UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
______________________________________
FORM
10-K
(Mark One)
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X
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ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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For
the fiscal year ended December 29,
2007
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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For
the transition period from _______________ to
_______________
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Commission
File Number
0-24620
DARLING
INTERNATIONAL INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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36-2495346
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(State
or other jurisdiction
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(I.R.S.
Employer
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of
incorporation or organization)
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Identification
Number)
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251
O'Connor Ridge Blvd., Suite 300
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Irving,
Texas
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75038
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (972) 717-0300
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Exchange on Which
Registered
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Common
Stock $0.01 par value per share
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New
York Stock Exchange (“NYSE”)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
____
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form
10-K. X
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.
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Large
accelerated filer
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X
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
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(Do
not check if a smaller
reporting
company)
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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
$720,979,000 based upon the closing price of the common stock as reported on the
American Stock Exchange (“AMEX”) 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 81,377,100 shares of common
stock, $0.01 par value, outstanding at February 15, 2008.
DOCUMENTS
INCORPORATED BY REFERENCE
Selected designated portions of the
Registrant’s definitive Proxy Statement in connection with the Registrant’s 2008
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 DECEMBER 29, 2007
TABLE
OF CONTENTS
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Page No.
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PART
I.
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Item
1.
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BUSINESS
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4 | |
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Item
1A.
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RISK
FACTORS
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9 | |
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Item
1B.
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UNRESOLVED
STAFF COMMENTS
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15 | |
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Item
2.
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PROPERTIES
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15 | |
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Item
3.
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LEGAL
PROCEEDINGS
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17 | |
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Item
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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17 | |
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PART
II.
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|||
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Item
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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18 | |
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Item
6.
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SELECTED
FINANCIAL DATA
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21 | |
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Item
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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23 | |
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Item
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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41 | |
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Item
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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42 | |
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Item
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
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78 | |
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Item
9A.
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CONTROLS
AND PROCEDURES
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78 | |
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Item
9B.
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OTHER
INFORMATION
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79 | |
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PART
III.
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Item
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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80 | |
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Item
11.
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EXECUTIVE
COMPENSATION
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80 | |
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Item
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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80 | |
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Item
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS,
AND
DIRECTOR INDEPENDENCE
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80 | |
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Item
14.
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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80 | |
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PART
IV.
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Item
15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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81 | |
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SIGNATURES
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85 |
Page 3
PART
I
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ITEM
1.
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BUSINESS
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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. On
May 15, 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 39
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 2007 include 52 weeks 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 15 of Notes to Consolidated
Financial Statements.
The Company’s net external sales from
continuing operations by operating segment were as follows (in
thousands):
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Fiscal
2007
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Fiscal
2006
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Fiscal
2005
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Continuing
operations:
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Rendering
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$ | 464,468 | 72.0 | % | $ | 279,011 | 68.6 | % | $ | 192,340 | 62.3 | % | |||||||||||||
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Restaurant Services
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180,845 | 28.0 | 127,979 | 31.4 | 116,527 | 37.7 | |||||||||||||||||||
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Total
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$ | 645,313 | 100.0 | % | $ | 406,990 | 100.0 | % | $ | 308,867 | 100.0 | % | |||||||||||||
PROCESSING
OPERATIONS
The Company creates finished products
primarily through the drying, grinding, separating and blending of its various
raw materials. The process starts with the collection of animal
processing by-products (fat, bones, feathers and offal) from meat 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 970 trucks and tractor-trailers to collect raw materials from
approximately 115,000 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 2007 fiscal year, the
Company’s largest single supplier accounted for approximately 5% of the total
raw material processed by the Company, and the 10 largest raw materials
suppliers accounted for approximately 25% of the total raw material processed by
the Company. For a discussion of the Company’s competition for raw
materials, see “Competition.” Many of the Company’s suppliers supply
raw material under 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 57% 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 $171.6 million,
$112.7 million and $77.6 million for the years ended December 29, 2007,
December 30, 2006 and December 31, 2005, 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 15 of
Notes to Consolidated Financial Statements for a breakdown of the Company’s
sales by country.
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 18, 2008, most foreign markets that were
closed to U.S. beef following the discovery of the first U.S. case of BSE had
been reopened, although Japan only permits imports of U.S. beef from cattle 20
months of age or younger at slaughter. South Korea, which previously
permitted U.S. boneless beef from cattle 30 months of age or younger to be
imported, suspended such imports on October 5, 2007. Export markets
for MBM containing beef material produced in the U.S. have remained closed with
the exception of the Indonesia market, which is now open for MBM and has made an
impact upon MBM prices especially on the West Coast of the U.S.
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
tallow, yellow grease 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." Company
policy generally is to pursue intellectual property protection considered
necessary or advisable.
EMPLOYEES
AND LABOR RELATIONS
As of December 29, 2007, the Company
employed approximately 1,880 persons full-time. Approximately 45.7%
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:
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·
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The Food and Drug
Administration (“FDA”), which regulates food and feed
safety. Effective August 1997, the FDA promulgated a rule
prohibiting the use of mammalian proteins, with some exceptions, in feeds
for cattle, sheep and other ruminant animals (21 CFR 589.2000, referred to
herein as the “BSE Feed Rule”). The intent of this rule is to
prevent further spread of BSE, commonly referred to as “mad cow disease.”
Company management believes the Company is in compliance with the
provisions of this rule.
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Interim
regulations published by the FDA in 2004 and amended in 2006 prohibit: 1)
specified risk materials (“SRM”) from human food and 2) SRM and materials from
non-ambulatory or dead cattle from cosmetics. Edible BFT that is
either derived from SRM-free raw materials or contains less than 0.15% insoluble
impurities are permitted in human food supplements and
cosmetics. Derivatives of BFT (glycerin and fatty acids) are exempt
from these regulations.
See Item
1A “Risk Factors – The Company’s business may be affected by the impact of BSE
and other food safety issues,” for more information regarding certain FDA rules
that affect the Company’s business, including a proposed amendment to the BSE
Feed Rule.
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·
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The
United States Department
of Agriculture (“USDA”), which regulates collection and production
methods. Within the USDA, two agencies exercise direct
regulatory oversight of the Company’s
activities:
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|
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–
Animal and Plant Health
Inspection Service (“APHIS”) certifies facilities and claims made
for exported materials, and
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–
Food Safety Inspection
Service (“FSIS”) regulates sanitation and
food safety programs.
|
On
December 30, 2003, the Secretary of Agriculture announced new beef
slaughter/meat processing regulations to assure consumers of the safety of the
meat supply. These regulations prohibit non-ambulatory animals from
entering the food chain, require removal of SRM at slaughter and prohibit
carcasses from cattle tested for BSE from entering the food chain until the
animals are shown negative for BSE.
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·
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The
Environmental Protection
Agency (“EPA”), which regulates air and water discharge
requirements, as well as local and state agencies governing air and water
discharge.
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·
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State Departments of
Agriculture, which regulate animal by-product collection and
transportation procedures and animal feed
quality.
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Page
8
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·
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The
United States Department
of Transportation (“USDOT”), as well as local and state agencies,
which regulate the operation of the Company’s commercial
vehicles.
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|
·
|
The
Securities and Exchange
Commission (“SEC”), which regulates securities and information
required in annual and quarterly reports filed by publicly traded
companies.
|
These
material rules and regulations and other rules and regulations promulgated by
other agencies may influence the Company’s operating results at one or more
facilities.
AVAILABLE
INFORMATION
Under the Securities Exchange Act of
1934, the Company is required to file annual, quarterly and special reports,
proxy statements and other information with the SEC, which can be read and/or
copies made at the SEC’s Public Reference Room at 100 F Street N.E., Room 1580,
Washington D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information about the Public Reference
Room. The SEC maintains a web site at http://www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The Company
files electronically with the SEC.
The Company makes available, free of
charge, through its investor relations web site, its reports on
Forms
10-K,
10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable
after they are filed
with, or
furnished to, the SEC pursuant to Section 13(a) or 15(d) of the Exchange
Act.
The Company’s website is http://www.darlingii.com
and the address for the Company’s investor relations web site is http://www.darlingii.com/investors/investors.asp.
|
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.
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. A significant decrease in available raw materials
could materially and adversely affect the Company’s business and results of
operations.
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. 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.
The
Company may incur material costs and liabilities in complying with government
regulations.
The Company is subject to the rules and
regulations of various federal, state and local governmental
agencies. Material rules and regulations and the applicable agencies
include:
|
·
|
The
FDA, which regulates food and feed
safety;
|
|
·
|
The
USDA, including its agencies APHIS and FSIS, which regulates collection
and production methods;
|
|
·
|
The
EPA, which regulates air and water discharge requirements, as well as
local and state agencies governing air and water
discharge;
|
|
·
|
State
Departments of Agriculture, which regulate animal by-product collection
and transportation procedures and animal feed
quality;
|
|
·
|
The
USDOT, as well as local and state transportation agencies, which regulate
the operation of the Company’s commercial vehicles;
and
|
|
·
|
The
SEC, which regulates securities and information required in annual and
quarterly reports filed by publicly traded
companies.
|
The applicable rules and regulations
promulgated by these agencies may influence the Company’s operating results at
one or more facilities. Furthermore, the loss of or failure to obtain necessary
federal, state or local permits and registrations at one or more of the
Company’s facilities could halt or curtail operations at impacted facilities,
which could adversely affect the Company’s operating results. The
Company’s failure to comply with applicable rules and regulations could subject
it to: 1) administrative penalties and injunctive relief; 2) civil
remedies, including fines, injunctions and product recalls; and 3)
adverse publicity. There can be no assurance that the Company will
not incur material costs and liabilities in connection with these rules and
regulations.
The
Company is 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 relatively high
throughout 2008. The Company consumes significant volumes of natural
gas to operate boilers in its plants to generate steam to heat raw
material. High 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. High 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 relatively
high in fiscal 2008 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.
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.
Page
10
The
Company’s business may be affected by the impact of BSE and other food safety
issues.
Effective
August 1997, the FDA promulgated the BSE Feed Rule in an effort to prevent the
spread of BSE. Detection of the first case of BSE in the U.S. in December 2003
resulted in additional U.S. government regulations, finished product export
restrictions by foreign governments, market price fluctuations for the Company’s
finished products and reduced demand for beef and beef products by
consumers. Even though the export markets for U.S. beef have been
significantly re-opened, most of these markets remain closed to MBM derived from
U.S. beef. Continued concern about BSE in the U.S. may result in
additional regulatory and market related challenges that may affect the
Company’s operations or increase the Company’s operating costs.
The
following are recent developments and recent regulatory history with respect to
BSE in the U.S.:
|
·
|
On
January 18, 2008, APHIS published a final rule (“Clarification Rule”) that
addressed discrepancies in import regulations created in 2005 when a final
rule allowing the importation of cattle and bovine products derived from
countries posing a minimal risk for BSE (“Minimal Risk Rule”) was
implemented. The Minimal Risk Rule classified Canada as a
minimal risk country. The Clarification Rule became effective
on February 19, 2008 and allows products derived from poultry and pork
processed in the same facility as Canadian beef to be imported into the
U.S. Regulations affecting the importation of pork and poultry
products were not harmonized with the Minimal Risk Rule to recognize
countries classified as a minimal risk for BSE. As a result, imports of
Canadian pork and poultry products processed in the same facility as
Canadian beef were prohibited until the Clarification Rule went into
effect. Import regulations may affect the Company’s access to
raw materials for processing.
|
|
·
|
On
November 19, 2007, APHIS implemented revised import regulations that
allowed Canadian cattle over 30 months of age and born after March 1, 1999
and bovine products derived from such cattle to be imported into the US
for any use. Imports of Canadian cattle younger than 30 months of age have
been allowed since March 2005. Canada banned the skull, brain, trigeminal
ganglia, eyes, tonsils, spinal cord and dorsal root ganglia of cattle aged
30 months or older and the distal ileum of cattle of all ages from all
animal feed, pet food and fertilizers on July 12, 2007. Canada
also prohibits the exportation of such
materials.
|
|
·
|
On
May 22, 2007, a report released by the World Organization for Animal
Health (“OIE”) formally classified the U.S. as a “controlled risk” country
for BSE. In the same report, the OIE recommended tightening
feed rules in the U.S. and eliminating SRM from the feed chain as Canada
has done. The OIE advised that proper implementation of an SRM
ban in the U.S. will be a key factor in maintaining a controlled risk
status for BSE.
|
|
·
|
In
2005, the FDA proposed to amend the BSE Feed Rule by also prohibiting from
the food or feed of all animals: (1) brain and spinal cord from
cattle 30 months and older that are inspected and passed for human
consumption; (2) the brain and spinal cord from cattle of any
age not inspected and passed for human consumption; and (3) the
entire carcass of cattle not inspected and passed for human consumption if
the brain and spinal cord has not been removed (“Proposed
Rule”). In addition, the Proposed Rule provides that tallow
containing more than 0.15% insoluble impurities also be banned from all
animal food and feed if this tallow is derived from the proposed
prohibited materials. In November 2007, the FDA submitted a
final draft of the Proposed Rule to the Office of Management and Budget
(“OMB”) for review. The OMB is an office of the White House and
is typically allowed up to 90 days to review proposed, interim and final
rules submitted by regulatory agencies, among its other
functions. Once its review is completed, the OMB may allow the
FDA to publish the Proposed Rule as a final rule or recommend the FDA
address economic or other issues before submitting it to the OMB
again. Although management will continue to monitor the
Proposed Rule and other regulatory issues, it is possible that, if
implemented, the Proposed Rule or other FDA regulatory action could
negatively impact the Company’s operations and financial
performance.
|
Page
11
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 that arose during 2007:
|
·
|
On
November 7, 2007, the FDA released its Food Protection Plan (the “2007
Plan”), which describes prevention, intervention and response strategies
the FDA proposes to use for improving food and animal feed safety for
imported and domestically produced ingredients and products. The 2007 Plan
also lists additional resources and authorities that, in the FDA’s
opinion, are needed to implement the 2007 Plan. Legislation
will be necessary for the FDA to obtain these additional authorities. As
of February 18, 2008, Congress has not granted these authorities to the
FDA.
|
|
·
|
On
September 27, 2007, the Food and Drug Administration Amendments Act of
2007 (the “2007 Act”) was signed into law as a result of Congressional
concern for pet food and livestock feed safety, following the discovery of
adulterated imported pet food and livestock feed in March
2007. The 2007 Act directs the Secretary of Health and Human
Services and the FDA to promulgate significant new requirements for the
pet food and animal feed industries. The impact of the 2007 Act
on the Company will not be clear until the FDA interprets the 2007 Act and
issues guidance or proposes new
regulations.
|
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, is well established in Asia and periodically
spreads into 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 was not detected in North or South
America during 2007, but low pathogenic strains that are not a threat to human
health were reported in the U.S. and Canada during that period. The
USDA has developed safeguards to protect the U.S. poultry industry from the
H5N1 strain of Bird Flu. These safeguards are based on import
restrictions, disease surveillance and a response plan for isolating and
depopulating infected flocks if the disease is
detected. Notwithstanding these safeguards, any significant outbreak
of Bird Flu in the U.S. could have a negative impact on the Company’s
business by reducing demand for MBM.
The
Company’s ability to achieve the benefits resulting from the
Transaction.
On May
15, 2006, the Company completed the acquisition of substantially all of the
assets of NBP with the expectation that the Transaction would result in mutual
benefits including, among other things, revenue growth, diversification of raw
material supplies and the creation of a larger platform to grow the restaurant
services segment. Although the operational and administrative phase of this
integration has been substantially completed and many of these expectations have
been realized, any future goodwill impairment charges that the Company might
incur with respect to the assets of NBP could affect the Company’s ability to
achieve the full benefits of the Transaction.
Page
12
Certain
of the Company’s 39 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.
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.
Restrictions
imposed by the Company’s credit agreement and future debt agreements may limit
its ability to finance future operations or capital needs or engage in other
business activities that may be in the Company’s interest.
The Company’s credit agreement
currently, and future debt agreements may, restrict its ability to:
| · | incur additional indebtedness; | |
|
·
|
pay
dividends and make other distributions;
|
|
|
·
|
make restricted payments; | |
|
·
|
create
liens;
|
|
|
·
|
merge, consolidate or acquire other businesses; | |
|
·
|
sell
or otherwise dispose of assets;
|
|
|
·
|
make investments, loans and advances; | |
|
·
|
guarantee indebtedness or other obligations; | |
|
·
|
enter into operating leases or sale-leaseback, synthetic leases, or similar transactions; | |
|
·
|
make changes to its capital structure; and | |
|
·
|
engage in new lines of business unrelated to the Company’s current businesses. |
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.
Page
13
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 ability to pay any dividends on its common stock may be
limited.
The Company has not paid any dividends
on its common stock since January 3, 1989. The Company’s current
financing arrangements permit the Company to pay cash dividends on its common
stock within limitations defined in its credit agreement. Any future
determination to pay cash dividends on the Company’s common stock will be at the
discretion of the Company’s board of directors and will be based upon the
Company’s financial condition, operating results, capital requirements, plans
for expansion, restrictions imposed by any financing arrangements, and any other
factors that the board of directors determines are relevant. Furthermore,
the Company’s ability to pay any cash or non-cash dividends on its common stock
is subject to applicable provisions of state law and to the terms of its credit
agreement.
The
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 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 15,
2008, the Company has available for issuance 18,440,534 authorized but unissued
shares of common stock and 1,000,000 authorized but unissued shares of preferred
stock that may be issued in series.
Page
14
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 2007. 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.
The Company’s 39 operating facilities
consist of 25 full service rendering plants, six yellow grease/trap plants, four
blending plants, one edible meat plant, one technical tallow plant, one hides
plant and one pet food plant. Except for three 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
|
LOCATION
|
DESCRIPTION
|
Combined Rendering and
Restaurant Services Business Segments
|
Bellevue,
NE
|
Rendering/Yellow
Grease
|
|
Berlin,
WI
|
Rendering/Yellow
Grease
|
|
Blue
Earth, MN
|
Rendering/Yellow
Grease
|
|
Boise,
ID
|
Rendering/Yellow
Grease
|
|
Clinton,
IA
|
Rendering/Yellow
Grease
|
|
Coldwater,
MI
|
Rendering/Yellow
Grease
|
|
Collinsville,
OK
|
Rendering/Yellow
Grease
|
|
Dallas,
TX
|
Rendering/Yellow
Grease
|
|
Denver,
CO
|
Rendering/Yellow
Grease
|
|
Des
Moines, IA
|
Rendering/Yellow
Grease
|
|
Detroit,
MI
|
Rendering/Yellow
Grease/Trap
|
|
E.
St. Louis, IL
|
Rendering/Yellow
Grease/Trap
|
|
Fresno,
CA
|
Rendering/Yellow
Grease
|
|
Houston,
TX
|
Rendering/Yellow
Grease/Trap
|
|
Kansas
City, KS
|
Rendering/Yellow
Grease/Trap
|
|
Los
Angeles, CA
|
Rendering/Yellow
Grease/Trap
|
|
Mason
City, IL
|
Rendering/Yellow
Grease
|
|
Newark,
NJ
|
Rendering/Yellow
Grease/Trap
|
|
San
Francisco, CA *
|
Rendering/Yellow
Grease/Trap
|
|
Sioux
City, IA
|
Rendering/Yellow
Grease
|
|
Tacoma,
WA *
|
Rendering/Yellow
Grease/Trap
|
|
Turlock,
CA
|
Rendering/Yellow
Grease
|
|
Wahoo,
NE
|
Rendering/Yellow
Grease
|
|
Wichita,
KS
|
Rendering/Yellow
Grease/Trap
|
Rendering Business
Segment
|
Denver,
CO
|
Edible
Meat and Tallow
|
|
Fairfax,
MO
|
Protein
Blending
|
|
Grand
Island, NE *
|
Pet
Food
|
|
Kansas
City, KS
|
Protein
Blending
|
|
Kansas
City, MO
|
Hides
|
|
Lynn
Center, IL
|
Protein
Blending
|
|
Omaha,
NE
|
Rendering
|
|
Omaha,
NE
|
Protein
Blending
|
|
Omaha,
NE
|
Technical
Tallow
|
Restaurant Services Business
Segment
|
Chicago,
IL
|
Yellow
Grease/Trap
|
|
Ft.
Lauderdale, FL
|
Yellow
Grease/Trap
|
|
Indianapolis,
IN
|
Yellow
Grease/Trap
|
|
Little
Rock, AR
|
Yellow
Grease/Trap
|
|
No.
Las Vegas, NV
|
Yellow
Grease/Trap
|
|
Tampa,
FL
|
Yellow
Grease/Trap
|
|
|
*
Property is leased. Rent expense for these leased properties was
$0.7 million in the aggregate in fiscal
2007.
|
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 December 29, 2007 and December 30, 2006,
the reserves for insurance, environmental and litigation contingencies reflected
on the balance sheet in accrued expenses and other non-current liabilities for
which there are no insurance recoveries were approximately $17.1 million and
$17.9 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.
In July 2007, a judgment was entered in
a litigation matter involving a contract dispute in which the Company was a
party. The judgment required the Company to convey an unused parcel
of property recorded on the books for approximately $500,000 to the counterparty
for that amount. In December 2007, a judgment was entered in the
matter awarding the counterparty approximately $2.6 million in attorneys’ fees
and costs. The Company filed appeals of both
judgments. The Company settled this matter during the first quarter
of fiscal 2008. Pursuant to the terms of the settlement, the Company
transferred the property to the counterparty for a purchase price of $500,000,
paid the counterparty approximately $2.2 million towards attorneys’ fees and
costs and agreed to dismiss its pending appeals with prejudice. In
addition, the parties exchanged mutual releases. The Company has
recorded a charge of $2.2 million for the attorneys’ fees and costs in the
fourth quarter of 2007, which is included in selling, general and administrative
expenses.
In June
2006, the Company was awarded damages of approximately $7.4 million as a result
of a service provider’s failure to provide steam under a service agreement to
one of the Company’s plants. At the time the damages were awarded,
collectibility of such damages was uncertain; however on October 12, 2006, the
Company entered into an agreement to sell its rights to such damages to a third
party for $2.2 million in cash. The agreement was made subject to
certain conditions which were satisfied on March 1, 2007. On March 8,
2007, the Company received $2.2 million, completing the
transaction. The Company recorded a gain with the receipt of the $2.2
million in proceeds in the first quarter of 2007.
|
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 December 29, 2007.
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.
|
Market
Price
|
||||||||
|
Fiscal
Quarter
|
High
|
Low
|
||||||
|
2007:
|
||||||||
|
First Quarter
|
$ | 6.60 | $ | 5.17 | ||||
|
Second Quarter
|
$ | 9.47 | $ | 6.28 | ||||
|
Third Quarter
|
$ | 10.17 | $ | 7.31 | ||||
|
Fourth Quarter
|
$ | 12.10 | $ | 9.34 | ||||
|
2006:
|
||||||||
|
First Quarter
|
$ | 4.80 | $ | 3.79 | ||||
|
Second Quarter
|
$ | 4.92 | $ | 3.91 | ||||
|
Third Quarter
|
$ | 4.59 | $ | 3.95 | ||||
|
Fourth Quarter
|
$ | 5.55 | $ | 3.96 | ||||
On February 15, 2008, the closing sales
price of the Company’s common stock on the NYSE was $12.91. The
Company has been notified by its stock transfer agent that as of February 15,
2008, there were 135 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 2008. 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-Nelson Agribusiness Index for the period from December 28, 2002 to December
29, 2007, assuming the investment of $100 on December 28, 2002 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 December 29, 2007 with respect to the Company’s equity
compensation plans (including individual compensation arrangements) under which
the Company’s equity securities are authorized for issuance, aggregated by i)
all compensation plans previously approved by the Company’s security holders,
and ii) all compensation plans not previously approved by the Company’s security
holders. The table includes:
|
·
|
the
number of securities to be issued upon the exercise of outstanding
options;
|
|
·
|
the
weighted-average exercise price of the outstanding options;
and
|
|
·
|
the
number of securities that remain available for future issuance under the
plans.
|
Page
19
|
Plan
Category
|
(a)
Number
of securities to be issued upon exercise of outstanding
options,
warrants and rights
|
(b)
Weighted-average
exercise price of outstanding
options,
warrants
and
rights
|
(c)
Number
of securities remaining available
for
future issuance
under
equity
compensation
plans
(excluding
securities reflected in column (a))
|
|||||||||
|
Equity
compensation plans approved
by
security holders
|
1,320,705 | (1) |
$
|
3.06 | 3,481,742 | |||||||
|
Equity
compensation plans not
approved
by security holders
|
– | – | – | |||||||||
|
Total
|
1,320,705 |
$
|
3.06 | 3,481,742 | ||||||||
|
(1)
|
Includes
shares underlying options that have been issued pursuant to the Company’s
2004 Omnibus Incentive Plan (the “2004 Plan”) as approved by the Company‘s
stockholders. See Note 11 of Notes to Consolidated Financial
Statements for information regarding the material features of the 2004
Plan.
|
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 December 29, 2007, December 30, 2006, and
December 31, 2005, and the related notes thereto.
|
Fiscal 2007
|
Fiscal 2006
|
Fiscal 2005
|
Fiscal 2004
|
Fiscal 2003
|
|
|
Fifty-two
Weeks
Ended
December
29,
2007
|
Fifty-two
Weeks
Ended
December
30,
2006 (g)
|
Fifty-two
Weeks
Ended
December 31,
2005
|
Fifty-two
Weeks
Ended
January
1,
2005
|
Fifty-three
Weeks
Ended
January 3,
2004
|
(dollars
in thousands, except per share data)
|
Statement
of Operations Data:
|
||||||||||||||||||||
|
Net
sales
|
$ | 645,313 | $ | 406,990 | $ | 308,867 | $ | 320,229 | $ | 323,267 | ||||||||||
|
Cost
of sales and operating
expenses (a)
|
483,453 | 321,416 | 241,707 | 237,925 | 245,175 | |||||||||||||||
|
Selling,
general and administrative
expenses (b)
|
57,999 | 45,649 | 35,240 | 36,509 | 35,808 | |||||||||||||||
|
Depreciation
and amortization
|
23,214 | 20,686 | 15,787 | 15,224 | 15,124 | |||||||||||||||
|
Operating
income
|
80,647 | 19,239 | 16,133 | 30,571 | 27,160 | |||||||||||||||
|
Interest
expense
|
5,045 | 7,184 | 6,157 | 6,759 | 2,363 | |||||||||||||||
|
Other
(income)/expense, net (c) (d)
|
570 | 4,682 | (903 | ) | 299 | (3,914 | ) | |||||||||||||
|
Income
from continuing operations
before income taxes
|
75,032 | 7,373 | 10,879 | 23,513 | 28,711 | |||||||||||||||
|
Income
tax expense
|
29,499 | 2,266 | 3,184 | 9,245 | 10,632 | |||||||||||||||
|
Income
from continuing operations
|
45,533 | 5,107 | 7,695 | 14,268 | 18,079 | |||||||||||||||
|
Income/(loss)
from discontinued
operations, net
of tax
|
- | - | 46 | (376 | ) | 112 | ||||||||||||||
|
Net
Income
|
$ | 45,533 | $ | 5,107 | $ | 7,741 | $ | 13,892 | $ | 18,191 | ||||||||||
|
Basic
earnings per common share
|
$ | 0.56 | $ | 0.07 | $ | 0.12 | $ | 0.22 | $ | 0.29 | ||||||||||
|
Diluted
earnings per common share
|
$ | 0.56 | $ | 0.07 | $ | 0.12 | $ | 0.22 | $ | 0.29 | ||||||||||
|
Weighted
average shares
outstanding
|
80,772 | 74,310 | 63,929 | 63,840 | 62,588 | |||||||||||||||
|
Diluted
weighted average shares
outstanding
|
81,896 | 75,259 | 64,525 | 64,463 | 63,188 | |||||||||||||||
|
Other
Financial Data:
|
||||||||||||||||||||
|
Adjusted
EBITDA (e)
|
$ | 103,861 | $ | 39,925 | $ | 31,920 | $ | 45,795 | $ | 42,284 | ||||||||||
|
Depreciation
|
18,332 | 16,134 | 11,903 | 11,345 | 10,958 | |||||||||||||||
|
Amortization
|
4,882 | 4,552 | 3,884 | 3,879 | 4,166 | |||||||||||||||
|
Capital
expenditures (f)
|
15,552 | 11,800 | 21,406 | 13,312 | 11,586 | |||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Working
capital
|
$ | 34,385 | $ | 17,865 | $ | 40,407 | $ | 39,602 | $ | 31,189 | ||||||||||
|
Total
assets
|
351,338 | 320,806 | 190,772 | 182,809 | 174,649 | |||||||||||||||
|
Current
portion of long-term debt
|
6,250 | 5,004 | 5,026 | 5,030 | 7,489 | |||||||||||||||
|
Total
long-term debt less current
portion
|
37,500 | 78,000 | 44,502 | 49,528 | 48,188 | |||||||||||||||
|
Stockholders’
equity
|
200,984 | 151,325 | 73,680 | 67,235 | 55,282 | |||||||||||||||
|
(a)
|
Included
in cost of sales and operating expenses is a settlement with certain past
insurers of approximately $2.8 million recorded in fiscal 2004 as a credit
(recovery) of claims expense and previous insurance
premiums.
|
|
(b)
|
Included
in selling, general and administrative expenses is a loss on a legal
settlement of approximately $2.2 million offset by a gain on a separate
legal settlement of approximately $1.0 million in fiscal
2007.
|
|
(c)
|
Included
in other (income)/expense in fiscal 2006 is a write-off of deferred loan
costs of approximately $2.6 million and early retirement fees of
approximately $1.9 million for the early retirement of senior subordinated
notes and termination of the previous senior credit
agreement.
|
|
(d)
|
Included
in other (income)/expense is gain on early retirement of debt of
approximately $1.3 million in fiscal 2004 and $4.7 million in fiscal
2003. Also included in other (income)/expense is loss on
redemption of preferred stock of approximately $1.7 million in fiscal
2004.
|
Page
21
|
(e)
|
Adjusted
EBITDA is presented here not as an alternative to net income, but rather
as a measure of the Company’s operating performance and is not intended to
be a presentation in accordance with generally accepted accounting
principles. Since EBITDA is not calculated identically by all
companies, the presentation in this report may not be comparable to those
disclosed by other companies.
|
|
|
Adjusted
EBITDA is calculated below and represents, for any relevant period, net
income/(loss) plus depreciation and amortization, 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 generally accepted accounting
principles. Also, since adjusted EBITDA is not calculated
identically by all companies, the presentation in this report may not be
comparable to those disclosed by other
companies.
|
|
|
In
addition to the foregoing, management also uses or will use adjusted
EBITDA to measure compliance with certain financial covenants under the
Company’s credit agreement. The amounts shown below for
adjusted EBITDA differ from the amounts calculated under similarly titled
definitions in the Company’s credit agreement, as those definitions permit
further adjustment to reflect certain other non-cash
charges.
|
Reconciliation of Net Income to Adjusted EBITDA
|
(dollars
in thousands)
|
December
29,
2007
|
December 30,
2006
|
December 31,
2005
|
January 1,
2005
|
January 3,
2004
|
|||||||||||||||
|
Net
income
|
$ | 45,533 | $ | 5,107 | $ | 7,741 | $ | 13,892 | $ | 18,191 | ||||||||||
|
Depreciation
and amortization
|
23,214 | 20,686 | 15,787 | 15,224 | 15,124 | |||||||||||||||
|
Interest
expense
|
5,045 | 7,184 | 6,157 | 6,759 | 2,363 | |||||||||||||||
|
(Income)/loss
from discontinued
operations,
net of tax
|
- | - | (46 | ) | 376 | (112 | ) | |||||||||||||
|
Income
tax expense
|
29,499 | 2,266 | 3,184 | 9,245 | 10,632 | |||||||||||||||
|
Other
(income)/expense
|
570 | 4,682 | (903 | ) | 299 | (3,914 | ) | |||||||||||||
|
Adjusted
EBITDA
|
$ | 103,861 | $ | 39,925 | $ | 31,920 | $ | 45,795 | $ | 42,284 | ||||||||||
|
(f)
|
Excludes
the capital assets acquired as part of substantially all of the assets of
NBP of approximately $51.9 million in fiscal
2006.
|
|
(g)
|
Fiscal
2006 includes 33 weeks of contribution from the acquired NBP
assets.
|
Page
22
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and
uncertainties. The Company’s actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth in Item 1A of this report under the
heading “Risk Factors.”
The following discussion should be read
in conjunction with the historical consolidated financial statements and notes
thereto included in Item 8 of this report. The Company is organized
along two operating business segments, Rendering and Restaurant
Services. See Note 15 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’s
operations are organized into two segments: Rendering and Restaurant
Services. With the May 15, 2006 acquisition of substantially
all of the assets (the “Transaction”) of National By-Products, LLC (“NBP”), the
Company now processes such raw materials at 39 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. The Company’s year end results for fiscal
2007 include 52 weeks 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 15 of Notes to Consolidated Financial Statements.
During fiscal 2007 the Company
benefited from significantly higher finished product prices. Higher
finished product prices are indicative of tightening grain and oilseed supplies
driven by a combination of new demand for bio-fuels, growing consumption from
China and India, and back-to-back droughts in various grain and oilseed
producing regions of the world. Raw material volumes improved
modestly during fiscal 2007, but export markets in most foreign countries for
U.S. produced finished beef products and cattle by-products remained
closed. Fiscal 2007 also reflects the integration and resulting
synergies of the Transaction completed on May 15, 2006. The Company
continues to face challenges relating to volatile commodity markets, volatile
natural gas and diesel prices and unsettled trade issues in relation to beef
production and exports of its finished products.
Operating income increased by $61.4
million in fiscal 2007 compared to fiscal 2006. The continuing challenges
faced by the Company indicate there can be no assurance that operating results
achieved by the Company in fiscal 2007 are indicative of future operating
performance of the Company.
Summary of Critical Issues
Faced by the Company during Fiscal 2007
|
·
|
Higher
finished product prices are indicative of tightening grain and oilseed
supplies driven by a combination of new demand for bio-fuels, growing
consumption from China and India, and back-to-back droughts in various
grain and oilseed producing regions of the world. Higher
finished product prices were favorable to the Company’s sales revenue, but
this favorable result was partially offset by the negative impact on raw
material cost due to the Company’s formula pricing arrangements with raw
material suppliers, which index raw material cost to the prices of
finished product derived from the raw material. The financial
impact of finished goods prices on sales revenue and raw material cost is
summarized below in “Results of Operations.” Comparative sales
price information from the Jacobsen index, an established trading exchange
publisher used by management, is listed below in “Summary of Key
Indicators.”
|
Page
23
|
·
|
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 will provide 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 Internal Revenue
Service (“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 December 29, 2007, the Company has applied for
and received approximately $1.9 million in Alternative Fuel Mixture
Credits from the IRS relating to these credits. During the
fourth quarter of 2007, the Company received further clarification on a
portion of these tax credits received and as a result has recorded
approximately $1.2 million to income as a reduction of energy
costs. The remaining $0.7 million of received credits are
included in current liabilities on the balance sheet as deferred income
while the Company pursues further clarification. The Company
expects to continue to burn alternative fuels at its plants in future
periods as long as the price of natural gas remains
high.
|
|
·
|
Raw
material volumes during fiscal 2007 improved modestly as some of our
export oriented suppliers processed additional volumes and overall
consumption of meat products improved. Contributing to this increase was a
full fiscal year of contribution from the acquired NBP locations as
compared to 33 weeks of contribution from these locations in fiscal
2006.
|
Summary of Critical Issues
and Known Trends Faced by the Company in Fiscal 2007 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 proposed an amendment to the BSE Feed Rule. 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 proposed amendment to the BSE Feed 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
|
·
|
Energy
prices for natural gas and diesel fuel are expected to remain volatile
in fiscal 2008. The Company consumes significant volumes of
natural gas to operate boilers in its plants, which generate steam to heat
raw material. High 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. High 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 remained
relatively volatile throughout fiscal 2007 and represent an ongoing
challenge to the Company’s operating results for future
periods.
|
Page
24
|
·
|
Expenses
related to compliance with requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 (the “Sarbanes Act”) are expected to continue
throughout 2008 and thereafter. The Company expects recurring
compliance costs related to the required updating of documentation and the
testing and auditing of the Company’s system of internal control over
financial reporting, as required by the Sarbanes
Act.
|
|
·
|
Avian
influenza (“H5N1”), or Bird Flu, a highly contagious disease that affects
chickens and other poultry species, is well established in Asia and
periodically spreads into 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 was not
detected in North or South America during 2007, but low pathogenic strains
that are not a threat to human health were reported in the U.S. and Canada
during that period. The USDA has developed safeguards to
protect the U.S. poultry industry from the H5N1 strain of Bird
Flu. 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.
|
These challenges indicate there can be
no assurance that fiscal 2007 operating results are indicative of future
operating performance of the Company.
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:
|
·
|
Higher
finished product prices,
|
|
·
|
The
inclusion of the operations of NBP, and
|
|
·
|
Increased
raw material volume.
|
These increases to operating income
were partially offset by:
|
·
|
Higher
raw material costs,
|
|
·
|
Higher
payroll and incentive-related benefits,
|
|
·
|
Higher
plant repair and maintenance expenses, and
|
|
·
|
Higher
energy costs, primarily related to natural gas and diesel
fuel.
|
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:
|
·
|
Finished
product commodity prices quoted on the Jacobsen index,
|
|
·
|
Raw
material volume,
|
|
·
|
Production
volume and related yield of finished product,
|
|
·
|
Energy
prices for natural gas quoted on the NYMEX index and diesel
fuel,
|
|
·
|
Collection
fees and collection operating expense, and
|
|
·
|
Factory
operating expenses.
|
These
indicators and their importance are discussed below in greater
detail.
Page
25
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:
|
Avg.
Price
Fiscal
2007
|
Avg.
Price
Fiscal
2006
|
Increase
|
%
Change
|
||||
|
MBM
(Illinois)
|
$233.51/ton
|
$153.48
/ton
|
$80.03/ton
|
52.1%
|
|||
|
MBM
(California)
|
$235.00/ton
|
$126.27
/ton
|
$108.73/ton
|
86.1%
|
|
||
|
BFT
(Chicago)
|
$
27.89/cwt
|
$ 16.87
/cwt
|
$11.02/cwt
|
65.3%
|
|||
|
YG
(Illinois)
|
$ 21.62/cwt
|
$ 12.64
/cwt
|
$8.98/cwt
|
71.0%
|
|||
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 commodity prices are quoted
each day on the NYMEX exchange for future months of delivery of natural
gas. The prices are important to the Company because natural gas is a
major component of factory operating costs and natural gas 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
26
|
Renderingg
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
|
Higher
finished goods prices
|
$ | 98.0 | $ | 27.1 | $ | – | $ | 125.1 | ||||||||
|
Net
sales due to contribution from NBP assets
|
84.8 | 6.7 | – | 91.5 | ||||||||||||
|
Purchases
of finished product for resale
|
8.3 | 6.0 | – | 14.3 | ||||||||||||
|
Higher
raw material volume
|
6.8 | (1.7 | ) | – | 5.1 | |||||||||||
|
Other
sales increases
|
1.8 | 0.5 | – | 2.3 | ||||||||||||
|
Product
transfers
|
(12.9 | ) | 12.9 | – | – | |||||||||||
| $ | 186.8 | $ | 51.5 | $ | – | $ | 238.3 | |||||||||
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):
|
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
|
Higher
raw material costs
|
$ | 61.2 | $ | 9.4 | $ | – | $ | 70.6 | ||||||||
|
Cost
of sales and operating expenses related
to
NBP assets
|
65.6 | 3.6 | – | 69.2 | ||||||||||||
|
Purchases
of finished product for resale
|
8.3 | 6.0 | – | 14.3 | ||||||||||||
|
Plant
repairs and maintenance
|
3.5 | 0.5 | – | 4.0 | ||||||||||||
|
Higher
energy costs, primarily natural gas and
diesel
fuel
|
2.6 | 0.8 | – | 3.4 | ||||||||||||
|
Multi-employer
pension plan mass withdrawal
termination
liability
|
1.1 | – | – | 1.1 | ||||||||||||
|
Higher
raw material volume
|
1.4 | (0.4 | ) | – | 1.0 | |||||||||||
|
Other
expenses
|
(0.2 | ) | 0.1 | (0.2 | ) | (0.3 | ) | |||||||||
|
Sale
of judgment
|
(1.2 | ) | – | – | (1.2 | ) | ||||||||||
|
Product
transfers
|
(12.9 | ) | 12.9 | – | – | |||||||||||
| $ | 129.4 | $ | 32.9 | $ | (0.2 | ) | $ | 162.1 | ||||||||
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):
|
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
|
Payroll
and related benefits expense
|
$ | (0.7 | ) | $ | (0.7 | ) | $ | 1.5 | $ | 0.1 | ||||||
|
Incentive
compensation
|
– | 0.2 | 6.7 | 6.9 | ||||||||||||
|
Selling,
general and administrative expenses
related
to NBP assets
|
1.8 | 0.2 | 0.9 | 2.9 | ||||||||||||
|
Other
expenses
|
0.6 | 0.2 | 0.5 | 1.3 | ||||||||||||
|
Legal
settlements
|
– | – | 1.2 | 1.2 | ||||||||||||
| $ | 1.7 | $ | (0.1 | ) | $ | 10.8 | $ | 12.4 | ||||||||
Page
27
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):
|
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
|
Write-off
of deferred loan costs
|
$ | – | $ | – | $ | (2.6 | ) | $ | (2.6 | ) | ||||||
|
Subordinated
debt prepayment fees
|
– | – | (1.9 | ) | (1.9 | ) | ||||||||||
|
Decrease
in interest income
|
– | – | 0.3 | 0.3 | ||||||||||||
|
Increase
in other expense
|
– | – | 0.1 | 0.1 | ||||||||||||
| $ | – | $ | – | $ | (4.1 | ) | $ | (4.1 | ) | |||||||
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.
Results
of Operations
Fifty-two
Week Fiscal Year Ended December 30, 2006 (“Fiscal 2006”) Compared to Fifty-two
Week Fiscal Year Ended December 31, 2005 (“Fiscal 2005”)
Summary of Key Factors
Impacting Fiscal 2006 Results:
Principal factors that contributed to a
$3.1 million (19.3%) increase in operating income, which are discussed in
greater detail in the following section, were:
|
·
|
The
inclusion of the operations of NBP,
|
|
·
|
Higher
raw material volume, and
|
|
·
|
Improved
recovery of collection expenses.
|
These increases to operating income
were partially offset by:
|
·
|
Lower
finished product sales prices,
|
|
·
|
Higher
plant repair and maintenance expenses, and
|
|
·
|
Higher
legal fees.
|
Page
28
Summary of Key Indicators of
Fiscal 2006 Performance:
Principal indicators that management
routinely monitors and compares to previous periods as an indicator of problems
or improvements in operating results include:
|
·
|
Finished
product commodity prices quoted on the Jacobsen index,
|
|
·
|
Raw
material volume,
|
|
·
|
Production
volume and related yield of finished product,
|
|
·
|
Energy
prices for natural gas quoted on the NYMEX index and diesel
fuel,
|
|
·
|
Collection
fees and collection operating expense, and
|
|
·
|
Factory
operating expenses.
|
These
indicators and their importance are discussed below in greater
detail.
Prices
for finished product commodities that the Company produces are quoted each
business day on the Jacobsen index, an established trading exchange price
publisher. These finished products are MBM, BFT and
YG. The prices quoted are for delivery of the finished product at a
specified location. These prices are relevant because they provide an
indication of a component of revenue and achievement of business plan benchmarks
on a daily basis. The Company’s actual sales prices for its finished products
may vary 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 2006, compared to average Jacobsen prices for Fiscal
2005 follow:
|
Avg.
Price
Fiscal
2006
|
Avg.
Price
Fiscal
2005
|
Increase/
(Decrease)
|
%
Change
|
||||
|
MBM
(Illinois)
|
$153.48/ton
|
$167.53
/ton
|
$(14.05/ton)
|
(8.4%)
|
|||
|
MBM
(California)
|
$126.27/ton
|
$142.26
/ton
|
$(15.99/ton)
|
(11.2%)
|
|||
|
BFT
(Chicago)
|
$
16.87/cwt
|
$ 17.46
/cwt
|
$(0.59/cwt)
|
(3.4%)
|
|||
|
YG
(Illinois)
|
$ 12.64/cwt
|
$ 14.44
/cwt
|
$(1.80/cwt)
|
(12.5%)
|
|||
The
decrease in the average prices of the finished products the Company sells had an
unfavorable impact on revenue which is partially offset by a positive impact to
the Company’s raw material cost, due to formula pricing arrangements which
compute raw material cost based upon the price of finished product.
Raw material volume represents the
quantity (pounds) of raw material collected from suppliers, including beef,
pork, poultry and used cooking oils. Raw material volumes provide an
indication of future production of finished products available for sale and are
a component of potential future revenue.
Finished product production volumes are
the end result of the Company’s production processes, and directly impact goods
available for sale, and thus become an important component of sales
revenue. 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. Both of these
factors negatively impacted the Company’s yield during Fiscal 2006.
Natural gas commodity prices are quoted
each day on the NYMEX exchange for future months of delivery of natural
gas. The prices are important to the Company because natural gas is a
major component of factory operating costs and natural gas 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.
Page
29
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 2006, net sales increased
by $98.1 million (31.8%) to $407.0 million as compared to $308.9 million during
Fiscal 2005. The increase in net sales was primarily due to the
following increases/(decreases) (in millions of dollars):
|
Renderingg
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
|
Net
sales due to acquisition of NBP
|
$ | 110.7 | $ | 7.3 | $ | – | $ | 118.0 | ||||||||
|
Higher
raw material volume
|
8.1 | (1.7 | ) | – | 6.4 | |||||||||||
|
Improved
recovery of collection expenses
|
2.6 | 1.9 | – | 4.5 | ||||||||||||
|
Higher
yields on production
|
0.8 | (0.7 | ) | – | 0.1 | |||||||||||
|
Lower
finished goods prices
|
(18.1 | ) | (3.2 | ) | – | (21.3 | ) | |||||||||
|
Purchases
of finished product for resale
|
(6.0 | ) | (2.6 | ) | – | (8.6 | ) | |||||||||
|
Other
sales decreases
|
(1.4 | ) | 0.4 | – | (1.0 | ) | ||||||||||
|
Product
transfers
|
(10.0 | ) | 10.0 | – | – | |||||||||||
| $ | 86.7 | $ | 11.4 | $ | – | $ | 98.1 | |||||||||
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,
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 some of its plants to help manage
the Company’s price exposure to volatile energy markets.
During Fiscal 2006, cost of sales and
operating expenses increased $79.7 million (33.0%) to $321.4 million as compared
to $241.7 million during Fiscal 2005. The increase in cost of sales
and operating expenses was primarily due to the following (in millions of
dollars):
|
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
|
Cost
of sales and operating expenses of NBP
|
$ | 94.4 | $ | 3.3 | $ | (0.1 | ) | $ | 97.6 | |||||||
|
Payroll
and related benefits
|
0.9 | 1.1 | 0.1 | 2.1 | ||||||||||||
|
Plant
repairs and maintenance
|
2.0 | – | – | 2.0 | ||||||||||||
|
Higher
raw material volume
|
1.8 | (0.4 | ) | – | 1.4 | |||||||||||
|
Sewer
and trap disposal
|
0.4 | 0.7 | – | 1.1 | ||||||||||||
|
Lower
raw material prices
|
(13.0 | ) | (2.7 | ) | – | (15.7 | ) | |||||||||
|
Purchases
of finished product for resale
|
(6.0 | ) | (2.6 | ) | – | (8.6 | ) | |||||||||
|
Lower
energy costs, primarily natural gas and
diesel
fuel
|
(0.2 | ) | 0.3 | (0.2 | ) | (0.1 | ) | |||||||||
|
Other
|
(1.0 | ) | 0.9 | – | (0.1 | ) | ||||||||||
|
Product
transfers
|
(10.0 | ) | 10.0 | – | – | |||||||||||
| $ | 69.3 | $ | 10.6 | $ | (0.2 | ) | $ | 79.7 | ||||||||
Page
30
Selling, General and Administrative
Expenses. Selling, general and
administrative expenses were $45.6 million during Fiscal 2006, a $10.4 million
increase (29.5%) from $35.2 million during Fiscal 2005. The increase
is primarily due to increased costs associated with the Transaction, higher
legal expense, particularly related to matters in which the Company sought
affirmative relief, as well as higher audit fees and payroll related expenses,
as follows (in millions of dollars):
|
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
|
Selling,
general and administrative expenses of
NBP
|
$ | 3.0 | $ | 0.3 | $ | 2.3 | $ | 5.6 | ||||||||
|
Payroll
and related benefits expense
|
0.1 | 0.5 | 1.7 | 2.3 | ||||||||||||
|
Higher
legal expense
|
– | – | 2.0 | 2.0 | ||||||||||||
|
Higher
audit fees
|
– | – | 0.7 | 0.7 | ||||||||||||
|
Other
expenses
|
(0.3 | ) | (0.1 | ) | 0.2 | (0.2 | ) | |||||||||
| $ | 2.8 | $ | 0.7 | $ | 6.9 | $ | 10.4 | |||||||||
Depreciation and
Amortization. Depreciation and
amortization charges increased $4.9 million (31.0%) to $20.7 million during
Fiscal 2006 as compared to $15.8 million during Fiscal 2005. The
increase is primarily due to the acquisition of capital assets from NBP in the
Transaction and increased capital expenditures made in Fiscal 2005.
Interest
Expense. Interest expense was $7.2 million during Fiscal
2006 compared to $6.2 million during Fiscal 2005, an increase of $1.0
million (16.1%), primarily due to the overall increase in debt outstanding as a
result of the Transaction.
Other
Income/Expense. Other expense was $4.7 million in Fiscal 2006, a
$5.6 million increase from other income of $0.9 million in Fiscal
2005. The increase in other expense in Fiscal 2006 is primarily due
to the following (in millions of dollars):
|
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
|
Write-off
of deferred loan costs
|
$ | – | $ | – | $ | 2.6 | $ | 2.6 | ||||||||
|
Subordinated
debt prepayment fees
|
– | – | 1.9 | 1.9 | ||||||||||||
|
Decrease
in gain on disposal of assets
|
– | – | 0.5 | 0.5 | ||||||||||||
|
Decrease
in interest income
|
– | – | 0.4 | 0.4 | ||||||||||||
|
Increase
in other expense
|
– | – | 0.2 | 0.2 | ||||||||||||
| $ | – | $ | – | $ | 5.6 | $ | 5.6 | |||||||||
The
decrease in gain on sale of assets was primarily the result of the gain on the
sale of the Matamoras, Pennsylvania property that occurred during Fiscal 2006,
amounting to less than the gain recognized on the sale of two properties sold
during Fiscal 2005. In addition, interest income decreased by $0.4
million in Fiscal 2006 as a result of less cash investment on the balance
sheet.
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 $2.3 million for Fiscal 2006, compared to
income tax expense of $3.2 million recorded in Fiscal 2005, a decrease of $0.9
million (28.1%), primarily due to the decreased pre-tax earnings of the Company
in fiscal 2006. 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.
Page
31
Discontinued Operations. The Company recorded a profit
from discontinued operations, net of applicable taxes, related to the closure
and sale of certain assets of the Company’s London, Ontario, Canadian subsidiary
in fiscal 2005, which was not significant.
FINANCING,
LIQUIDITY, AND CAPITAL RESOURCES
On April 7, 2006, the Company entered
into a new $175 million credit agreement (the “Credit Agreement”) with new
lenders that replaced the senior credit agreement executed in April 2004. The
principal components of the Credit Agreement consist of the
following.
|
·
|
The
Credit Agreement provides for a total of $175.0 million in financing
facilities, consisting of a $50.0 million term loan facility and a $125.0
million revolving credit facility, which includes a $35.0 million letter
of credit sub-facility.
|
|
·
|
The
$125.0 million revolving credit facility has a term of five years and
matures on April 7, 2011.
|
|
·
|
As
of December 29, 2007, the Company has borrowed all $50.0 million under the
term loan facility, which provides for scheduled quarterly amortization
payments of $1.25 million over a six-year term ending April 7,
2012. The Company has reduced the term loan facility by quarterly
payments totaling $6.25 million, for an aggregate of $43.75 million
principal outstanding under the term loan facility at December 29,
2007.
|
|
·
|
Alternative
base rate loans under the Credit Agreement bear interest at a rate per
annum based on the greater of (a) the prime rate and (b) the federal funds
effective rate (as defined in the Credit Agreement) plus ½ of 1%, plus, in
each case, a margin determined by reference to a pricing grid and adjusted
according to the Company’s adjusted leverage ratio. Eurodollar
loans bear interest at a rate per annum based on the then-applicable LIBOR
multiplied by the statutory reserve rate plus a margin determined by
reference to a pricing grid and adjusted according to the Company’s
adjusted leverage ratio.
|
|
·
|
The
Credit Agreement provided sufficient liquidity to complete the Transaction
and to retire the Company’s senior subordinated notes in the aggregate
amount of $37.6 million in principal, accrued interest and fees on June 1,
2006. Additionally, the Credit Agreement has an extended term,
lower interest rates, fewer restrictions on investments, and improved
flexibility for paying dividends or repurchasing Company stock (all of
which are subject to the terms of the Credit Agreement) than the Company’s
prior credit facility.
|
|
·
|
The
Credit Agreement contains restrictive covenants that are customary for
similar credit arrangements and requires the maintenance of certain
minimum financial ratios. The Credit Agreement also requires
the Company to make certain mandatory prepayments of outstanding
indebtedness using the net cash proceeds received from certain
dispositions of property, casualty or condemnation, any sale or issuance
of equity interests in a public offering or in a private placement,
unpermitted additional indebtedness incurred by the Company, and excess
cash flow under certain
circumstances.
|
The
Company’s Credit Agreement consists of the following elements at December 29,
2007 (in thousands):
|
Credit
Agreement:
|
|||
|
Term
Loan
|
$ | 43,750 | |
|
Revolving
Credit Facility:
|
|||
|
Maximum availability
|
$ | 125,000 | |
|
Borrowings outstanding
|
– | ||
|
Letters of credit issued
|
18,881 | ||
|
Availability
|
$ | 106,119 | |
The
obligations under the Credit Agreement are guaranteed by Darling National LLC, a
Delaware limited liability company and a wholly-owned subsidiary of Darling
(“Darling National”), and are secured by substantially all of the property of
the Company, including a pledge of all equity interests in Darling
National. As of December 29, 2007, the Company was in compliance
with all of the covenants contained in the Credit Agreement.
Page
32
The classification of long-term debt in
the Company’s December 29, 2007 consolidated balance sheet is based on the
contractual repayment terms of the debt issued under the Credit
Agreement.
On
December 29, 2007, the Company had working capital of $34.4 million and its
working capital ratio was 1.43 to 1 compared to working capital of $17.9 million
and a working capital ratio of 1.31 to 1 on December 30, 2006. The
increase in working capital is primarily due to the increase in commodity
prices. At December 29, 2007, the Company had unrestricted cash of
$16.3 million and funds available under the revolving credit facility of $106.1
million, compared to unrestricted cash of $5.3 million and funds available under
the revolving credit facility of $71.1 million at December 30,
2006.
Net cash
provided by operating activities was $65.7 million and $28.8 million for the
fiscal years ended December 29, 2007 and December 30, 2006, respectively, an
increase of $36.9 million, primarily due to an increase in net income of
approximately $40.4 million and changes in operating assets and liabilities,
which includes a reduction in accounts receivable of approximately $14.2
million, a reduction in inventory of approximately $7.1 million and an increase
in accounts payable and accrued expenses of approximately $20.3
million. Cash used by investing activities was $15.6 million during
Fiscal 2007, compared to $91.2 million in Fiscal 2006, a decrease in cash used
of $75.6 million, primarily due to $80.2 million in cash used for the
Transaction in Fiscal 2006. Net cash used by financing activities was
$39.1 million in the year ended December 29, 2007 compared to cash provided by
financing activities of $31.7 million in the year ended December 30, 2006, a
decrease of cash provided of $70.8 million, principally due to borrowing related
to the acquisition of NBP in the second quarter of Fiscal 2006 and the repayment
of a majority of that debt in Fiscal 2007.
Capital
expenditures of $15.6 million were made during Fiscal 2007 as compared to $11.8
million in Fiscal 2006, an increase of $3.8 million (32.2%). Capital
expenditures related to compliance with environmental regulations were $1.8
million in Fiscal 2007, $0.8 million in Fiscal 2006 and $1.9 million in Fiscal
2005.
Based
upon the underlying terms of the Credit Agreement, approximately $6.25 million
in current debt, which is included in current liabilities on the Company’s
balance sheet at December 29, 2007, will be due during the next twelve months,
which includes a scheduled payment of $1.25 million due December 31, 2007, and
scheduled quarterly installment payments of $1.25 million.
Based
upon the annual actuarial estimate, current accruals, and claims paid during
Fiscal 2007, the Company has accrued approximately $5.2 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 December 29, 2007. 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 does not expect to make any
payments in order to meet minimum pension funding requirements during fiscal
2008. 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 2007 of
approximately $6.2 million.
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 Company participates in several
multi-employer pension plans that provide defined benefits to certain employees
covered by labor contracts. These plans are not administered by the
Company and contributions are determined in accordance with provisions of
negotiated labor contracts. Current information with respect to the
Company’s proportionate share of the over- and under-funded status of all
actuarially computed value of vested benefits over these pension plans’ net
assets is not available as the Company relies on third parties outside its
control to provide such information. The Company knows that three of
these multi-employer plans were under-funded as of the latest available
information, some of which is over a year old. The Company has no
ability to compel the plan trustees to provide more current information. 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. Therefore, at December 29, 2007, the Company has a recorded
liability of approximately $1.1 million related to the termination, which
represents the net present value of the liability as determined by the
terminated plan. While we have 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 will provide 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 December 29, 2007, the Company has applied for and
received approximately $1.9 million in Alternative Fuel Mixture Credits from the
IRS relating to these credits. During the fourth quarter of 2007, the
Company received further clarification on a portion of these tax credits
received and as a result has recorded approximately $1.2 million to income as a
reduction of energy costs. The remaining $0.7 million of received
credits are included in current liabilities on the balance sheet as deferred
income while the Company pursues further clarification. The Company
expects to continue to burn alternative fuels at its plants in future periods as
long as the price of natural gas remains high. Depending on the
natural gas prices and market price of fats, the amount of Alternative Fuel
Mixture Credits the Company applies for and receives could be
material.
In July 2007, a judgment was entered in
a litigation matter involving a contract dispute in which the Company was a
party. The judgment required the Company to convey an unused parcel
of property recorded on the books for approximately $500,000 to the counterparty
for that amount. In December 2007, a judgment was entered in the
matter awarding the counterparty approximately $2.6 million in attorneys’ fees
and costs. The Company filed appeals of both
judgments. The Company settled this matter during the first quarter
of fiscal 2008. Pursuant to the terms of the settlement, the Company
transferred the property to the counterparty for a purchase price of $500,000,
paid the counterparty approximately $2.2 million towards attorneys’ fees and
costs and agreed to dismiss its pending appeals with prejudice. In
addition, the parties exchanged mutual releases. The Company has
recorded a charge of $2.2 million for the attorneys’ fees and costs in the
fourth quarter of 2007, which is included in selling, general and administrative
expenses.
The
Company’s management believes that cash flows from operating activities
consistent with the level generated in Fiscal 2007, 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 through the next twelve months. 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 processing industry or
otherwise; 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; loss of or
failure to obtain necessary permits and registrations; and/or
unfavorable export markets. These factors, coupled with high prices
for natural gas and diesel fuel, among others, could either positively or
negatively impact the Company’s results of operations in fiscal 2008 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 growing interest in
bio-fuels; 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.
Page
34
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
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 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.
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 December
29, 2007 (in thousands):
|
Total
|
Less
than
1
Year
|
1 –
3
Years
|
3 –
5
Years
|
More
than
5
Years
|
||||||||||||||||
|
Contractual
obligations(a):
|
||||||||||||||||||||
|
Long-term
debt obligations (b)
|
$ | 43,750 | $ | 6,250 | $ | 10,000 | $ | 27,500 | $ | – | ||||||||||
|
Operating
lease obligations (c)
|
41,821 | 9,943 | 14,616 | 7,502 | 9,760 | |||||||||||||||
|
Estimated
interest payable (d)
|
11,014 | 2,781 | 4,576 | 3,179 | 478 | |||||||||||||||
|
Purchase
commitments (e)
|
10,437 | 10,437 | – | – | – | |||||||||||||||
|
Derivative
obligations (f)
|
1,867 | 547 | 1,057 | 263 | – | |||||||||||||||
|
Other
long-term liabilities (g)
|
1,332 | 191 | 137 | 74 | 930 | |||||||||||||||
|
Pension
funding obligation (h)
|
– | – | – | – | – | |||||||||||||||
|
Total
|
$ | 110,221 | $ | 30,149 | $ | 30,386 | $ | 38,518 | $ | 11,168 | ||||||||||
|
(a)
|
The
above table does not reflect uncertain tax positions of approximately $0.5
million because the timing of the cash settlement can not be reasonably
estimated.
|
|
(b)
|
See
Note 8 to the consolidated financial
statements.
|
|
(c)
|
See
Note 7 to the consolidated financial
statements.
|
|
(d)
|
Interest
payable was calculated using the current rate for term debt and current
rates on other liabilities.
|
|
(e)
|
Purchase
commitments were determined based on specified contracts for natural gas
and finish product purchases.
|
|
(f)
|
Represents
liabilities for interest rate swap contracts that were valued at December
29, 2007. The ultimate settlement amounts of these swap
contracts are unknown because they are subject to continuing market risk
until the derivatives are settled.
|
|
(g)
|
Includes
other contractual liabilities and a pension plan termination withdrawal
liability from the multi-employer plan that terminated during Fiscal
2007.
|
|
(h)
|
Pension
funding requirements are determined annually based upon a third party
actuarial estimate. The Company does not expect to make
contributions to its pension plan in fiscal 2008. The Company
is not able to estimate pension funding requirements beyond the next
twelve months. The accrued pension benefit liability was approximately
$9.2 million at the end of Fiscal 2007. The Company knows that
two of the multi-employer pension plans that have not terminated to which
it contributes and which are not administered by the Company were
under-funded as of the latest available information, and while the Company
has no ability to calculate a possible current liability for the
under-funded multi-employer plans to which the Company contributes, the
amounts could be material.
|
The Company’s off-balance sheet
contractual obligations and commercial commitments as of December 29, 2007
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.
Page
35
The following table summarizes the
Company’s other commercial commitments, including both on- and off-balance sheet
arrangements at December 29, 2007 (in thousands):
|
Other
commercial commitments:
|
|||
|
Standby
letters of credit
|
$ | 18,881 | |
|
Total
other commercial commitments:
|
$ | 18,881 | |
OFF
BALANCE SHEET OBLIGATIONS
Based
upon underlying purchase agreements, the Company has commitments to purchase
$10.4 million of finished products and natural gas during fiscal 2008, which are
not included in liabilities on the Company’s balance sheet at December 29,
2007. 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 2008, in accordance with accounting principles
generally accepted in the U.S.
Based
upon underlying lease agreements, the Company expects to pay approximately $9.9
million in operating lease obligations during fiscal 2008 which are not included
in liabilities on the Company’s balance sheet at December 29,
2007. This amount includes amounts related to the obligations assumed
in connections with the Transaction. These lease obligations are
included in cost of sales or selling, general and administrative expense as the
underlying lease obligation comes due, in accordance with accounting principles
generally accepted in the U.S.
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 included in this report.
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
$22.5 million and $14.6 million at December 29, 2007 and December 30, 2006,
respectively.
Page
36
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 $18.3 million, $16.1
million and $11.9 million in fiscal years ending December 29, 2007, December 30,
2006 and December 31, 2005, respectively. The increase in
depreciation expense as compared to historical amounts is primarily due to the
Transaction.
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 $4.9
million, $4.6 million and $3.9 million in fiscal years ending December 29, 2007,
December 30, 2006 and December 31, 2005, respectively. The increase
in intangible amortization expense as compared to historical amounts is
primarily due to the Transaction.
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.
The net
book value of property, plant and equipment was approximately $128.7 million and
$132.1 million at December 29, 2007 and December 30, 2006,
respectively. The net book value of intangible assets was
approximately $29.0 million and $33.7 million at December 29, 2007 and December
30, 2006, 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 reporting unit assets exceeds the estimated fair
value of reporting unit assets. For purposes of evaluating impairment
of goodwill, the Company estimates fair value of reporting unit assets at each
reporting unit, based upon future discounted net cash flows from use of those
assets. 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 assets at these reporting units and of future
discounted net cash flows from operation of these assets could change if actual
volumes, prices, costs or expenses vary from these estimates. A
future reduction of earnings in the reporting units with recorded goodwill could
result in an impairment charge because the estimate of fair value would be
negatively impacted by a reduction of earnings at those reporting
units. Goodwill was approximately $71.9 million at December 29, 2007
and December 30, 2006.
Page
37
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 insurance
recoveries was approximately $17.1 million and $17.9 million at December 29,
2007 and December 30, 2006, respectively.
Pension
Liability
The
Company provides retirement benefits to employees under separate final-pay
noncontributory pension plans for salaried and hourly employees (excluding those
employees covered by a union-sponsored plan), who meet service and age
requirements. Benefits are based principally on length of service and
earnings patterns during the five years preceding retirement. Pension
expense and pension liability recorded by the Company is based upon an annual
actuarial estimate provided by a third party administrator. Factors
included in estimates of current year pension expense and pension liability at
the balance sheet date include estimated future service period of employees,
estimated future pay of employees, estimated future retirement ages of
employees, and the projected time period of pension benefit
payments. Two of the most significant assumptions used to calculate
future pension obligations are the discount rate applied to pension liability
and the expected rate of return on pension plan assets. These
assumptions and estimates are subject to the risk of change over time, and each
factor has inherent uncertainties which neither the actuary nor the Company is
able to control or to predict with certainty. See Note 12 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 discount rate is based on the yield of long-term
corporate fixed income securities at the measurement date of October 1 in the
year of calculation. The Company considered the Moody’s Index (6.03%
as of October 1, 2007) as well as the Lehman AA Index (6.06% as of October 1,
2007), which combined to average 6.058% as of October 1, 2007. With
estimated liability payment streams under the plans being 30 to 40 years out and
no bonds available with maturity dates that far into the future, but with the
yield curve historically flat, the Company believes it is appropriate to
reference from the Citigroup and Lehman bond rates. The weighted
average discount rate was 6.00% and 5.75% at October 1, 2007 and 2006,
respectively. The net periodic benefit cost for fiscal 2008 would
increase by approximately $0.7 million if the discount rate was 0.5% lower at
5.50%. The net periodic benefit cost for fiscal 2008 would decrease
by approximately $0.5 million if the discount rate was 0.5% higher at
6.50%.
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 8.25% and 8.38% for
Fiscal 2007 and Fiscal 2006, respectively.
The
Company has recorded a pension liability of approximately $9.2 million and $18.7
million at December 29, 2007 and December 30, 2006, respectively. The
Company’s net pension cost was approximately $3.0 million, $3.7 million and $3.2
million for the fiscal years ending December 29, 2007, December 30, 2006 and
December 31, 2005, respectively.
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
significant 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 $4.8 million and
$9.4 million at December 29, 2007 and December 30, 2006,
respectively. The decrease in the Company’s valuation allowance is
primarily due to the expiration of certain net operating losses.
Page
38
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 December 29, 2007 and December 30, 2006 of approximately $0.4 million and
$0.5 million, respectively. Prior to adopting SFAS 123(R) the Company accounted
for its stock options under APB Opinion No. 25 and related interpretations,
which utilized the intrinsic value method. Under the intrinsic-value
method compensation expense is recorded only to the extent that the grant price
is less than market on the measurement date. Accordingly, the Company
would have recorded additional compensation expense of $0.6 million for the year
ended December 31, 2005 had the Company accounted for stock options using the
fair value-based method.
NEW
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (“SAB 108”), to address diversity in practice in quantifying
financial statement misstatements. SAB 108 requires that registrants
quantify uncorrected misstatements using both the “rollover” and “iron curtain”
methods, with adjustment required if either method results in a misstatement
that is material. The Company has identified a $2.8 million
overstatement of income tax liabilities. The Company has not been
able to determine how these excess liabilities arose; however, the Company has
determined that these liabilities were recorded prior to 2002. The
Company had previously concluded that the $2.8 million misstatement was
immaterial using the rollover method for evaluating misstatements. As
a result of adopting SAB 108, the Company has corrected the misstatement by
recording a cumulative effect adjustment to retained earnings at the beginning
of Fiscal 2006.
In June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”), which
prescribes accounting for and disclosure of uncertain tax positions
(“UTP”). FIN 48 requires application of a more likely than not
threshold to the recognition and de-recognition of UTP. FIN 48
permits recognition of the amount of tax benefit that has a greater than 50
percent likelihood of being realized upon settlement. It further
requires that a change in judgment related to the expected ultimate resolution
of UTP be recognized in earnings in the quarter of change. Effective
December 31, 2006 the Company adopted the provisions of FIN 48 resulting in a
reduction in the Company’s existing reserves for uncertain state and federal
income tax positions of approximately $0.1 million. This reduction
was recorded as a cumulative effect adjustment to retained
earnings. At the adoption date of December 31, 2006, the Company had
$0.7 million of gross unrecognized tax benefits. If the Company
recognized such tax benefits, the net impact on the Company’s effective tax rate
would be $0.6 million, which includes the effect of the reversal of the $0.1
million deferred tax asset. At December 29, 2007, the Company had
$0.5 million of gross unrecognized tax benefits; if recognized, the net impact
on the Company’s effective tax rate would be $0.4 million, which includes the
effect of the reversal of $0.1 million in deferred tax
asset. Additionally, at December 31, 2006, the Company had an accrual
for interest and penalties of $0.1 million. The Company recognizes
accrued interest and penalties, as appropriate, related to unrecognized tax
benefits as a component of income tax expense.
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value
measurements. This statement is effective for the Company on
December 30, 2007 and is not expected to have a significant impact on the
Company’s consolidated financial statements.
Page
39
In
February 2007, the FASB issued Statement of Financial Accounting Standards 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 the Company on December 30,
2007 and is not expected to have a significant impact on the Company’s
consolidated financial statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards 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 SFAS 141(R) on the consolidated
financial statements.
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; prices in the competing commodity
markets which are volatile and are beyond the Company’s control; the
implementation of an amendment to the 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 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
RISKS
|
Market
risks affecting the Company are exposures to changes in prices of the finished
products the Company sells, interest rates on debt, availability of raw material
supply and the price of natural gas used in the Company’s plants. Raw
materials available to the Company are impacted by seasonal factors, including
holidays, when raw material volume declines; 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 instruments are not subject to the requirements of SFAS 133, because
the natural gas 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 December 29, 2007, the fair value of
these interest swap agreements was $1.9 million and is included in non-current
liabilities on the balance sheet, with an offset recorded to accumulated other
comprehensive income.
As of
December 29, 2007, the Company had forward purchase agreements in place for
purchases of approximately $5.3 million of natural gas for the months of January
2008 through March 2008. As of December 29, 2007, the Company had
forward purchase agreements in place for purchases of approximately $5.1 million
of finished product in the month of January 2007.
Interest
Rate Sensitivity
The Company’s obligations subject to
variable interest rates include (in thousands, except interest
rates):
|
Total
|
Less
than
1
Year
|
1 –
3
Years
|
3 –
5
Years
|
More
than
5
Years
|
||||||||||||||||
|
Long-term
debt:
|
||||||||||||||||||||
|
Variable
rate
|
$ | 43,750 | $ | 6,250 | $ | 10,000 | $ | 27,500 | $ | – | ||||||||||
|
Average
interest rate
|
5.88 | % | 5.88 | % | 5.88 | % | 5.88 | % | – | |||||||||||
|
Total
|
$ | 43,750 | $ | 6,250 | $ | 10,000 | $ | 27,500 | $ | – | ||||||||||
The Company has $43.75 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 December 29, 2007 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 2008. At December 29, 2007, the
Company had no fixed rate debt.
Page
41
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
||||
|
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial Statements
|
43 | |||
|
Report
of Independent Registered Public Accounting Firm on Internal Control
Over Financial
Reporting
|
44 | |||
|
Consolidated
Balance Sheets -
|
||||
|
December
29, 2007 and December 30, 2006
|
45 | |||
|
Consolidated
Statements of Operations -
|
||||
|
Three
years ended December 29, 2007
|
46 | |||
|
Consolidated
Statements of Stockholders’ Equity -
|
||||
|
Three
years ended December 29, 2007
|
47 | |||
|
Consolidated
Statements of Cash Flows -
|
||||
|
Three
years ended December 29, 2007
|
49 | |||
|
Notes
to Consolidated Financial Statements
|
50 | |||
|
Financial
Statement Schedule:
|
||||
|
II
- Valuation and Qualifying Accounts -
|
||||
|
Three
years ended December 29, 2007
|
77 | |||
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 have also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements
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 December 29, 2007 and December 30, 2006, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 29, 2007, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to basic consolidated financial statements
taken as a whole, present 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 17 to the consolidated financial
statements, effective January 1, 2006, the Company adopted the provision of
Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements When Quantifying Misstatements in the Current Year Financial
Statements. As discussed in Note 12 to the consolidated
financial statements, effective December 30, 2006, the Company adopted Statement
of Financial Accounting Standards No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans.
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 December 29, 2007, 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 February 27,
2008.
KPMG
LLP
Dallas,
TX
February
27, 2008
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 December 29, 2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Darling International
Inc.'s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Darling International Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 29, 2007,
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 February 27, 2008 expressed an
unqualified opinion on those consolidated financial statements.
KPMG
LLP
Dallas,
TX
February
27, 2008
Page
44
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
December
29, 2007 and December 30, 2006
(in
thousands, except share and per share data)
|
ASSETS
|
December
29,
2007
|
December
30,
2006
|
||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 16,335 | $ | 5,281 | ||||
|
Restricted cash
|
433 | 480 | ||||||
|
Accounts
receivable, less allowance for bad debts of $1,466
at
December 29, 2007 and $1,639 at December 30, 2006
|
59,401 | 42,381 | ||||||
|
Inventories
|
22,481 | 14,562 | ||||||
|
Other
current assets
|
8,417 | 5,036 | ||||||
|
Deferred
income taxes
|
8,026 | 6,921 | ||||||
|
Total
current assets
|
115,093 | 74,661 | ||||||
|
Property,
plant and equipment, net
|
128,685 | 132,149 | ||||||
|
Intangible
assets, less accumulated amortization of $42,481
|
||||||||
|
at
December 29, 2007 and $37,599 at December 30,
2006
|
29,037 | 33,657 | ||||||
|
Goodwill
|
71,856 | 71,856 | ||||||
|
Other
assets
|
6,667 | 6,683 | ||||||
|
Deferred
income taxes
|
– | 1,800 | ||||||
| $ | 351,338 | $ | 320,806 | |||||
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
portion of long-term debt
|
$ | 6,250 | $ | 5,004 | ||||
|
Accounts
payable, principally trade
|
24,879 | 17,473 | ||||||
|
Accrued
expenses
|
49,579 | 34,319 | ||||||
|
Total
current liabilities
|
80,708 | 56,796 | ||||||
|
Long-term
debt, net
|
37,500 | 78,000 | ||||||
|
Other
noncurrent liabilities
|
27,225 | 34,685 | ||||||
|
Deferred
income taxes
|
4,921 | – | ||||||
|
Total
liabilities
|
150,354 | 169,481 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Common
stock, $.01 par value; 100,000,000 shares
authorized,
|
||||||||
|
81,544,466 and 80,875,453
shares issued
|
||||||||
|
at December 29, 2007 and
December 30, 2006, respectively
|
815 | 809 | ||||||
|
Additional
paid-in capital
|
152,264 | 150,045 | ||||||
|
Treasury stock, at cost; 182,366
and 21,000 shares at
December 29, 2007 and December
30, 2006, respectively
|
(1,547 | ) | (172 | ) | ||||
|
Accumulated
other comprehensive loss
|
(8,598 | ) | (11,733 | ) | ||||
|
Accumulated
earnings
|
58,050 | 12,376 | ||||||
|
Total
stockholders’ equity
|
200,984 | 151,325 | ||||||
| $ | 351,338 | $ | 320,806 | |||||
The
accompanying notes are an integral part of these consolidated
financial statements.
Page
45
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
Three
years ended December 29, 2007
(in
thousands, except per share data)
|
December
29,
2007
|
December
30,
2006
|
December
31,
2005
|
||||||||||
|
Net
sales
|
$ | 645,313 | $ | 406,990 | $ | 308,867 | ||||||
|
Costs
and expenses:
|
||||||||||||
|
Cost
of sales and operating expenses
|
483,453 | 321,416 | 241,707 | |||||||||
|
Selling,
general and administrative expenses
|
57,999 | 45,649 | 35,240 | |||||||||
|
Depreciation
and amortization
|
23,214 | 20,686 | 15,787 | |||||||||
|
Total costs and
expenses
|
564,666 | 387,751 | 292,734 | |||||||||
|
Operating income
|
80,647 | 19,239 | 16,133 | |||||||||
|
Other
income/(expense):
|
||||||||||||
|
Interest
expense
|
(5,045 | ) | (7,184 | ) | (6,157 | ) | ||||||
|
Other,
net
|
(570 | ) | (4,682 | ) | 903 | |||||||
|
Total other
income/(expense)
|
(5,615 | ) | (11,866 | ) | (5,254 | ) | ||||||
|
Income
from continuing operations before
income taxes
|
75,032 | 7,373 | 10,879 | |||||||||
|
Income
taxes
|
29,499 | 2,266 | 3,184 | |||||||||
|
Income
from continuing operations
|
45,533 | 5,107 | 7,695 | |||||||||
|
Income
from discontinued operations,
net of tax
|
– | – | 46 | |||||||||
|
Net
income
|
$ | 45,533 | $ | 5,107 | $ | 7,741 | ||||||
|
Basic
and diluted earnings per share:
|
||||||||||||
|
Continuing
operations
|
$ | 0.56 | $ | 0.07 | $ | 0.12 | ||||||
|
Discontinued
operations
|
– | – | – | |||||||||
|
Total
|
$ | 0.56 | $ | 0.07 | $ | 0.12 | ||||||
The
accompanying notes are an integral part of these
consolidated financial statements.
Page
46
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders’ Equity
Three
years ended December 29, 2007
(in
thousands, except share data)
|
Common
Stock
|
|
||||||||
|
Number
of Outstanding
Shares
|
$.01
par Value
|
Additional
Paid-In
Capital
|
Treasury
Stock
|
Accumulated
Other
Compre- hensive Loss |
Retained
Earnings
(Accumulated
Deficit)
|
Unearned
Compensation
|
Total
Stockholders’
Equity/
(Deficit)
|
||
|
Balances
at January 1, 2005
|
63,897,346 | $ | 639 | $ | 77,393 | $ | (172 | ) | $ | (7,331 | ) | $ | (3,294 | ) | $ | - | $ | 67,235 | ||||||||||||||
|
Net
income
|
– | – | – | – | – | 7,741 | – | 7,741 | ||||||||||||||||||||||||
|
Minimum
pension liability
adjustment, net of tax
|
– | – | – | – | (2,148 | ) | – | – | (2,148 | ) | ||||||||||||||||||||||
|
Natural
gas hedge
derivative adjustment
|
– | – | – | – | 197 | – | – | 197 | ||||||||||||||||||||||||
|
Total
comprehensive
income
|
– | – | – | – | – | – | – | 5,790 | ||||||||||||||||||||||||
|
Issuance
of non-vested
stock
|
489,150 | 5 | 1,923 | – | – | – | (1,928 | ) | – | |||||||||||||||||||||||
|
Amortization
of unearned
compensation
|
– | – | – | – | – | – | 601 | 601 | ||||||||||||||||||||||||
|
Issuance
of common stock
|
50,914 | – | 54 | – | – | – | – | 54 | ||||||||||||||||||||||||
|
Balances
at December 31,
2005
|
64,437,410 | $ | 644 | $ | 79,370 | $ | (172 | ) | $ | (9,282 | ) | $ | 4,447 | $ | (1,327 | ) | $ | 73,680 | ||||||||||||||
|
Net
income
|
– | – | – | – | – | 5,107 | – | 5,107 | ||||||||||||||||||||||||
|
Minimum
pension liability
adjustment,
net of tax
|
– | – | – | – | 2,415 | – | – | 2,415 | ||||||||||||||||||||||||
|
Interest
rate swap
derivative adjustment,
net of tax
|
– | – | – | – | (408 | ) | – | – | (408 | ) | ||||||||||||||||||||||
|
Total
comprehensive
income
|
– | – | – | – | – | – | – | 7,114 | ||||||||||||||||||||||||
|
Adjustment
to initially
apply FASB
Statement
No. 158, net
of tax
(revised)
|
– | – | – | – | (4,458 | ) | – | – | (4,458 | ) | ||||||||||||||||||||||
|
Adjustment
to opening
stockholders’
equity
|
– | – | – | – | – | 2,822 | – | 2,822 | ||||||||||||||||||||||||
|
Adjustment
to initially
apply FASB
Statement
No. 123R
|
– | – | (1,327 | ) | – | – | – | 1,327 | – | |||||||||||||||||||||||
|
Stock-based
compensation
|
– | – | 1,488 | – | – | – | – | 1,488 | ||||||||||||||||||||||||
|
Tax
benefits associated
with stock-based
compensation
|
– | – | 50 | – | – | – | – | 50 | ||||||||||||||||||||||||
|
Issuance
of common stock
|
16,417,043 | 165 | 70,464 | – | – | – | – | 70,629 | ||||||||||||||||||||||||
|
Balances
at December 30,
2006
|
80,854,453 | $ | 809 | $ | 150,045 | $ | (172 | ) | $ | (11,733 | ) | $ | 12,376 | $ | – | $ | 151,325 |
Page
47
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders’ Equity (Continued)
Three
years ended December 29, 2007
(in
thousands, except share data)
|
Common
Stock
|
|
||||||||
|
Number
of Outstanding
Shares
|
$.01
par Value
|
Additional
Paid-In
Capital
|
Treasury
Stock
|
Accumulated
Other
Compre- hensive Loss |
Retained
Earnings
(Accumulated
Deficit)
|
Unearned
Compensation
|
Total
Stockholders’
Equity/
(Deficit)
|
||
|
Net
income
|
– | – | – | – | – | 45,533 | – | 45,533 | |||||||||||||||||||||||
|
Unrecognized
net actuarial
loss of defined benefit
plans:
|
|||||||||||||||||||||||||||||||
|
Pension liability
adjustments, net
of tax
|
– | – | – | – | 3,870 | – | – | 3,870 | |||||||||||||||||||||||
|
Interest
rate swap derivative
adjustment, net of tax
|
– | – | – | – | (735 | ) | – | – | (735 | ) | |||||||||||||||||||||
|
Total
comprehensive income
|
– | – | – | – | – | – | – | 48,668 | |||||||||||||||||||||||
|
Adjustment
to initially apply
FIN 48
|
– | – | – | – | – | 141 | – | 141 | |||||||||||||||||||||||
| Stock-based compensation | – | – | 365 | – | – | – | – | 365 | |||||||||||||||||||||||
|
Tax
benefits associated with
stock-based compensation
|
– | – | 1,223 | – | – | – | – | 1,223 | |||||||||||||||||||||||
|
Treasury
stock
|
(161,366 | ) | – | – | (1,375 | ) | – | – | – | (1,375 | ) | ||||||||||||||||||||
|
Issuance
of common stock
|
669,013 | 6 | 631 | – | – | – | – | 637 | |||||||||||||||||||||||
|
Balances
at December 29,
2007
|
81,362,100 | $ | 815 | $ | 152,264 | $ | (1,547 | ) | $ | (8,598 | ) | $ | 58,050 | $ | – | $ | 200,984 |
The
accompanying notes are an integral part
of
these consolidated financial statements.
Page
48
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Three
years ended December 29, 2007
(in
thousands)
|
December
29,
2007
|
December
30,
2006
|
December 31,
2005
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 45,533 | $ | 5,107 | $ | 7,741 | ||||||
|
Adjustments
to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Depreciation
and amortization
|
23,214 | 20,686 | 15,787 | |||||||||
|
Deferred
income taxes
|
5,616 | (3,929 | ) | (3,850 | ) | |||||||
|
Gain
on sale of assets
|
(5 | ) | (42 | ) | (555 | ) | ||||||
|
Increase/(decrease)
in long-term pension liability
|
(5,664 | ) | 1,336 | 715 | ||||||||
|
Stock-based
compensation expense
|
1,235 | 1,588 | 601 | |||||||||
|
Write-off
of deferred loan costs
|
– | 2,569 | – | |||||||||
|
Changes
in operating assets and liabilities, net
of
effects from acquisition:
|
||||||||||||
|
Restricted
cash
|
47 | 1,869 | 30 | |||||||||
|
Accounts
receivable
|
(17,020 | ) | (2,787 | ) | 793 | |||||||
|
Inventories
and prepaid expenses
|
(7,728 | ) | 867 | (3,074 | ) | |||||||
|
Accounts
payable and accrued expenses
|
18,916 | (1,336 | ) | 1,276 | ||||||||
|
Other
|
1,563 | 2,904 | 5,074 | |||||||||
|
Net
cash provided by discontinued operations
|
– | – | 46 | |||||||||
|
Net
cash provided by operating activities
|
65,707 | 28,832 | 24,584 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Capital
expenditures
|
(15,552 | ) | (11,800 | ) | (21,406 | ) | ||||||
|
Acquisition
of NBP, net of cash acquired
|
– | (80,166 | ) | – | ||||||||
|
Gross
proceeds from sale of property, plant and equipment
and
other assets
|
217 | 739 | 1,115 | |||||||||
|
Payments
related to routes and other intangibles
|
(262 | ) | – | (347 | ) | |||||||
|
Net
cash used in investing activities
|
(15,597 | ) | (91,227 | ) | (20,638 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from long-term debt
|
42,500 | 126,500 | – | |||||||||
|
Payments
on long-term debt
|
(81,754 | ) | (93,024 | ) | (5,030 | ) | ||||||
|
Contract
payments
|
(167 | ) | (245 | ) | (178 | ) | ||||||
|
Deferred
loan costs
|
– | (1,634 | ) | (41 | ) | |||||||
|
Issuance
of common stock
|
517 | 29 | 54 | |||||||||
|
Minimum
withholding taxes paid on stock awards
|
(1,375 | ) | – | – | ||||||||
|
Excess
tax benefits from stock-based compensation
|
1,223 | 50 | – | |||||||||
|
Net
cash provided/(used) in financing activities
|
(39,056 | ) | 31,676 | (5,195 | ) | |||||||
|
Net
increase/(decrease) in cash and cash equivalents
|
11,054 | (30,719 | ) | (1,249 | ) | |||||||
|
Cash
and cash equivalents at beginning of year
|
5,281 | 36,000 | 37,249 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 16,335 | $ | 5,281 | $ | 36,000 | ||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash
paid during the year for:
|
||||||||||||
|
Interest
|
$ | 5,151 | $ | 6,345 | $ | 5,765 | ||||||
|
Income
taxes, net of refunds
|
$ | 26,307 | $ | 2,684 | $ | 3,859 | ||||||
The
accompanying notes are an integral part
of these
consolidated financial statements.
Page
49
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
NOTE
1.
|
GENERAL
|
|
(a)
|
NATURE
OF OPERATIONS
|
| Darling International Inc., a Delaware corporation (“Darling”), is a recycler of food and animal by-products and provides grease trap services to food service establishments. Darling collects and recycles animal by-products and used cooking oil from food service establishments. Darling processes raw materials at 39 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. Darling sells these products nationally and internationally, primarily to producers of oleo-chemicals, soaps, pet foods, leather goods, livestock feed and bio-fuels for use as ingredients in their products or for further processing. As further discussed in Note 3, on May 15, 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’s year end results include 52 weeks of contribution from the assets acquired in the Transaction, as compared to 33 weeks of contributions from these assets in fiscal 2006. The Company’s operations are currently organized into two segments: Rendering and Restaurant Services. For additional information on the Company’s segments, see Note 15. |
|
(b)
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|
(1)
|
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and
transactions have been eliminated in
consolidation.
|
|
(2)
|
Fiscal
Year
The
Company has a 52/53 week fiscal year ending on the Saturday nearest
December 31. Fiscal years for the consolidated financial
statements included herein are for the 52 weeks ended December 29, 2007,
the 52 weeks ended December 30, 2006, and the 52 weeks ended December 31,
2005.
|
|
(3)
|
Accounts
Receivable and Allowance for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from customers’ non-payment of trade accounts receivable owed to
the Company. These trade receivables arise in the ordinary
course of business from sales of raw material, finished product or
services to the Company’s customers. The estimate of allowance
for doubtful accounts is based upon the Company’s bad debt experience,
prevailing market conditions, and aging of trade accounts receivable,
among other factors. If the financial condition of the
Company’s customers deteriorates, resulting in the customers’ inability to
pay the Company’s receivables as they come due, additional allowances for
doubtful accounts may be required.
|
|
(4)
|
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO)
method.
|
|
(5)
|
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Depreciation is
computed by the straight-line method over the estimated useful lives of
assets: 1) Buildings and improvements, 15 to 30 years;
2)
Machinery and equipment, 3 to 10 years; and 3) Vehicles, 2 to 6
years.
Maintenance
and repairs are charged to expense as incurred and expenditures for major
renewals and improvements are
capitalized.
|
Page
50
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
(6)
|
Goodwill
and Other Intangible Assets
|
|
|
Goodwill
and other intangible assets not subject to amortization are tested for
impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be
impaired. Statement of Financial Accounting Standards No. 142,
Goodwill and Other
Intangible Assets (“SFAS 142”) requires a two-step process for
testing impairment. First, the fair value of each reporting
unit is compared to its carrying value to determine whether an indication
of impairment exists. If impairment is indicated, then the fair
value of the reporting unit’s goodwill is determined by allocating the
unit’s fair value of its assets and liabilities (including any
unrecognized intangible assets) as if the reporting unit had been acquired
in a business combination. The amount of impairment for
goodwill is measured as the excess of its carrying value over its fair
value.
The
fair values of the Company’s reporting units containing goodwill exceed
the related carrying values; consequently, there has been no impairment of
goodwill for the periods presented. Goodwill was approximately $71.9
million at December 29, 2007 and December 30, 2006.
Intangible
assets subject to amortization consist of: 1) collection
routes which are made up of groups of suppliers of raw materials in
similar geographic areas from which the Company derives collection fees
and a dependable source of raw materials for processing into finished
products; 2) permits that represent licensing of operating
plants that have been acquired, giving those plants the ability to
operate; 3) non-compete agreements that represent contractual arrangements
with former competitors whose businesses were acquired; and 4)
royalty and consulting agreements. Amortization expense is
calculated using the straight-line method over the estimated useful lives
of the assets ranging from: 8-20 years for collection
routes; 20 years for permits; and 3-10 years for non-compete
covenants.
The
gross carrying amount of intangible assets subject to amortization include
(in thousands):
|
|
December
29,
2007
|
December
30,
2006
|
||||||||
|
Intangible
Assets:
|
|||||||||
|
Routes
|
$ | 48,239 | $ | 47,987 | |||||
|
Permits
|
20,500 | 20,500 | |||||||
|
Non-compete
agreements
|
2,366 | 2,356 | |||||||
|
Royalty
and consulting agreements
|
413 | 413 | |||||||
| 71,518 | 71,256 | ||||||||
|
Accumulated
Amortization:
|
|||||||||
|
Routes
|
(38,437 | ) | (34,779 | ) | |||||
|
Permits
|
(1,676 | ) | (650 | ) | |||||
|
Non-compete
agreements
|
(2,059 | ) | (1,880 | ) | |||||
|
Royalty
and consulting agreements
|
(309 | ) | (290 | ) | |||||
| (42,481 | ) | (37,599 | ) | ||||||
|
Intangible
assets, less accumulated
amortization
|
$ | 29,037 | $ | 33,657 | |||||
|
Amortization
expense for the three years ended December 29, 2007, December 30, 2006 and
December 31, 2005, was approximately $4,882,000, $4,552,000 and
$3,884,000, respectively. Amortization expense for the
next five fiscal years is estimated to be $4,905,000, $2,072,000,
$1,817,000, $1,570,000 and
$1,469,000.
|
Page
51
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
(7)
|
Environmental
Expenditures
|
|
| Environmental expenditures incurred to mitigate or prevent environmental impacts that have yet to occur and that otherwise may result from future operations are capitalized. Expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenues are expensed or charged against established environmental reserves. Reserves are established when environmental impacts have been identified which are probable to require mitigation and/or remediation and the costs are reasonably estimable. |
|
(8)
|
Income
Taxes
|
|
|
The
Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
Statement
of Financial Accounting Standards No. 109 – Accounting for Income
taxes requires the Company to periodically assess whether it is
more likely than not that it will generate sufficient taxable income to
realize its deferred income tax assets. In making this
determination, the Company considers all available positive and negative
evidence and makes certain assumptions. The Company considers,
among other things, its deferred tax liabilities, the overall business
environment, its historical earnings and losses, current industry trends
and its outlook for future years. Although the Company is
unable to carryback any of its net operating losses, based upon recent
favorable operating results and future projections, certain net operating
losses can be carried forward and utilized.
In
June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN
48”), which prescribes accounting for and disclosure of uncertain tax
positions (“UTP”). FIN 48 requires application of a more likely
than not threshold to the recognition and de-recognition of
UTP. FIN 48 permits recognition of the amount of tax benefit
that has a greater than 50 percent likelihood of being realized upon
settlement. It further requires that a change in judgment
related to the expected ultimate resolution of UTP be recognized in
earnings in the quarter of change. Effective December 31, 2006
the Company adopted the provisions of FIN 48 resulting in a reduction in
the Company’s existing reserves for uncertain state and federal income tax
positions of approximately $0.1 million. This reduction was
recorded as a cumulative effect adjustment to retained
earnings. At the adoption date of December 31, 2006, the
Company had $0.7 million of gross unrecognized tax benefits. If
the Company recognized such tax benefits, the net impact on the Company’s
effective tax rate would be $0.6 million, which includes the effect of the
reversal of the $0.1 million deferred tax asset. At December
29, 2007, the Company had $0.5 million of gross unrecognized tax benefits;
if recognized, the net impact on the Company’s effective tax rate would be
$0.4 million, which includes the effect of the reversal of $0.1 million in
deferred tax asset. Additionally, at December 31, 2006, the
Company had an accrual for interest and penalties of $0.1
million. The Company recognizes accrued interest and penalties,
as appropriate, related to unrecognized tax benefits as a component of
income tax expense.
|
Page
52
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
| The following table shows a reconciliation of the change in the unrecognized tax benefit balance for federal, state and foreign taxes for the period ended December 29, 2007 (in thousands). |
|
2007
|
|||||
|
Balance
December 31, 2006
|
$ | 689 | |||
|
Additions
for tax positions related to the current year
|
– | ||||
|
Reductions
for tax positions related to the current year
|
– | ||||
|
Additions
for tax positions related to prior years
|
41 | ||||
|
Reductions
for tax positions related to prior years
|
(73 | ) | |||
|
Settlements
|
(68 | ) | |||
|
Lapses
in statutes of limitations
|
(46 | ) | |||
|
Balance
December 29, 2007
|
$ | 543 | |||
|
The Company’s major taxing
jurisdictions include the U.S. (federal and state). The Company
is no longer subject to federal examinations on years prior to fiscal
2005. The number of years open for state tax audits varies,
depending on the tax jurisdiction, but are generally from three to five
years. Currently, several state examinations are either in
progress or scheduled to begin. The Company does not anticipate
that any state or federal audits will have a significant impact on the
Company’s results of operations or financial position. In
addition, the Company does not reasonably expect any significant changes
to the estimated amount of liability associated with the Company’s UTP in
fiscal 2008.
|
|
(9)
|
Net
Income per Common Share
|
| Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the year increased by dilutive common equivalent shares determined using the treasury stock method. |
|
|
Net
Income per Common Share (in thousands)
|
|
December
29,
|
December
30,
|
December
31,
|
|||||||||||
|
|
2007
|
|
2006
|
|
2005
|
||||||||
|
Income
|
Shares
|
Per-Share
|
Income
|
Shares
|
Per-Share
|
Income
|
Shares
|
Per-Share
|
|||||
|
Basic:
|
|||||||||||||
|
Income
from continuing
|
|||||||||||||
|
operations
|
$45,533
|
80,772
|
$0.56
|
$5,107
|
74,310
|
$0.07
|
$7,695
|
63,929
|
$0.12
|
||||
|
Income
from discontinued
|
|||||||||||||
|
operations,
net of tax
|
–
|
80,772
|
–
|
–
|
74,310
|
–
|
46
|
63,929
|
–
|
||||
|
Net
income
|
45,533
|
80,772
|
0.56
|
5,107
|
74,310
|
0.07
|
7,741
|
63,929
|
0.12
|
||||
|
Diluted:
|
|||||||||||||
|
Effect
of dilutive securities
|
|||||||||||||
|
Add:
Option shares in the money and
|
|||||||||||||
|
dilutive
effect of restricted stock
|
–
|
1,772
|
–
|
–
|
1,264
|
–
|
–
|
1,053
|
–
|
||||
|
Less:
Pro-forma treasury shares
|
–
|
(648)
|
–
|
–
|
(315)
|
–
|
–
|
(457)
|
–
|
||||
|
Income
from continuing
|
|||||||||||||
|
operations
|
$45,533
|
81,896
|
$0.56
|
$5,107
|
75,259
|
$0.07
|
$7,695
|
64,525
|
$0.12
|
||||
|
Income
from discontinued
|
|||||||||||||
|
operations,
net of tax
|
–
|
81,896
|
–
|
–
|
75,259
|
–
|
46
|
64,525
|
–
|
||||
|
Net
income
|
$45,533
|
81,896
|
$0.56
|
$5,107
|
75,259
|
$0.07
|
$7,741
|
64,525
|
$0.12
|
||||
Page
53
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
For fiscal 2007, 2006 and
2005, respectively, 5,187, 771,950 and 726,092 outstanding stock options
were excluded from diluted income per common share as the effect was
antidilutive. For fiscal 2007, 2006 and 2005, respectively,
117,179, 248,848 and 286,168 shares of non-vested stock and restricted
stock were excluded from diluted income per common share as the effect was
antidilutive. For fiscal 2007, 2006 and 2005, respectively,
60,713, 99,821 and zero shares of contingent issuable stock were excluded
from diluted income per common share as the effect was
antidilutive.
|
|
(10)
|
Stock
Based Compensation
|
|
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment
(“SFAS 123(R)”). SFAS 123(R) requires all entities to
recognize compensation expense in an amount equal to the fair value of the
share-based payments (e.g., stock options and non-vested and
restricted stock) granted to employees or by incurring liabilities to an
employee or other supplier (a) in amounts based, at least in part, on the
price of the entity’s shares or other equity instruments, or (b) that
require or may require settlement by issuing the entity’s equity shares or
other equity instruments.
Effective
January 1, 2006, the Company adopted the provisions of SFAS 123(R) and
related interpretations, using the modified prospective
method. Using the modified prospective method of SFAS 123(R),
the Company began recognizing compensation expense for the remaining
unvested portions of stock-based compensation granted prior to January 1,
2006. As a result of adopting SFAS 123(R), for the year ended
December 30, 2006, the Company recorded additional stock option expense of
approximately $0.5 million, which reduced income from continuing
operations and income before income taxes by approximately $0.5 million,
reduced net income by $0.4 million, and reduced basic and diluted earnings
per share by $0.01 per share. Total stock-based compensation
recognized under SFAS 123(R) in the statements of operations for the years
ended December 29, 2007, December 30, 2006 and December 31, 2005 was
approximately $1.4 million, $1.6 million and $0.6 million, respectively,
which is included in selling, general and administrative costs, and the
related income tax benefit recognized was approximately $0.4 million, $0.6
million and $0.2 million, respectively. See Note 11 for further
information on the Company’s stock-based compensation plans.
SFAS
123(R) requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as
an operating cash flow as required under the Accounting Principles Board
(“APB”) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. For the year
ended December 29, 2007 and December 30, 2006, the Company recognized $1.2
million and $50,000, respectively in such tax deductions, which were
recorded as an increase in financing cash flows and a reduction in
operating cash flows.
Prior
to adopting SFAS 123(R), the Company accounted for its stock options under
the Company’s 2004 Omnibus Incentive Plan (the “2004 Plan”) in accordance
with the provisions of APB Opinion No. 25. Under the
intrinsic-value method, compensation expense is recorded only to the
extent that the grant price is less than market on the measurement
date. All options granted under the 2004 Plan were issued at or
above market price, and therefore no stock-based compensation was recorded
due to option grants.
The
following table illustrates the effect on net income and income per share
if the fair value based method, net of applicable taxes, had been applied
to all outstanding and vested awards in fiscal 2005 (in thousands, except
per share amounts).
|
Page
54
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
December
31,
2005
|
|||||
|
Reported
net income
|
$ | 7,741 | |||
|
Add:
Stock-based employee compensation
expense included in
reported net
income,
net of tax
|
391 | ||||
|
Deduct:
Total stock-based employee compensation expense determined under
fair-value-based method for all rewards, net
of tax
|
(973 | ) | |||
|
Pro
forma net income
|
$ | 7,159 | |||
|
Earnings
per share:
|
|||||
|
Basic
– as reported
|
$ | 0.12 | |||
|
Basic
– pro forma
|
$ | 0.11 | |||
|
Diluted
– as reported
|
$ | 0.12 | |||
|
Diluted
– pro forma
|
$ | 0.11 | |||
|
The fair value of each stock
option grant under the Company’s stock option plan was estimated on the
date of grant using the Black Scholes option-pricing model with the
following weighted average assumptions and results for fiscal 2007 and
2005. No options were granted during fiscal
2006.
|
|
Weighted
Average
|
2007
|
2005
|
||||||
|
Expected
dividend yield
|
0.0%
|
0.0%
|
||||||
|
Risk-free
interest rate
|
4.57%
|
3.94%
|
||||||
|
Expected
term
|
5.75
years
|
5.9
years
|
||||||
|
Expected
volatility
|
52.1%
|
55.0%
|
||||||
|
Fair
value of options granted
|
$
4.30
|
$
2.04
|
||||||
|
The
expected lives for options granted during 2007 and 2005 were computed
using the simplified method as prescribed by Staff Accounting Bulletin No.
107.
At
December 29, 2007, $1.1 million of total future equity-based compensation
expense (determined using the Black-Scholes option pricing model) related
to outstanding non-vested options and stock awards is expected to be
recognized ratably over a weighted average period of 1.7
years.
|
|
(11)
|
Statements
of Cash Flows
The
Company considers all short-term highly liquid instruments, with an
original maturity of three months or less, to be cash
equivalents.
|
|
(12)
|
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those
estimates.
|
Page
55
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
If
it is at least reasonably possible that the estimate of the effect on the
financial statements of a condition, situation, or set of circumstances
that exist at the date of the financial statements will change in the near
term due to one or more future confirming events and the effect of the
change would be material to the financial statements, the Company will
disclose the nature of the uncertainty and include an indication that it
is at least reasonably possible that a change in the estimate will occur
in the near term. If the estimate involves a loss contingency
covered by FASB Statement No. 5, the disclosure will also include an
estimate of the possible loss or range of loss or state that an estimate
cannot be made.
|
|
(13)
|
Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed
of
|
|
|
The
Company follows Statement of Financial Accounting Standards No. 144, Accounting for the Impairment
of Disposal of Long-Lived Assets (“SFAS 144”). 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. SFAS 144 requires
discontinued operations to be carried at the lower of cost or fair value
less costs to sell and requires the classification of operating results of
discontinued operations to be separately presented, net of tax, within the
statement of operations.
|
|
(14)
|
Financial
Instruments
|
|
|
The
carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates fair value due to the
short maturity of these instruments. In addition, the
carrying amount of the Company’s outstanding borrowings under the Credit
Agreement described in Notes 2 and 8 approximates the fair value due to
the floating interest rates on the
borrowings.
|
|
(15)
|
Derivative
Instruments
|
|
|
The
Company makes limited use of derivative instruments to manage cash flow
risks related to interest expense. Interest rate swaps are entered into
with the intent of managing overall borrowing costs by reducing the
potential impact of increases in interest rates on floating-rate long-term
debt. The Company does not use derivative instruments for trading
purposes.
Under
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), entities are
required to report all derivative instruments in the statement of
financial position at fair value. The accounting for changes in the fair
value (i.e., gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding the instrument. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair value, cash flows or
foreign currencies. If the hedged exposure is a cash flow
exposure, the effective portion of the gain or loss on the derivative
instrument is reported initially as a component of other comprehensive
income (outside of earnings) and is subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts
excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss are reported in earnings
immediately. If the derivative instrument is not designated as a hedge,
the gain or loss is recognized in earnings in the period of
change.
|
Page
56
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
|
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 Company’s 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 Company’s 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 Company’s
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 December 29, 2007, the fair
value of these interest swap agreements was $1.9 million and is included
in non-current other liabilities on the balance sheet, with the offset
recorded to accumulated other comprehensive loss.
A
summary of the derivative adjustment recorded to accumulated other
comprehensive income, the net change arising from hedging transactions,
and the amounts recognized in earnings during the years ended December 29,
2007 and December 30, 2006 are as follows (in
thousands):
|
|
2007
|
2006
|
||||||||
|
Derivative
adjustment included in accumulated other
comprehensive loss at December 30, 2006 and
December 31, 2005
|
$ | 408 | $ | – | |||||
|
Net
change arising from current period hedging
transactions
|
689 | 404 | |||||||
|
Reclassifications
into earnings
|
46 | 4 | |||||||
|
Accumulated
other comprehensive loss at
December 29, 2007 and December 30, 2006 (a)
|
$ | 1,143 | $ | 408 | |||||
|
|
(a)
|
Reported
as accumulated other comprehensive loss of approximately $1.9 million and
$0.7 million recorded net of taxes of approximately
$0.7
million and
$0.3 million at December 29, 2007 and December 30, 2006,
respectively.
|
|
|
The
Company estimates the amount that will be reclassified from accumulated
other comprehensive loss at December 29, 2007 into earnings in fiscal 2008
will be approximately $0.5 million.
At
December 29, 2007, the Company has forward purchase agreements in place
for purchases of approximately $5.3 million of natural gas for the months
of January through March of 2008. These forward purchase
agreements have no net settlement provisions and the Company intends to
take physical delivery. Accordingly, the forward purchase agreements are
not subject to the requirements of SFAS 133 because they qualify as normal
purchases as defined in the
standard.
|
|
(16)
|
Comprehensive
Income
|
|
|
The
Company follows the provisions of SFAS No. 130, Reporting Comprehensive
Income (“SFAS 130”). SFAS 130 establishes standards for reporting
and presentation of comprehensive income and its components. In
accordance with SFAS 130, the Company has presented the components of
comprehensive income in its consolidated statements of stockholders’
equity.
|
Page
57
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
(17)
|
Revenue
Recognition
|
|
|
The
Company recognizes revenue on sales when products are shipped and the
customer takes ownership and assumes risk of loss. Collection
fees are recognized in the month the service is
provided.
|
|
NOTE
2.
|
FINANCING
|
|
(a)
|
Credit
Agreement
|
| The
Company entered into a $175 million credit agreement (the “Credit
Agreement”) with lenders on April 7, 2006 which replaced the former senior
credit agreement executed in April 2004. The Credit Agreement
provides for a total of $175.0 million in financing facilities, consisting
of a $50.0 million term loan facility and a $125.0 million revolver
facility, which includes a $35.0 million letter of credit
sub-facility. As of December 29, 2007, the Company has borrowed
all $50.0 million under the term loan facility which provides for
quarterly scheduled amortization payments of $1.25 million over the
six-year term ending April 7, 2012; at that point, the remaining balance
of $22.5 million will be payable in full. The revolving credit
facility has a five-year term ending April 7, 2011. The
proceeds of the revolving credit facility may be used for: (i)
the payment of fees and expenses payable in connection with the Credit
Agreement, acquisitions and the repayment of indebtedness; (ii)
financing the working capital needs of the Company and its subsidiaries;
and (iii) other general corporate purposes. The proceeds of the
term loan facility and a portion of the revolving credit facility were
used to pay a portion of the consideration for the
Transaction. See Note 3 for further discussion regarding the
Transaction.
The
Credit Agreement allows for borrowings at per annum rates based on the
following loan types. Alternate base rate loans under the
Credit Agreement will bear interest at a rate per annum based on the
greater of (a) the prime rate and (b) the Federal Funds Effective Rate
plus 1/2 of 1% plus, in each case, a margin determined by reference to a
pricing grid and adjusted according to the Company’s adjusted leverage
ratio. Eurodollar loans will bear interest at a rate per annum
based on the then applicable London Inter-Bank Offer Rate ("LIBOR")
multiplied by the statutory reserve rate plus a margin determined by
reference to a pricing grid and adjusted according to the Company’s
adjusted leverage ratio. At December 29, 2007 under the Credit
Agreement, the interest rate for $42.5 million of the term loan that was
outstanding was based on LIBOR plus a margin of 1.0% per annum for a total
of 5.875% per annum and the interest rate for $1.25 million of the term
loan was based on prime plus a margin of 0.0% for a total of 7.25% per
annum. At December 29, 2007 there were no outstanding
borrowings under the Company’s revolving facility.
The
Credit Agreement contains certain restrictive covenants that are customary
for similar credit arrangements and requires the maintenance of certain
minimum financial ratios. The Credit Agreement also requires
the Company to make certain mandatory prepayments of outstanding
indebtedness using the net cash proceeds received from certain
dispositions of property, casualty or condemnation, any sale or issuance
of equity interests in a public offering or in a private placement,
unpermitted additional indebtedness incurred by the Company, and excess
cash flow under certain circumstances.
On
April 7, 2006, the Company repaid the balance on the term facility under
its former senior credit agreement and incurred a write-off of deferred
loan costs of approximately $1.5
million.
|
Page
58
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
|
The Company’s Credit Agreement consisted of the following elements at December 29, 2007 and December 30, 2006, respectively (in thousands): |
|
December
29,
2007
|
December
30,
2006
|
||||||||
|
Credit
Agreement:
|
|||||||||
|
Term
Loan
|
$ | 43,750 | $ | 47,500 | |||||
|
Revolving
Credit Facility:
|
|||||||||
|
Maximum
availability
|
$ | 125,000 | $ | 125,000 | |||||
|
Borrowings
outstanding
|
– | 35,500 | |||||||
|
Letters
of credit issued
|
18,881 | 18,391 | |||||||
|
Availability
|
$ | 106,119 | $ | 71,109 | |||||
|
|
The
obligations under the Credit Agreement are guaranteed by Darling National
and are secured by substantially all of the property of the Company,
including a pledge of all equity interests in Darling
National. As of December 29, 2007, the Company was in
compliance with all the covenants contained in the Credit
Agreement.
|
|
(b)
|
Senior
Subordinated Notes
|
|
On
December 31, 2003, the Company issued senior subordinated notes in the
principal amount of $35.0 million. On June 1, 2006, the Company
retired the senior subordinated notes using money available under the
Credit Agreement and incurred charges of $1.925 million for prepayment
fees and approximately $1.1 million to write off deferred loan
costs.
|
|
NOTE
3.
|
ACQUISITION
|
| On
May 15, 2006, Darling, through its wholly-owned subsidiary Darling
National, completed the acquisition of substantially all of the assets of
NBP (the “Transaction”). The purchase was accounted for as an
asset purchase pursuant to the terms of the asset purchase agreement, by
and among Darling, Darling National and NBP, whereby Darling National
acquired substantially all of the assets and liabilities of
NBP. The assets acquired in the Transaction has increased
Darling’s capabilities by growing revenues, diversifying the raw material
supplies and creating a larger platform to grow Darling’s restaurant
services business.
As
a result of the Transaction, effective May 15, 2006, the Company began
including the operations of NBP into the Company’s consolidated financial
statements. The following table presents selected pro forma
information, for comparative purposes, assuming the Transaction had
occurred on January 2, 2005 for the periods presented (unaudited) (in
thousands, except per share data):
The
selected unaudited pro forma information is not necessarily indicative of
the consolidated results of operations for future periods or the results
of operations that would have been realized had the Transaction actually
occurred on January 2, 2005.
|
|
December
30,
2006
|
December
31,
2005
|
||||||||
|
Net
sales
|
$ | 480,347 | $ | 497,039 | |||||
|
Income
from continuing operations
|
9,194 | 18,040 | |||||||
|
Net
income
|
9,194 | 18,086 | |||||||
|
Earnings
per share
|
|||||||||
|
Basic
and diluted
|
$ | 0.11 | $ | 0.22 | |||||
Page
59
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
|
The
Transaction was accounted for using the purchase method of accounting for
business combinations and, accordingly, the results of operations related
to the Transaction have been included in the Company’s consolidated
financial statements since the date of acquisition.
The
purchase price for the Transaction totaled $150.7 million, which included
the issuance of approximately 16.3 million shares of Darling common stock
valued at $70.5 million.
The
following table summarizes the fair value of the assets acquired and
liabilities assumed as of May 15, 2006 (in thousands):
|
|
Accounts
receivable, net
|
$ | 13,708 | |||
|
Inventory,
net
|
7,184 | ||||
|
Other
current assets
|
135 | ||||
|
Deferred
tax asset
|
425 | ||||
|
Identifiable
intangibles
|
25,740 | ||||
|
Property
and equipment
|
51,892 | ||||
|
Goodwill
|
68,343 | ||||
|
Accounts
payable
|
(7,837 | ) | |||
|
Accrued
expenses
|
(7,650 | ) | |||
|
Other
liabilities
|
(1,274 | ) | |||
|
Purchase
price
|
$ | 150,666 |
|
|
As
a result of the acquisition of NBP, the Company reduced its valuation
allowance for pre-acquisition deferred tax assets of approximately $0.9
million, resulting in a reduction of the $68.3 million of goodwill to
$67.4 million.
The
$67.4 million of goodwill was assigned to the rendering and restaurant
services segments in the amounts of $53.0 million and $14.4 million,
respectively. Of the total amount, $62.0 million is expected to
be deductible for tax purposes. Identifiable intangibles
include $5.1 million in routes with a weighted average useful life of 20
years, $20.5 million in permits with a weighted average useful life of 20
years, and $0.1 million in non-compete agreements with a useful life of 5
years.
|
|
NOTE
4.
|
INVENTORIES
|
| A summary of inventories follows (in thousands): |
|
December
29,
2007
|
December
30,
2006
|
||||||||
|
Finished product
|
$ | 19,678 | $ | 11,909 | |||||
|
Supplies and other
|
2,803 | 2,653 | |||||||
| $ | 22,481 | $ | 14,562 | ||||||
Page
60
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
NOTE
5.
|
PROPERTY,
PLANT AND EQUIPMENT
|
| A summary of property, plant and equipment follows (in thousands): |
|
December
29,
2007
|
December
30,
2006
|
||||||||
|
Land
|
$ | 17,501 | $ | 17,971 | |||||
|
Buildings
and improvements
|
45,684 | 44,450 | |||||||
|
Machinery
and equipment
|
205,376 | 195,702 | |||||||
|
Vehicles
|
54,482 | 54,960 | |||||||
|
Construction
in process
|
4,799 | 3,127 | |||||||
| 327,842 | 316,210 | ||||||||
|
Accumulated
depreciation
|
(199,157 | ) | (184,061 | ) | |||||
| $ | 128,685 | $ | 132,149 | ||||||
|
NOTE
6.
|
ACCRUED
EXPENSES
|
| Accrued expenses consist of the following (in thousands): |
|
December
29,
2007
|
December
30,
2006
|
||||||||
|
Compensation
and benefits
|
$ | 16,411 | $ | 7,175 | |||||
|
Utilities
and sewage
|
5,230 | 4,599 | |||||||
|
Accrued
income, ad valorem, and franchise taxes
|
2,277 | 4,478 | |||||||
|
Reserve
for self insurance, litigation, environmental and
tax matters (Note 14)
|
5,750 | 6,414 | |||||||
|
Medical
claims liability
|
3,298 | 3,494 | |||||||
|
Other
accrued expense
|
16,613 | 8,159 | |||||||
| $ | 49,579 | $ | 34,319 | ||||||
|
NOTE
7.
|
LEASES
|
| The Company leases four plants and storage locations, three office locations and a portion of its transportation equipment under operating leases. Leases are noncancellable and expire at various times through the year 2028. Minimum rental commitments under noncancellable leases as of December 29, 2007, are as follows (in thousands): |
|
Period Ending Fiscal
|
Operating Leases
|
||||
|
2008
|
$ | 9,943 | |||
|
2009
|
8,424 | ||||
|
2010
|
6,192 | ||||
|
2011
|
4,725 | ||||
|
2012
|
2,777 | ||||
|
Thereafter
|
9,760 | ||||
|
Total
|
$ | 41,821 | |||
|
|
Rent
expense for the fiscal years ended December 29, 2007, December 30, 2006
and December 31, 2005 was $7.8 million, $6.2 million and $5.5 million,
respectively.
|
Page
61
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
NOTE
8.
|
DEBT
|
| Debt consists of the following (in thousands): |
|
December
29,
2007
|
December 30,
2006
|
||||||||
|
Credit
Agreement (Note 2):
|
|||||||||
|
Revolving
Credit Facility
|
$ | – | $ | 35,500 | |||||
|
Term
Loan
|
43,750 | 47,500 | |||||||
|
Other
Notes
|
– | 4 | |||||||
| 43,750 | 83,004 | ||||||||
|
Less
Current Maturities
|
6,250 | 5,004 | |||||||
| $ | 37,500 | $ | 78,000 | ||||||
|
|
Maturities of long-term debt at December 29, 2007 follow (in thousands): |
|
Contractual
Debt
Payment
|
|
|
2008
|
$ 6,250
|
|
2009
|
5,000
|
|
2010
|
5,000
|
|
2011
|
5,000
|
|
2012
|
22,500
|
|
$43,750
|
|
|
As of December 29, 2007, current maturities of debt of $6.25 million will be due during fiscal 2008, which include a scheduled payment of $1.25 million due December 31, 2007 and scheduled installment payments of $1.25 million due each quarter. |
|
NOTE
9.
|
OTHER
NONCURRENT LIABILITIES
|
|
|
Other
noncurrent liabilities consist of the following (in
thousands):
|
|
December
29,
2007
|
December 30,
2006
|
||||||||
|
Accrued
pension liability
|
$ | 9,164 | $ | 18,698 | |||||
|
Reserve
for self insurance, litigation, environmental and tax matters
(Note 14)
|
15,053 | 15,087 | |||||||
|
Other
|
3,008 | 900 | |||||||
| $ | 27,225 | $ | 34,685 | ||||||
|
NOTE
10.
|
INCOME
TAXES
|
| Income tax expense/(benefit) attributable to income from continuing operations before income taxes consists of the following (in thousands): |
|
December
29,
2007
|
December
30,
2006
|
December 31,
2005
|
|||||||||||
|
Current:
|
|||||||||||||
|
Federal
|
$ | 22,418 | $ | 4,294 | $ | 4,826 | |||||||
|
State
|
3,301 | 523 | 176 | ||||||||||
|
Deferred:
|
|||||||||||||
|
Federal
and State
|
3,780 | (2,551 | ) | (1,818 | ) | ||||||||
| $ | 29,499 | $ | 2,266 | $ | 3,184 | ||||||||
Page
62
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
|
Income tax expense for the years ended December 29, 2007, December 30, 2006 and December 31, 2005, differed from the amount computed by applying the statutory U.S. federal income tax rate to income from continuing operations before income taxes as a result of the following (in thousands): |
|
December
29,
2007
|
December
30,
2006
|
December
31,
2005
|
|||||||||||
|
Computed
“expected” tax expense
|
$ | 26,261 | $ | 2,581 | $ | 3,753 | |||||||
|
State
income taxes
|
2,827 | 273 | 393 | ||||||||||
|
Section
199 deduction
|
(832 | ) | (143 | ) | – | ||||||||
|
Non-deductible
employee compensation
|
500 | – | – | ||||||||||
|
Tax
credits
|
(49 | ) | (208 | ) | (257 | ) | |||||||
|
Reversal
of reserve for taxes
|
(51 | ) | (272 | ) | (700 | ) | |||||||
|
Other,
net
|
843 | 35 | (5 | ) | |||||||||
| $ | 29,499 | $ | 2,266 | $ | 3,184 | ||||||||
|
|
The tax effects of temporary
differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 29, 2007 and December 30,
2006 are presented below (in
thousands):
|
|
December
29,
2007
|
December
30,
2006
|
||||||||
|
Deferred
tax assets:
|
|||||||||
|
Net operating loss
carryforwards
|
$ | 7,262 | $ | 12,163 | |||||
|
Loss contingency
reserves
|
6,944 | 6,938 | |||||||
|
Employee benefits
|
2,843 | 2,746 | |||||||
|
Pension liability
|
4,535 | 7,306 | |||||||
|
Other
|
2,383 | 2,279 | |||||||
|
Total gross deferred tax
assets
|
23,967 | 31,432 | |||||||
|
Less valuation
allowance
|
(4,793 | ) | (9,416 | ) | |||||
|
Net deferred tax
assets
|
19,174 | 22,016 | |||||||
|
Deferred
tax liabilities:
|
|||||||||
|
Intangible assets
amortization
|
(3,016 | ) | (2,035 | ) | |||||
|
Property, plant and equipment
depreciation
|
(11,159 | ) | (10,115 | ) | |||||
|
Other
|
(1,894 | ) | (1,145 | ) | |||||
|
Total gross deferred tax
liabilities
|
(16,069 | ) | (13,295 | ) | |||||
| $ | 3,105 | $ | 8,721 | ||||||
|
|
At
December 29, 2007, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $19,475,000 expiring through
2020. The availability of the net operating loss carryforwards
to reduce future taxable income is subject to various
limitations. As a result of the change in ownership which
occurred pursuant to the May 2002 recapitalization, utilization of the net
operating loss carryforwards is limited to approximately $687,000 per year
for the remaining life of the net operating losses.
The
net change in the total valuation allowance was a decrease of $4,623,000
for the year ended December 29, 2007 due to the expected expiration of net
operating loss carryforwards in future
periods.
|
Page
63
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
NOTE
11.
|
STOCKHOLDERS’
EQUITY AND STOCK-BASED COMPENSATION
|
| On
May 11, 2005, the shareholders approved the 2004 Plan. The 2004
Plan replaced both the 1994 Employee Flexible Stock Option Plan and the
Non-Employee Directors Stock Option Plan and thus broadens the array of
equity alternatives available to the Company. Under the 2004
Plan, the Company is allowed to grant stock options, stock appreciation
rights, non-vested and restricted stock (including performance stock),
restricted stock units (including performance units), other stock-based
awards, non-employee director awards, dividend equivalents and cash-based
awards. There are up to 6,074,969 common shares available under
the 2004 Plan which may be granted to any participant in any plan year as
defined in the 2004 Plan. Some of those shares are subject to
outstanding awards as detailed in the tables below. To the
extent these outstanding awards are forfeited or expire without exercise,
the shares will be returned to and available for future grants under the
2004 Plan. The 2004 Plan’s purpose is to attract, retain and
motivate employees, directors and third party service providers of the
Company and to encourage them to have a financial interest in the
Company. The 2004 Plan is administered by the Compensation
Committee (the “Committee”) of the Board of Directors. The
Committee has the authority to select plan participants, grant awards, and
determine the terms and conditions of such awards as defined in the 2004
Plan. The Company’s stock options granted under the 2004 Plan
generally terminate 10 years after date of grant. At December
29, 2007, the number of equity awards available for issuance under the
2004 Plan was 3,481,742.
The
following is a summary of stock-based compensation granted during the
years ended December 29, 2007, December 30, 2006 and December 31,
2005.
Nonqualified Stock
Options. On March 17, 2005, under the previous
Non-Employee Director Stock Option Plan, the Company granted 20,000
nonqualified non-employee director stock options, in the aggregate, to
five directors. The exercise price for these options was $4.04
per share (fair market value at grant date). Under the 2004
Plan, on May 11, 2005, the Company granted 4,000 nonqualified stock
options to the non-employee director newly elected to the board by the
stockholders. The exercise price for the May 11, 2005 stock
options was $3.95 per share (fair market value at grant
date). On May 8, 2007, following their election to the board by
the stockholders, the Company granted 8,000 nonqualified stock options in
the aggregate to the two most recent non-employee
directors. The exercise price for the May 8, 2007 stock options
was $8.03 per share (fair market value at grant date). All of
the non-employee director stock options vest 25 percent six months after
the grant date and 25 percent on each anniversary date
thereafter.
On
November 19, 2004, subject to the approval of the 2004 Plan, the Company
issued 276,600 nonqualified stock options to four of the executive
officers of the Company, that is the Chief Executive Officer and the
Executive Vice Presidents of Finance and Administration, Operations, and
Commodities (collectively with the Executive Vice President of Sales and
Services these officers are referred to in this note as “Named Executive
Officers”). The nonqualified stock options at November 19, 2004
were issued at an exercise price of $4.16. This exercise price
represents a 10% premium to the fair market value of the Company’s common
stock at the issue date. On May 11, 2005, these issued stock
options were authorized by the shareholders and made effective as a result
of the approval of the 2004 Plan. Additionally, on June 16,
2005, the Company granted an aggregate 194,350 nonqualified stock options
under the 2004 Plan to the Named Executive Officers at an exercise price
of $3.94, which represented a 10% premium to the fair market value of the
Company’s common stock at the grant date. The nonqualified stock options
vest over a three-year period at 33-1/3 percent per year.
Incentive Stock
Options. On June 16, 2005, the Company granted 82,500 incentive
stock options to various additional employees. The exercise
price was equal to the fair market value at the grant date of $3.58 per
share. These incentive stock options vest 20 percent at grant
date and 20 percent on each anniversary date thereafter.
A
summary of stock option activity as of December 29, 2007 and changes
during the year ended is presented
below.
|
Page
64
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
Number
of shares
|
Weighted-avg.
exercise
price
per
share
|
Weighted-avg.
remaining
contractual
life
|
|||||||||
|
Options
outstanding at December 30, 2006
|
1,673,985 |
2.71
|
|||||||||
|
Granted
|
8,000 |
8.03
|
|||||||||
|
Exercised
|
(352,280 | ) |
1.47
|
||||||||
|
Forfeited
|
(9,000 | ) |
4.02
|
||||||||
|
Expired
|
– |
N/A
|
|||||||||
|
Options
outstanding at December 29, 2007
|
1,320,705 |
3.06
|
6.1
years
|
||||||||
|
Options
exercisable at December 29, 2007
|
1,183,422 |
2.95
|
6.0
years
|
||||||||
|
|
For
the year ended December 29, 2007, the amount of cash received from the
exercise of options was approximately $0.5 million and the related tax
benefits were approximately $0.2 million. For the years ended
December 30, 2006 and December 31, 2005, the amount of cash received from
the exercise of options and the related tax benefits were
insignificant. The total intrinsic value of options exercised
for the years ended December 29, 2007, December 30, 2006 and December 31,
2005 was approximately $2.5 million, $0.2 million and $0.1 million,
respectively. The fair value of shares vested for the years
ended December 29, 2007, December 30, 2006 and December 31, 2005 was
approximately $0.6 million, $0.7 million and $0.6 million,
respectively. At December 29, 2007, the aggregate intrinsic
value of options outstanding was approximately $11.4 million and the
aggregate intrinsic value of options exercisable was approximately $10.3
million.
Non-Vested Stock
Awards. On November 19, 2004, subject to the approval of
the 2004 Plan, the Company issued 477,200 non-vested stock awards to the
Chief Executive Officer and the Executive Vice Presidents of Finance and
Administration, Operations, and Commodities. On May 11, 2005,
upon approval of the 2004 Plan these awards were authorized by the
shareholders and made effective. Additionally, on June 16,
2005, the Company granted 11,950 non-vested stock awards to the Executive
Vice President of Sales and Services. These non-vested stock
awards contain vesting periods of four to six years from date of
issuance. The six-year awards contain accelerated vesting
provisions based upon specified increases in the Company’s stock
price. During the second quarter of 2005, the Company recorded
$1.9 million of unearned compensation for the market value of the shares
on the date of grant. The unearned compensation is being
amortized to expense over the estimated lapse in restrictions of 1.3 - 4
years. During fiscal 2007 the accelerated vesting provisions on
the six-year awards were met and those shares vested.
On
March 9, 2006, the Company’s board of directors approved the contingent
issuance of 296,500 shares of common stock to certain members of
management upon completion of the Transaction. These contingent
shares had a fair value of approximately $0.6 million at date of
grant. These shares were issued in the third quarter of fiscal
2007 as a result of the Company’s average stock price for the 90-day
period ending on June 30, 2007 exceeded $4.31 per share.
A
summary of the Company’s non-vested stock awards as of December 29, 2007,
and changes during the year ended is as
follows:
|
|
Non-Vested
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||||
|
Stock
awards outstanding December 30, 2006
|
779,675 | $ | 3.48 | ||||||
|
Shares
granted
|
– | N/A | |||||||
|
Shares
vested
|
(529,675 | ) | 2.86 | ||||||
|
Shares
forfeited
|
— | — | |||||||
|
Stock
awards outstanding December 29, 2007
|
250,000 | $ | 3.95 | ||||||
Page
65
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
|
Restricted Stock
Awards. On March 9, 2006, the Company's Board of
Directors approved a Non-Employee Director Restricted Stock Award Plan
(the "Director Restricted Stock Plan") pursuant to and in accordance with
the 2004 Plan in order to attract and retain highly qualified persons to
serve as non-employee directors and to more closely align such directors'
interests with the interests of the stockholders of the Company by
providing a portion of their compensation in the form of Company common
stock.
Under
the Director Restricted Stock Plan, $20,000 in restricted Company common
stock (the "Restricted Stock") will be awarded to each non-employee
director on the third business day after the Company releases its earnings
for its prior completed fiscal year (the "Date of Award"). The Restricted
Stock will be subject to a right of repurchase at $0.01 per share upon
termination of the holder as a member of the Company's board of directors
for cause and will not be transferable. These restrictions will lapse with
respect to 100% of the Restricted Stock upon the earliest to occur of (i)
ten years after the Date of Award, (ii) a Change of Control (as defined in
the 2004 Plan), and (iii) termination of the non-employee director's
service with the Company, other than for "cause" (as defined in the
Director Restricted Stock Plan). On March 20, 2007 and March
21, 2006, the Company issued 20,232 and 21,925 shares of restricted stock
in the aggregate, respectively, to its non-employee directors under the
Director Restricted Stock Plan.
A
summary of the Company’s directors’ restricted stock awards as of December
29, 2007, and changes during the year ended is as
follows:
|
|
Restricted
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||||
|
Stock
awards outstanding December 30, 2006
|
17,540 | $ | 4.56 | ||||||
|
Restricted
shares granted
|
20,232 | 5.93 | |||||||
|
Restricted
shares where the restriction lapsed
|
(7,757 | ) | 5.16 | ||||||
|
Restricted
shares forfeited
|
— | N/A | |||||||
|
Stock
awards outstanding December 29, 2007
|
30,015 | $ | 5.33 | ||||||
|
|
Long-Term Incentive Opportunity
Awards. The Committee has adopted a Long-Term Incentive Plan
(the “LTIP”) for the Company’s key employees, as a subplan under the terms
of the 2004 Plan. The principal purpose of the LTIP is to
encourage the Company’s executives to enhance the value of the Company
and, hence, the price of the Company’s stock and the stockholders’
return. In addition, the LTIP is designed to create retention
incentives for the individual and to provide an opportunity for increased
equity ownership by executives. The Committee awarded dollar
value performance based restricted stock opportunities under the LTIP for
fiscal 2007 to certain of the Company’s officers, including each of the
Named Executive Officers (the “2007 Restricted Stock
Awards”). The restricted stock underlying the 2007 Restricted
Stock Awards is issued only if a predetermined financial objective is met
by the Company. The Company met the financial objective for
fiscal 2007. Accordingly, in accordance with the terms of the
2007 Restricted Stock Awards, it is anticipated that the restricted stock
will be granted and issued to the executives on the third business day
after the Company releases its annual financial results for fiscal
2007. The amount of restricted stock to be issued will be
calculated using the closing price of the Company’s common stock on the
second business day after the Company releases its annual financial
results for fiscal 2007. These awards vest in four equal
installments, with the first installment vesting immediately upon the
grant date and the remaining three installments vesting on the next three
anniversary dates of the grant. The award is treated as a
liability until the grant date when the number of shares to be issued is
known, and then it becomes equity-classified. At December 29,
2007 the Company recorded a liability of approximately $0.9 million on the
balance sheet for the long-term incentive
opportunities.
|
Page
66
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
NOTE
12.
|
EMPLOYEE
BENEFIT PLANS
|
| The
Company has retirement and pension plans covering substantially all of its
employees. As a condition to the Transaction, the Company was required to
provide the non-union employees of NBP with benefits that were comparable
to those in effect for those employees on the closing date of the
Transaction. Accordingly, the Company continued to maintain
certain of the NBP benefit plans following the closing of the Transaction,
including the Darling National LLC Retirement Savings Plan, a defined
contribution plan, and the Darling National LLC Pension Retirement Plan, a
defined benefit plan.
Under
the transition rules of Code Section 410(b), affected plans in an
acquisition are allowed to be treated separately for discrimination
coverage testing purposes until the end of the plan year following the
acquisition. For the Transaction, the transition period lasted
through December 31, 2007. Therefore, following the completion
of the Transaction, the Company initiated a project to review its employee
retirement benefit programs in the context of comparable programs in the
manufacturing industry sector. As a result of this review,
effective January 1, 2008, the Company announced a series of changes to
the benefits provided by its 401(k) defined contribution plans and its
defined benefit plans.
Effective
January 1, 2008, the Darling National LLC Pension Retirement Plan was
merged into the Darling International Inc. Hourly Employees’ Retirement
Plan, which plan was then amended and restated. Employees from
both plans are entitled to their accrued benefit as of December 31, 2007
under their prior plan design, plus benefit accruals after January 1, 2008
using the new benefit of $20 for each year of service with no cap on
service years. Previously, these hourly employees had been
accruing $20-$30 per year of service, depending on location of
employment.
Also
effective January 1, 2008, the Darling International Inc. Salaried
Employees’ Retirement Plan, a defined benefit plan, was
amended. Effective January 1, 2008, all of the Company’s
eligible salaried employees participate in this plan, including all former
Darling National salaried employees who did not have a defined benefit
plan prior to January 1, 2008. All eligible salaried employees
are entitled to their accrued benefit as of December 31, 2007, which
accrued benefit is an amount equal to 1.8% times years of service (up to
25 years) times final average pay plus 0.5% for each additional service
year beyond 25 years, with a total service year cap of 40
years. Effective January 1, 2008, for service years earned
going forward, the benefit accrual will be 0.25% times years of service
times final average pay.
|
|
|
Also
effective January 1, 2008, the Darling National LLC Retirement Savings
Plan was amended and restated to, among other things, update the plan for
the Economic Growth and Tax Relief Reconciliation Act and change the name
of the plan to the Darling International Inc. Hourly 401(k) Savings
Plan. Effective January 1, 2008, all of the Company’s hourly
employees are eligible to participate in this plan, which allows for
elective deferrals, an employer match equal to 100% of the first $10 per
pay period deferred by a participant, with a maximum of $520 per year, and
an employer contribution equal to $520 per year. Previously,
certain of the Company’s hourly employees were only given the opportunity
to make deferrals. The $520 employer contribution will be a new
contribution for all participating hourly employees. This plan
accepted the transfer of assets and liabilities of the hourly employees
that had account balances in the Darling International Inc. 401(k) Savings
Plan which existed prior to January 1, 2008.
Effective
January 1, 2008, the Darling International Inc. 401(k) Savings Plan, a
defined contribution plan, was amended and restated and became the Darling
International Inc. Salaried 401(k) Savings Plan and now includes all
eligible salaried employees. This plan received the assets and
liabilities of participating salaried employees under the Darling National
LLC Retirement Savings Plan. Effective January 1, 2008, the
Darling International Inc. Salaried 401(k) Savings Plan includes an
employer contribution based on age (ranging from 2-5% of compensation per
year), and will continue to allow for employee
deferrals. Previously, only the Darling National employees
received an employer match, which was equal to 100% of the first $10 per
pay period deferred by a participant, with a maximum of $520 per
year.
|
Page
67
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
In
September 2006, the FASB issued SFAS 158, Employers’ Accounting for
Defined Benefit Pension and Other Post-Retirement Plans – an Amendment of
FASB Statements No. 87, 88, 106 and 132(R) (“SFAS 158”), which requires that
the Company recognize the over-funded or under-funded status of the
Company’s defined benefit post-retirement plans as an asset or liability
in the Company’s balance sheet, with changes in the funded status
recognized through comprehensive income in the year in which they
occur. Based on the funded status of the Company’s pension
plans as of December 30, 2006, the adoption of SFAS 158 increased the
Company’s total assets, as a result of deferred tax assets, by
approximately $2.2 million, increased total liabilities by approximately
$6.7 million and reduced total stockholder’s equity by approximately $4.5
million, net of taxes. The adoption of the funded status
portion of SFAS 158 did not affect the Company’s results of
operations.
In
addition, SFAS 158 requires that companies using a measurement date other
than the fiscal year end change to a fiscal year end measurement date
effective for years ending after December 15, 2008. The Company
will adopt the measurement date provision in 2008.
The
following table sets forth the plans’ funded status and amounts recognized
in the Company’s consolidated balance sheets based on the measurement date
(October 1, 2007 and 2006) (in
thousands):
|
|
December
29,
2007
|
December 30,
2006
|
||||||||
|
Change
in projected benefit obligation:
|
|||||||||
|
Projected
benefit obligation at beginning of period
|
$ | 88,719 | $ | 82,650 | |||||
|
Acquisition
|
– | 6,305 | |||||||
|
Service
cost
|
2,328 | 2,429 | |||||||
|
Interest
cost
|
5,011 | 4,673 | |||||||
|
Actuarial
(gain)
|
(1,822 | ) | (4,160 | ) | |||||
|
Benefits
paid
|
(3,570 | ) | (3,178 | ) | |||||
|
Other
|
76 | – | |||||||
|
Projected
benefit obligation at end of period
|
90,742 | 88,719 | |||||||
|
Change
in plan assets:
|
|||||||||
|
Fair
value of plan assets at beginning of period
|
69,898 | 60,083 | |||||||
|
Post
measurement date contributions
|
123 | – | |||||||
|
Acquisition
|
– | 5,141 | |||||||
|
Actual
return on plan assets
|
8,941 | 5,158 | |||||||
|
Employer
contribution
|
6,186 | 2,694 | |||||||
|
Benefits
paid
|
(3,570 | ) | (3,178 | ) | |||||
|
Fair
value of plan assets at end of period
|
81,578 | 69,898 | |||||||
|
Funded
status
|
(9,164 | ) | (18,821 | ) | |||||
|
Post-measurement
date contributions
|
– | 123 | |||||||
|
Net
amount recognized
|
$ | (9,164 | ) | $ | (18,698 | ) | |||
|
Amounts
recognized in the consolidated balance
sheets
consist of:
|
|||||||||
|
Non-current
liability
|
$ | (9,164 | ) | $ | (18,698 | ) | |||
|
Net
amount recognized
|
$ | (9,164 | ) | $ | (18,698 | ) | |||
|
Amounts
recognized in accumulated other
comprehensive
loss consist of:
|
|||||||||
|
Net
actuarial loss
|
$ | 11,107 | $ | 17,385 | |||||
|
Prior
service cost
|
499 | 541 | |||||||
|
Net
amount recognized (a)
|
$ | 11,606 | $ | 17,926 | |||||
|
(a)
|
Amounts
do not include deferred taxes of $4.2 million and $6.6 million at
December 29, 2007 and December 30, 2006,
respectively.
|
Page
68
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
|
The accumulated benefit
obligation for all defined benefit pension plans was $84.0 million and
$82.0 million at December 29, 2007 and December 30, 2006,
respectively.
|
|
December
29,
2007
|
December
30,
2006
|
||||||||
|
Projected
benefit obligation
|
$ | 90,742 | $ | 88,719 | |||||
|
Accumulated
benefit obligation
|
83,953 | 82,025 | |||||||
|
Fair
value of plan assets
|
81,578 | 69,898 | |||||||
|
|
Net pension cost includes the
following components (in
thousands):
|
|
December
29,
2007
|
December
30,
2006
|
December
31,
2005
|
|||||||||||
|
Service
cost
|
$ | 2,328 | $ | 2,429 | $ | 1,998 | |||||||
|
Interest
cost
|
5,011 | 4,673 | 4,206 | ||||||||||
|
Expected
return on plan assets
|
(5,636 | ) | (5,192 | ) | (4,379 | ) | |||||||
|
Net
amortization and deferral
|
1,269 | 1,792 | 1,406 | ||||||||||
|
Net
pension cost
|
$ | 2,972 | $ | 3,702 | $ | 3,231 | |||||||
|
|
Amounts recognized in accumulated
other comprehensive income (loss) for the year ended (in
thousands):
|
|
2007
|
|||||
|
Actuarial
gains recognized:
|
|||||
|
Reclassification
adjustments
|
$ | 705 | |||
|
Actuarial
gain recognized during the period
|
3,139 | ||||
|
Prior
service (cost) credit recognized:
|
|||||
|
Reclassification
adjustments
|
72 | ||||
|
Prior
service cost arising during the period
|
(46 | ) | |||
| $ | 3,870 | ||||
|
|
The estimated amount that will be
amortized from accumulated other comprehensive loss into net periodic
pension cost in fiscal 2008 is as follows (in
thousands):
|
|
2008
|
|||||
|
Net
actuarial loss
|
$ | 349 | |||
|
Prior
service cost
|
123 | ||||
| $ | 472 | ||||
|
|
Weighted average assumptions used
to determine benefit obligations
were:
|
|
December
29,
2007
|
December
30,
2006
|
December
31
2005
|
|||||||||||
|
Discount
rate
|
6.00% | 5.75% | 5.50% | ||||||||||
|
Rate
of compensation increase
|
4.10% | 4.08% | 4.32% | ||||||||||
Page
69
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
|
Weighted average assumptions used
to determine net periodic benefit cost for the employee benefit pension
plans were:
|
|
December
29,
2007
|
December
30,
2006
|
December
31,
2005
|
|||||||||||
|
Discount
rate
|
5.75% | 5.50% |
6.00%
|
||||||||||
|
Rate
of increase in future compensation levels
|
4.08% | 4.32% | 4.66% | ||||||||||
|
Expected
long-term rate of return on assets
|
8.25% | 8.38% | 8.75% | ||||||||||
|
|
Consideration
was made to the long-term time horizon for the plans’ benefit obligations
as well as the related asset class mix in determining the expected
long-term rate of return. Historical returns are also
considered, over the long-term time horizon, in determining the expected
return. Considering the overall asset mix of approximately 60%
equity and 40% fixed income, several years in the last ten years having
strong double digit returns along with several years of single digit
losses, the Company believes it is reasonable to expect a long-term rate
of return of 8.25% for the plans’ investments as a whole.
Plan
Assets
The
Company’s pension plan weighted-average asset allocations at December 29,
2007 and December 30, 2006, by asset category, are as
follows:
|
|
Plan
Assets at
|
|||||||||
|
Asset Category
|
December
29,
2007
|
December 30,
2006
|
|||||||
|
Equity
Securities
|
60.9%
|
65.2%
|
|||||||
|
Debt
Securities
|
39.1%
|
34.8%
|
|||||||
|
Total
|
100.0%
|
100.0%
|
|||||||
|
|
The
investment objectives have been established in conjunction with a
comprehensive review of the current and projected financial
requirements. The primary investment objectives
are: 1) to have the ability to pay all benefit and expense
obligations when due; 2) to maximize investment returns within reasonable
and prudent levels of risk in order to minimize contributions; and 3) to
maintain flexibility in determining the future level of
contributions.
Investment
results are the most critical element in achieving funding objectives,
while reliance on contributions is a secondary element.
The
investment guidelines are based upon an investment horizon of greater than
ten years; therefore, interim fluctuations are viewed with this
perspective. The strategic asset allocation is based on
this long-term perspective. However, because the participants’
average age is somewhat older than the typical average plan age,
consideration is given to retaining some short-term
liquidity. Analysis of the cash flow projections of the plans
indicates that benefit payments will continue to exceed
contributions.
Based
upon the plans’ time horizon, risk tolerances, performance expectations
and asset class constraints, target asset allocation ranges are as
follows:
|
|
Fixed
Income
|
35%
- 45%
|
|
|||||||
|
Domestic
Equities
|
45% - 55%
|
|
|||||||
|
International
Equities
|
7% - 13%
|
|
|
|
The fixed income asset allocation
may be invested in corporate and government bonds denominated in U.S.
dollars, private and publicly traded mortgages, private placement debt,
and cash equivalents. The average maturity of the asset class
will not exceed ten years. The portfolio is expected to be well
diversified.
|
Page
70
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
|
The
domestic equity allocation is invested in stocks traded on one of the U.S.
stock exchanges. Securities convertible into such stocks,
convertible bonds and preferred stock, may also be
purchased. The majority of the domestic equities are invested
in large, mid, and small cap index accounts that are well
diversified. By definition, small cap investments carry greater
risk, but also are expected to create greater returns over
time. The plans target approximately 7.5% of the total asset
mix to small cap. American Depository Receipts (“ADR’s”) may
not account for more than 3% of the holdings. Small company
stocks may not exceed 15% of the plans’ assets. Small company
definitions fluctuate with market levels, but generally will be considered
companies with market capitalizations less than $500
million. The portfolio will be diversified in terms of
individual company securities and industries.
The
international equity allocation is invested in companies whose stock is
traded outside the U.S. and/or companies that conduct the major portion of
their business outside of the U.S. The portfolio may invest in
ADR’s. The emerging market portion of the international equity
investment is held below 20% due to greater volatility in the asset
class. The portfolio is expected to be diversified in terms of
companies, industries and countries.
All
investment objectives are expected to be achieved over a market cycle
anticipated to be a period of five years. Reallocations are
performed at a minimum of twice a year to retain target asset allocation
ranges.
|
| Contributions
The
Company's funding policy for employee benefit pension plans is to
contribute annually not less than the minimum amount required nor more
than the maximum amount that can be deducted for federal income tax
purposes. Contributions are intended to provide not only for
benefits attributed to service to date but also for those expected to be
earned in the future.
Based
on current actuarial estimates, the Company does not expect to make any
payments to meet funding requirements for its pension plans in fiscal
2008.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in
thousands):
|
|
Year
Ending
|
Pension
Benefits
|
||
|
2008
|
$ 3,970
|
||
|
2009
|
4,110
|
||
|
2010
|
4,480
|
||
|
2011
|
4,860
|
||
|
2012
|
5,190
|
||
|
Years
2013 – 2017
|
33,450
|
|
|
The Company participates in
several multi-employer pension plans which provide defined benefits to
certain employees covered by labor contracts. These plans are
not administered by the Company and contributions are determined in
accordance with provisions of negotiated labor
contracts. Current information with respect to the Company's
proportionate share of the over-and under-funded status of all actuarially
computed value of vested benefits over these pension plans’ net assets is
not available. The Company’s portion of contributions to these
plans amounted to $2.6 million, $2.0 million and $1.8 million for the
years ended December 29, 2007, December 30, 2006 and December 31, 2005,
respectively.
|
Page
71
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
|
In August 2006 the Pension
Protection Act of 2006 (“PPA”) was signed into law 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. Should a multi-employer plan elect
to terminate rather than increase contributions, the Company will record a
liability for its cost of the plan termination when such liability becomes
probable and estimable. One multi-employer plan in which the
Company participates has given notification of a mass withdrawal
termination for the plan year ended June 30, 2007. Therefore,
at December 29, 2007 the Company has recorded a liability of approximately
$1.1 million related to this termination, which represents the net present
value of the liability as determined by the terminated
plan.
|
|
NOTE
13.
|
CONCENTRATION
OF CREDIT RISK
|
|
Concentration
of credit risk is limited due to the Company’s diversified customer base
and the fact that the Company sells commodities. No single
customer accounted for more than 10% of the Company’s net sales in fiscal
years 2007, 2006 and 2005.
|
|
NOTE
14.
|
CONTINGENCIES
|
|
The
Company is a party to several lawsuits, claims and loss contingencies
arising in the ordinary course of its business, including assertions by
certain regulatory 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 such claims are paid by the
Company.
|
|
| As a result of the matters discussed above, the Company has established loss reserves for insurance, environmental and litigation matters. At December 29, 2007 and December 30, 2006, the reserves for insurance, environmental and litigation contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities for which there are no insurance recoveries were approximately $17.1 million and $17.9 million, respectively. Management of the Company believes these reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management; however, there can be no assurance that final costs related to these matters will not exceed current estimates. The Company believes that the likelihood is remote that any additional liability from such lawsuits and claims that may not be covered by insurance would have a material effect on the financial statements. | |
|
In
July 2007, a judgment was entered in a litigation matter involving a
contract dispute in which the Company was a party. The judgment
required the Company to convey an unused parcel of property recorded on
the books for approximately $500,000 to the counterparty for that
amount. In December 2007, a judgment was entered in the matter
awarding the counterparty approximately $2.6 million in attorneys’ fees
and costs. The Company filed appeals of both
judgments. The Company settled this matter during the first
quarter of fiscal 2008. Pursuant to the terms of the
settlement, the Company transferred the property to the counterparty for a
purchase price of $500,000, paid the counterparty approximately $2.2
million towards attorneys’ fees and costs and agreed to dismiss its
pending appeals with prejudice. In addition, the parties
exchanged mutual releases. The Company has recorded a charge of
$2.2 million for the attorneys’ fees and costs in the fourth quarter of
2007, which is included in selling, general and administrative
expenses.
|
Page
72
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
|
In June 2006, the Company was
awarded damages of approximately $7.4 million as a result of a service
provider’s failure to provide steam under a service agreement to one of
the Company’s plants. At the time the damages were awarded,
collectibility of such damages was uncertain; however on October 12, 2006,
the Company entered into an agreement to sell its rights to such damages
to a third party for $2.2 million in cash. The agreement was
made subject to certain conditions which were satisfied on March 1,
2007. On March 8, 2007, the Company received $2.2 million,
completing the transaction. The Company recorded a gain with
the receipt of the $2.2 million in proceeds in the first quarter of
2007.
|
|
NOTE
15.
|
BUSINESS
SEGMENTS
|
|
The
Company sells its products domestically and internationally and operates
within two industry segments: Rendering and Restaurant
Services. The measure of segment profit (loss) includes all
revenues, operating expenses (excluding certain amortization of
intangibles), and selling, general and administrative expenses incurred at
all operating locations and excludes general corporate expenses.
|
|
|
Included
in corporate activities are general corporate expenses and the
amortization of intangibles. Assets of corporate activities include cash,
unallocated prepaid expenses, deferred tax assets, prepaid pension, and
miscellaneous other assets. The acquisition of substantially
all of the assets of NBP are reflected primarily in the Rendering
segment.
|
|
| Rendering
Rendering
consists of the collection and processing of animal by-products, including
hides, from butcher shops, grocery stores, food service industry and meat
and poultry processors, converting these principally into useable oils and
proteins utilized by the agricultural, leather and oleo-chemical
industries.
|
|
| Restaurant
Services
Restaurant
Services consists of the collection of used cooking oils from food service
establishments and recycling them into similar products such as
high-energy animal feed ingredients and industrial
oils. Restaurant Services also provides grease trap
servicing. Included in restaurant services is the National
Service Center (“NSC”). The NSC schedules services such as fat
and bone and used cooking oil collection as well as trap cleaning for
contracted customers using the Company’s resources or third party
providers.
|
|
| Included
in corporate activities are general corporate expenses and the
amortization of intangibles related to “Fresh Start Reporting.”
Business Segment Net
Revenues (in thousands):
|
|
Year
Ended
|
|
December
29,
2007
|
December 30,
2006
|
|
December 31,
2005
|
|
Rendering:
|
||||||||||||||
|
Trade
|
$ | 464,468 | $ | 279,011 | $ | 192,340 | ||||||||
|
Intersegment
|
42,095 | 29,194 | 19,206 | |||||||||||
| 506,563 | 308,205 | 211,546 | ||||||||||||
|
Restaurant
Services:
|
||||||||||||||
|
Trade
|
180,845 | 127,979 | 116,527 | |||||||||||
|
Intersegment
|
5,311 | 3,111 | 4,808 | |||||||||||
| 186,156 | 131,090 | 121,335 | ||||||||||||
|
Eliminations
|
(47,406 | ) | (32,305 | ) | (24,014 | ) |
|
|||||||
|
Total
|
$ | 645,313 | $ | 406,990 | $ | 308,867 | ||||||||
Page
73
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
|
Business Segment
Profit/(Loss) (in
thousands):
|
|
Year
Ended
|
|
December
29,
2007
|
December 30,
2006
|
|
December 31,
2005
|
|
Rendering
|
$ | 85,654 | $ | 33,177 | $ | 21,668 | ||||||||
|
Restaurant
Services
|
34,953
|
14,789 |
15,385
|
|||||||||||
|
Corporate
Activities
|
(70,029 | ) | (35,675 | ) | (23,201 | ) | ||||||||
|
Interest
expense
|
(5,045 | ) |
(7,184
|
)
|
(6,157 | ) | ||||||||
|
Income from continuing
operations
|
$ | 45,533 | $ | 5,107 | $ | 7,695 |
|
|
Certain
assets are not attributable to a single operating segment but instead
relate to multiple operating segments operating out of individual
locations. These assets are utilized by both the Rendering and
Restaurant Services business segments and are identified in the category
Combined Rendering/Restaurant Services. Depreciation of
Combined Rendering/Restaurant Services assets is allocated based upon an
estimate of the percentage of corresponding activity attributed to each
segment. Additionally, although intangible assets are allocated
to operating segments, the amortization related to the adoption of “Fresh
Start Reporting” in 1993 is not considered in the measure of operating
segment profit/(loss) and is included in Corporate
Activities.
As
discussed in Note 14 Contingencies, the Company received proceeds of $2.2
million during the first quarter of fiscal 2007 as a result of a service
provider’s failure to provide steam under a service agreement to one of
the Company’s plants. The Company recorded approximately $1.2
million of the proceeds as a reduction of cost of sales in the Company’s
rendering segment and approximately $1.0 million as a reduction of selling
and general and administrative costs in the corporate
segment.
Business Segment
Assets (in
thousands):
|
|
December
29,
2007
|
December 30,
2006
|
|||||||
|
Rendering
|
$ | 162,091 | $ | 153,798 | ||||
|
Restaurant
Services
|
40,518 | 36,359 | ||||||
|
Combined
Rendering/Restaurant Services
|
106,958 | 105,402 | ||||||
|
Corporate
Activities
|
41,771 | 25,247 | ||||||
|
Total
|
$ | 351,338 | $ | 320,806 | ||||
|
|
Business
Segment Property, Plant and Equipment (in
thousands):
|
|
December
29,
2007
|
December 30,
2006
|
December
31,
2005
|
|||||||||||
|
Depreciation
and amortization:
|
|||||||||||||
|
Rendering
|
$ | 13,509 | $ | 11,388 | $ | 7,928 | |||||||
|
Restaurant
Services
|
3,881 | 3,844 | 3,289 | ||||||||||
|
Corporate
Activities
|
5,824 | 5,454 | 4,570 | ||||||||||
|
Continuing
operations
|
$ | 23,214 | $ | 20,686 | $ | 15,787 | |||||||
|
Capital
expenditures:
|
|||||||||||||
|
Rendering
|
$ | 2,880 | $ | 1,421 | $ | 4,746 | |||||||
|
Restaurant
Services
|
538 | 254 | 2,208 | ||||||||||
|
Combined
Rendering/Restaurant Services
|
10,609 | 8,644 | 12,622 | ||||||||||
|
Corporate
Activities
|
1,525 | 1,481 | 1,830 | ||||||||||
|
Continuing
operations (a)
|
$ | 15,552 | $ | 11,800 | $ | 21,406 | |||||||
|
(a)
|
Excludes
the capital assets acquired as part of the acquisition of substantially
all of the assets of NBP of approximately $51.9 million in fiscal
2006.
|
Page
74
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
|
The Company has no material
foreign operations, but exports a portion of its products to customers in
various foreign countries.
Geographic Area Net Trade
Revenues (in
thousands):
|
|
December
29,
2007
|
December
30,
2006
|
December 31,
2005
|
|||||||||||
|
Domestic
|
$ | 473,694 | $ | 294,301 | $ | 231,282 | |||||||
|
Foreign
|
171,619 |
112,689
|
77,585 | ||||||||||
|
Total
|
|
$ | 645,313 | $ | 406,990 | $ | 308,867 | ||||||
|
|
The Company
attributes revenues from external customers to individual foreign
countries based on the destination of the Company’s
shipments. For fiscal 2007, 2006 and 2005, no individual
foreign country comprised more than 5% of the Company’s consolidated
revenue, with the exception of sales to Mexico during fiscal 2005, which
totaled $17.5 million in revenue or 5.7% of consolidated fiscal 2005
revenue.
|
|
NOTE
16.
|
QUARTERLY
FINANCIAL DATA (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE
AMOUNTS):
|
|
Year
Ended December 29, 2007
|
||||||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
Net
sales
|
$ | 138,612 | $ | 159,425 | $ | 171,831 | $ | 175,445 | ||||||||
|
Operating
income
|
17,043 | 17,410 | 21,010 | 25,184 | ||||||||||||
|
Income
from continuing operations
|
9,580 | 9,482 | 12,100 | 14,371 | ||||||||||||
|
Net
income
|
9,580 | 9,482 | 12,100 | 14,371 | ||||||||||||
|
Basic
earnings per share
|
0.12 | 0.12 | 0.15 | 0.18 | ||||||||||||
|
Diluted
earnings per share
|
0.12 | 0.12 | 0.15 | 0.18 | ||||||||||||
|
Year
Ended December 30, 2006
|
||||||||||||||||
|
First
Quarter
|
Second
Quarter(a)
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
Net
sales
|
$ | 76,400 | $ | 87,231 | $ | 115,229 | $ | 128,130 | ||||||||
|
Operating
income
|
1,899 | 1,534 | 4,362 | 11,444 | ||||||||||||
|
Income/(loss)
from continuing
Operations
|
366 | (3,149 | ) | 1,801 | 6,089 | |||||||||||
|
Net
income/(loss)
|
366 | (3,149 | ) | 1,801 | 6,089 | |||||||||||
|
Basic
earnings/(loss) per share
|
0.01 | (0.04 | ) | 0.02 | 0.08 | |||||||||||
|
Diluted
earnings/(loss) per share
|
0.01 | (0.04 | ) | 0.02 | 0.07 | |||||||||||
|
(a)
|
Included
in net income/(loss) and income/(loss) from continuing operations in the
second quarter of fiscal 2006 is a write-off of deferred loan cost of
approximately $2.6
million and fees of approximately $1.9 for the early retirement of senior
subordinated notes and termination of the previous senior credit
agreement.
|
Page
75
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
|
NOTE
17.
|
NEW
ACCOUNTING PRONOUNCEMENTS
|
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (“SAB 108”), to address diversity in practice in quantifying
financial statement misstatements. SAB 108 requires that registrants
quantify uncorrected misstatements using both the “rollover” and “iron curtain”
methods, with adjustment required if either method results in a misstatement
that is material. The Company has identified a $2.8 million
overstatement of income tax liabilities. The Company has not been
able to determine how these excess liabilities arose; however, the Company has
determined that these liabilities were recorded prior to 2002. The
Company had previously concluded that the $2.8 million misstatement was
immaterial using the rollover method for evaluating misstatements. As
a result of adopting SAB 108, the Company has corrected the misstatement by
recording a cumulative effect adjustment to retained earnings at the beginning
of fiscal 2006.
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value
measurements. This statement is effective for the Company on
December 30, 2007 and is not expected to have a significant impact on the
Company’s consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards 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 the Company on December 30,
2007 and is not expected to have a significant impact on the Company’s
consolidated financial statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards 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 SFAS 141(R) on the consolidated
financial statements.
Page
76
DARLING
INTERNATIONAL INC.
Notes to
Consolidated Financial Statements (continued)
SCHEDULE
II
Valuation
and Qualifying Accounts
(In
thousands)
|
Balance
at
|
Additions
Charged to:
|
Balance
at
|
||||||||||||||||||
|
Description
|
Beginning
of Period
|
Costs
and Expenses
|
Other
(a)
|
Deductions
(b)
|
End
of Period |
|||||||||||||||
|
Reserve
for bad debts:
|
||||||||||||||||||||
|
Year ended December 29, 2007
|
$ | 1,639 | $ | 407 | $ | – | $ | 580 | $ | 1,466 | ||||||||||
|
Year ended December 30, 2006
|
$ | 728 | $ | 874 | $ | 596 | $ | 559 | $ | 1,639 | ||||||||||
|
Year ended December 31, 2005
|
$ | 757 | $ | 484 | $ | – | $ | 513 | $ | 728 | ||||||||||
|
Deferred
tax valuation allowance:
|
||||||||||||||||||||
|
Year ended December 29, 2007
|
$ | 9,416 | $ | – | $ | – | $ | 4,623 | $ | 4,793 | ||||||||||
|
Year ended December 30, 2006
|
$ | 19,086 | $ | – | $ | – | $ | 9,670 | $ | 9,416 | ||||||||||
|
Year ended December 31, 2005
|
$ | 20,257 | $ | – | $ | – | $ | 1,171 | $ | 19,086 | ||||||||||
|
(a)
|
Includes
amounts acquired as part of the NBP
acquisition.
|
|
|
(b)
|
Deductions
consist of write-offs of uncollectible accounts receivable and reductions
of the deferred tax valuation allowance. In 2006, the
reductions in the deferred tax valuation allowance were offset against
deferred tax assets and/or goodwill, resulting in no deferred tax
benefit.
|
Page
77
PART
II
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures.
As required by Exchange Act Rule
13a-15(b), the Company’s management, including the Chief Executive Officer and
Chief Financial Officer, conducted an evaluation, as of the end of the period
covered by this report, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures. As defined in Exchange
Act Rules 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls
and procedures are controls and other procedures of the Company that are
designed to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports it files or submits under the
Exchange Act is accumulated and communicated to the Company’s management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
Based on management’s evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of the end of the period
covered by this report.
Internal
Control over Financial Reporting.
(a) Management’s Annual
Report
on Internal Control over
Financial Reporting. Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
promulgated under the Exchange Act. Those rules define internal
control over financial reporting as a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures
that:
|
•
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
•
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
|
•
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 29, 2007. In making this
assessment, the Company’s management used the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
Page
78
Based on their assessment, management
has concluded that the Company’s internal control over financial reporting was
effective as of December 29, 2007.
KPMG LLP,
the registered public accounting firm that audited the Company’s financial
statements, has issued an audit report on management’s assessment of the
Company’s internal control over financial reporting, which report is included
herein.
(b) Attestation Report of the Registered
Public Accounting Firm. The attestation report called for by
Item 308(b) of Regulation S-K is incorporated herein by reference to Report of
Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting, included in Part II, Item 8, “Financial Statements and
Supplementary Data” of this report.
(c) Changes in Internal Control over
Financial Reporting. As required by Exchange Act Rule
13a-15(d), the Company’s management, including the Chief Executive Officer and
Chief Financial Officer, also conducted an evaluation of the Company’s internal
control over financial reporting to determine whether any change occurred during
the last fiscal quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting. Based on that evaluation, there has
been no change in the Company’s internal control over financial reporting during
the last fiscal quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
Page
79
PART
III
|
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
The information required by this Item with respect to Items 401, 405 and
407 of Regulation S-K will appear in the sections entitled “Election of
Directors,” “Executive Officers and Directors,” “Section 16(a) Beneficial
Ownership Reporting Compliance” and “Corporate Governance-Committees of the
Board-Audit Committee” included in the Company’s definitive Proxy Statement
relating to the 2008 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
The Company has adopted the Darling
International Inc. Code of Business Conduct (“Code of Business Conduct”), which
is applicable to all of the Company’s employees, including its senior financial
officers, the Chief Executive Officer, Chief Financial Officer, Controller,
Treasurer and General Counsel. The Company has not granted any
waivers to the Code of Business Conduct to date. A copy of the
Company’s Code of Business Conduct has been posted on the “Investor” portion of
our web site, at www.darlingii.com. Shareholders
may request a free copy of our Code of Business Conduct from:
Brad
Phillips
Darling
International Inc.
251
O’Connor Ridge Blvd, Suite 300
Irving,
Texas 75038
Phone: 972-717-0300
Fax: 972-717-1588
Email: bphillips@darlingii.com
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
The information required by this Item
will appear in the sections entitled “Executive Compensation” and “Corporate
Governance-Compensation Committee Interlocks and Insider Participation” included
in the Company’s definitive Proxy Statement relating to the 2008 Annual Meeting
of Stockholders, which information is incorporated herein by
reference.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The information required by this Item
with respect to Item 201(d) of Regulation S-K appears in Item 5 of this
report.
The information required by this Item with respect to Item 403 of Regulation S-K
will appear in the section entitled “Security Ownership of Certain Beneficial
Owners and Management” included in the Company’s definitive Proxy Statement
relating to the 2008 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required by this Item
will appear in the sections entitled “Transactions with Related Persons,
Promoters and Certain Control Persons” and “Corporate Goverance-Independent
Directors” included in the Company’s definitive Proxy Statement relating to the
2008 Annual Meeting of Stockholders, which information is incorporated herein by
reference.
|
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information required by this Item will appear in the section entitled
“Independent Auditors” included in the Company’s definitive Proxy Statement
relating to the 2008 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
Page
80
PART
IV
|
ITEM
15.
|
EXHIBITS,
FINANCIAL STATEMENT
SCHEDULES
|
|
Page
|
||
|
(a)
|
Documents
filed as part of this report:
|
| (1 | ) |
The
following consolidated financial statements are included in Item
8.
|
|||||
|
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial
Statements
|
43 | ||||||
|
Report
of Independent Registered Public Accounting Firm on Internal Control
Over
Financial
Reporting
|
44 | ||||||
|
Consolidated
Balance Sheets
|
|||||||
|
December
29, 2007 and December 30, 2006
|
45 | ||||||
|
Consolidated
Statements of Operations-
|
|||||||
|
Three
years ended December 29, 2007
|
46 | ||||||
|
Consolidated
Statements of Stockholders’ Equity -
|
|||||||
|
Three
years ended December 29, 2007
|
47 | ||||||
|
Consolidated
Statements of Cash Flows -
|
|||||||
|
Three
years ended December 29, 2007
|
49 | ||||||
|
Notes
to Consolidated Financial Statements
|
50 | ||||||
| (2 | ) |
The
following financial statement schedule is included in Item
8.
|
|||||
|
Schedule II
- Valuation and Qualifying Accounts
|
|||||||
|
Three
years ended December 29, 2007
|
77 | ||||||
| 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
81
|
(3)
|
Exhibits.
|
||||||
| Exhibit No. | Document | |
|
2.1
|
Asset
Purchase Agreement, dated as of December 19, 2005, among Darling
International Inc., Darling National LLC, and National By-Products LLC
(filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
December 19, 2005 and incorporated herein by
reference).
|
|
|
2.2
|
Claim
Purchase Agreement, dated as of October 12, 2006, by and between Darling
International Inc. and Trust Company of the West as trustee of the trust
established pursuant to an Individual Trust Agreement between the
Boilermaker-Blacksmith National Pension Trust and itself (filed as Exhibit
2.1 to the Company’s Current Report on Form 8-K filed October 18, 2006 and
incorporated herein by reference).
|
|
|
2.3
|
Amendment
No. 1 to Claim Purchase Agreement, dated as of December 31, 2006, by and
between Darling International Inc. and Trust Company of the West as
trustee of the trust established pursuant to an Individual Trust Agreement
between the Boilermaker-Blacksmith National Pension Trust and itself
(filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
January 3, 2007 and incorporated herein by reference).
|
|
|
3.1
|
Restated
Certificate of Incorporation of the Company, as amended (filed as Exhibit
3.1 to the Company’s Registration Statement on Form S-1 filed May 23, 2002
and incorporated herein by reference).
|
|
|
3.2
|
Amended
and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed August 13, 2007 and incorporated herein
by reference).
|
|
|
4.1
|
Specimen
Common Stock Certificate (filed as Exhibit 4.1 to the Company’s
Registration Statement on Form S-1 filed May 27, 1994 and incorporated
herein by reference).
|
|
|
4.2
|
Certificate
of Designation, Preference and Rights of Series A Preferred Stock (filed
as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed
May 23, 2002 and incorporated herein by reference).
|
|
|
10.1
|
Recapitalization
Agreement, dated as of March 15, 2002, among Darling International Inc.,
each of the banks or other lending institutions which is a signatory
thereto or any successor or assignee thereof, and Credit Lyonnais New York
Branch, individually as a bank and as agent (filed as Annex C to the
Company’s Definitive Proxy Statement filed on April 29, 2002, and
incorporated herein by reference).
|
|
|
10.2
|
First
Amendment to Recapitalization Agreement, dated as of April 1, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Annex D to the Company’s
Definitive Proxy Statement filed on April 29, 2002, and incorporated
herein by reference).
|
|
|
10.3
|
Second
Amendment to Recapitalization Agreement, dated as of April 29, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Exhibit 10.3 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
|
|
10.4
|
Registration
Rights Agreement, dated as of December 29, 1993, between Darling
International Inc., and the signatory holders identified therein (filed as
Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed on
May 27, 1994, and incorporated herein by reference).
|
|
|
10.5
|
Registration
Rights Agreement, dated as of May 10, 2002, between Darling International
Inc., and the holders identified therein (filed as Exhibit 10.6 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
|
Page
82
|
10.6
*
|
Form
of Indemnification Agreement (filed as Exhibit 10.7 to the Company’s
Registration Statement on Form S-1 filed on May 27, 1994, and incorporated
herein by reference).
|
|
10.7
|
Credit
Agreement, dated as of April 7, 2006, among Darling International Inc.,
various lending institutions party thereto and JPMorgan Chase Bank, N.A.
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
|
|
10.8
|
First
Amendment to Note Purchase Agreement, dated as of April 7, 2006, among
Darling International Inc. and the securities purchasers party thereto
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
|
|
10.9
|
Leases,
dated July 1, 1996, between the Company and the City and County of San
Francisco (filed pursuant to temporary hardship exemption under cover of
Form SE).
|
|
|
10.10
|
Lease,
dated November 24, 2003, between Darling International Inc. and the Port
of Tacoma (filed as Exhibit 10.3 to the Company’s Annual Report on
Form 10-K filed March 29, 2004, and incorporated herein by
reference).
|
|
|
10.11
*
|
1994
Employee Flexible Stock Option Plan (filed as Exhibit 2 to the Company’s
Revised Definitive Proxy Statement filed on April 20, 2001, and
incorporated herein by reference).
|
|
|
10.12
*
|
Non-Employee
Directors Stock Option Plan (filed as Exhibit 10.13 to the Company’s
Registration Statement on Form S-1/A filed on June 5, 2002, and
incorporated herein by reference).
|
|
|
10.13
*
|
Darling
International Inc. 2004 Omnibus Incentive Plan (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed May 11, 2005, and
incorporated herein by reference).
|
|
|
10.14
*
|
Amendment
to Darling International Inc. 2004 Omnibus Incentive Plan (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 22,
2007 and incorporated herein by reference).
|
|
|
10.15
*
|
Darling
International Inc. Compensation Committee Long-Term Incentive Program
Policy Statement (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed June 22, 2005, and incorporated herein by
reference).
|
|
|
10.16
*
|
Integration
Success Incentive Award Plan (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed March 15, 2006 and incorporated herein by
reference).
|
|
|
10.17
*
|
Non-Employee
Director Restricted Stock Award Plan (filed as Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed March 15, 2006 and incorporated
herein by reference).
|
|
|
10.18
*
|
Notice
of Amendment to Grants and Awards, dated as of October 10, 2006 (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 10,
2006 and incorporated herein by reference).
|
|
|
10.19
*
|
Employment
Agreement, dated as of February 3, 2003, between Darling International
Inc. and Randall C. Stuewe (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed February 3, 2003, and incorporated herein by
reference).
|
|
|
10.20
*
|
Amendment
No. 1 to Employment Agreement, dated as of July 1, 2003, between Darling
International Inc. and Randall C. Stuewe (filed as Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q filed August 12, 2003, and
incorporated herein by reference).
|
|
Page
83
|
10.21
*
|
Amendment
No. 2 to Employment Agreement, dated as of October 13, 2006, by and
between Darling International Inc. and Randall C. Stuewe (filed as Exhibit
10.1 to the Company’s Current Report on Form 8-K filed October 18, 2006
and incorporated herein by reference).
|
|
|
10.22
*
|
Amended
and Restated Employment Agreement, dated as of February 28, 2006, by and
among Darling International Inc., Darling National LLC and Mark A. Myers
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
May 17, 2006 and incorporated herein by
reference).
|
|
10.23
*
|
Form
of Senior Executive Termination Benefits Agreement (filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed November 29, 2007 and
incorporated herein by reference).
|
|
|
10.24
*
|
Form
of Indemnification Agreement between Darling International Inc. and its
directors and executive officers (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed February 25, 2008, and
incorporated herein by reference).
|
|
|
14
|
Darling
International Inc. Code of Business Conduct applicable to all employees,
including senior executive officers (filed as Exhibit 14 to the
Company’s Current Report on Form 8-K filed February 25, 2008, and
incorporated herein by reference).
|
|
|
21
|
Subsidiaries
of the Registrant (filed as Exhibit 21.1 to the Company’s Registration
Statement on Form S-4 filed on February 2, 2006, and incorporated herein
by reference).
|
|
|
23
|
Consent
of KPMG LLP (filed herewith).
|
|
|
31.1
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of Randall C. Stuewe, the Chief Executive Officer of the
Company (filed herewith).
|
|
|
31.2
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of John O. Muse, the Chief Financial Officer of the Company
(filed herewith).
|
|
|
32
|
Written
Statement of Chief Executive Officer and Chief Financial Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) (filed herewith).
|
|
|
The
Exhibits are available upon request from the Company.
|
||
|
*
|
Management
contract or compensatory plan or
arrangement.
|
Page
84
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
DARLING
INTERNATIONAL INC.
|
|||
|
By:
|
/s/ Randall
C. Stuewe
|
||
|
Randall
C. Stuewe
|
|||
|
Chairman
of the Board and
|
|||
|
Chief
Executive Officer
|
|||
|
Date:
|
February
27, 2008
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
Signature
|
Title
|
Date
|
||||
|
/s/ Randall
C. Stuewe
|
Chairman
of the Board and
|
February
27, 2008
|
||||
|
Randall
C. Stuewe
|
Chief
Executive Officer
|
|||||
|
(Principal
Executive Officer)
|
||||||
|
/s/ John
O. Muse
|
|
Executive Vice President - |
February
27, 2008
|
|||
|
John
O. Muse
|
Finance
and Administration
|
|
||||
|
|
(Principal
Financial and Accounting Officer)
|
|||||
|
|
||||||
|
/s/ O.
Thomas Albrecht
|
Director
|
February
27, 2008
|
||||
|
O.
Thomas Albrecht
|
||||||
|
/s/ C.
Dean Carlson
|
Director
|
February
27, 2008
|
||||
|
C.
Dean Carlson
|
||||||
|
/s/ Marlyn
Jorgensen
|
Director
|
February
27, 2008
|
||||
|
Marlyn
Jorgensen
|
||||||
|
/s/ Charles
Macaluso
|
Director
|
February
27, 2008
|
||||
|
Charles
Macaluso
|
||||||
|
/s/ Michael
Urbut
|
Director
|
February
27, 2008
|
||||
|
Michael
Urbut
|
Page
85
INDEX
TO EXHIBITS
|
2.1
|
Asset
Purchase Agreement, dated as of December 19, 2005, among Darling
International Inc., Darling National LLC, and National By-Products LLC
(filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
December 19, 2005 and incorporated herein by
reference).
|
|
|
2.2
|
Claim
Purchase Agreement, dated as of October 12, 2006, by and between Darling
International Inc. and Trust Company of the West as trustee of the trust
established pursuant to an Individual Trust Agreement between the
Boilermaker-Blacksmith National Pension Trust and itself (filed as Exhibit
2.1 to the Company’s Current Report on Form 8-K filed October 18, 2006 and
incorporated herein by reference).
|
|
|
2.3
|
Amendment
No. 1 to Claim Purchase Agreement, dated as of December 31, 2006, by and
between Darling International Inc. and Trust Company of the West as
trustee of the trust established pursuant to an Individual Trust Agreement
between the Boilermaker-Blacksmith National Pension Trust and itself
(filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
January 3, 2007 and incorporated herein by reference).
|
|
|
3.1
|
Restated
Certificate of Incorporation of the Company, as amended (filed as Exhibit
3.1 to the Company’s Registration Statement on Form S-1 filed May 23, 2002
and incorporated herein by reference).
|
|
|
3.2
|
Amended
and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed August 13, 2007 and incorporated herein
by reference).
|
|
|
4.1
|
Specimen
Common Stock Certificate (filed as Exhibit 4.1 to the Company’s
Registration Statement on Form S-1 filed May 27, 1994 and incorporated
herein by reference).
|
|
|
4.2
|
Certificate
of Designation, Preference and Rights of Series A Preferred Stock (filed
as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed
May 23, 2002 and incorporated herein by reference).
|
|
|
10.1
|
Recapitalization
Agreement, dated as of March 15, 2002, among Darling International Inc.,
each of the banks or other lending institutions which is a signatory
thereto or any successor or assignee thereof, and Credit Lyonnais New York
Branch, individually as a bank and as agent (filed as Annex C to the
Company’s Definitive Proxy Statement filed on April 29, 2002, and
incorporated herein by reference).
|
|
|
10.2
|
First
Amendment to Recapitalization Agreement, dated as of April 1, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Annex D to the Company’s
Definitive Proxy Statement filed on April 29, 2002, and incorporated
herein by reference).
|
|
|
10.3
|
Second
Amendment to Recapitalization Agreement, dated as of April 29, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Exhibit 10.3 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
|
|
10.4
|
Registration
Rights Agreement, dated as of December 29, 1993, between Darling
International Inc., and the signatory holders identified therein (filed as
Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed on
May 27, 1994, and incorporated herein by reference).
|
|
|
10.5
|
Registration
Rights Agreement, dated as of May 10, 2002, between Darling International
Inc., and the holders identified therein (filed as Exhibit 10.6 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
|
|
10.6
|
*
|
Form
of Indemnification Agreement (filed as Exhibit 10.7 to the Company’s
Registration Statement on Form S-1 filed on May 27, 1994, and incorporated
herein by reference).
|
Page
86
|
10.7
|
Credit
Agreement, dated as of April 7, 2006, among Darling International Inc.,
various lending institutions party thereto and JPMorgan Chase Bank, N.A.
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
|
|
10.8
|
First
Amendment to Note Purchase Agreement, dated as of April 7, 2006, among
Darling International Inc. and the securities purchasers party thereto
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
|
|
10.9
|
Leases,
dated July 1, 1996, between the Company and the City and County of San
Francisco (filed pursuant to temporary hardship exemption under cover of
Form SE).
|
|
|
10.10
|
Lease,
dated November 24, 2003, between Darling International Inc. and the Port
of Tacoma (filed as Exhibit 10.3 to the Company’s Annual Report on
Form 10-K filed March 29, 2004, and incorporated herein by
reference).
|
|
|
10.11
|
*
|
1994
Employee Flexible Stock Option Plan (filed as Exhibit 2 to the Company’s
Revised Definitive Proxy Statement filed on April 20, 2001, and
incorporated herein by reference).
|
|
10.12
|
*
|
Non-Employee
Directors Stock Option Plan (filed as Exhibit 10.13 to the Company’s
Registration Statement on Form S-1/A filed on June 5, 2002, and
incorporated herein by reference).
|
|
10.13
|
*
|
Darling
International Inc. 2004 Omnibus Incentive Plan (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed May 11, 2005, and
incorporated herein by reference).
|
|
10.14
|
*
|
Amendment
to Darling International Inc. 2004 Omnibus Incentive Plan (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 22,
2007 and incorporated herein by reference).
|
|
10.15
|
*
|
Darling
International Inc. Compensation Committee Long-Term Incentive Program
Policy Statement (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed June 22, 2005, and incorporated herein by
reference).
|
|
10.16
|
*
|
Integration
Success Incentive Award Plan (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed March 15, 2006 and incorporated herein by
reference).
|
|
10.17
|
*
|
Non-Employee
Director Restricted Stock Award Plan (filed as Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed March 15, 2006 and incorporated
herein by reference).
|
|
10.18
|
*
|
Notice
of Amendment to Grants and Awards, dated as of October 10, 2006 (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 10,
2006 and incorporated herein by reference).
|
|
10.19
|
*
|
Employment
Agreement, dated as of February 3, 2003, between Darling International
Inc. and Randall C. Stuewe (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed February 3, 2003, and incorporated herein by
reference).
|
|
10.20
|
*
|
Amendment
No. 1 to Employment Agreement, dated as of July 1, 2003, between Darling
International Inc. and Randall C. Stuewe (filed as Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q filed August 12, 2003, and
incorporated herein by reference).
|
|
|
10.21
|
*
|
Amendment
No. 2 to Employment Agreement, dated as of October 13, 2006, by and
between Darling International Inc. and Randall C. Stuewe (filed as Exhibit
10.1 to the Company’s Current Report on Form 8-K filed October 18, 2006
and incorporated herein by reference).
|
|
|
10.22
|
*
|
Amended
and Restated Employment Agreement, dated as of February 28, 2006, by and
among Darling International Inc., Darling National LLC and Mark A. Myers
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
May 17, 2006 and incorporated herein by reference).
|
|
Page
87
|
10.23
|
*
|
Form
of Senior Executive Termination Benefits Agreement (filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed November 29, 2007 and
incorporated herein by reference).
|
|
|
10.24
|
*
|
Form
of Indemnification Agreement between Darling International Inc. and its
directors and executive officers (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed February 25, 2008, and
incorporated herein by reference).
|
|
|
14
|
Darling
International Inc. Code of Business Conduct applicable to all employees,
including senior executive officers (filed as Exhibit 14 to the Company’s
Current Report on Form 8-K filed February 25, 2008, and incorporated
herein by reference).
|
||
|
21
|
|
Subsidiaries
of the Registrant (filed as Exhibit 21.1 to the Company’s Registration
Statement on Form S-4 filed on February 2, 2006, and incorporated herein
by reference).
|
|
|
23
|
Consent
of KPMG LLP (filed herewith).
|
||
|
31.1
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of Randall C. Stuewe, the Chief Executive Officer of the
Company (filed herewith).
|
||
|
31.2
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of John O. Muse, the Chief Financial Officer of the Company
(filed herewith).
|
||
|
32
|
Written
Statement of Chief Executive Officer and Chief Financial Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) (filed herewith).
|
||
|
*
|
Management
contract or compensatory plan or
arrangement.
|
||
Page
88