XFRA:43D Darling Ingredients Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
 
FORM 10-Q
 
 (Mark One)      
/X/  QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2012
OR
 
/  /  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
  For the transition period from _______ to _______
 
Commission File Number   001-13323

DARLING INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
 
 Delaware
 
 36-2495346
 (State or other jurisdiction     
 
(I.R.S. Employer
of incorporation or organization)   
 
Identification Number)
 
 
 
 251 O'Connor Ridge Blvd., Suite 300
 
 
 Irving, Texas
 
 75038
(Address of principal executive offices)  
 
(Zip Code)
 
Registrant's telephone number, including area code:  (972) 717-0300
 
    Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes    X         No ____
 
    Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).        Yes    X        No ___

 Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     
X
 
Accelerated filer    
 
 
Non-accelerated filer 
 
 
Smaller reporting company       
 
 
 
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes            No  X  
 
There were 117,618,937 shares of common stock, $0.01 par value, outstanding at August 2, 2012.

1



DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012
 
 
TABLE OF CONTENTS   

 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 46
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2






DARLING INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
June 30, 2012 and December 31, 2011
(in thousands, except shares)

 
June 30,
2012
 
December 31,
2011
ASSETS
(unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
72,254

 
$
38,936

Restricted cash
367

 
365

Accounts receivable, net
97,436

 
95,807

Inventories
56,160

 
50,830

Income taxes refundable
789

 
17,042

Other current assets
12,654

 
9,235

Deferred income taxes
8,394

 
7,465

Total current assets
248,054

 
219,680

Property, plant and equipment, less accumulated depreciation of
   $301,323 at June 30, 2012 and $278,400 at December 31, 2011
422,664

 
400,222

Intangible assets, less accumulated amortization of
   $96,346 at June 30, 2012 and $82,364 at December 31, 2011
351,349

 
362,914

Goodwill
381,369

 
381,369

Investment in unconsolidated subsidiary
46,359

 
21,733

Other assets
29,413

 
31,112

 
$
1,479,208

 
$
1,417,030

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
10

 
$
10

Accounts payable, principally trade
71,329

 
60,402

Accrued expenses
63,338

 
66,845

Total current liabilities
134,677

 
127,257

Long-term debt, net of current portion
250,015

 
280,020

Other non-current liabilities
56,725

 
58,245

Deferred income taxes
42,603

 
31,133

Total liabilities
484,020

 
496,655

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

     Common stock, $0.01 par value; 150,000,000 shares authorized;
        118,280,617 and 117,591,822 shares issued at June 30, 2012
        and at December 31, 2011, respectively
1,183

 
1,176

Additional paid-in capital
597,767

 
587,685

     Treasury stock, at cost;  665,581 and 543,384 shares at
       June 30, 2012 and at December 31, 2011, respectively
(7,624
)
 
(5,588
)
Accumulated other comprehensive loss
(28,940
)
 
(30,904
)
Retained earnings
432,802

 
368,006

Total stockholders’ equity
995,188

 
920,375

 
$
1,479,208

 
$
1,417,030


 The accompanying notes are an integral part of these consolidated financial statements.

3



DARLING INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
Three months and six months ended June 30, 2012 and July 2, 2011
(in thousands, except per share data)
(unaudited)


 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
Net sales
$
436,674

 
$
470,610

 
$
823,782

 
$
910,508

Costs and expenses:
 

 
 

 
 
 
 
Cost of sales and operating expenses
314,138

 
325,204

 
590,607

 
626,555

Selling, general and administrative expenses
36,894

 
34,092

 
74,263

 
64,785

Depreciation and amortization
21,674

 
19,055

 
42,434

 
38,736

Total costs and expenses
372,706

 
378,351

 
707,304

 
730,076

Operating income
63,968

 
92,259

 
116,478

 
180,432

 
 
 
 
 
 
 
 
Other expense:
 

 
 

 
 
 
 
Interest expense
(5,753
)
 
(7,745
)
 
(12,678
)
 
(21,973
)
Other income/(expense), net
270

 
(854
)
 
(338
)
 
(1,460
)
Total other expense
(5,483
)
 
(8,599
)
 
(13,016
)
 
(23,433
)
 
 
 
 
 
 
 
 
Equity in net loss of unconsolidated subsidiary
(656
)
 
(1,174
)
 
(892
)
 
(1,174
)
Income before income taxes
57,829

 
82,486

 
102,570

 
155,825

Income taxes
21,604

 
30,259

 
37,774

 
57,036

Net income
$
36,225

 
$
52,227

 
$
64,796

 
$
98,789

 
 
 
 
 
 
 
 
Basic income per share
$
0.31

 
$
0.45

 
$
0.55

 
$
0.88

Diluted income per share
$
0.31

 
$
0.44

 
$
0.55

 
$
0.87



 



The accompanying notes are an integral part of these consolidated financial statements.

4



DARLING INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months and six months ended June 30, 2012 and July 2, 2011
(in thousands)
(unaudited)


 
Three Months Ended
 
Six Months Ended
 
June 30, 2012
 
July 2, 2011
 
June 30, 2012
 
July 2, 2011
Net income
$
36,225

 
$
52,227

 
$
64,796

 
$
98,789

Other comprehensive income (loss):
 
 
 
 
 
 
 
Pension adjustments, net of tax
742

 
431

 
1,484

 
862

Natural gas swap derivative adjustments, net of tax
314

 
(75
)
 
321

 
(114
)
Interest rate swap derivative adjustment, net of tax
17

 
186

 
159

 
381

Total other comprehensive income
1,073

 
542

 
1,964

 
1,129

Total comprehensive income
$
37,298

 
$
52,769

 
$
66,760

 
$
99,918







The accompanying notes are an integral part of these consolidated financial statements.


5



DARLING INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2012 and July 2, 2011
(in thousands)
(unaudited)

 
June 30,
2012
 
July 2,
2011
Cash flows from operating activities:
 
 
 
Net income
$
64,796

 
$
98,789

Adjustments to reconcile net income to net cash provided by
         operating activities:
 
 
 
Depreciation and amortization
42,434

 
38,736

Loss/(gain) on disposal of property, plant, equipment and other assets
629

 
(64
)
Deferred taxes
10,541

 
10,832

Increase in long-term pension liability
167

 
415

Stock-based compensation expense
4,926

 
2,204

Write-off deferred loan costs
725

 
4,184

Deferred loan cost amortization
1,519

 
1,697

Equity in net loss of unconsolidated subsidiary
892

 
1,174

Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
Restricted cash
(2
)
 
(3
)
Accounts receivable
(1,629
)
 
(23,536
)
Escrow receivable

 
16,267

Income taxes refundable/payable
16,253

 
(7,909
)
Inventories and prepaid expenses
(8,734
)
 
(21,037
)
Accounts payable and accrued expenses
6,598

 
(1,957
)
Other
3,745

 
(1,288
)
Net cash provided by operating activities
142,860

 
118,504

Cash flows from investing activities:
 
 
 
Capital expenditures
(53,496
)
 
(27,870
)
       Acquisition
(2,000
)
 
(164
)
       Investment in unconsolidated subsidiary
(25,518
)
 
(10,741
)
Gross proceeds from disposal of property, plant and equipment
        and other assets
2,516

 
665

Net cash used by investing activities
(78,498
)
 
(38,110
)
Cash flows from financing activities:
 
 
 
Payments on long-term debt
(30,005
)
 
(240,005
)
Borrowings from revolving credit facility

 
131,000

Payments on revolving credit facility

 
(271,000
)
Deferred loan costs

 
(267
)
Issuance of common stock
64

 
293,189

Minimum withholding taxes paid on stock awards
(2,214
)
 
(1,205
)
Excess tax benefits from stock-based compensation
1,111

 
1,136

Net cash used by financing activities
(31,044
)
 
(87,152
)
Net increase/(decrease) in cash and cash equivalents
33,318

 
(6,758
)
Cash and cash equivalents at beginning of period
38,936

 
19,202

Cash and cash equivalents at end of period
$
72,254

 
$
12,444

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
10,904

 
$
16,023

Income taxes, net of refunds
$
10,786

 
$
53,780


The accompanying notes are an integral part of these consolidated financial statements.

6



DARLING INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2012
(unaudited)

(1)
General

Darling International Inc., a Delaware corporation (“Darling”, and together with its subsidiaries, the “Company”), is a leading provider of rendering, cooking oil and bakery waste recycling and recovery solutions to the nation's food industry. The Company collects and recycles animal by-products, bakery waste and used cooking oil from poultry and meat processors, commercial bakeries, grocery stores, butcher shops, and food service establishments and provides grease trap cleaning services to many of the same establishments. The Company operates over 120 processing and transfer facilities located throughout the United States to process raw materials into finished products such as protein (primarily meat and bone meal (“MBM”) and poultry meal (“PM”)), hides, fats (primarily bleachable fancy tallow (“BFT”), poultry grease (“PG”) and yellow grease (“YG”)) and bakery by-products (“BBP”) as well as a range of branded and value-added products. The Company sells these products domestically and internationally, primarily to producers of animal feed, pet food, fertilizer, bio-fuels and other consumer and industrial ingredients including oleo-chemicals, soaps and leather goods for use as ingredients in their products or for further processing. The accompanying consolidated financial statements for the three and six month periods ended June 30, 2012 and July 2, 2011, have been prepared in accordance with generally accepted accounting principles in the United States by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The information furnished herein reflects all adjustments (consisting only of normal recurring accruals) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations.  However, management of the Company believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading.  The Company has determined that there were no subsequent events that would require disclosure or adjustments to the accompanying consolidated financial statements through the date the financial statements were issued.  The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Form 10-K for the fiscal year ended December 31, 2011

(2)
Summary of Significant Accounting Policies

(a)
Basis of Presentation

The consolidated financial statements include the accounts of Darling and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

(b)
Fiscal Periods

The Company has a 52/53 week fiscal year ending on the Saturday nearest December 31.  Fiscal periods for the consolidated financial statements included herein are as of June 30, 2012, and include the 13 and 26 weeks ended June 30, 2012, and the 13 and 26 weeks ended July 2, 2011.

(c)
Reclassifications

Certain prior year immaterial amounts have been reclassified to conform to the current year presentation.

(d)
Earnings Per Share

Basic income per common share is computed by dividing net income by the weighted average number of common shares including non-vested and restricted shares outstanding during the period.  Diluted income per common share is computed by dividing net income by the weighted average number of common shares including non-vested and restricted shares outstanding during the period increased by dilutive common equivalent shares determined using the treasury stock method. As a result of the use of weighted average number of shares the full effect of the issuance of 24,193,548 shares as discussed in Note 9 are not in the earnings per share calculation set forth below for fiscal 2011.

7




 
Net Income per Common Share (in thousands, except per share data)
 
Three Months Ended
 
 
 
June 30, 2012
 
 
 
 
 
July 2, 2011
 
 
 
Income
 
Shares
 
Per Share
 
Income
 
Shares
 
Per Share
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net Income
$
36,225

 
117,613

 
$
0.31

 
$
52,227

 
117,064

 
$
0.45

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Effect of dilutive securities:
 

 
 

 
 

 
 

 
 

 
 

Add: Option shares in the money and dilutive effect of non-vested stock
 

 
867

 
 

 
 

 
973

 
 

Less: Pro forma treasury shares
 

 
(339
)
 
 

 
 

 
(365
)
 
 

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Net income
$
36,225

 
118,141

 
$
0.31

 
$
52,227

 
117,672

 
$
0.44



 
Net Income per Common Share (in thousands, except per share data)
 
Six Months Ended
 
 
 
June 30, 2012
 
 
 
 
 
July 2, 2011
 
 
 
Income
 
Shares
 
Per Share
 
Income
 
Shares
 
Per Share
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net Income
$
64,796

 
117,458

 
$
0.55

 
$
98,789

 
112,795

 
$
0.88

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Effect of dilutive securities:
 

 
 

 
 

 
 

 
 

 
 

Add: Option shares in the money and dilutive effect of non-vested stock
 

 
870

 
 

 
 

 
986

 
 

Less: Pro forma treasury shares
 

 
(343
)
 
 

 
 

 
(381
)
 
 

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Net income
$
64,796

 
117,985

 
$
0.55

 
$
98,789

 
113,400

 
$
0.87


For the three months ended June 30, 2012 and July 2, 2011, respectively, 211,890 and 72,157 outstanding stock options were excluded from diluted income per common share as the effect was antidilutive. For the three months ended June 30, 2012 and July 2, 2011, respectively, 112,296 and 326,526 shares of non-vested stock were excluded from diluted income per common share as the effect was antidilutive.

For the six months ended June 30, 2012 and July 2, 2011, respectively, 211,890 and 50,387 outstanding stock options were excluded from diluted income per common share as the effect was antidilutive. For the six months ended June 30, 2012 and July 2, 2011, respectively, 117,746 and 350,125 shares of non-vested stock were excluded from diluted income per common share as the effect was antidilutive.

(3)
Acquisition

On June 8, 2012, the Company completed its acquisition of substantially all of the assets of RVO BioPur, LLC ("BioPur"). Headquartered in Waterbury, Connecticut, BioPur provides used cooking oil collection and grease trap services to restaurants and food service establishments in the New England area of the Company's existing East coast operations. Pro forma results of operations for the BioPur acquisition have not been presented because the effect is not deemed material to revenues and net income of the Company for any fiscal period presented.


8



(4)
Investment in Unconsolidated Subsidiary

The Company announced on January 21, 2011 that a wholly-owned subsidiary of Darling entered into a limited liability company agreement with a wholly-owned subsidiary of Valero Energy Corporation (“Valero”) to form Diamond Green Diesel Holdings LLC (the “Joint Venture”). The Joint Venture is owned 50% / 50% with Valero and was formed to design, engineer, construct and operate a renewable diesel plant (the “Facility”), which will be capable of producing approximately 9,300 barrels per day of renewable diesel fuel and certain other co-products, to be located adjacent to Valero's refinery in Norco, Louisiana. The Joint Venture is in the process of constructing the Facility under an engineering, procurement and construction contract that is intended to fix the Company's maximum economic exposure for the cost of the Facility.

On May 31, 2011, the Joint Venture and Diamond Green Diesel LLC, a wholly-owned subsidiary of the Joint Venture (“Opco”), entered into (i) a facility agreement (the “Facility Agreement”) with Diamond Alternative Energy, LLC, a wholly-owned subsidiary of Valero (the “Lender”), and (ii) a loan agreement (the “Loan Agreement”) with the Lender, which will provide the Joint Venture with a 14 year multiple advance term loan facility of approximately $221,300,000 (the “JV Loan”) to support the design, engineering and construction of the Facility, which is now under construction. The Facility Agreement and the Loan Agreement prohibit the Lender from assigning all or any portion of the Facility Agreement or the Loan Agreement to unaffiliated third parties. Opco has also pledged substantially all of its assets to the Lender, and the Joint Venture has pledged all of Opco's equity interests to the Lender, until the JV Loan has been paid in full and the JV Loan has terminated in accordance with its terms.

Pursuant to sponsor support agreements executed in connection with the Facility Agreement and the Loan Agreement, each of the Company and Valero are committed to contributing approximately $93.2 million of the estimated aggregate costs of approximately $407.7 million for the completion of the Facility. The Company is also required to pay for 50% of any cost overruns incurred in connection with the construction of the Facility, including relating to any project scope changes and working capital funding. As of the date of this report, it is anticipated that the project will incur an additional $8.1 million in costs related to project scope changes, of which the Company will be responsible for 50%. As of June 30, 2012 under the equity method of accounting, the Company has an investment in the Joint Venture of approximately $46.4 million on the consolidated balance sheet and has recorded approximately $0.9 million and 1.2 million in losses in the unconsolidated subsidiary for the six months ended June 30, 2012 and July 2, 2011, respectively.

(5)
Contingencies 

The Company is a party to several lawsuits, claims and loss contingencies arising in the ordinary course of its business, including assertions by certain regulatory and governmental agencies related to permitting requirements and air, wastewater and storm water discharges from the Company’s processing facilities.

The Company’s workers compensation, auto and general liability policies contain significant deductibles or self-insured retentions.  The Company estimates and accrues its expected ultimate claim costs related to accidents occurring during each fiscal year and carries this accrual as a reserve until these claims are paid by the Company.

As a result of the matters discussed above, the Company has established loss reserves for insurance, environmental and litigation matters.  At June 30, 2012 and December 31, 2011, the reserves for insurance, environmental and litigation contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities were approximately $39.9 million and $38.0 million, respectively.  The Company has insurance recovery receivables of approximately $9.6 million as of June 30, 2012 and December 31, 2011, related to these liabilities. The Company's management believes these reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management; however, there can be no assurance that final costs related to these matters will not exceed current estimates. The Company believes that the likelihood is remote that any additional liability from these lawsuits and claims that may not be covered by insurance would have a material effect on the financial statements.

Lower Passaic River Area. The Company has been named as a third party defendant in a lawsuit pending in the Superior Court of New Jersey, Essex County, styled New Jersey Department of Environmental Protection, The Commissioner of the New Jersey Department of Environmental Protection Agency and the Administrator of the New Jersey Spill Compensation Fund, as Plaintiffs, vs. Occidental Chemical Corporation, Tierra Solutions, Inc., Maxus Energy Corporation, Repsol YPF, S.A., YPF, S.A., YPF Holdings, Inc., and CLH Holdings, as Defendants (Docket No. L-009868-05) (the “Tierra/Maxus Litigation”). In the Tierra/Maxus Litigation, which was filed on December 13, 2005, the plaintiffs seek to recover from the defendants past and future cleanup and removal costs, as well as unspecified economic damages, punitive damages, penalties and a variety of other forms of relief, purportedly arising from the alleged discharges into the Passaic River of a particular type of dioxin and other unspecified hazardous substances. The damages

9



being sought by the plaintiffs from the defendants are likely to be substantial. On February 4, 2009, two of the defendants, Tierra Solutions, Inc. (“Tierra”) and Maxus Energy Corporation (“Maxus”), filed a third party complaint against over 300 entities, including the Company, seeking to recover all or a proportionate share of cleanup and removal costs, damages or other loss or harm, if any, for which Tierra or Maxus may be held liable in the Tierra/Maxus Litigation. Tierra and Maxus allege that Standard Tallow Company, an entity that the Company acquired in 1996, contributed to the discharge of the hazardous substances that are the subject of this case while operating a former plant site located in Newark, New Jersey. The Company is investigating these allegations, has entered into a joint defense agreement with many of the other third-party defendants and intends to defend itself vigorously. The court has issued a trial plan that contemplates a liability trial for third-party defendants (including the Company) in April 2013, with additional proceedings if necessary to allocate costs between third-party defendants in January 2014. Additionally, in December 2009, the Company, along with numerous other entities, received notice from the United States Environmental Protection Agency (EPA) that the Company (as successor-in-interest to Standard Tallow Company) is considered a potentially responsible party with respect to alleged contamination in the lower Passaic River area which is part of the Diamond Alkali Superfund Site located in Newark, New Jersey. In the letter, EPA requested that the Company join a group of other parties in funding a remedial investigation and feasibility study at the site. As of the date of this report, the Company has not agreed to participate in the funding group. The Company's ultimate liability for investigatory costs, remedial costs and/or natural resource damages in connection with the lower Passaic River area cannot be determined at this time; however, as of the date of this report, there is nothing that leads the Company to believe that these matters will have a material effect on the Company's financial position or results of operation.

Fresno Facility Permit Issue. The Company has been named as a defendant and a real party in interest in a lawsuit filed on April 9, 2012 in the Superior Court of the State of California, Fresno County, styled Concerned Citizens of West Fresno vs. The City of Fresno and Darling International Inc. In the complaint, the plaintiff alleges that the City of Fresno has failed to enforce its own zoning ordinances and engaged in a number of discriminatory practices against the citizens of West Fresno. In addition, the complaint alleges that the Company's Fresno facility is operating without a proper use permit. Rendering operations have been conducted on the site since 1955, and the Company believes that it possesses all of the required federal, state and local permits to continue to operate the facility in the manner currently conducted and intends to defend itself vigorously in this matter. While management cannot predict the ultimate outcome of this matter, management does not believe the outcome will have a material effect on the Company's financial condition or results of operations.

(6)
Business Segments

The Company sells its products domestically and internationally and operates within two industry segments: Rendering and Bakery. 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 taxes, prepaid pension, and miscellaneous other assets.

Rendering
Rendering operations process poultry, animal by-products and used cooking oil into fats (primarily BFT, PG and YG), protein (primarily MBM and PM (feed grade and pet food)) and hides. Fat was approximately $226.1 million and $245.5 million of net sales for the three months ended June 30, 2012 and July 2, 2011, respectively and approximately $420.1 million and $481.7 million of net sales for the six months ended June 30, 2012 and July 2, 2011, respectively. Protein was approximately $121.3 million and $120.4 million of net sales for the three months ended June 30, 2012 and July 2, 2011, respectively and $224.8 million and $230.5 million of net sales for the six months ended June 30, 2012 and July 2, 2011, respectively. Rendering operations also provides grease trap servicing. Included in the Rendering Segment is the National Service Center (“NSC”). The NSC schedules services such as fat and bone and used cooking oil collection and trap cleaning for contracted customers using the Company's resources or third party providers.

Bakery
Bakery products are collected from large commercial bakeries that produce a variety of products, including cookies, crackers, cereal, bread, dough, potato chips, pretzels, sweet goods and biscuits, among others. The Company processes the raw materials into BBP, including Cookie Meal®, an animal feed ingredient primarily used in poultry rations.


10



Business Segment Net Sales (in thousands):

 
 
Three Months Ended
Six Months Ended
 
June 30,
2012
July 2,
2011
June 30,
2012
July 2,
2011
Rendering
$
371,481

$
392,675

$
693,793

$
764,245

Bakery
65,193

77,935

129,989

146,263

Total
$
436,674

$
470,610

$
823,782

$
910,508


Business Segment Profit/(Loss) (in thousands):

 
 
Three Months Ended
Six Months Ended
 
June 30, 2012
July 2, 2011
June 30, 2012
July 2, 2011
Rendering
$
73,061

$
93,398

$
137,639

$
182,354

Bakery
13,093

18,541

24,145

33,509

Corporate Activities
(44,176
)
(51,967
)
(84,310
)
(95,101
)
Interest expense
(5,753
)
(7,745
)
(12,678
)
(21,973
)
Net Income
$
36,225

$
52,227

$
64,796

$
98,789


 Business Segment Assets (in thousands):

 
 
June 30,
2012
December 31,
2011
Rendering
$
1,096,658

$
1,092,988

Bakery
166,205

165,885

Corporate Activities
216,345

158,157

Total
$
1,479,208

$
1,417,030

 
(7)
Income Taxes
 
The Company has provided income taxes for the three-month periods ended June 30, 2012 and July 2, 2011, based on its estimate of the effective tax rate for the entire 2012 and 2011 fiscal years.
 
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.

The Company periodically assesses 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, the Company believes it is more likely than not that certain net operating losses can be carried forward and utilized and other deferred tax assets will be realized.

The Company’s major taxing jurisdiction is the U.S. (federal and state).  The Company is currently under federal examination by the Internal Revenue Service for fiscal 2009 and 2010. The Company is also currently being examined by several state tax agencies. Although the final outcome of these examinations is not yet determinable, the Company does not anticipate that any of the federal or state examinations will have a significant impact on the Company's results of operations or financial position. In addition, the Company does not reasonably expect any material changes to the Company's unrecognized tax positions in the next twelve months. The statute of limitations for the Company's federal and material state returns remains open for examination for tax years 2007 to 2011.

11



(8)
Debt

Credit Facilities

Senior Secured Credit Facilities. On December 17, 2010, the Company entered into a credit agreement (the “Credit Agreement”) consisting of a five-year senior secured revolving loan facility and a six-year senior secured term loan facility. On March 25, 2011, the Company amended its Credit Agreement to increase the aggregate available principal amount under the revolving loan facility from $325.0 million to $415.0 million (approximately $75.0 million of which will be available for a letter of credit sub-facility and $15.0 million of which will be available for a swingline sub-facility) and to add additional stepdowns to the pricing grid providing lower spread margins to the applicable base or Libor rate under the Credit Agreement based on defined leverage ratio levels. As of June 30, 2012, the Company had availability of $389.7 million under the revolving loan facility, taking into account no outstanding borrowings and letters of credit issued of $25.3 million. As of June 30, 2012, the Company had repaid all of the original $300.0 million term loan issued under the Credit Agreement, including $30.0 million repaid in the first quarter of fiscal 2012. The amounts that have been repaid on the term loan may not be reborrowed. As a result of the term loan payments, the Company incurred a write-off of a portion of the senior term loan facilities deferred loan costs of approximately $0.7 million and $4.2 million in the six month periods ending June 30, 2012 and July 2, 2011, respectively,which is included in interest expense. The revolving credit facility has a five-year term ending December 17, 2015. The Company used the original proceeds of the term loan facility and a portion of the revolving loan facility to pay a portion of the consideration of its prior year acquisitions, to pay related fees and expenses and to provide for working capital needs and general corporate purposes.

The Credit Agreement allows for borrowings at per annum rates based on the following loan types. With respect to any revolving facility loan, i) an alternate base rate means a rate per annum equal to the greatest of (a) the prime rate (b) the federal funds effective rate (as defined in the Credit Agreement) plus ½ to 1% and (c) the adjusted London Inter-Bank Offer Rate (“LIBOR”) for a month interest period plus 1%, plus in each case, a margin determined by reference to a pricing grid under the Credit Agreement and adjusted according to the Company's adjusted leverage ratio, and, ii) Eurodollar rate 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. With respect to an alternate base rate loan that is a term loan, at no time will the alternate base rate be less than 2.50% per annum, plus the term loan alternate base rate margin of 2.50%. With respect to a LIBOR loan that is a term loan, at no time will the LIBOR rate applicable to the term loans (before giving effect to any adjustment for reserve requirements) be less than 1.50% per annum, plus the term loan LIBOR margin of 3.50%.

The Credit Agreement contains various customary representations and warranties by the Company, which include customary use of materiality, material adverse effect and knowledge qualifiers. The Credit Agreement also contains (a) certain affirmative covenants that impose certain reporting and/or performance obligations on the Company, (b) certain negative covenants that generally prohibit, subject to various exceptions, the Company from taking certain actions, including, without limitation, incurring indebtedness, making investments, incurring liens, paying dividends, and engaging in mergers and consolidations, sale leasebacks and sales of assets, (c) financial covenants such as maximum total leverage ratio and a minimum fixed charge coverage ratio and (d) customary events of default (including a change of control). Obligations under the Credit Agreement may be declared due and payable upon the occurrence of such customary events of default.

Senior Notes. On December 17, 2010, Darling issued $250.0 million aggregate principal amount of its 8.5% Senior Notes due 2018 (the “Restricted Notes”) under an indenture with U.S. Bank National Association, as trustee. Darling used the net proceeds from the sale of the Restricted Notes to finance in part the cash portion of the purchase price paid in connection with Darling's acquisition of Griffin Industries, Inc. The Company will pay 8.5% annual cash interest on the Restricted Notes on June 15 and December 15 of each year, commencing June 15, 2011. Other than for extraordinary events such as change of control and defined assets sales, the Company is not required to make any mandatory redemption or sinking fund payments on the Restricted Notes.

The original holders of the Restricted Notes were given the benefit of registration rights pursuant to a registration rights agreement (the “Notes Registration Rights Agreement”) with the representative of the initial purchasers. In accordance with the terms of the Notes Registration Rights Agreement, on June 15, 2011, the Company filed a registration statement on Form S-4 to offer to exchange all outstanding Restricted Notes for $250.0 million 8.5% Senior Notes due 2018 (the “Exchange Notes” and collectively with the Restricted Notes, the “Notes”). The exchange offer was made effective June 27, 2011 and expired July 27, 2011 with the Company offering to exchange all outstanding Restricted Notes that were validly tendered and not withdrawn prior to the expiration or termination of the exchange offer for an equal principal

12



amount of the applicable Exchange Notes. All of the Notes have been exchanged. The terms of the Exchange Notes are substantially identical in all material respects to those of the applicable outstanding Restricted Notes, except that transfer restrictions, registration rights and additional interest provisions relating to the Restricted Notes do not apply to the Exchange Notes. The Exchange Notes have been issued under the same indenture as the Restricted Notes. The Company did not receive any proceeds from the exchange offer. The Exchange Notes may be sold in the over-the-counter market, in negotiated transactions or through a combination of such methods. The Company does not plan to list the Notes on a national market.

The Company may at any time and from time to time purchase Notes in the open market or otherwise. The Notes are redeemable, in whole or in part, at any time on or after December 15, 2014 at the redemption prices specified in the indenture. Prior to December 15, 2014, the Company may redeem some or all of the Notes at a redemption price of 100% of the principal amount of the Notes redeemed, plus accrued and unpaid interest to the redemption date and an applicable premium as specified in the indenture.

The indenture contains covenants limiting Darling's ability and the ability of its restricted subsidiaries to, among other things; incur additional indebtedness or issue preferred stock; pay dividends on or make other distributions or repurchase of Darling's capital stock or make other restricted payments; create restrictions on the payment of dividends or other amounts from Darling's restricted subsidiaries to Darling or Darling's other restricted subsidiaries; make loans or investments; enter into certain transactions with affiliates; create liens; designate Darling's subsidiaries as unrestricted subsidiaries; and sell certain assets or merge with or into other companies or otherwise dispose of all or substantially all of Darling's assets.

The indenture also provides for customary events of default, including, without limitation, payment defaults, covenant defaults, cross acceleration defaults to certain other indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency and judgment defaults in excess of specified amounts. If any such event of default occurs and is continuing under the indenture, the Trustee or the holders of at least 25% in principal amount of the total outstanding Notes may declare the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Notes issued under the indenture to be due and payable immediately.

The Credit Agreement and the Notes consisted of the following elements at June 30, 2012 and December 31, 2011, respectively (in thousands):

 
 
June 30,
2012
December 31,
2011
Senior Notes:
 
 
8.5% Senior Notes due 2018
$
250,000

$
250,000

Senior Secured Credit Facilities:
 
 
Term Loan
$

$
30,000

Revolving Credit Facility:
 

 

Maximum availability
$
415,000

$
415,000

Borrowings outstanding


Letters of credit issued
25,309

23,440

Availability
$
389,691

$
391,560


The obligations under the Credit Agreement are guaranteed by Darling National LLC, a Delaware limited liability company (“Darling National”), Griffin Industries LLC, a Kentucky limited liability company (“Griffin”), and its subsidiary, Craig Protein Division, Inc (“Craig Protein”) and are secured by substantially all of the property of the Company, including a pledge of 100% of the stock of all material domestic subsidiaries and 65% of the capital stock of certain foreign subsidiaries. The Notes are guaranteed on an unsecured basis by Darling's existing restricted subsidiaries, including Darling National, Griffin and all of its subsidiaries, other than Darling's foreign subsidiaries, its captive insurance subsidiary and any inactive subsidiary with nominal assets. The Notes rank equally in right of payment to any existing and future senior debt of Darling. The Notes will be effectively junior to existing and future secured debt of Darling and the guarantors, including debt under the Credit Agreement, to the extent of the value of assets securing such debt. The Notes will be structurally subordinated to all of the existing and future liabilities (including trade payables) of each of the subsidiaries of Darling that do not guarantee the Notes. The guarantees by the guarantors (the “Guarantees”) rank equally in right of payment to any existing and future senior indebtedness of the guarantors. The Guarantees will be effectively junior to existing and future secured debt of the guarantors including debt under the Credit Agreement, to the extent the value of the assets

13



securing such debt. The Guarantees will be structurally subordinated to all of the existing and future liabilities (including trade payables) of each of the subsidiaries of each guarantor that do not guarantee the Notes.

As of June 30, 2012, the Company believes it is in compliance with all of the financial covenants, as well as all of the other covenants contained in the Credit Agreement and the Notes Indenture. 

(9)
Stockholders' Equity

On January 27, 2011, the Company entered into an underwritten public offering for 24,193,548 shares of its common stock, at a price to the public of $12.70 per share, pursuant to an effective shelf registration statement. The offering closed on February 2, 2011. In addition, certain former stockholders of Griffin Industries, Inc. (pursuant to such stockholders' contractual registration rights) granted the underwriters a 30-day option, which the underwriters subsequently exercised in full, to purchase from them up to an additional 3,629,032 shares of Darling common stock to cover over-allotments. The Company used the net proceeds of approximately $292.7 million from the offering to repay all of its then outstanding revolver balance and a portion of its term loan facility under the Company's Credit Agreement. Darling did not receive any proceeds from the sale of shares by the former stockholders of Griffin Industries, Inc.

(10)
Derivatives

The Company’s operations are exposed to market risks relating to commodity prices that affect the Company’s cost of raw materials, finished product prices and energy costs and the risk of changes in interest rates.

The Company makes limited use of derivative instruments to manage cash flow risks related to interest expense, natural gas usage, diesel fuel usage and inventory. The Company does not use derivative instruments for trading purposes. Interest rate swaps are entered into with the intent of managing overall borrowing costs by reducing the potential impact of increases in interest rates on floating-rate long-term debt. Natural gas swaps and options are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential impact of seasonal weather demands on natural gas that increases natural gas prices. Heating oil swaps and options are entered into with the intent of managing the overall cost of diesel fuel usage by reducing the potential impact of seasonal weather demands on diesel fuel that increases diesel fuel prices. Inventory swaps and options are entered into with the intent of managing seasonally high concentrations of MBM, PM, BFT, PG, YG and BBP inventories by reducing the potential impact of decreasing prices. At June 30, 2012, the Company had natural gas swaps outstanding that qualified and were designated for hedge accounting as well as heating oil swaps and heating oil and corn options that did not qualify and were not designated for hedge accounting.

Entities are required to report all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding the instrument. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair value, cash flows or foreign currencies. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside of earnings) and is subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss are reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change.

Cash Flow Hedges

On May 19, 2006, the Company entered into two interest rate swap agreements that were considered cash flow hedges according to FASB authoritative guidance. In December 2010, as a result of the Merger and entry into a new Credit Agreement the term loan that specifically related to these interest swap transactions was repaid. As such, the Company discontinued the interest rate swaps and paid approximately $2.0 million representing the fair value of these two interest swap transactions at the discontinuance date with the effective portion recorded in accumulated other comprehensive loss to be reclassified to income over the remaining original term of the interest swaps which ended April 7, 2012.


14



In fiscal 2011 and the first six month of fiscal 2012, the Company entered into natural gas swap contracts that are considered cash flow hedges. Under the terms of the natural gas swap contracts the Company fixed the expected purchase cost of a portion of its plants expected natural gas usage into the third quarter of fiscal 2012. As of June 30, 2012, some of the contracts have expired and settled according to the contracts while the remaining contract positions and activity are disclosed below.

The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at June 30, 2012 into earnings over the next 12 months will be approximately $0.1 million. As of June 30, 2012, approximately $0.3 million of losses have been reclassified into earnings as a result of the discontinuance of cash flow hedges.

The following table presents the fair value of the Company’s derivative instruments under FASB authoritative guidance as of June 30, 2012 and December 31, 2011 (in thousands):

Derivatives not
Designated as
Hedges
Balance Sheet
Asset Derivatives Fair Value
Location
June 30, 2012
December 31, 2011
Heating oil swaps and options
Other current assets
$
42

$
6

 
 
 
 
Total asset derivatives not designated as hedges
$
42

$
6

 
 
 
 
Total asset derivatives
 
$
42

$
6


Derivatives Designated
Balance Sheet
Liability Derivatives Fair Value
as Hedges
Location
June 30, 2012
December 31, 2011
Natural gas swaps
Accrued expenses
$
141

$
669

 
 
 
 
Total liability derivatives designated as hedges
$
141

$
669

 
 
 
 
Derivatives not
Designated as
Hedges
 
 

 

Natural gas swaps
Accrued expenses
$

$
143

Heating oil swaps and options
Accrued expenses
156

24

Corn options
Accrued expenses
85


 
 
 
 
Total liability derivatives not designated as hedges
$
241

$
167

 
 
 
 
Total liability derivatives
$
382

$
836


The effect of the Company’s derivative instruments on the consolidated financial statements as of and for the three months ended June 30, 2012 and July 2, 2011 is as follows (in thousands):

 
 
 
Derivatives
Designated as
Cash Flow Hedges
 
Gain or (Loss)
Recognized in OCI
on Derivatives
(Effective Portion) (a)
Gain or (Loss)
Reclassified From
Accumulated OCI
into Income
(Effective Portion) (b)
Gain or (Loss)
Recognized in Income
on Derivatives
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing) (c)
 
2012
2011
2012
2011
2012
2011
Interest rate swaps
$

$

$
(28
)
$
(303
)
$

$

Natural gas swaps
217

(18
)
(295
)
105


(9
)
 
 
 
 
 
 
 
Total
$
217

$
(18
)
$
(323
)
$
(198
)
$

$
(9
)

15




(a)
Amount recognized in accumulated OCI (effective portion) is reported as accumulated other comprehensive income/(loss) of approximately $0.2 million and less than $0.1 million recorded net of taxes of approximately $0.1 million and less than $0.1 million as of June 30, 2012 and July 2, 2011, respectively.
(b)
Gains and (losses) reclassified from accumulated OCI into income (effective portion) for interest rate swaps and natural gas swaps is included in interest expense and cost of sales, respectively, in the Company’s consolidated statements of operations.
(c)
Gains and (losses) recognized in income on derivatives (ineffective portion) for interest rate swaps and natural gas swaps is included in other, net in the Company’s consolidated statements of operations.

The effect of the Company’s derivative instruments on the consolidated financial statements as of and for the six months ended June 30, 2012 and July 2, 2011 is as follows (in thousands):

 
 
 
Derivatives
Designated as
Cash Flow Hedges
 
Gain or (Loss)
Recognized in OCI
on Derivatives
(Effective Portion) (a)
Gain or (Loss)
Reclassified From
Accumulated OCI
into Income
(Effective Portion) (b)
Gain or (Loss)
Recognized in Income
on Derivatives
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing) (c)
 
2012
2011
2012
2011
2012
2011
Interest rate swaps
$

$

$
(260
)
$
(622
)
$

$

Natural gas swaps
(483
)
(231
)
(1,008
)
(45
)
3

(1
)
 
 
 
 
 
 
 
Total
$
(483
)
$
(231
)
$
(1,268
)
$
(667
)
$
3

$
(1
)

(a)
Amount recognized in accumulated OCI (effective portion) is reported as accumulated other comprehensive income/(loss) of approximately $0.5 million and approximately $0.2 million recorded net of taxes of approximately $0.2 million and approximately $0.1 million as of June 30, 2012 and July 2, 2011, respectively.
(b)
Gains and (losses) reclassified from accumulated OCI into income (effective portion) for interest rate swaps and natural gas swaps is included in interest expense and cost of sales, respectively, in the Company’s consolidated statements of operations.
(c)
Gains and (losses) recognized in income on derivatives (ineffective portion) for interest rate swaps and natural gas swaps is included in other, net in the Company’s consolidated statements of operations.

At June 30, 2012, the Company had forward purchase agreements in place for purchases of approximately $8.2 million of natural gas and diesel fuel.  These forward purchase agreements have no net settlement provisions and the Company intends to take physical delivery of the underlying product.  Accordingly, the forward purchase agreements are not subject to the requirements of fair value accounting because they qualify and the Company has elected to account for these as normal purchases as defined in the FASB authoritative guidance.

(11)    Revenue Recognition

The Company recognizes revenue on sales when products are shipped and the customer takes ownership and assumes risk of loss.  Certain customers may be required to prepay prior to shipment in order to maintain payment protection related to certain foreign and domestic sales.  These amounts are recorded as unearned revenue and recognized when the products have shipped and the customer takes ownership and assumes risk of loss.  The Company has formula arrangements with certain suppliers whereby the charge or credit for raw materials is tied to published finished product commodity prices after deducting a fixed processing fee incorporated into the formula and is recorded as a cost of sale by line of business.  The Company recognizes revenue related to grease trap servicing in the month the trap service occurs.


16



(12)  
Comprehensive Income

The Company follows Financial Accounting Standards Board ("FASB") authoritative guidance for reporting and presentation of comprehensive income or loss and its components.  Other comprehensive income (loss) is derived from adjustments that reflect pension adjustments, natural gas derivative adjustments and interest rate swap derivative adjustments. The components of other comprehensive income (loss) and the related tax impacts for the three months ended June 30, 2012 and July 2, 2011 are as follows (in thousands):

 
Before-Tax
 
Tax (Expense)
 
Net-of-Tax
 
Amount
 
or Benefit
 
Amount
 
June 30, 2012
July 2, 2011
 
June 30, 2012
July 2, 2011
 
June 30, 2012
July 2, 2011
Defined benefit pension plans
 
 
 
 
 
 
 
 
Amortization of prior service cost
$
22

$
22

 
$
(8
)
$
(8
)
 
$
14

$
14

Amortization of actuarial loss
1,189

681

 
(461
)
(264
)
 
728

417

Total defined benefit pension plans
1,211

703

 
(469
)
(272
)
 
742

431

 
 
 
 
 
 
 
 
 
Natural gas swap derivatives
 
 
 
 
 
 
 
 
Loss reclassified to net income
295

(105
)
 
(114
)
41

 
181

(64
)
Loss activity recognized in other comprehensive loss
217

(18
)
 
(84
)
7

 
133

(11
)
Total natural gas swap derivatives
512

(123
)
 
(198
)
48

 
314

(75
)
 
 
 
 
 
 
 
 
 
Interest rate swap derivatives
 
 
 
 
 
 
 
 
Loss reclassified to net income
28

303

 
(11
)
(117
)
 
17

186

 
 
 
 
 
 
 
 
 
Other Comprehensive income (loss)
$
1,751

$
883

 
$
(678
)
$
(341
)
 
$
1,073

$
542


The components of other comprehensive income (loss) and the related tax impacts for the six months ended June 30, 2012 and July 2, 2011 are as follows (in thousands):

 
Before-Tax
 
Tax (Expense)
 
Net-of-Tax
 
Amount
 
or Benefit
 
Amount
 
June 30, 2012
July 2, 2011
 
June 30, 2012
July 2, 2011
 
June 30, 2012
July 2, 2011
Defined benefit pension plans
 
 
 
 
 
 
 
 
Amortization of prior service cost
$
44

$
44

 
$
(16
)
$
(16
)
 
$
28

$
28

Amortization of actuarial loss
2,378

1,362

 
(922
)
(528
)
 
1,456

834

Total defined benefit pension plans
2,422

1,406

 
(938
)
(544
)
 
1,484

862

 
 
 
 
 
 
 
 
 
Natural gas swap derivatives
 
 
 
 
 
 
 
 
Loss reclassified to net income
1,008

45

 
(390
)
(17
)
 
618

28

Loss activity recognized in other comprehensive loss
(483
)
(231
)
 
186

89

 
(297
)
(142
)
Total natural gas swap derivatives
525

(186
)
 
(204
)
72

 
321

(114
)
 
 
 
 
 
 
 
 
 
Interest rate swap derivatives
 
 
 
 
 
 
 
 
Loss reclassified to net income
260

622

 
(101
)
(241
)
 
159

381

 
 
 
 
 
 
 
 
 
Other Comprehensive income (loss)
$
3,207

$
1,842

 
$
(1,243
)
$
(713
)
 
$
1,964

$
1,129



17



(13)    Employee Benefit Plans

The Company has retirement and pension plans covering substantially all of its employees.  Most retirement benefits are provided by the Company under separate final-pay noncontributory and contributory defined benefit and defined contribution plans for all salaried and hourly employees (excluding those covered by union-sponsored plans) who meet service and age requirements. Defined benefits are based principally on length of service and earnings patterns during the five years preceding retirement. During the third quarter of fiscal 2011, as part of the initiative to combine the Darling and Griffin retirement benefit programs, the Company's Board of Directors authorized the Company to proceed with the restructuring of its retirement benefit program effective January 1, 2012, to include the closing of Darling's salaried and hourly defined benefit plans to new participants as well as the freezing of service and wage accruals thereunder effective December 31, 2011 (a curtailment of these plans for financial reporting purposes) and the enhancing of benefits under the Company's defined contribution plans. However, the Company-sponsored hourly union plan has not been curtailed.

Net pension cost for the three and six months ended June 30, 2012 and July 2, 2011 includes the following components (in thousands):

 
Three Months Ended
Six Months Ended
 
June 30,
2012
July 2,
2011
June 30,
2012
July 2,
2011
Service cost
$
82

$
295

$
163

$
590

Interest cost
1,363

1,513

2,726

3,026

Expected return on plan assets
(1,678
)
(1,722
)
(3,355
)
(3,444
)
Amortization of prior service cost
22

22

44

44

Amortization of net loss
1,189

681

2,378

1,362

Net pension cost
$
978

$
789

$
1,956

$
1,578

  
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 actuarial estimates at June 30, 2012, the Company expects to contribute approximately $2.9 million to its pension plans to meet funding requirements during the next twelve months. Additionally, the Company has made tax deductible discretionary and required contributions to its pension plans for the six months ended June 30, 2012 and July 2, 2011 of approximately $0.9 million and $0.6 million, respectively.  

The Company participates in various 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 to meet their pension benefit obligations to their participants.   The Company's contributions to each individual multi-employer plan represent less than 5% of the total contributions to each such plan. Based on the most currently available information, the Company has determined that, if a withdrawal were to occur, withdrawal liabilities on two of the plans in which the Company currently participates could be material to the Company, with one of these material plans certified as critical or red zone. With respect to the other multi-employer pension plans in which the Company participates and which are not individually significant, five plans have certified as critical or red zone, one plan has certified as endangered or yellow zone and one plan has certified as seriously endangered or orange zone as defined by the Pension Protection Act of 2006.

In June 2009, the Company received a notice of a mass withdrawal termination and a notice of initial withdrawal liability from a multi-employer plan in which it participated. The Company had anticipated this event and as a result had accrued approximately $3.2 million as of January 3, 2009 based on the most recent information that was probable and estimable for this plan. The plan had given a notice of redetermination liability in December 2009. In fiscal 2010, the Company received further third party information confirming the future payout related to this multi-employer plan. As a result, the Company reduced its liability to approximately $1.2 million. In fiscal 2010, another underfunded multi-employer plan in which the Company participates gave notification of partial withdrawal liability. As of June 30, 2012, the Company has an accrued liability of approximately $1.0 million representing the present value of scheduled withdrawal liability payments under this multi-employer plan. While the Company has no ability to calculate a possible current liability for under-funded multi-employer plans that could terminate or could require additional funding under the Pension Protection Act of 2006, the amounts could be material.


18



(14)    Fair Value Measurements

FASB authoritative guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The following table presents the Company’s financial instruments that are measured at fair value on a recurring and nonrecurring basis as of June 30, 2012 and are categorized using the fair value hierarchy under FASB authoritative guidance.  The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value.
 
 
 
Fair Value Measurements at June 30, 2012 Using
 
 
Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable
Inputs
Significant
Unobservable
Inputs
(In thousands of dollars)
Total
(Level 1)
(Level 2)
(Level 3)
Assets:
 
 
 
 
Derivative instruments
$
42

$

$
42

$

Total Assets
$
42

$

$
42

$

 
 
 
 
 
Liabilities:
 
 
 
 
Derivative instruments
$
382

$

$
382

$

Senior Notes
280,625


280,625


Total Liabilities
$
281,007

$

$
281,007

$


Derivative assets consist of the Company’s heating oil swap and option contracts, which represents the difference between observable market rates of commonly quoted intervals for similar assets and liabilities in active markets and the fixed swap rate considering the instruments term, notional amount and credit risk.  See Note 10 Derivatives for breakdown by instrument type.

Derivative liabilities consist of the Company’s natural gas swap and heating oil swap and heating oil and corn option contracts, which represents the difference between observable market rates of commonly quoted intervals for similar assets and liabilities in active markets and the fixed swap rate considering the instruments term, notional amount and credit risk.  See Note 10 Derivatives for breakdown by instrument type.

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 and as such have been excluded from the table above. The carrying amount for the Company's other debt is not deemed to be significantly different than the fair value and all other instruments have been recorded at fair value. 

The fair value of the senior notes is based on market quotation from a third-party bank.

(15)     New Accounting Pronouncements

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The ASU amends ASC Topic 220, Comprehensive Income.  The new standard eliminates the option to report other comprehensive income and its components in the statement of changes in equity and instead requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. Reclassification adjustments between net income and other comprehensive income must be shown on the face of the statement(s), with no resulting change in net earnings. In December 2011, the FASB issued ASU No. 2011-12, Deferral of Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This ASU amends ASC Topic 220, Comprehensive Income. The new standard deferred the requirement to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income while the FASB further deliberates this aspect of the proposal. This update is effective for the Company on January 1, 2012 and must be applied retrospectively. The Company adopted this standard as of March 31, 2012. The adoption did not have a material impact on the Company's consolidated financial statements.


19



In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. The ASU amends ASC Topic 350, Intangibles - Goodwill and Other. The new standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permissible. The Company adopted this standard in the first quarter of 2012 and the adoption did not have a material impact on the Company's consolidated financial statements.

In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. The ASU amends ASC Topic 350, Intangibles - Goodwill and Other. The new standard is intended to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by providing entities an option to perform a "qualitative" assessment to determine whether further impairment testing is necessary. The new standard allows an entity to first assess qualitative factors to determine if it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If based on its qualitative assessment an entity concludes it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. The standards update is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard.

(16)     Guarantor Financial Information

The Company's Notes (see Note 8) are guaranteed on an unsecured basis by the Company's 100% directly and indirectly owned subsidiaries Darling National, Griffin and its subsidiary Craig Protein (collectively, the "Guarantors"). The Guarantors fully and unconditionally guaranteed the Notes on a joint and several basis. The following financial statements present condensed consolidating financial data for (i) Darling, the issuer of the Notes, (ii) the combined Guarantors, (iii) the combined other subsidiaries of the Company that did not guarantee the Notes (the "Non-guarantors"), and (iv) eliminations necessary to arrive at the Company's consolidated financial statements, which include condensed consolidated balance sheets as of June 30, 2012 and December 31, 2011, and the condensed consolidating statements of operations, the condensed consolidating statements of comprehensive income and the condensed consolidating statements of cash flows for the three and six months ended June 30, 2012 and July 2, 2011.






20



Condensed Consolidating Balance Sheet
As of June 30, 2012
(in thousands)

 
Issuer
Guarantors
Non-guarantors
Eliminations
Consolidated
ASSETS
 
 
 
 
 
Total current assets
$
140,396

$
417,313

$
2,857

$
(312,512
)
$
248,054

Investment in subsidiaries
1,371,568



(1,371,568
)

Property, plant and equipment, net
132,807

289,857



422,664

Intangible assets, net
15,814

335,253

282


351,349

Goodwill
21,860

359,243

266


381,369

Investment in unconsolidated subsidiary


46,359


46,359

Other assets
28,717

696



29,413

 
$
1,711,162

$
1,402,362

$
49,764

$
(1,684,080
)
$
1,479,208

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 

 
 
 

Total current liabilities
$
366,825

$
78,973

$
1,391

$
(312,512
)
$
134,677

Long-term debt, net of current portion
250,000

15



250,015

Other noncurrent liabilities
56,546


179


56,725

Deferred income taxes
42,603




42,603

Total liabilities
715,974

78,988

1,570

(312,512
)
484,020

Stockholders’ equity:
 

 

 
 
 

Common stock, additional paid-in capital and treasury stock
591,326

1,022,544

53,524

(1,076,068
)
591,326

Retained earnings and accumulated other comprehensive loss
403,862

300,830

(5,330
)
(295,500
)
403,862

Total stockholders’ equity
995,188

1,323,374

48,194

(1,371,568
)
995,188

 
$
1,711,162

$
1,402,362

$
49,764

$
(1,684,080
)
$
1,479,208




21



Condensed Consolidating Balance Sheet
As of December 31, 2011
(in thousands)

 
Issuer
Guarantors
Non-guarantors
Eliminations
Consolidated
ASSETS
 
 
 
 
 
Total current assets
$
124,675

$
347,989

$
3,980

$
(256,964
)
$
219,680

Investment in subsidiaries
1,286,175



(1,286,175
)

Property, plant and equipment, net
119,898

280,324



400,222

Intangible assets, net
14,747

347,874

293


362,914

Goodwill
21,860

359,243

266


381,369

Investment in unconsolidated subsidiary


21,733


21,733

Other assets
27,725

3,387



31,112

 
$
1,595,080

$
1,338,817

$
26,272

$
(1,543,139
)
$
1,417,030

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 

 
 
 

Total current liabilities
$
317,561

$
63,718

$
2,942

$
(256,964
)
$
127,257

Long-term debt, net of current portion
280,000

20



280,020

Other noncurrent liabilities
46,011

12,052

182


58,245

Deferred income taxes
31,133




31,133

Total liabilities
674,705

75,790

3,124

(256,964
)
496,655

Stockholders’ equity:
 

 

 
 
 

Common stock, additional paid-in capital and treasury stock
583,273

1,022,544

27,982

(1,050,526
)
583,273

Retained earnings and accumulated other comprehensive loss
337,102

240,483

(4,834
)
(235,649
)
337,102

Total stockholders’ equity
920,375

1,263,027

23,148

(1,286,175
)
920,375

 
$
1,595,080

$
1,338,817

$
26,272

$
(1,543,139
)
$
1,417,030




Condensed Consolidating Statements of Operations
For the three months ended June 30, 2012
(in thousands)

 
Issuer
Guarantors
Non-guarantors
Eliminations
Consolidated
Net sales
$
184,570

$
300,190

$
3,721

$
(51,807
)
$
436,674

Cost and expenses:
 
 
 
 
 
Cost of sales and operating expenses
142,905

219,470

3,570

(51,807
)
314,138

Selling, general and administrative expenses
18,927

17,933

34


36,894

Depreciation and amortization
5,816

15,853

5


21,674

Total costs and expenses
167,648

253,256

3,609

(51,807
)
372,706

Operating income
16,922

46,934

112


63,968

 
 

 

 
 
 

Interest expense
(5,752
)
(1
)


(5,753
)
Other, net
(588
)
878

(20
)

270

Equity in net loss of unconsolidated subsidiary


(656
)

(656
)
Earnings in investments in subsidiaries
29,519



(29,519
)

Income/(loss) before taxes
40,101

47,811

(564
)
(29,519
)
57,829

Income taxes (benefit)
3,876

17,938

(210
)

21,604

Net income (loss)
$
36,225

$
29,873

$
(354
)
$
(29,519
)
$
36,225




22



Condensed Consolidating Statements of Operations
For the six months ended June 30, 2012
(in thousands)

 
Issuer
Guarantors
Non-guarantors
Eliminations
Consolidated
Net sales
$
337,558

$
573,699

$
6,275

$
(93,750
)
$
823,782

Cost and expenses:
 
 
 
 
 
Cost of sales and operating expenses
264,002

414,283

6,072

(93,750
)
590,607

Selling, general and administrative expenses
39,712

34,478

73


74,263

Depreciation and amortization
12,112

30,311

11


42,434

Total costs and expenses
315,826

479,072

6,156

(93,750
)
707,304

Operating income
21,732

94,627

119


116,478

 
 

 

 
 
 

Interest expense
(12,677
)
(1
)


(12,678
)
Other, net
(1,230
)
905

(13
)

(338
)
Equity in net loss of unconsolidated subsidiary


(892
)

(892
)
Earnings in investments in subsidiaries
59,851



(59,851
)

Income/(loss) from operations before taxes
67,676

95,531

(786
)
(59,851
)
102,570

Income taxes (benefit)
2,880

35,184

(290
)

37,774

Net income (loss)
$
64,796

$
60,347

$
(496
)
$
(59,851
)
$
64,796


Condensed Consolidating Statements of Operations
For the three months ended July 2, 2011
(in thousands)
 
 
Issuer
Guarantors
Non-guarantors
Eliminations
Consolidated
Net sales
$
183,604

$
327,243

$
4,683

$
(44,920
)
$
470,610

Cost and expenses:
 
 
 
 
 
Cost of sales and operating expenses
135,223

230,413

4,489

(44,921
)
325,204

Selling, general and administrative expenses
17,524

16,527

41


34,092

Depreciation and amortization
5,571

13,473

11


19,055

Total costs and expenses
158,318

260,413

4,541

(44,921
)
378,351

Operating income
25,286

66,830

142

1

92,259

 
 

 

 
 
 

Interest expense
(7,745
)



(7,745
)
Other, net
(750
)
(205
)
102

(1
)
(854
)
Equity in net loss of unconsolidated subsidiary


(1,174
)

(1,174
)
Earnings in investments in subsidiaries
41,588



(41,588
)

Income/(loss) before taxes
58,379

66,625

(930
)
(41,588
)
82,486

Income taxes (benefit)
6,152

24,448

(341
)

30,259

Net income (loss)
$
52,227

$
42,177

$
(589
)
$
(41,588
)
$
52,227





23



Condensed Consolidating Statements of Operations
For the six months ended July 2, 2011
(in thousands)

 
Issuer
Guarantors
Non-guarantors
Eliminations
Consolidated
Net sales
$
358,259

$
634,357

$
11,232

$
(93,340
)
$
910,508

Cost and expenses:
 
 
 
 
 
Cost of sales and operating expenses
267,211

441,938

10,746

(93,340
)
626,555

Selling, general and administrative expenses
32,711

31,993

81


64,785

Depreciation and amortization
11,755

26,970

11


38,736

Total costs and expenses
311,677

500,901

10,838

(93,340
)
730,076

Operating income
46,582

133,456

394


180,432

 
 

 

 
 
 

Interest expense
(21,972
)
(1
)


(21,973
)
Other, net
(1,274
)
(281
)
95


(1,460
)
Equity in net loss of unconsolidated subsidiary


(1,174
)

(1,174
)
Earnings in investments in subsidiaries
83,995



(83,995
)

Income/(loss) from operations before taxes
107,331

133,174

(685
)
(83,995
)
155,825

Income taxes (benefit)
8,542

48,745

(251
)

57,036

Net income (loss)
$
98,789

$
84,429

$
(434
)
$
(83,995
)
$
98,789



Condensed Consolidating Statements of Comprehensive Income (Loss)
For the three months ended June 30, 2012
(in thousands)
 
 
Issuer
Guarantors
Non-guarantors
Eliminations
Consolidated
Net income
$
36,225

$
29,873

$
(354
)
$
(29,519
)
$
36,225

Other comprehensive income (loss):
 
 
 
 
 
Pension adjustments, net of tax
742




742

Natural gas swap derivative adjustments, net of tax
314




314

Interest rate swap derivative adjustment, net of tax
17




17

Total other comprehensive income (loss)
1,073




1,073

Total comprehensive income (loss)
$
37,298

$