Darling Ingredients, a global developer and producer of sustainable natural ingredients from edible and inedible bio-nutrients, creating a wide range of ingredients and customized specialty solutions for customers in the pharmaceutical, food, pet food, feed, technical, fuel, bioenergy, and fertilizer industries, today reported financial results for the third quarter ended September 27, 2014.
Net sales for the third quarter of 2014 increased to $955.8 million, compared with $425.8 million in the same period of 2013, attributable to newly acquired operations. Segment operating income in the third quarter of 2014 was $49.9 million reflecting an increase of $8.3 million or 20% as compared to income for the same period of 2013. Including the Company's share of net loss of unconsolidated subsidiaries, primarily the Diamond Green Diesel (DGD) Joint Venture, operating income for the third quarter of fiscal 2014 would have been $48.9 million or $4.7 million lower than the same period in 2013.
Comments on the Third Quarter
"In the third quarter, our business felt the pressures of the global resetting of ingredient prices. Lower earnings were driven by a significant decline in fat and used cooking oil finished product prices attributable to overall lower feed ingredient prices and the business interruption at DGD, on the portion that was not offset by our formula agreements. Most notably, the shutdown at DGD forced us to sell our finished fats into the spot feed market, which was already being negatively impacted by the record grain production and the effect was to lower fat values even further. The good news is we were able to roll our sales with DGD that got deferred in August and September forward to October and November at the July values," said Randall Stuewe, Darling Ingredients Inc. Chairman and Chief Executive Officer.
"Our European rendering business felt similar margin pressures from lower fat prices driven by a global biofuel slowdown; however, management has since been working to adjust raw material values to normalize margins. Our Canadian rendering business did a nice job navigating a difficult finished product value market. Overall, our raw material volumes were steady globally and we completed the acquisition of Custom Blenders, which is an excellent addition to our Bakery Feeds group," continued Mr. Stuewe.
"Our gelatin business showed moderately lower earnings with softness in demand in China and increased raw material pricing in South America. Our European edible fat business normalized from second quarter with the casings business showing signs of weaker seasonal demand."
"Diamond Green Diesel suffered a fire incident on August 3 which limited production during the quarter," Mr. Stuewe added. "The downtime at our DGD Joint Venture allowed the facility to proceed with a planned expansion increasing the input feedstock capacity to 11,000 barrels per day following the resumption of operations on September 18, 2014. Overall, we were thankful no one was injured and the DGD team seized the opportunity for expansion," concluded Mr. Stuewe.
Continued Quarter Results
Third quarter 2014 net income was $14.3 million, or $0.09 per diluted share, compared with net income of $27.7 million, or $0.23 per diluted share, in the third quarter of 2013. Results for the third quarter of 2014 and 2013 respectively, include the following after-tax costs:
Fiscal 2014
* $1.4 million ($0.01 per diluted share) associated with the acquisition and integration of Rothsay and VION Ingredients during the third quarter of fiscal 2014.
Fiscal 2013
* $5.3 million ($0.04 per diluted share) associated mainly with the acquisition and integration of Rothsay and VION Ingredients during the third quarter of fiscal 2013.
Net income and diluted earnings per common share, adjusted to eliminate the one-time costs listed above, would have been $15.7 million and $0.10 per diluted share, respectively, for the third quarter of 2014.
Reconciliation of Net Income to Adjusted EBITDA and Pro forma Adjusted EBITDA
Darling Ingredients Inc. reports Adjusted EBITDA as a measure to evaluate performance and for other discretionary purposes. However, Adjusted EBITDA is not a recognized measurement under generally accepted accounting principles (GAAP), should not be considered as an alternative to net income as a measure of operating results or to cash flow as a measure of liquidity, and is not intended to be a presentation in accordance with GAAP. In addition to the foregoing, management also uses or will use Adjusted EBITDA to measure compliance with certain financial covenants under the Company's Senior Secured Credit Facilities and 5.375% Notes that were outstanding at September 27, 2014. However, the amounts shown below for Adjusted EBITDA differ from the amounts calculated under similarly titled definitions in the Company's Senior Secured Credit Facilities and 5.375% Notes, as those definitions permit further adjustments to reflect certain other non-recurring costs and non-cash charges.
For the third quarter of fiscal 2014, the Company generated Adjusted EBITDA of $117.2 million, as compared to $64.8 million in the same period in 2013. The increase was primarily attributable to the inclusion of the newly acquired businesses. On a Pro Forma Adjusted EBITDA basis, the Company would have generated $122.3 million in the third quarter 2014, as compared to a Pro Forma Adjusted EBITDA of $89.5 million in the same period in 2013. The increase in Pro Forma Adjusted EBITDA is attributable to the inclusion of the newly acquired businesses that more than offset the decrease in earnings from the DGD Joint Venture and the reduction in acquisition and integration expenses.
* Feed Ingredients operating income decreased by $12.5 million to $46.3 million compared to the third quarter of fisal 2013. Lower earnings were driven by a significant decline in fat and used cooking oil finished product prices attributable to overall lower feed ingredient prices as a result of the global record-setting grain production and the business interruption at DGD on the portion that was not offset by our formula agreements.
* Canada had a solid performance, China performed generally as expected, and Europe was moderately below expectations.
* Food Ingredients operating income was $14.0 million for the third quarter of 2014 compared to no prior reporting segment or activity in the Food Ingredients business lines in the third quarter of 2013. On an adjusted sequential quarter basis, the Food Ingredients operating income (exclusive of the non-cash inventory step-up) decreased from $14.7 million in the second quarter of fiscal 2014 to $14.0 million in the third quarter of fiscal 2014, a decrease of $0.7 million.
* The gelatin business had marginally lower earnings, which was principally related to softness in demand in China as a result of recent food safety and pharmaceutical scandals, increasing raw material prices and competition in South America, general economic slowdowns in both China and Brazil, and unfavorable foreign exchange impacts caused by the strengthening U.S. dollar. The European edible fats business normalized from the second quarter; however, the Company's casings business weakened marginally over the second quarter principally as a result of a reduction in seasonal demand for casings.
* Exclusive of the DGD Joint Venture, Fuel Ingredients operating income for the third quarter of fiscal 2014 was $2.9 million, an increase of $2.5 million as compared to third quarter of fiscal 2013. Including the DGD Joint Venture, the Fuel Ingredients Segment income was $1.4 million in third quarter 2014, as compared to $12.3 million in the same period of 2013. The reduction of $10.9 million is primarily related to the blenders tax credit which applied during the third quarter of fiscal 2013, but which expired as of December 31, 2013 and therefore, no such credits were generated in the third quarter of fiscal 2014 and the shutdown of the facility as a result of the fire incident on August 3, 2014.
* Results for North America continue to be negatively impacted by lower RIN (Renewable Identification Number) values, resulting from an uncertain regulatory environment with respect to the U.S. mandated renewable fuel volume obligation (RVO) requirements for 2014 and uncertainty related to the possible extension of the blenders tax credit. The DGD Joint Venture resumed operations on September 18, 2014, and operated on 52% of the available production days in the third quarter of 2014.
For the nine months ended September 27, 2014, the Company reported net sales of $2.9 billion, as compared to $1.3 billion for the 2013 comparable period. The $1.6 billion increase in sales resulted primarily to the inclusion of the newly acquired businesses.
For the nine months ended September 27, 2014, the Company reported a net loss of $(5.7) million, or $(0.03) per diluted share, as compared to net income of $86.5 million, or $0.73 per diluted share, for the 2013 comparable period. The results for the first nine months of fiscal 2014 and 2013 respectively, include the following after-tax costs:
Fiscal 2014
* $34.8 million ($0.21 per diluted share) related to a non-cash inventory step-up associated with the required purchase accounting for the VION Acquisition related to the portion of acquired inventory sold during the period;
* $20.2 million ($0.12 per diluted share) related to the redemption premium and write-off of deferred loan cost associated with the retirement of the Company's 8.5% Senior Notes on January 7, 2014;
* $16.8 million ($0.10 per diluted share) associated with the acquisition and integration of Rothsay and VION Ingredients during the period;
* $8.0 million ($0.05 per diluted share) related to certain euro forward contracts entered into to hedge against foreign exchange risks related to the closing of the VION Acquisition; and
* $5.2 million ($0.03 per diluted share) associated with discrete tax items principally associated with the VION Acquisition.
Fiscal 2013
* $5.8 million ($0.05 per diluted share) associated mainly with the acquisition and integration of Rothsay and VION Ingredients during the first nine months of 2013.
Net income and diluted earnings per common share, adjusted to eliminate the one-time costs listed above, would have been $79.3 million and $0.48 per diluted share for the nine months ended September 27, 2014, respectively as compared to $92.3 million and $0.78 per share for the first nine months ended September 28, 2013, respectively. When comparing the first nine months of fiscal 2014 to the first nine months of fiscal 2013 this would have resulted in a $13.0 million decrease in net income and a 38.5% decline in diluted earnings per common share.
Segment operating income for the nine months ended September 27, 2014 was $124.8 million, which reflects a decline of $26.2 million or 17% as compared to the nine months ended September 28, 2013. The results for the nine months include an increase to cost of sales of $49.8 million related to the inventory step-up associated with the required purchase accounting for the VION Acquisition. Without these costs, segment operating income for the first nine months of fiscal 2014 would have been $174.6 million or 15.6% higher than the same period in 2013. Including the Company's share of net income of unconsolidated subsidiaries, primarily the DGD Joint Venture, segment income for the nine months ended September 27, 2014, would have been $180.7 million or $20.9 million (13%) higher than the same period in 2013. The DGD Joint Venture has not yet distributed any earnings to its venture partners.
