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 October 2, 1999
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 0-24620
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 No.)
251 O'CONNOR RIDGE BLVD., SUITE 300, IRVING, TEXAS 75038
(Address of principal
executive offices)
(972) 717-0300
(Registrant's telephone number)
Not applicable
(Former name, address and fiscal year, if changed since last report)
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 report(s)), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
The number of shares outstanding of the Registrant's common stock, $0.01 par
value, as of November 12, 1999 was 15,587,292.
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED OCTOBER 2, 1999
TABLE OF CONTENTS
Page No.
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets. . . . . . . . . . . . . 3
October 2, 1999 (unaudited) and January 2, 1999
Consolidated Statements of Operations (unaudited). . . . . . 4
Three Months and Nine Months Ended
October 2, 1999 and October 3, 1998
Consolidated Statements of Cash Flows (unaudited). . . . . . 5
Nine Months Ended October 2, 1999 and October 3, 1998
Notes to Consolidated Financial Statements (unaudited). . . . 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . 11
PART II: OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. . . . . . . . . . . . . . . . . 19
Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . 19
Signatures. . . . . . . . . . . . . . . . . . . 20
Index to Exhibits. . . . . . . . . . . . . . . . . 21
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 2, 1999 and January 2, 1999
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
October 2, January 2,
1999 1999
--------- ---------
(unaudited)
<S> ............................................................................... <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 2,757 $ 12,317
Accounts receivable .......................................................... 16,812 16,615
Inventories .................................................................. 8,484 11,707
Prepaid expenses ............................................................. 6,177 3,977
Deferred income tax assets ................................................... 4,306 3,928
Other ........................................................................ 508 671
--------- ---------
Total current assets ..................................................... 39,044 49,215
Property, plant and equipment, less accumulated
depreciation of $116,725 at October 2, 1999 and
$100,713 at January 2, 1999 .................................................... 121,328 140,074
Collection routes and contracts, less accumulated
amortization of $15,665 at October 2, 1999 and
$12,101 at January 2, 1999 ..................................................... 38,747 42,978
Goodwill, less accumulated amortization of $684
at October 2, 1999 and $513 at January 2, 1999 ................................. 5,320 5,461
Other assets ...................................................................... 5,519 5,438
Net assets of discontinued operations ............................................. -- 20,000
--------- ---------
$209,958 $263,166
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............................................ $ 10,125 $ 7,717
Accounts payable, principally trade .......................................... 10,615 15,517
Accrued expenses ............................................................. 23,249 22,255
Accrued interest ............................................................. 143 656
--------- ---------
Total current liabilities ................................................ 44,132 46,145
Long-term debt, less current portion .............................................. 114,939 140,613
Other non-current liabilities ..................................................... 21,106 24,836
Deferred income taxes ............................................................. 6,013 13,626
--------- ---------
Total liabilities ........................................................ 186,190 225,220
--------- ---------
Stockholders' equity
Common stock, $.01 par value; 25,000,000 shares authorized; 15,589,119 and
15,589,077 shares issued and outstanding at
October 2, 1999 and at January 2, 1999, respectively ...................... 156 156
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, none issued ................................................... -- --
Additional paid-in capital ................................................... 35,063 35,063
Retained earnings (accumulated deficit) ...................................... (11,451) 2,727
--------- ---------
Total stockholders' equity ............................................... 23,768 37,946
--------- ---------
Contingencies (note 3)
$209,958 $263,166
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months and Nine Months ended October 2, 1999 and October 3, 1998
(in thousands, except per share data)
<TABLE>
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
(unaudited) (unaudited)
<CAPTION>
<S> .............................................. <C> <C> <C> <C>
Net sales ........................................ $ 63,381 $ 79,347 $ 191,410 $ 262,333
--------- --------- --------- ---------
Costs and expenses:
Cost of sales and operating expenses ........ 52,148 68,589 156,982 219,629
Selling, general and administrative expenses 6,616 8,433 19,473 24,470
Depreciation and amortization ............... 7,935 8,156 23,714 24,504
--------- --------- --------- ---------
Total costs and expenses ................. 66,699 85,178 200,169 268,603
--------- --------- --------- ---------
Operating loss ........................... (3,318) (5,831) (8,759) (6,270)
--------- --------- --------- ---------
Other income (expense):
Interest expense ............................ (3,262) (3,012) (10,673) (8,867)
Other, net .................................. (2,084) (584) (2,909) (913)
--------- --------- --------- ---------
Total other income (expense) ........... (5,346) (3,596) (13,582) (9,780)
--------- --------- --------- ---------
Loss from continuing operations
before income taxes ..................... (8,664) (9,427) (22,341) (16,050)
Income tax benefit ............................... (3,468) (3,134) (8,497) (5,685)
--------- --------- --------- ---------
Loss from continuing operations .......... (5,196) (6,293) (13,844) (10,365)
Discontinued operations:
Loss from discontinued operations,
net of tax ........................... -- (601) -- (564)
Estimated loss on disposal of discontinued
operations, net of tax .............. -- -- (334) --
--------- --------- --------- ---------
Net loss ................................. $ (5,196) $ (6,894) $ (14,178) $ (10,929)
========= ========= ========= =========
Basic loss per share:
Continuing operations .................... $ (0.33) $ (0.40) $ (0.89) $ (0.66)
Discontinued operations:
Loss from operations .................... -- (0.04) -- (0.04)
Estimated loss on disposal .............. -- -- (0.02) --
Total .............................. $ (0.33) $ (0.44) $ (0.91) $ (0.70)
========= ========= ========= =========
Diluted loss per share:
Continuing operations .................... $ (0.33) $ (0.40) $ (0.89) $ (0.66)
Discontinued operations:
Loss from operations .................... -- (0.04) -- (0.04)
Estimated loss on disposal .............. -- -- (0.02) --
Total .............................. $ (0.33) $ (0.44) $ (0.91) $ (0.70)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months ended October 2, 1999 and October 3, 1998
(in thousands)
<TABLE>
Nine Months Ended
October 2, October 3,
1999 1998
---------- ----------
(unaudited)
<CAPTION>
<S> .......................................................... <C> <C>
Cash flows from operating activities:
Loss from continuing operations ......................... $ (13,844) $ (10,365)
Adjustments to reconcile net loss from
continuing operations to net cash
provided (used) by operating activities:
Depreciation and amortization ........................ 23,714 24,504
Deferred income tax benefit .......................... (7,991) (5,799)
Loss (Gain) on sales of assets ....................... 965 (19)
Changes in operating assets and liabilities:
Accounts receivable ................................. (197) 9,061
Inventories and prepaid expenses .................... 1,025 (1,364)
Accounts payable and accrued expenses ............... (3,507) (1,997)
Accrued interest .................................... (513) 419
Other ............................................... (1,983) 3,181
--------- ---------
Net cash provided (used) by continuing operations ...... (2,331) 17,621
Net cash provided (used) by discontinued operations .... 119 (1,159)
--------- ---------
Net cash provided (used) by operating activities ....... (2,212) 16,462
--------- ---------
Cash flows from investing activities:
Recurring capital expenditures .......................... (3,987) (9,836)
Gross proceeds from sale of property, plant and equipment
and other assets ..................................... 22,135 264
Payments related to routes and other intangibles ........ (109) (152)
Net cash used in discontinued operations ................ (330) (1,701)
--------- ---------
Net cash provided (used) by investing activities 17,709 (11,425)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt ............................ 127,022 71,881
Payments on long-term debt .............................. (150,288) (76,526)
Contract payments ....................................... (1,669) (1,265)
Issuance of common stock ................................ -- 91
--------- ---------
Net cash used in discontinued operations ................ (150) (410)
--------- ---------
Net cash used in financing activities .......... (25,085) (6,229)
--------- ---------
Net increase in cash and cash equivalents
from discontinued operations ........................ 28 1,635
--------- ---------
Net increase (decrease) in cash and cash equivalents ......... (9,560) 443
Cash and cash equivalents at beginning of period ............. 12,317 2,955
--------- ---------
Cash and cash equivalents at end of period ................... $ 2,757 $ 3,398
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ............................................ $ 11,186 $ 8,254
--------- ---------
Income taxes, net of refunds ........................ $ (866) $ 148
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 2, 1999
(unaudited)
(1) General
The accompanying consolidated financial statements for the three month
and nine month periods ended October 2, 1999 and October 3, 1998 have
been prepared by Darling International Inc. (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) which 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 that the
disclosures herein are adequate to make the information presented not
misleading. 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 January 2,
1999.
(2) Summary of Significant Accounting Policies
(a) 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.
The operations of International Processing Corporation ("Bakery
By-Products Recycling Segment") have been classified as
discontinued operations. This segment was sold during the quarter
ended July 3, 1999. Certain prior year balances have been
reclassified in order to conform to current year presentation.
(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 January 2, 1999, and include
the 13 and 39 weeks ended October 2, 1999, and the 13 and 39 weeks
ended October 3, 1998.
(c) Earnings Per Common Share
Basic earnings (loss) per common share are computed by dividing
net earnings (loss) attributable to outstanding common stock by
the weighted average number of common stock shares outstanding
during the year. Diluted earnings per common share are computed by
dividing net earnings attributable to outstanding common stock by
the weighted average number of common shares outstanding during
the year increased by dilutive common equivalent shares (stock
options) determined using the treasury stock method, based on the
average market price exceeding the exercise price of the stock
options.
The weighted average common shares used for basic earnings (loss)
per common share was 15,589,000 and 15,589,000 for the three
months and nine months ended October 2, 1999, and 15,585,000 and
15,578,000 for the three months and nine months ended October 3,
1998. The effect of all outstanding stock options were excluded
from diluted earnings (loss) per common share for all periods as
the effect was antidilutive.
<PAGE>
(3) Contingencies
(a) ENVIRONMENTAL
Chula Vista
The Company is the owner of an undeveloped property located in
Chula Vista, California (the "Site"). A rendering plant was
operated on the Site until 1982. From 1959 to 1978, a portion of
the Site was used as an industrial waste disposal facility, which
was closed pursuant to Closure Order No. 80-06, issued by the State
of California Regional Water Quality Control Board for the San
Diego Region (the "RWQCB"). In June 1982, RWQCB staff approved a
completed closure plan which included construction of a containment
cell (the "Containment Cell") on a portion (approximately 5 acres)
of the Site to isolate contaminated soil excavated from the Site.
The Site has been listed by the State of California as a site for
which expenditures for removal and remedial actions may be made by
the State pursuant to the California Hazardous Substances Account
Act, California Health & Safety Code Section 25300 et seq.
Technical consultants retained by the Company have conducted
various investigations of the environmental conditions at the Site,
and in 1996, requested that the RWQCB issue a "no further action"
letter with respect to the Site. In 1997 the RWQCB issued Order No.
97-40 prescribing a maintenance and monitoring program for the
Containment Cell. The Company continues to work with the RWQCB to
define the scope of an additional order which will address the
Company's future obligations for that remaining portion
(approximately 30 acres) of the Site. The Company has signed an
agreement for the sale of the entire Site pursuant to which the
purchaser would assume responsibility for known environmental
issues. The agreement is subject to contingencies and purchaser
evaluation of the Site, and there can be no assurance that the sale
will be completed.
Cleveland
In August, 1997, the Company received a Notice of Violation ("NOV")
from the United States Environmental Protection Agency ("EPA") for
alleged violations of the Ohio Air Quality Rules as they relate to
odor emissions. The NOV asserted that the Cleveland, OH facility
was in violation of the State's nuisance rule based on a City of
Cleveland record of complaints associated with odors emanating from
its facility. Since December, 1992, the Company has been working
with the City of Cleveland under a Consent Agreement to address
such complaints and concerns of the neighborhood in close proximity
to the Plant. Upon receipt of the NOV the Company initiated a
cooperative effort with EPA to address the NOV. In August, 1998,
the Company received a second NOV from EPA which encompassed the
alleged violations from the first NOV and alleged several
violations of terms and conditions found in the Cleveland plant's
air permit. The Company again met with EPA to seek an amicable
resolution. Rendering of animal by-products has been discontinued
at the Cleveland plant. The Company has negotiated with EPA and
signed an Administrative Consent Order satisfactory to the Company.
There can be no assurance that this order will be finalized, but
this matter is not expected to have a material adverse effect on
the Company.
(b) LITIGATION
Melvindale
A group of residents living near the Company's Melvindale, Michigan
plant has filed suit, purportedly on behalf of a class of persons
similarly situated. The class has been certified for injunctive
relief only. The court declined to certify a damage class. The suit
is based on legal theories of trespass, nuisance and negligence
and/or gross negligence, and is pending in the United States
District Court, Eastern District of Michigan. Plaintiffs allege
that emissions to the air, particularly odor, from the plant have
reduced the value and enjoyment of Plaintiffs' property, and
Plaintiffs seek damages, including mental anguish, exemplary
damages and injunctive relief. In a lawsuit with similar factual
allegations, also pending in United States District Court, Eastern
District of Michigan, the City of Melvindale has filed suit against
the Company based on legal theories of nuisance, trespass,
negligence and violation of Melvindale nuisance ordinances seeking
damages and declaratory and injunctive relief. The court has
dismissed the trespass counts in both lawsuits without prejudice.
The Company or its predecessors have operated a rendering plant at
the Melvindale location since 1927 in a heavily industrialized area
down river south of Detroit. The Company has taken and is taking
all reasonable steps to minimize odor emissions from its recycling
processes and is defending the lawsuit vigorously.
Other
The Company is also a party to several other lawsuits, claims and
loss contingencies incidental to its business, including assertions
by regulatory agencies related to the release of unacceptable odors
from some of its processing facilities.
(c) INSURANCE
The Company purchases its workers compensation, auto and general
liability insurance on a retrospective basis. The Company accrues
its expected ultimate costs related to claims occurring during each
fiscal year and carries this accrual as a reserve until such claims
are paid by the Company.
The Company has established loss reserves for environmental and
other matters as a result of the matters discussed above. Although
the ultimate liability cannot be determined with certainty,
management of the Company believes that reserves for contingencies
are reasonable and sufficient based upon present governmental
regulations and information currently available to management. The
Company estimates the range of possible losses related to
environmental and litigation matters, based on certain assumptions,
is between $2.0 million and $8.0 million at October 2, 1999. The
accrued expenses and other noncurrent liabilities classifications
in the Company's consolidated balance sheets include reserves for
insurance, environmental and litigation contingencies of $19.9
million and $19.2 million at October 2, 1999 and January 2, 1999,
respectively. There can be no assurance, however, that final costs
will not exceed current estimates. The Company believes that any
additional liability relative to such lawsuits and claims which may
not be covered by insurance would not likely have a material
adverse effect on the Company's financial position, although it
could potentially have a material impact on the results of
operations in any one year.
<PAGE>
(4) Business Segments
The Company operated on a worldwide basis within three industry
segments: Rendering, Restaurant Services, and Esteem Products. 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 related to "Fresh Start Reporting." Assets
of corporate activities include cash, unallocated prepaid expenses,
deferred tax assets, prepaid pension, and miscellaneous other assets.
Rendering
Rendering consists of the collection and processing of animal
by-products from butcher shops, grocery stores and independent meat
and poultry processors, converting these wastes into similar
products such as useable oils and proteins utilized by the
agricultural and oleochemical industries.
Restaurant Services
Restaurant Services consists of the collection of used cooking oils
from restaurants and recycling them into similar products such as
high-energy animal feed ingredients and industrial oils. Restaurant
Services also provides grease trap servicing.
Esteem Products
Esteem Products consists of the development and marketing of
enhanced feed ingredients from existing raw material streams
utilizing advanced biochemistry and animal nutrition technologies.
Business Segment Net Sales (in thousands):
Three Months Ended Nine Months Ended
---------------------------------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
----------------------------------------------------
Rendering:
Trade $ 50,821 $ 64,970 $150,573 $217,023
Intersegment 6,402 8,580 19,884 27,892
--------- --------- -------- --------
57,223 73,650 170,457 244,915
-------- -------- ------- -------
Restaurant Services:
Trade 12,536 14,355 40,610 45,280
Intersegment 1,704 2,230 5,148 5,801
--------- ---------- -------- ---------
14,240 16,585 45,758 51,081
-------- --------- ------- --------
Esteem Products:
Trade 24 22 227 30
Intersegment 1 42 25 69
----------- ----------- ---------- ----------
25 64 252 99
----------- ----------- --------- ----------
Eliminations (8,107) (10,852) (25,057) (33,762)
--------- -------- ------- -------
Total $ 63,381 $ 79,347 $191,410 $262,333
======== ======== ======= =======
<PAGE>
Business Segment Profit (Loss) (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
------------------------------------------------------------
<S> <C> <C> <C> <C>
Rendering $ 1,740 $ (412) $ 2,909 $ 6,392
Restaurant Services (1,101) (341) (1,080) 777
Esteem Products (381) (851) (1,495) (2,017)
Corporate Activities (5,660) (4,811) (12,002) (12,335)
Interest expense (3,262) (3,012) (10,673) (8,867)
------- ------- ------- -------
Loss from continuing operations
before income taxes $ (8,664) $(9,427) $(22,341) $(16,050)
======= ====== ====== ======
</TABLE>
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 Rend./Rest. Svcs. Depreciation of Combined
Rend./Rest. Svcs. 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" is not considered in the measure of operating segment profit
(loss) and is included in Corporate Activities.
Business Segment Assets (in thousands):
October 2, January 2,
1999 1999
---------- ----------
Rendering $71,918 $84,904
Restaurant Services 28,733 32,100
Combined Rend./Rest. Svcs. 84,804 93,080
Esteem Products 3,668 3,097
Corporate Activities 20,835 29,985
Net assets of discontinued operations - 20,000
------- --------
Total $209,958 $263,166
======= =======
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS AND NINE MONTHS
ENDED OCTOBER 2, 1999
PART I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion summarizes information with respect to the
liquidity and capital resources of the Company at October 2, 1999 and factors
affecting its results of operations for the three months and nine months ended
October 2, 1999 and October 3, 1998.
RESULTS OF OPERATIONS
Three Months Ended October 2, 1999 Compared to
Three Months Ended October 3, 1998
GENERAL
The Company recorded a loss from continuing operations of $5.2 million
for the third quarter of the fiscal year ending January 1, 2000 ("Fiscal 1999"),
as compared to a loss of $6.3 million for the third quarter of the fiscal year
ended January 2, 1999 ("Fiscal 1998"). Operating loss improved $2.5 million
to an operating loss of $3.3 million in the third quarter of Fiscal 1999 from an
operating loss of $5.8 million in the third quarter of Fiscal 1998. The decrease
in the operating loss was primarily due to reductions in selling, general and
administrative costs and operating expenses. Interest expense increased from
$3.0 million in Fiscal 1998 to $3.3 million in Fiscal 1999, primarily due to a
higher overall interest rate.
NET SALES
The Company collects and processes animal by-products (fat, bones and
offal) and used restaurant cooking oil to produce finished products of tallow,
meat and bone meal, and yellow grease. In addition, the Company provides grease
trap collection services to restaurants. Sales are significantly affected by
finished goods prices, quality of raw material, and volume of raw material. Net
sales include the sales of produced finished goods, trap grease services, and
finished goods purchased for resale, which constitute less than 10% of total
sales.
During the third quarter of Fiscal 1999, net sales decreased 20.1%, to
$63.4 million as compared to $79.3 million during the third quarter of Fiscal
1998 primarily due to the following: 1) Decreases in overall finished goods
prices resulted in a $11.6 million decrease in sales in the third quarter of
Fiscal 1999 versus the third quarter of Fiscal 1998; the Company's average
prices for the third quarter of Fiscal 1999 were 22.0% lower than the average
prices for the third quarter of Fiscal 1998; 2) Decreases in the volume of raw
materials processed resulted in an $3.2 million decrease in sales which
consisted in part of a $2.8 million decrease due to the sale of an operating
facility. This was somewhat offset by $0.5 million in yield gains; 3) Decreases
in finished hides sales accounted for $1.1 million in sales decreases; 4)
Inventory changes and decreases in finished product purchased for resale
accounted for additional decreases of $2.8 million in sales; and 5) Collection
charge income increased $2.3 million to somewhat offset the other decreases.
COST OF SALES AND OPERATING EXPENSES
Cost of sales and operating expenses include prices paid to raw
material suppliers, the cost of product purchased for resale, and the cost to
collect and process raw material. The Company utilizes both fixed and formula
pricing methods for the purchase of raw materials. Fixed prices are adjusted
where possible as needed 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.
During the third quarter of Fiscal 1999, cost of sales and operating
expenses decreased $16.5 million (24.1%) to $52.1 million as compared to $68.6
million during the third quarter of Fiscal 1998 primarily as a result of the
following: 1) Lower raw material prices paid, correlating to decreased prices
for fats and oils, and meat and bone meal resulted in a decrease of $9.6 million
in cost of sales; 2) Decreases in the volume of raw materials collected and
processed, primarily resulting from the sale of an operating facility, resulted
in a decrease of approximately $0.6 million in cost of sales and decreases in
hides costs resulted in a $1.0 million decrease in cost of sales; 3) Changes
in inventory levels and decreases in product purchased for resale resulted in
an approximately $2.9 million decrease in cost of sales; 4) Decreases in
operating costs due to the sale of an operating facility resulted in a decrease
of $1.2 million; and 5) Decreases in labor costs resulted in a $0.7 million
decrease in operating expenses, while repair cost reductions resulted in a
$0.5 million decrease in operating expenses.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs were $6.6 million during the
third quarter of Fiscal 1999, a $1.8 million decrease from $8.4 million for the
third quarter of Fiscal 1998. Decreases were realized in labor costs, travel and
entertainment, and professional and legal fees.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization charges decreased $0.3 million to $7.9
million during the third quarter of Fiscal 1999 as compared to $8.2 million
during the third quarter of Fiscal 1998.
INTEREST EXPENSE
Interest expense increased $0.3 million from $3.0 million during the
third quarter of Fiscal 1998 to $3.3 million during the third quarter of Fiscal
1999, primarily due to an increase in the overall interest rate.
OTHER INCOME (EXPENSE)
Other income (expense) increased $1.6 million from a net expense of
$0.5 million during the third quarter of Fiscal 1998 to a net expense of $2.1
million during the third quarter of Fiscal 1999. This additional expense was
primarily related to the sale of certain equipment and customer routes in one
location at a loss of $1.5 million.
INCOME TAXES
The income tax benefit of $3.5 million for the third quarter of Fiscal
1999 consists of federal tax benefit and various state and foreign taxes. This
is an increase of $0.4 million from the $3.1 million income tax benefit during
the third quarter of Fiscal 1998.
CAPITAL EXPENDITURES
The Company made capital expenditures of $1.3 million during the third
quarter of Fiscal 1999 compared to capital expenditures of $1.8 million during
the third quarter of Fiscal 1998.
<PAGE>
Nine Months Ended October 2, 1999 Compared to Nine Months Ended October 3, 1998
GENERAL
The Company recorded a loss from continuing operations of $13.8 million
for the first nine months of Fiscal 1999, as compared to a loss of $10.4 million
for the first nine months of Fiscal 1998. Operating loss increased from an
operating loss of $6.3 million in the first nine months of Fiscal 1998 to an
operating loss of $8.8 million in the first nine months of Fiscal 1999. The
increase in the operating loss was primarily due to: 1) Declines in overall
finished goods prices; and 2) Declines in the volume of raw materials processed.
Interest expense increased from $8.9 million to $10.7 million in Fiscal 1999,
primarily due to a higher overall interest rate.
NET SALES
During the first nine months of Fiscal 1999, net sales decreased by
$70.9 million (27%) to $191.4 million as compared to $262.3 million during the
first nine months of Fiscal 1998, primarily due to the following: 1) Decreases
in overall finished goods prices resulted in a $42.6 million decrease in sales
in the first nine months of Fiscal 1999, versus the first nine months of Fiscal
1998. The Company's average prices for the first nine months of Fiscal 1999 were
25.4% lower than the average prices for the first nine months of Fiscal 1998; 2)
Decreases in the volume of raw materials processed resulted in a $26.6 million
decrease in sales which consisted in part of a $9.1 million decrease due to the
sale of an operating facility and a $10.6 million decrease from the closure of
facilities by suppliers. This was somewhat offset by $2.9 million in yield
gains; 3) Decreases in finished hides sales accounted for $4.1 million in sales
decreases; 4) Inventory changes and decreases in finished product purchased
for resale resulted in a $4.9 million decrease in sales; and 5) Increases in
collection charge income of $4.4 million somewhat offset the decreases.
COST OF SALES AND OPERATING EXPENSES
During the first nine months of Fiscal 1999, cost of sales and
operating expenses decreased $62.6 million (28.5%) to $157.0 million as compared
to $219.6 million during the first nine months of Fiscal 1998, primarily as a
result of the following: 1) Lower raw material prices paid, correlating to
decreased prices for fats and oils, and meat and bone meal resulted in decreases
of $39.9 million in cost of sales; 2) Decreases in the volume of raw materials
collected and processed, primarily resulting from the sale of an operating
facility, resulted in a decrease of approximately $4.3 million in cost of sales
and decreases in hides costs resulted in a $3.3 million decrease in cost of
sales; 3) Inventory changes and decreases in finished product purchased for
resale resulted in an approximately $4.2 million decrease in cost of sales;
4) Decreases in operating costs due to the sale of an operating facility
resulted in a decrease of $3.8 million; 5) Decreases in steam cost resulted in
a $1.4 million decrease in operating expenses; and 6) Decreases in labor costs
and contract hauling resulted in a $3.7 million decrease in operating expenses
and repair costs resulted in a $2.0 million decrease in operating expenses.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs were $19.5 million during the
first nine months of Fiscal 1999, a $5.0 million decrease from $24.5 million for
the first nine months of Fiscal 1998. Decreases were primarily a result of lower
labor cost, travel and entertainment, advertising and promotional, and
professional and legal fees.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization charges decreased by $0.8 million to
$23.7 million during the first nine months of Fiscal 1999, as compared to $24.5
million during the first nine months of Fiscal 1998.
<PAGE>
INTEREST EXPENSE
Interest expense increased by $1.8 million from $8.9 million during the
first nine months of Fiscal 1998, to $10.7 million during the first nine months
of Fiscal 1999, primarily due to a higher overall rate of interest.
OTHER INCOME (EXPENSE)
Other income (expense) increased $2.0 million from a net expense of
$0.9 million during the first nine months of Fiscal 1998 to a net expense of
$2.9 million during the first nine months of Fiscal 1999. This additional
expense was partially due to the sale of certain equipment and customer routes
in one location at a loss of $1.5 million.
INCOME TAXES
The income tax benefit of $8.5 million for the first nine months of
Fiscal 1999 consists of federal tax benefit and various state and foreign taxes.
This is an increase of $2.8 million from the $5.7 million income tax benefit
during the first nine months of Fiscal 1998.
CAPITAL EXPENDITURES
The Company made capital expenditures of $4.0 million during the first
nine months of Fiscal 1999, compared to capital expenditures of $9.8 million
during the first nine months of Fiscal 1998.
DISCONTINUED OPERATIONS
The operations of the Bakery By-Products Recycling segment have been
classified as discontinued operations. The Company recorded an estimated loss on
disposal, net of tax, of $14.7 million to reflect the pending sale of this
business segment in the fourth quarter of Fiscal 1998. The sale of this business
segment was closed on April 5, 1999. During the first nine months of Fiscal
1999, the Company recorded an additional loss on disposal of $0.3 million.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Effective June 5, 1997, the Company entered into a Credit Agreement
(the "Credit Agreement") which originally provided for borrowings in the form of
a $50,000,000 Term Loan and $175,000,000 Revolving Credit Facility. On October
3, 1998, the Company entered into an amendment of the Credit Agreement whereby
BankBoston, N.A., as agent, and the other participant banks in the Credit
Agreement (the "Banks") agreed to forbear from exercising rights and remedies
arising as a result of several existing events of default of certain financial
covenants (the "Defaults") under the Credit Agreement, as amended, until
November 9, 1998.
On November 6, 1998, the Company entered into an extension of the
Amendment whereby the Banks agreed to forbear from exercising rights and
remedies arising as a result of the Defaults until December 14, 1998. The
forbearance period was subsequently extended to January 22, 1999. On January 22,
1999, the Company and the banks entered into an Amended and Restated Credit
Agreement (the "Amended and Restated Credit Agreement").
The Amended and Restated Credit Agreement provides for borrowing in
the form of a $36,702,000 Term Loan and $135,000,000 Revolving Credit Facility.
The Term Loan provides for $36,702,000 of borrowing. Under the Amended and
Restated Credit Agreement, the Term Loan bears interest, payable quarterly, at a
Base Rate (8.0% at October 2, 1999) plus a margin of 1%. Under the Amended and
Restated Credit Agreement, the Term Loan is payable by the Company in quarterly
installments of $2,500,000 on December 31, 1999; $2,500,000 on March 31, 2000;
$22,500,000 on June 30, 2000; $2,500,000 on September 30, 2000; and the balance
due on December 31, 2000. On April 5, 1999 and September 20, 1999, respectively,
the net proceeds from the sale of International Processing Corporation of
$19,600,000 and the net proceeds from the sale of the Milwaukee plant of
$950,000 were applied against installments due on September 30, 1999, December
31, 1999, March 31, 2000, and a portion of the installment due on June 30, 2000.
As of October 2, 1999, $14,237,000 was outstanding under the Term Loan.
The Revolving Credit Facility provides for borrowings up to a maximum
of $135,000,000 with sublimits available for letters of credit and a swingline.
Under the Amended and Restated Credit Agreement, the Revolving Credit Facility
bears interest, payable quarterly, at a Base Rate (8.0% at October 2, 1999) plus
a margin of 1%. Additionally, the Company must pay a commitment fee equal to
0.375% per annum on the unused portion of the Revolving Credit Facility. Under
the Amended and Restated Credit Agreement, the Revolving Credit Facility
provides for a mandatory reduction of $2,500,000 on March 31, 2001, with the
remaining balance due at maturity on June 30, 2001. As of October 2, 1999,
$110,685,000 was outstanding under the Revolving Credit Facility. As of October
2, 1999, the Company had outstanding irrevocable letters of credit aggregating
$11,398,000.
Substantially all assets of the Company are either pledged or mortgaged
as collateral for borrowings under the Amended and Restated Credit Agreement.
The Amended and Restated Credit Agreement contains certain terms and covenants,
which restricts, among other matters, the incurrence of additional indebtedness,
the payment of cash dividends, the retention of certain proceeds from sales of
assets, and the annual amount of capital expenditures, and requires the
maintenance of certain minimum financial ratios. As of October 2, 1999, no cash
dividends could be paid to the Company's stockholders pursuant to the Amended
and Restated Credit Agreement.
The Company has only very limited involvement with derivative financial
instruments and does not use them for trading purposes. Interest rate swap
agreements are used to reduce the potential impact of increases in interest
rates on floating-rate long-term debt. At October 2, 1999, the Company was party
to three interest rate swap agreements. Under terms of the swap agreements, the
interest obligation on $70 million of Amended and Restated Credit Agreement
floating-rate debt was exchanged for fixed rate contracts which bear interest,
payable quarterly. One swap agreement for $25 million matures June 27, 2002, and
bears interest at 6.5925% plus a credit margin and is compared to three month
LIBOR. A second swap agreement for $25 million matures June 27, 2001, and bears
interest at 9.83% and is compared to Base Rate. The third swap agreement for $20
million matures June 27, 2002, with a one-time option for bank to cancel at June
27, 2001, and bears interest at 9.17% and is compared to Base Rate.
On October 2, 1999, the Company had a working capital deficit of $5.1
million and its working capital ratio was 0.88 to 1 compared to working capital
of $3.1 million and a working capital ratio of 1.07 to 1 on January 2, 1999. As
of October 2, 1999, the Company was in compliance with all provisions of the
Amended and Restated Credit Agreement.
In 1998, the Company made a strategic decision to dispose of the Bakery
By-Products Recycling segment. The sale took place on April 5, 1999. Net
proceeds from the sale were required to be used to retire debt.
The Company has credit available under the Revolving Credit Facility to
cover its presently foreseeable capital needs, assuming it continues to meet the
certain financial covenant tests under the Amended and Restated Credit Agreement
dated January 22, 1999, which were adjusted downward to reflect the sharp
decline in the prices the Company received for its finished products (meat and
bone meal, yellow grease and tallow) in 1998. Such prices continued to decline
early in 1999. The Company has modified its business operations in light of the
continued low prices for its finished goods. However, if prices for finished
goods the Company sells were to materially decline below those prevailing in the
first nine months of 1999, the Company might be forced to seek further covenant
waivers under the Amended and Restated Credit Agreement in the later part of
1999.
ACCOUNTING MATTERS
The Company is assessing the reporting and disclosure requirements of SFAS
No. 133, Accounting For Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. This statement, as amended by SFAS No. 137,
is effective for financial statements for fiscal years beginning after June 15,
2000. The Company has not yet determined the impact SFAS No. 133 will have on
its financial statements. The Company will adopt the provisions of SFAS No. 133
in the first quarter of Fiscal 2001.
YEAR 2000
Readiness
Since many computer systems and other equipment with embedded chips or
processors (collectively, "Business Systems") use only two digits to represent
the year, these business systems may be unable to accurately process certain
data before, during or after the year 2000. As a result, business and
governmental entities are at risk for possible miscalculations or systems
failures causing disruptions in their business operations. This is commonly
known as the Year 2000 issue. The Year 2000 issue can arise at any point in the
Company's supply, manufacturing, distribution and financial chains.
The Company began work on the Year 2000 compliance issue in 1997. The
scope of the project includes: ensuring the compliance of all applications,
operating systems and hardware on PC and LAN platforms; addressing issues
related to non-IT embedded software and equipment; and addressing the compliance
of key suppliers and customers. The project has four phases: assessment of
systems and equipment affected by the Year 2000 issue; definition of strategies
to address affected systems and equipment; remediation or replacement of
affected systems and equipment; and testing that each is Year 2000 compliant.
With respect to ensuring the compliance of all applications, operating
systems and hardware on the Company's various computer platforms, the assessment
phase and definition of strategies phase have been completed. The remediation or
replacement phase has been completed. The testing phase of existing
applications, operating systems and hardware not being remediated or replaced
has been completed.
With respect to addressing issues related to Non-IT embedded software
and equipment, which principally exists in the Company's manufacturing plants,
the assessment phase and definition of strategies phase are complete. Testing
began in 1999, and remediation and replacement is completed.
The Company relies on third party suppliers for raw materials, water,
utilities, transportation and other key services. Interruption of supplier
operations due to Year 2000 issues could affect Company operations. We have
initiated efforts to evaluate the status of our most critical suppliers'
progress. This process of evaluating our critical suppliers is substantially
complete. Options to reduce the risks of interruption due to suppliers failures
include identification of alternate suppliers where feasible or warranted. These
activities are intended to provide a means of managing risk, but cannot
eliminate the potential for disruption due to third party failure.
The Company is also dependent upon customers for sales and cash flow.
Year 2000 interruptions in customers' operations could result in reduced sales,
increased inventory or receivable levels, and cash flow reductions. The Company
is in the assessment phase with respect to the evaluation of critical customers'
progress and is substantially complete.
Contingency
The Company is in the process of developing contingency plans for those
areas that are critical to our business. These contingency plans will be
designed to mitigate serious disruptions to our business flow beyond the end of
1999, where possible. The major efforts related to contingency planning are
substantially complete.
Costs
The Company does not separately track the internal costs incurred for
the Y2K project. Such costs, however, are principally the related payroll costs
for the Company's information systems group. The Company has incurred
approximately $180,000 in related internal expenses to date.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition.
<PAGE>
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking" statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts included in the Quarterly Report on
Form 10-Q, including, without limitation, the statements under the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and located elsewhere herein regarding industry prospects
and the Company's financial position are forward-looking statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct. 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 European and Asian markets; and prices in the
competing commodity markets which are volatile and are beyond the Company's
control, and the Year 2000 readiness issue. Future profitability may be affected
by the Company's ability to grow its restaurant services business and the
development of its value-added feed ingredients, all of which face competition
from companies which may have substantially greater resources than the Company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The principal market risk affecting the Company is exposure to changes in
interest rates on debt. The Company does not use derivative instruments,
exclusive of interest rate swaps. While the Company does have international
operations, and operates in international markets, it considers its market risks
in such activities to be immaterial.
The Company uses interest rate swaps to hedge adverse interest rate changes on a
portion of its long-term debt. At October 2, 1999, the Company had $70 million
notational value of interest rate swaps outstanding. One swap effectively
changed the interest rate on $25 million in long-term debt to a 9.83% fixed rate
through the period ending June 27, 2001. Two other swaps effectively changed the
interest rate on $45 million in long-term debt to an average 9.26% fixed rate
through the period ending June 27, 2002. Assuming variable rates at the end of
the third quarter of Fiscal 1999 and average long-term borrowings for the first
Nine Months of Fiscal 1999, a one hundred basis point change in interest rates
would impact net interest expense by $0.2 million, net of the effect of swaps.
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 2, 1999
PART II: Other Information
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 October 2, 1999.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibits No. Description
11 Statement re-computation of per share earnings.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the three months ended
October 2, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange 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.
Registrant
Date: November 16, 1999 By: /s/ Denis J. Taura
-------------------------------
Denis J. Taura
Chairman and
Chief Executive Officer
Date: November 16, 1999 By: /s/ John O. Muse
-------------------------------
John O. Muse
Vice President and
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 2, 1999
INDEX TO EXHIBITS
Exhibits No. Description Page No.
11 Statement re-computation of per share earnings. 22
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
The following table details the computation of basic and diluted earnings
(loss) per common share, in thousands except per share data.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
=========================================================== ============== =============== ============== ==============
<S> .......................................................... <C> <C> <C> <C>
Earnings (loss) from continuing operations ................... $ (5,196) $ (6,293) $(13,844) $ (10,365)
========== ======== ======== ========
Discontinued operations:
Income (loss) from discontinued operations, net of tax ... -- (601) -- (564)
Estimated loss on disposal of discontinued operations,
net of tax ............................................ -- -- (334) --
---------- -------- -------- --------
Net earnings (loss) available to common stock ............ $ (5,196) $ (6,894) $(14,178) $(10,929)
========== ======== ======== ========
Shares (Basic):
Weighted average number of common shares outstanding...... 15,589 15,585 15,589 15,578
========== ======== ======== ========
Basic earnings (loss) per share:
Continuing operations ............................... $ (0.33) $ (0.40) $ (0.89) $ (0.66)
Discontinued operations:
Income (loss) from operations .................... -- (0.04) -- (0.04)
Estimated loss on disposal ....................... -- -- (0.02) --
---------- -------- -------- --------
Total ...................................... $ (0.33) $ (0.44) $ (0.91) $ (0.70)
========== ======== ======== ========
Shares (Diluted):
Weighted average number of common shares outstanding ........ 15,589 15,585 15,589 15,578
Additional shares assuming exercise of stock options ......... -- -- -- --
---------- -------- -------- --------
Average common shares outstanding and equivalents ............ 15,589 15,585 15,589 15,578
Diluted earnings (loss) per share:
Continuing operations ............................... $ (0.33) $ (0.40) $ (0.89) $ (0.66)
Discontinued operations:
Income (loss) from operations .................... -- (0.04) -- (0.04)
Estimated loss on disposal ....................... -- -- (0.02) --
---------- -------- -------- --------
Total ...................................... $ (0.33) $ (0.44) $ (0.91) $ (0.70)
========== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> OCT-02-1999
<CASH> 2,757
<SECURITIES> 0
<RECEIVABLES> 16,812
<ALLOWANCES> 123
<INVENTORY> 8,484
<CURRENT-ASSETS> 39,044
<PP&E> 121,328
<DEPRECIATION> 116,725
<TOTAL-ASSETS> 209,958
<CURRENT-LIABILITIES> 44,132
<BONDS> 125,064
0
0
<COMMON> 156
<OTHER-SE> 23,612
<TOTAL-LIABILITY-AND-EQUITY> 209,958
<SALES> 191,410
<TOTAL-REVENUES> 191,410
<CGS> 156,982
<TOTAL-COSTS> 200,169
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,673
<INCOME-PRETAX> (22,341)
<INCOME-TAX> (8,497)
<INCOME-CONTINUING> (13,844)
<DISCONTINUED> (334)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,178)
<EPS-BASIC> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
