% primarily due to state taxes. The effective
tax rate of 30.7% for 2006 differed from the statutory rate of 35% primarily due
to federal and state income tax credits as well as the release of certain tax
contingencies. The impact of state income taxes for 2006 of $0.3
million was offset by certain state tax credits recorded in 2006 of $0.1
million.
FINANCING,
LIQUIDITY, AND CAPITAL RESOURCES
The Company entered into a $175 million
credit agreement (the “Credit Agreement”) effective April 7,
2006. The principal components of the Credit Agreement consist of the
following.
Page 31
The
Company’s Credit Agreement consists of the following elements at January 3, 2009
(in thousands):
The
obligations under the Credit Agreement are guaranteed by Darling National, a
wholly-owned subsidiary of Darling, 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 3, 2009, the Company was in compliance with
all of the covenants contained in the Credit Agreement.
The classification of long-term debt in
the Company’s January 3, 2009 consolidated balance sheet is based on the
contractual repayment terms of the debt issued under the Credit
Agreement.
On
January 3, 2009, the Company had working capital of $67.4 million and its
working capital ratio was 1.95 to 1 compared to working capital of $34.4 million
and a working capital ratio of 1.43 to 1 on December 29, 2007. The
increase in working capital is primarily due to the increase in cash which
offset decreases in accounts receivable with no change to inventory due to
physical inventory quantities increases. At January 3, 2009, the Company
had unrestricted cash of $50.8 million and funds available under the revolving
credit facility of $108.6 million, compared to unrestricted cash of $16.3
million and funds available under the revolving credit facility of $106.1
million at December 29, 2007. 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 $92.0 million and $65.7 million for the fiscal years ended
January 3, 2009 and December 29, 2007, respectively, an increase of $26.3
million, primarily due to an increase in net income of approximately $9.1
million and changes in operating assets and liabilities, which includes an
increase in accounts receivable of approximately $36.0 million, an increase in
inventory of approximately $8.5 million, a reduction for income taxes refundable
of approximately $11.2 million and a reduction in accounts payable and accrued
expenses of approximately $25.8 million. Cash used by investing
activities was $52.4 million during Fiscal 2008, compared to $15.6 million in
Fiscal 2007, an increase of $36.8 million, primarily due to $15.9 million in
cash used for the acquisition of assets of API Recycling in the third quarter of
Fiscal 2008 and increased capital expenditures, related mainly to a major
modernization project at the Turlock, California plant in Fiscal
2008. Net cash used by financing activities was $5.1 million in the
year ended January 3, 2009 a decrease of cash used of $34.0 million as compared
to $39.1 million at December 29, 2007, principally due to the repayment of
borrowings on the Company’s Credit Agreement in the year ended December 29,
2007.
Page 32
Capital
expenditures of $31.0 million were made during Fiscal 2008 as compared to $15.6
million in Fiscal 2007, an increase of $15.4 million (98.7%), due primarily to a
major modernization project at the Turlock California plant that was identified
over normal maintenance and compliance capital expenditures as well as a general
overall increase in capital expenditures. Additionally, the Company in
Fiscal 2008 spent approximately $0.7 million related to the Final BSE Rule and
expects to spend approximately $2.6 million in fiscal 2009 to comply with the
Final BSE Rule. Capital expenditures related to compliance with
environmental regulations were $1.1 million in Fiscal 2008, $1.8 million in
Fiscal 2007 and $0.8 million in Fiscal 2006.
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 3, 2009, will be due during the next twelve months, which
includes scheduled quarterly installment payments of $1.25 million.
Based
upon the annual actuarial estimate, current accruals, and claims paid during
Fiscal 2008, the Company has accrued approximately $5.1 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 3, 2009. The self
insurance reserve is composed of estimated liability for claims arising for
workers’ compensation and for auto liability and general liability
claims. The self insurance reserve liability is determined annually,
based upon a third party actuarial estimate. The actuarial estimate
may vary from year to year, due to changes in 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 less
than approximately $0.1 million in order to meet minimum pension funding
requirements during fiscal 2009. 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 2008 and Fiscal 2007 of approximately $6.5 million and
$6.2 million, respectively.
The
Pension Protection Act of 2006 (“PPA”) was signed into law in August 2006 and
went into effect in January 2008. The stated goal of the PPA is to
improve the funding of pension plans. Plans in an under-funded status
will be required to increase employer contributions to improve the funding level
within PPA timelines. The impact of recent declines in the world
equity and other financial markets could have a material negative impact on
pension plan assets and the status of required funding under the
PPA. The Company participates in several multi-employer pension plans
that provide defined benefits to certain employees covered by labor
contracts. These plans are not administered by the Company and
contributions are determined in accordance with provisions of negotiated labor
contracts. Current information with respect to the Company’s
proportionate share of the over- and under-funded status of all actuarially
computed value of vested benefits over these pension plans’ net assets is not
available as the Company relies on third parties outside its control to provide
such information. The Company knows that four 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. One of the under-funded
multi-employer plans in which the Company participates has given notification of
a mass withdrawal termination for the plan year ended June 30,
2007. In April 2008 the Company made a lump sum settlement payment to
the one multi-employer plan that terminated for approximately $1.4 million,
which included a release for any future liability. Another of the
underfunded multi-employer plans in which the Company participates has given
notification of “Critical Status” under the PPA. Based upon the
Company’s initial review and conversations with other participating employers in
this “Critical Status” plan, it appears probable that there will be a mass
withdrawal termination of this plan. As a result, the Company accrued
approximately $3.2 million based on the most recent information that is probable
and estimable for this 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.
Page 33
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 3, 2009, the Company has $0.7 million of
received credits included in current liabilities on the balance sheet as
deferred income while the Company pursues further clarification. The
Company is also reviewing new legislation under Section 40A of the Internal
Revenue Code for the biodiesel mixture credit the impact of which could be
material to the Company. The Company will continue to evaluate the
option of burning alternative fuels at its plants in future periods depending on
the price relationship between alternative fuels and natural gas.
The
Company’s management believes that cash flows from operating activities
consistent with the level generated in Fiscal 2008, unrestricted cash and funds
available under the Credit Agreement will be sufficient to meet the Company’s
working capital needs and maintenance and compliance-related capital
expenditures, scheduled debt and interest payments, income tax obligations and
other contemplated needs through the next twelve months. On February
23, 2009, the Company acquired substantially all of the assets of Boca
Industries, Inc. headquartered in Smyrna, Georgia for approximately $12.5
million. Numerous factors could have adverse consequences to the Company
that cannot be estimated at this time, such as: a reduction in
finished product prices; possible product recall resulting from
developments relating to the discovery of unauthorized adulterations to food
additives; the occurrence of Bird Flu in the U.S.; any
additional occurrence of BSE in the U.S. or elsewhere; reductions in
raw material volumes available to the Company due to weak margins in the meat
production industry as a result of higher feed costs or other factors, reduced
volume from food service establishments, reduced demand for animal feed, or
otherwise; unanticipated costs and/or reductions in raw material
volumes related to the Company’s implementation of and compliance with the Final
BSE Rule, including capital expenditures to comply with the Final BSE Rule;
unforeseen new U.S. or foreign regulations affecting the rendering industry
(including new or modified animal feed, Bird Flu or BSE
regulations); increased contributions to the Company’s multi-employer
defined benefit pension plans as required by the PPA; bad debt write-offs; loss
of or failure to obtain necessary permits and registrations; and/or
unfavorable export markets. These factors, coupled with volatile
prices for natural gas and diesel fuel, general performance of the U.S. economy
and declining consumer confidence including the inability of consumers and
companies to obtain credit due to the current lack of liquidity in the financial
markets, among others, could negatively impact the Company’s results of
operations in fiscal 2009 and thereafter. The Company cannot provide
assurance that the cash flows from operating activities generated in Fiscal 2008
are indicative of the future cash flows from operating activities that will be
generated by the Company’s operations. The Company reviews the
appropriate use of unrestricted cash periodically. Although no
decision has been made as to non-ordinary course cash usages at this time,
potential usages could include: opportunistic capital expenditures
and/or acquisitions; investments relating to the Company’s developing
a comprehensive renewable energy strategy, including, without limitation,
potential investments in renewable diesel and/or biodiesel
projects; investments in response to governmental regulations
relating to BSE or other regulations; unexpected funding resulting
from the PPA requirements; and paying dividends or repurchasing stock, subject
to limitations under the Credit Agreement, as well as suitable cash conservation
to withstand adverse commodity cycles.
The
current economic environment in the Company’s markets has the potential to
adversely impact its liquidity in a variety of ways, including through reduced
raw materials, reduced sales, potential inventory buildup and/or higher
operating costs. The
principal products that the Company sells are commodities, the prices of which
are based on established commodity markets and are subject to volatile
changes. Any decline in these prices has the potential to adversely
impact the Company’s liquidity. Any of a further disruption in
international sales, a further decline in commodities prices, further increases
in energy prices resulting from increased world demand 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.
Page 34
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 3,
2009 (in thousands):
The Company’s off-balance sheet
contractual obligations and commercial commitments as of January 3, 2009 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 3, 2009 (in thousands):
OFF
BALANCE SHEET OBLIGATIONS
Based
upon underlying purchase agreements, the Company has commitments to purchase
$16.9 million of finished products, natural gas and diesel fuel during fiscal
2009, which are not included in liabilities on the Company’s balance sheet at
January 3, 2009. These purchase agreements are entered into in the
normal course of the Company’s business and are not subject to derivative
accounting. The commitments will be recorded on the balance sheet of
the Company when delivery of these commodities occurs and ownership passes to
the Company during fiscal 2009, in accordance with accounting principles
generally accepted in the U.S.
Page 35
Based
upon underlying lease agreements, the Company expects to pay approximately $10.8
million in operating lease obligations during fiscal 2009 which are not included
in liabilities on the Company’s balance sheet at January 3, 2009. 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 pro-forma 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
$22.2 million and $22.5 million at January 3, 2009 and December 29, 2007,
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 $19.3 million, $18.3
million and $16.1 million in fiscal years ending January 3, 2009, December 29,
2007 and December 30, 2006, respectively.
The
Company’s intangible assets, including permits, routes and non-compete
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 3 to 10 years; 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 $5.2
million, $4.9 million and $4.6 million in fiscal years ending January 3, 2009,
December 29, 2007 and December 30, 2006, respectively.
Page 36
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 raw material suppliers at a single reporting
unit 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.
The net
book value of property, plant and equipment was approximately $143.3 million and
$128.7 million at January 3, 2009 and December 29, 2007,
respectively. The net book value of intangible assets was
approximately $36.0 million and $29.0 million at January 3, 2009 and December
29, 2007, 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 within a single
reporting unit due to lower commodity markets and the loss of 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. Goodwill was approximately $61.1 million and $71.9 million at
January 3, 2009 and December 29, 2007, respectively.
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 $17.3 million and $17.1 million at
January 3, 2009 and December 29, 2007, respectively.
Page 37
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 6.10% and 6.00% at
January 3, 2009 and October 1, 2007, respectively. The net periodic
benefit cost for fiscal 2009 would increase by approximately $0.7 million if the
discount rate was 0.5% lower at 5.60%. The net periodic benefit cost
for fiscal 2009 would decrease by approximately $0.7 million if the discount
rate was 0.5% higher at 6.60%.
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% and 8.25% for
Fiscal 2008 and Fiscal 2007, respectively. During 2008, the Company’s
actual return on pension plan assets was a loss of $22.9 million or
approximately 28% of pension plan assets due to the recent decline in global
financial markets. Although, the Company’s plan returns were negative the actual
returns exceeded returns of the broader S&P 500 Index’s performance for
2008. These losses contributed to an increase in accumulated other
comprehensive loss in the Company’s consolidated statement of stockholders’
equity of $20.4 million, net of tax.
The
Company has recorded a pension liability of approximately $36.3 million and $9.2
million at January 3, 2009 and December 29, 2007, respectively. The
Company’s net pension cost was approximately $0.4 million, $3.0 million and $3.7
million for the fiscal years ending January 3, 2009, December 29, 2007 and
December 30, 2006, respectively. The projected net periodic pension
expense for fiscal 2009 is expected to increase by approximately $5.9 million as
compared to Fiscal 2008.
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 and $4.8
million at January 3, 2009 and December 29, 2007, respectively. The
decrease in the Company’s valuation allowance is primarily due to the expiration
of certain net operating losses.
Stock
Option Expense
Effective January 1, 2006, the Company
adopted the provisions of Statement of Financial Accounting Standard No. 123
(revised 2004), Share-Based
Payment (“SFAS 123(R)”) and related interpretations, using the modified
prospective method. 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 3, 2009, December 29, 2007 and December 30, 2006 of approximately
$0.2 million, $0.4 million and $0.5 million, respectively.
Page 38
NEW
ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued
Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”), which allows entities to
choose to measure financial instruments and certain other items at fair
value. This statement is effective for fiscal years beginning after
November 15, 2007. The Company has adopted SFAS 159 and has elected
not to account for any additional financial instruments and other items at fair
value.
In December 2007, the FASB issued SFAS
No. 141(R), “Business
Combinations” (“SFAS 141(R)”), which is a revision of SFAS 141, “Business
Combinations.” SFAS 141(R) applies to all transactions and
other events in which one entity obtains control over one or more other
businesses. SFAS 141(R) requires an acquirer, upon initially
obtaining control of another entity, to recognize the assets, liabilities and
any non-controlling interest in the acquiree at fair value as of the acquisition
date. Contingent consideration is required to be recognized and
measured at fair value on the date of acquisition rather than at a later date
when the amount of that consideration may be determinable beyond a reasonable
doubt. This fair value approach replaces the cost-allocation process
required under SFAS 141 whereby the cost of an acquisition was allocated to the
individual assets acquired and liabilities assumed based on their estimated fair
value. SFAS 141(R) requires acquirers to expense acquisition related
costs as incurred rather than allocating these costs to assets acquired and
liabilities assumed, as was done under SFAS 141. The provisions of
SFAS 141(R) are effective for fiscal years beginning after December 15,
2008. Early adoption is not permitted. The Company is
currently evaluating the impact of adopting this accounting
standard.
In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB 51" (“SFAS
160”). SFAS 160 amends ARB 51 to establish new standards that will govern the
accounting for and reporting of (1) noncontrolling interests in partially owned
consolidated subsidiaries and (2) the loss of control of subsidiaries. The
provisions of SFAS 160 are effective as of the beginning of the Company’s 2009
fiscal year on a prospective basis. The Company is currently
evaluating the impact of adopting this accounting standard.
In March 2008, the FASB issued SFAS No.
161, “Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133” (“SFAS 161”). This statement is intended to improve
transparency in financial reporting by requiring enhanced disclosures of an
entity’s derivative instruments and hedging activities and their effects on the
entity’s financial position, financial performance, and cash
flows. SFAS 161 applies to all derivative instruments within the
scope of SFAS 133 as well as related hedged items, bifurcated derivatives, and
nonderivative instruments that are designated and qualify as hedging
instruments. The fair value of derivative instruments and their gains
and losses will need to be presented in tabular format in order to present a
more complete picture of the effects of using derivative
instruments. SFAS 161 is effective for financial statements issued
for fiscal years beginning after November 15, 2008, with early application
permitted. The Company is currently evaluating the impact of adopting
this accounting standard.
In May 2008, the FASB issued SFAS No.
162, “The Hierarchy of
Generally Accepted Accounting Principles” (“SFAS 162”). The
purpose of the new standard is to provide a consistent framework for determining
what accounting principles should be used when preparing U.S. generally accepted
accounting principle financial statements. Previous guidance did not properly
rank the accounting literature. The new standard is effective 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The adoption of SFAS 162 is not expected to have a
material effect on the Company’s financial statements.
In
October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not
Active.” This staff position clarifies the application of SFAS
157 in determining the fair values of assets or liabilities in a market that is
not active. This staff position became effective upon issuance,
including prior periods for which financial statements have not been
issued. The Company has adopted this staff position for the
consolidated financial statements contained within this Form
10-K. The adoption of this staff position did not have an impact to
the consolidated financial statements of the Company.
Page 39
In
December 2008, the FASB issued FASB Staff Position (FSP) FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets.” This FSP amends SFAS No. 132
(revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement
Benefits,” to provide guidance on an employer’s disclosures about plan assets of
a defined benefit pension or other postretirement plan on investment policies
and strategies, major categories of plan assets, inputs and valuation techniques
used to measure the fair value of plan assets and significant concentrations of
risk within plan assets. The disclosures about plan assets required by this FSP
shall be effective for fiscal years ending after December 15, 2009, with earlier
application permitted. Upon initial application, the provisions of this FSP are
not required for earlier periods that are presented for comparative
purposes. The Company is currently evaluating the disclosure
requirements impact of adopting this new FSP.
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.
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; 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.
Page 40
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 and natural gas expense. The Company uses
interest rate swaps with the intent of managing overall borrowing costs by
reducing the potential impact of increases in interest rates on floating-rate
long-term debt. The interest rate swaps are subject to the
requirements of Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”). The Company’s
natural gas and diesel fuel instruments are not subject to the requirements of
SFAS 133, because the natural gas and diesel fuel instruments qualify as normal
purchases as defined in the SFAS 133. The Company does not use
derivative instruments for trading purposes.
On May
19, 2006, the Company entered into two interest rate swap agreements that are
considered cash flow hedges according to SFAS 133. Under the terms of
these swap agreements, beginning June 30, 2006, the cash flows from the
Company’s $50.0 million floating-rate term loan facility under the Credit
Agreement have been exchanged for fixed rate contracts that bear interest,
payable quarterly. The first swap agreement for $25.0 million matures
April 7, 2012 and bears interest at 5.42%, which does not include the borrowing
spread per the Credit Agreement, with amortizing payments that mirror the term
loan facility. The second swap agreement for $25.0 million matures
April 7, 2012 and bears interest at 5.415%, which does not include the borrowing
spread per the Credit Agreement, with amortizing payments that mirror the term
loan facility. The Company’s receive rate on each swap agreement is
based on three-month LIBOR. At January 3, 2009, the fair value of
these interest swap agreements was $3.6 million and is included in non-current
liabilities on the balance sheet, with an offset recorded to accumulated other
comprehensive income for the effective portion and other expense for the
ineffective portion of the interest rate swap.
As of
January 3, 2009, the Company had forward purchase agreements in place for
purchases of approximately $13.3 million of natural gas and diesel fuel in
fiscal 2009. As of January 3, 2009, the Company had forward purchase
agreements in place for purchases of approximately $3.6 million of finished
product in fiscal 2009.
Interest
Rate Sensitivity
The Company’s obligations subject to
variable interest rates include (in thousands, except interest
rates):
The Company has $37.5 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 3, 2009 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 $0.4 million in fiscal 2009. At January 3, 2009, the
Company had no fixed rate debt.
Page 41
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
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
42
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 3, 2009 and December 29, 2007, and the results of
their operations and their cash flows for each of the years in the three-year
period ended January 3, 2009, 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.
As
discussed in Note 1 to the consolidated financial statements, effective January
1, 2006, the Company adopted Statement of Financial Accounting Standards No.
123(R), Share-Based
Payment. As discussed in Note 13 to the consolidated financial
statements, effective December 30, 2006, the Company adopted Statement of
Financial Accounting Standards No. 158, Employer’s Accounting for Defined
Benefit Pension and Other Postretirement Plans – an Amendment of FASB Statements
No. 87, 88, 106, and 132(R).
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 3,
2009, 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 4, 2009, expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
(signed)
KPMG LLP
Dallas,
Texas
March 4,
2009 Page
43
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 3, 2009, 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 U.S. 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 U.S. 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 3, 2009, 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 4, 2009 expressed an unqualified opinion on those
consolidated financial statements.
(signed)
KPMG LLP
Dallas,
Texas
March 4,
2009
Page
44
DARLING INTERNATIONAL INC. AND
SUBSIDIARIES
Consolidated Balance
Sheets
January 3, 2009 and December 29,
2007
(in
thousands, except share and per share data)
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