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 July 3, 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 August 12, 1999 was 15,587,292.
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED JULY 3, 1999
TABLE OF CONTENTS
Page No.
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets. . . . . . . . . . . . . 3
July 3, 1999 (unaudited) and January 2, 1999
Consolidated Statements of Operations (unaudited). . . . . . 4
Three Months and Six Months Ended July 3, 1999 and July 4, 1998
Consolidated Statements of Cash Flows (unaudited). . . . . . 5
Six Months Ended July 3, 1999 and July 4, 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
July 3, 1999 and January 2, 1999
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
July 3, January 2,
1999 1999
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 1,644 $ 12,317
Accounts receivable ....................................... 11,655 16,615
Inventories ............................................... 10,345 11,707
Prepaid expenses .......................................... 6,738 3,977
Deferred income tax assets ................................ 3,943 3,928
Other ..................................................... 3,060 671
------- --------
Total current assets .................................. 37,385 49,215
Property, plant and equipment, less accumulated
depreciation of $112,759 at July 3, 1999 and
$100,713 at January 2, 1999 ................................. 128,461 140,074
Collection routes and contracts, less accumulated
amortization of $14,978 at July 3, 1999 and
$12,101 at January 2, 1999 .................................. 40,103 42,978
Goodwill, less accumulated amortization of $627
at July 3, 1999 and $513 at January 2, 1999 ................. 5,377 5,461
Other assets ................................................... 5,254 5,438
Net assets of discontinued operations .......................... - 20,000
------- --------
$ 216,580 $ 263,166
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ......................... $ 11,103 $ 7,717
Accounts payable, principally trade ....................... 7,709 15,517
Accrued expenses .......................................... 21,865 22,255
Accrued interest .......................................... 107 656
------- -------
Total current liabilities ............................. 40,784 46,145
Long-term debt, less current portion ........................... 115,795 140,613
Other non-current liabilities .................................. 21,918 24,836
Deferred income taxes .......................................... 9,118 13,626
------- -------
Total liabilities ..................................... 187,615 225,220
------- --------
Stockholders' equity
Common stock, $.01 par value; 25,000,000 shares authorized;
15,589,077 and 15,589,077 shares issued and outstanding
at July 3, 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) ................... (6,254) 2,727
------- --------
Total stockholders' equity ............................ 28,965 37,946
------- --------
Contingencies (note 3)
$ 216,580 $ 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 six months ended July 3, 1999 and July 4, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
----------- ----------- ---------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 58,182 $ 88,578 $128,028 $182,984
------- ------- ------- -------
Costs and expenses:
Cost of sales and operating expenses 47,116 74,447 104,834 151,039
Selling, general and administrative expenses 5,912 7,211 12,856 16,035
Depreciation and amortization 7,972 8,248 15,779 16,348
------- ------- ------- -------
Total costs and expenses 61,000 89,906 133,469 183,422
------- ------- ------- -------
Operating loss (2,818) (1,328) (5,441) (438)
------- ------- ------- -------
Other income (expense):
Interest expense (3,831) (2,930) (7,411) (5,856)
Other, net (421) (171) (823) (329)
------- ------- ------- -------
Total other income (expense) (4,252) (3,101) (8,234) (6,185)
------- ------- ------- -------
Loss from continuing operations
before income taxes (7,070) (4,429) (13,675) (6,623)
Income tax benefit (2,613) (1,714) (5,027) (2,533)
------- ------- ------- -------
Loss from continuing operations (4,457) (2,715) (8,648) (4,090)
Discontinued operations:
Income from discontinued operations,
net of tax - 86 - 57
Estimated loss on disposal of discontinued
operations, net of tax (17) - (334) -
------- ------- ------- -------
Net loss $ (4,474) $ (2,629) $ (8,982) $ (4,033)
======= ======= ======= =======
Basic loss per share:
Continuing operations $ (0.29) $ (0.17) $ (0.56) $ (0.26)
Discontinued operations:
Income from operations - - - -
Estimated loss on disposal - - (0.02) -
------- ------- ------- -------
Total $ (0.29) $ (0.17) $ (0.58) $ (0.26)
======= ======= ======= =======
Diluted loss per share:
Continuing operations $ (0.29) $ (0.17) $ (0.56) $ (0.26)
Discontinued operations:
Income from operations - - - -
Estimated loss on disposal - - (0.02) -
------- ------- ------- -------
Total $ (0.29) $ (0.17) $ (0.58) $ (0.26)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended July 3, 1999 and July 4, 1998
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
July 3, July 4,
1999 1998
---------- ----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (8,648) $ (4,090)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 15,779 16,348
Deferred income tax expense (benefit) (4,523) (2,524)
Gain on sales of assets (219) (33)
Changes in operating assets and liabilities:
Accounts receivable 4,960 9,822
Inventories and prepaid expenses (1,397) (1,245)
Accounts payable and accrued expenses (10,310) (1,322)
Accrued interest (549) 8
Other (1,346) 6,854
-------- -------
Net cash provided (used) by continuing operations (6,253) 23,818
Net cash provided (used) by discontinued operations 119 (74)
-------- -------
Net cash provided (used) by operating activities (6,134) 23,744
-------- -------
Cash flows from investing activities:
Recurring capital expenditures (2,527) (7,145)
Gross proceeds from sale of property, plant and equipment
and other assets 21,180 162
Payments related to routes and other intangibles (98) 2,733
Net cash used in discontinued operations (330) (1,461)
-------- -------
Net cash provided (used) by investing activities 18,225 (11,177)
-------- -------
Cash flows from financing activities:
Proceeds from long-term debt 84,326 45,811
Payments on long-term debt (105,703) (57,242)
Contract payments (1,265) (1,530)
Issuance of common stock - 61
Net cash used in discontinued operations (150) (200)
-------- -------
Net cash used in financing activities (22,792) (13,100)
-------- -------
Net increase in cash and cash equivalents
from discontinued operations 28 863
-------- -------
Net increase (decrease) in cash and cash equivalents (10,673) 330
Cash and cash equivalents at beginning of period 12,317 2,949
-------- -------
Cash and cash equivalents at end of period $ 1,644 $ 3,279
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 7,960 $ 5,848
-------- -------
Income taxes, net of refunds $ 1,846 $ 109
-------- -------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 3, 1999
(unaudited)
(1) General
The accompanying consolidated financial statements for the three month
and six month periods ended July 3, 1999 and July 4, 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 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 reclassified 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 26 weeks ended July 3, 1999, and the 13 and 26 weeks
ended July 4, 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 six months ended July 3, 1999, and 15,580,000 and
15,574,000 for the three months and six months ended July 4,
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. In June 1998 the RWQCB provided a letter to
assure potential purchasers and lenders of limitations on their
liability connected to the balance of the Site (approximately 30
acres) in order to facilitate a potential sale. 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 of the Site.
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. Although rendering of
animal by-products has been discontinued at the Cleveland plant,
EPA [may not be] is not satisfied with this as a resolution of
the NOV and has expressed an intention to seek a monetary
penalty. The Company has challenged EPA's approach to resolution
of the NOV as well as EPA's authority to be involved with an
enforcement action connected with a state nuisance rule. The
Company continues to seek an amicable resolution.
<PAGE>
(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 Litigation
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.
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 July 3, 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 $20.6
million and $19.2 million at July 3, 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 exclude 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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-----------------------------------------------------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Rendering:
Trade $ 46,074 $ 72,897 $100,191 $152,491
Intersegment 5,463 10,687 13,483 19,312
------- ------- ------- -------
51,537 83,584 113,674 171,803
------- ------- ------- -------
Restaurant Services:
Trade 12,087 15,674 27,634 30,485
Intersegment 1,744 1,356 3,443 3,570
------- ------- ------- -------
13,831 17,030 31,077 34,055
------- ------- ------- -------
Esteem Products:
Trade 21 8 203 8
Intersegment - 27 24 27
------- ------- ------- -------
21 35 227 35
------- ------- ------- -------
Eliminations (7,207) (12,071) (16,950) (22,909)
------- ------- ------- -------
Total $ 58,182 $ 88,578 $128,028 $182,984
======= ======= ======= =======
</TABLE>
<PAGE>
Business Segment Profit (Loss) (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------------------------------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Rendering $ 490 $ 2,059 $ 1,169 $ 7,145
Restaurant Services (598) (224) 21 357
Esteem Products (581) (633) (1,114) (1,166)
Corporate Activities (2,550) (2,701) (6,340) (7,103)
Interest expense (3,831) (2,930) (7,411) (5,856)
------- ------- ------- -------
Loss from continuing operations
before income taxes $ (7,070) $(4,429) $(13,675) $(6,623)
======= ======= ======= =======
</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. The Bakery By-Products
Recycling segment has been classified as discontinued operations (See
Note 2a).
Business Segment Assets (in thousands):
July 3, January 2,
1999 1999
---------- ----------
Rendering $ 76,811 $ 84,904
Restaurant Services 30,400 32,100
Combined Rend./Rest. Svcs. 86,718 93,080
Esteem Products 3,790 3,097
Corporate Activities 18,861 29,985
Net assets of discontinued operations - 20,000
------- -------
Total $216,580 $263,166
======= =======
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS AND SIX MONTHS
ENDED JULY 3, 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 July 3, 1999 and factors
affecting its results of operations for the three months and six months ended
July 3, 1999 and July 4, 1998.
RESULTS OF OPERATIONS
Three Months Ended July 3, 1999 Compared to Three Months Ended July 4, 1998
GENERAL
The Company recorded a loss from continuing operations of $4.5 million
for the second quarter of the fiscal year ending January 1, 2000 ("Fiscal
1999"), as compared to a loss of $2.7 million for the second quarter of the
fiscal year ended January 2, 1999 ("Fiscal 1998"). Operating income decreased
$1.5 million to an operating loss of $2.8 million in the second quarter of
Fiscal 1999 from an operating loss of $1.3 million in the second quarter of
Fiscal 1998. The decrease in operating income 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 $2.9 million in Fiscal 1998 to $3.8
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 second quarter of Fiscal 1999, net sales decreased 34.3%, to
$58.2 million as compared to $88.6 million during the second quarter of Fiscal
1998 primarily due to the following: 1) Decreases in overall finished goods
prices resulted in a $16.2 million decrease in sales in the second quarter of
Fiscal 1999 versus the second quarter of Fiscal 1998. The Company's average
prices for the second quarter of Fiscal 1999 were 24.9% lower than the average
prices for the second quarter of Fiscal 1998; 2) Decreases in the volume of raw
materials processed resulted in an $11.4 million decrease in sales which
consisted in part of a $3.1 million decrease due to the sale of an operating
facility and a $5.3 million decrease from the closure of facilities by
suppliers. This was somewhat offset by $1.3 million in yield gains; 3) Decreases
in finished hides sales accounted for $1.4 million in sales decreases; 4)
Inventory changes and decreases in finished product purchased for resale
accounted for additional decreases of $4.0 million in sales; and 5) Service
charge income increased $1.3 million to somewhat offset the other decreases.
<PAGE>
COST OF SALES AND OPERATING EXPENSES
Cost of sales and operating expenses includes 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 second quarter of Fiscal 1999, cost of sales and operating
expenses decreased $27.3 million (36.7%) to $47.1 million as compared to $74.4
million during the second 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 decreases of $16.2 million
in cost of sales; 2) Decreases in the volume of raw materials collected and
processed resulted in a decrease of approximately $2.2 million in cost of sales
and operating expenses and decreases in hides costs resulted in a $1.1 million
decrease in cost of sales; 3) Changes in inventory levels and decreases in
product purchased for resale resulted in an approximately $3.7 million decrease
in cost of sales; 4) Decreases in steam cost resulted in a $1.2 million decrease
in operating expenses; and 5) Decreases in labor costs resulted in a $1.8
million decrease in operating expenses, while repair cost reductions resulted in
a $1.1 million decrease in operating expenses.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs were $5.9 million during the
second quarter of Fiscal 1999, a $1.3 million decrease from $7.2 million for the
second quarter of Fiscal 1998. Decreases were realized in labor costs, travel
and entertainment, and advertising and promotional.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization charges decreased $0.2 million to
$8.0 million during the second quarter of Fiscal 1999 as compared to $8.2
million during the second quarter of Fiscal 1998.
INTEREST EXPENSE
Interest expense increased $0.9 million from $2.9 million during the
second quarter of Fiscal 1998 to $3.8 million during the second quarter of
Fiscal 1999, primarily due to an increase in the overall interest rate.
INCOME TAXES
The income tax benefit of $2.6 million for the second quarter of Fiscal
1999 consists of federal tax benefit and various state and foreign taxes. This
is an increase of $0.9 million from the $1.7 million income tax benefit during
the second quarter of Fiscal 1998.
CAPITAL EXPENDITURES
The Company made capital expenditures of $1.7 million during the second
quarter of Fiscal 1999 compared to capital expenditures of $2.7 million during
the second quarter of Fiscal 1998.
<PAGE>
Six Months Ended July 3, 1999 Compared to Six Months Ended July 4, 1998
GENERAL
The Company recorded a loss from continuing operations of $8.6 million
for the first six months of Fiscal 1999, as compared to a loss of $4.1 million
for the first six months of Fiscal 1998. Operating income decreased from an
operating loss of $0.4 million in the first six months of Fiscal 1998 to an
operating loss of $5.4 million in the first six months of Fiscal 1999. The
decrease in operating income 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 $5.9 million to $7.4 million in Fiscal 1999,
primarily due to a higher overall interest rate.
NET SALES
During the first six months of Fiscal 1999, net sales decreased by
$55.0 million (30.0%) to $128.0 million as compared to $183.0 million during the
first six months of Fiscal 1998, primarily due to the following: 1) Decreases in
overall finished goods prices resulted in a $30.6 million decrease in sales in
the first six months of Fiscal 1999, versus the first six months of Fiscal 1998.
The Company's average prices for the first six months of Fiscal 1999 were 26.5%
lower than the average prices for the first six months of Fiscal 1998; 2)
Decreases in the volume of raw materials processed resulted in a $23.8 million
decrease in sales which consisted in part of a $6.3 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 $2.5 million in yield
gains; 3) Decreases in finished hides sales accounted for $2.9 million in sales
decreases; 4) Inventory adjustments and decreases in finished product purchased
for resale resulted in a $2.3 million decrease in sales; and 5) Increases in
service charge income of $2.1 million somewhat offset the decreases.
COST OF SALES AND OPERATING EXPENSES
During the first six months of Fiscal 1999, cost of sales and operating
expenses decreased $46.2 million (30.6%) to $104.8 million as compared to $151.0
million during the first six 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 $30.2 million
in cost of sales; 2) Decreases in the volume of raw materials collected and
processed resulted in a decrease of approximately $6.9 million in cost of sales
and operating expenses; 3) Changes in inventory levels and decreases in finished
product purchased for resale resulted in an approximately $1.8 million decrease
in cost of sales; 4) Decreases in steam cost resulted in a $2.3 million decrease
in operating expenses; and 5) Decreases in labor costs and repair costs resulted
in a $5.0 decrease in operating expenses.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs were $12.9 million during the
first six months of Fiscal 1999, a $3.1 million decrease from $16.0 million for
the first six months of Fiscal 1998. Decreases were primarily a result of lower
labor cost, travel and entertainment, and advertising and promotional.
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization charges decreased by $0.5 million to
$15.8 million during the first six months of Fiscal 1999, as compared to $16.3
million during the first six months of Fiscal 1998.
INTEREST EXPENSE
Interest expense increased by $1.5 million from $5.9 million during the
first six months of Fiscal 1998, to $7.4 million during the first six months of
Fiscal 1999, primarily due to a higher overall rate of interest.
INCOME TAXES
The income tax benefit of $5.0 million for the first six months of
Fiscal 1999 consists of federal tax benefit and various state and foreign taxes.
This is an increase of $2.5 million from the $2.5 million income tax benefit
during the first six months of Fiscal 1998.
CAPITAL EXPENDITURES
The Company made capital expenditures of $2.5 million during the first
six months of Fiscal 1999, compared to capital expenditures of $7.1 million
during the first six 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 six months of Fiscal 1999,
the Company recorded an additional loss on disposal of $0.3 million.
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.
<PAGE>
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 July 3, 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 $2,000,000 on September 30 1999; $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,
the net proceeds from the sale of International Processing Corporation of
$19,600,000 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 July 3, 1999, $15,187,000 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 July 3, 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 July 3, 1999,
$111,518,000 was outstanding under the Revolving Credit Facility. As of July 3,
1999, the Company had outstanding irrevocable letters of credit aggregating
$12,701,000.
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 July 3, 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 July 3, 1999, the Company was party to
three interest rate swap agreements, each with a term of five years (all
maturing June 27, 2002). 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, at an average rate of 6.6% plus a credit margin.
On July 3, 1999, the Company had a working capital deficit of $3.4
million and its working capital ratio was 0.91 to 1 compared to working capital
of $3.1 million and a working capital ratio of 1.07 to 1 on January 2, 1999.
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 six 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.
<PAGE>
ACCOUNTING MATTERS
The Company is assessing the reporting and disclosure requirements of
No. 133, Accounting For Derivative Instruments and Hedging Activities. This SFAS
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. It is estimated
that 95% of the remediation or replacement phase has been completed with the
balance of this phase expected to be completed by the end of the third quarter
of 1999. 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 expected to be
completed by the end of third quarter 1999, if needed.
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 scheduled for
completion by the end of third quarter 1999. 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 scheduled for completion by the end of third quarter 1999.
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
scheduled for completion by the end of the third quarter of 1999.
<PAGE>
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 $150,000 in related internal expenses to date. Future expenses are
expected to be approximately $30,000. Such cost estimates are based upon
presently available information and may change as the Company continues with its
Y2K project. All estimated costs have been budgeted and are expected to be
funded through cash flows from operations. These costs do not include any cost
associated with the implementation of contingency plans, which are in the
process of being developed.
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.
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
sections entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Legal Proceedings" and located elsewhere herein
regarding industry prospects and the Company's financial position are
forward-looking statements. Although the Company believes that the expectation
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 July 3, 1999, the Company had $70 million
notational value of interest rate swaps outstanding. These swaps effectively
changed the interest rate on $70 million in long-term debt to a 9.6% fixed rate
through the period ending June 27, 2002. Assuming variable rates at the end of
the second quarter of Fiscal 1999 and average long-term borrowings for the first
six 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 SIX MONTHS ENDED JULY 3, 1999
PART II: Other Information
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The matters voted upon at the annual meeting of stockholders held on
May 17, 1999 were as follows:
The election of five directors to serve until the next annual
meeting of stockholders or until their successors have been
elected and qualified. The number of votes cast for and
against the election of each nominee, as well as the number of
abstentions and broker non-votes with respect to the election
of each nominee, were as follows:
Fredric J. Klink
For 14,389,731 Against/Witheld 66,333
Dennis B. Longmire
For 14,389,731 Against/Witheld 66,333
Denis J. Taura
For 14,386,731 Against/Witheld 69,333
Bruce Waterfall
For 14,096,131 Against/Witheld 359,933
William L. Westerman
For 14,389,731 Against/Witheld 66,333
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
<PAGE>
(a) Exhibits
Exhibits No. Description
11 Statement re-computation of per share earnings.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Registrant filed the following current reports on Form 8-K during
the quarter ended July 3, 1999.
Current Report on Form 8-K dated April 16, 1999, including information
regarding the disposition of all of the outstanding stock of
International Processing Corporation and International Transportation
Service, Inc.
<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: August 13, 1999 By: /s/ Dennis B. Longmire
-----------------------------
Dennis B. Longmire
Chairman and
Chief Executive Officer
Date: August 13, 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 SIX MONTHS ENDED JULY 3, 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 Six Months Ended
------------------------------ -----------------------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
============================================================ ============== =============== ============== ==============
<S> <C> <C> <C> <C>
Earnings (loss) from continuing operations $ (4,457) $ (2,715) $ (8,648) $ (4,090)
======= ======= ======= =======
Discontinued operations:
Income (loss) from discontinued operations, net of tax - 86 - 57
Estimated loss on disposal of discontinued operations,
net of tax (17) - (334) -
======= ======= ======= =======
Net earnings (loss) available to common stock $ (4,474) $ (2,629) $ (8,982) $ (4,033)
======= ======= ======= =======
- ------------------------------------------------------------ -------------- --------------- -------------- --------------
Shares (Basic):
Weighted average number of common shares outstanding 15,589 15,580 15,589 15,574
======= ======= ======= =======
Continuing operations (0.29) (0.17) (0.56) (0.26)
Discontinued operations:
Income (loss) from operations - - - -
Estimated loss on disposal - - (0.02) -
------- ------- ------- -------
Total $ (0.29) $ (0.17) $ (0.58) $ (0.26)
======= ======= ======= =======
- ------------------------------------------------------------ -------------- --------------- -------------- --------------
Shares (Diluted):
Weighted average number of common shares 15,589 15,580 15,589 15,574
outstanding
Additional shares assuming exercise of stock options
- - - -
------- ------- ------- -------
Average common shares outstanding and equivalents 15,589 15,580 15,589 15,574
======= ======= ======= =======
Diluted earnings (loss) per share:
Continuing operations (0.29) (0.17) (0.56) (0.26)
Discontinued operations:
Income (loss) from operations - - - -
Estimated loss on disposal (0.02)
- - -
------- ------- -------- -------
Total $ (0.29) $ (0.17) $ (0.58) $ (0.26)
======= ======= ======= =======
- ------------------------------------------------------------ -------------- --------------- -------------- --------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JUL-03-1999
<CASH> 1,644
<SECURITIES> 0
<RECEIVABLES> 11,655
<ALLOWANCES> 122
<INVENTORY> 10,345
<CURRENT-ASSETS> 37,385
<PP&E> 128,461
<DEPRECIATION> 112,759
<TOTAL-ASSETS> 216,580
<CURRENT-LIABILITIES> 40,784
<BONDS> 126,898
0
0
<COMMON> 156
<OTHER-SE> 28,809
<TOTAL-LIABILITY-AND-EQUITY> 216,580
<SALES> 128,028
<TOTAL-REVENUES> 128,028
<CGS> 104,834
<TOTAL-COSTS> 133,469
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,411
<INCOME-PRETAX> (13,675)
<INCOME-TAX> (5,027)
<INCOME-CONTINUING> (8,648)
<DISCONTINUED> (334)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,982)
<EPS-BASIC> (0.58)
<EPS-DILUTED> (0.58)
</TABLE>
