Notes to Consolidated Financial Statements
NOTE 1. GENERAL
(a) NATURE OF OPERATIONS
Darling Ingredients Inc., a Delaware corporation (“Darling”, and together with its subsidiaries, the “Company”), is 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, industrial, fuel, bioenergy and fertilizer industries. The Company’s business operations is conducted through a global network of over
200
locations across
five
continents within
three
business segments, Feed Ingredients, Food Ingredients and Fuel Ingredients. Comparative segment revenues and related financial information are presented in Note 20 to the consolidated financial statements.
|
|
(b)
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
|
|
(1)
|
Basis of Presentation
|
The consolidated financial statements include the accounts of Darling and its consolidated subsidiaries. Noncontrolling interests represents the outstanding ownership interest in the Company's consolidated subsidiaries that are not owned by the Company. In the accompanying Consolidated Statements of Operations, the noncontrolling interest in net income of the consolidated subsidiaries is shown as an allocation of the Company's net income and is presented separately as “Net income attributable to noncontrolling interests”. In the Company's Consolidated Balance Sheets, noncontrolling interests represents the ownership interests in the Company consolidated subsidiaries' net assets held by parties other than the Company. These ownership interests are presented separately as “Noncontrolling interests” within “Stockholders' Equity.” All significant intercompany balances and transactions have been eliminated in consolidation.
The Company has a
52
/
53
week fiscal year ending on the Saturday nearest December 31. Fiscal years for the consolidated financial statements included herein are for the
52
weeks ended
December 30, 2017
, the
52
weeks ended
December 31, 2016
, and the
52
weeks ended
January 2, 2016
.
|
|
(3)
|
Cash and Cash Equivalents
|
The Company considers all short-term highly liquid instruments, with an original maturity of three months or less, to be cash equivalents. Cash balances are recorded net of book overdrafts when a bank right-of-offset exists. All other book overdrafts are recorded in accounts payable and the change in the related balance is reflected in operating activities on the Consolidated Statement of Cash Flows. In addition, the Company has bank overdrafts, which are considered a form of short-term financing with changes in the related balance reflected in financing activities in the Consolidated Statement of Cash Flows.
|
|
(4)
|
Accounts Receivable and Allowance for Doubtful Accounts
|
The Company maintains allowances for doubtful accounts for estimated losses resulting from customers’ non-payment of trade accounts receivable owed to the Company. These trade receivables arise in the ordinary course of business from sales of raw material, finished product or services to the Company’s customers. The estimate of allowance for doubtful accounts is based upon the Company’s bad debt experience, prevailing market conditions, and aging of trade accounts receivable, among other factors. If the financial condition of the Company’s customers deteriorates, resulting in the customers’ inability to pay the Company’s receivables as they come due, additional allowances for doubtful accounts may be required.
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
Inventories are stated at the lower of cost or net realizable value. Cost is primarily determined using the first-in, first-out (FIFO) method for the Feed Ingredients and Fuel Ingredients segments. In the Food Ingredients segment cost is primarily determined based on the weighted average cost.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is computed by the straight-line method over the estimated useful lives of assets: 1) Buildings and improvements,
15
to
30
years; 2) Machinery and equipment,
3
to
10
years; 3) Vehicles,
3
to
8
years; and 4) Aircraft,
7
to
10
years.
Maintenance and repairs are charged to expense as incurred and expenditures for major renewals and improvements are capitalized.
Intangible Assets
Intangible assets with indefinite lives, and therefore, not subject to amortization, consist of trade names acquired in the acquisition of Griffin Industries Inc. on December 17, 2010 (which was subsequently converted to a limited liability company) and its subsidiaries (“Griffin”) and trade names acquired in the acquisition of its Darling Ingredients International business. Intangible assets subject to amortization consist of: 1) collection routes which are made up of groups of suppliers of raw materials in similar geographic areas from which the Company derives collection fees and a dependable source of raw materials for processing into finished products; 2) permits that represent licensing of operating plants that have been acquired, giving those plants the ability to operate; 3) non-compete agreements that represent contractual arrangements with former competitors whose businesses were acquired; 4) trade names; and 5) royalty, consulting, land use rights and leasehold agreements. Amortization expense is calculated using the straight-line method over the estimated useful lives of the assets ranging from:
5
to
21
years for collection routes;
10
to
20
years for permits;
3
to
7
years for non-compete covenants; and
4
to
15
years for trade names. Royalty, consulting, land use rights and leasehold agreements are amortized over the term of the agreement.
|
|
(7)
|
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of
|
The Company reviews the carrying value of long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset, or related asset group, may not be recoverable from estimated future undiscounted cash flows. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount for which the carrying amount of the asset exceeds the fair value of the asset.
The Company performed the annual goodwill and indefinite-lived intangible assets impairment assessments at October 28, 2017 and concluded that the Company's goodwill for all reporting units and all recorded indefinite-lived intangible assets were not impaired as of that date. Goodwill and indefinite lived assets are tested annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company follows a two-step process for testing impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. If impairment is indicated, then the fair value of the reporting unit’s goodwill is determined by allocating the unit’s fair value of its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The amount of impairment for goodwill is measured as the excess of its carrying value over its implied fair value.
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
In
fiscal 2017
,
2016
and
2015
, the fair values of the Company’s reporting units containing goodwill exceeded the related carrying values. Goodwill was approximately $
1,301.1 million
and $
1,225.9 million
at
December 30, 2017
and
December 31, 2016
, respectively. See Note 6 for further information on the Company’s goodwill.
|
|
(9)
|
Environmental Expenditures
|
Environmental expenditures incurred to mitigate or prevent environmental impacts that have yet to occur and that otherwise may result from future operations are capitalized. Expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenues are expensed or charged against established environmental reserves. Reserves are established when environmental impacts have been identified which are probable to require mitigation and/or remediation and the costs are reasonably estimable.
The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable income to realize its deferred income tax assets. In making this determination, the Company considers all available positive and negative evidence and makes certain assumptions. The Company considers, among other things, its deferred tax liabilities, the overall business environment, its historical earnings and losses, current industry trends and its outlook for taxable income in future years.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination by the relevant taxing authority. Adjustments are made to the reserves for uncertain tax positions when facts and circumstances change or additional information is available.
Judgment is required to assess the impact of ongoing audits conducted by tax authorities in determining the Company’s consolidated income tax provision. The Company recognizes accrued interest and penalties on tax related matters as a component of income tax expense.
During 2017, the President signed into law the Tax Cuts and Jobs Act (the “Tax Act” or “U.S. tax reform”), effective January 1, 2018, that, among other things, lowered the corporate income tax rate from
35%
to
21%
, moved the country towards a territorial tax system with a one-time mandatory tax on previously deferred earnings of foreign subsidiaries, and introduced new provisions regarding the taxation of global intangible low-taxed income (“GILTI”) of foreign subsidiaries. The Company will be subject to the GILTI provisions effective beginning January 1, 2018. The Financial Accounting Standards Board (“FASB”) allows companies to adopt an accounting policy to either recognize deferred taxes for GILTI or treat such as a tax cost in the year incurred. The Company’s accounting policy election is to account for GILTI as incurred. See Note 12 for further information regarding the income tax accounting impact of the Tax Act.
Basic income per common share is computed by dividing net income attributable to Darling by the weighted average number of common shares including non-vested and restricted shares with participation rights outstanding during the period. Diluted income per common share is computed by dividing net income attributable to Darling by the weighted average number of common shares outstanding during the period increased by dilutive common equivalent shares determined using the treasury stock method.
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Common Share (in thousands, except per share data)
|
|
|
December 30,
|
|
|
|
December 31,
|
|
|
|
January 2,
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2016
|
|
|
Income
|
Shares
|
Per-Share
|
|
Income
|
Shares
|
Per-Share
|
|
Income
|
Shares
|
Per-Share
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Darling
|
$
|
128,468
|
|
164,752
|
$
|
0.78
|
|
|
$
|
102,313
|
|
164,600
|
$
|
0.62
|
|
|
$
|
78,531
|
|
165,031
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
Add: Option shares in the money and dilutive effect of nonvested stock
|
—
|
|
3,865
|
—
|
|
|
—
|
|
1,329
|
—
|
|
|
—
|
|
168
|
—
|
|
Less: Pro-forma treasury shares
|
—
|
|
(1,887)
|
—
|
|
|
—
|
|
(717)
|
—
|
|
|
—
|
(80)
|
—
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Darling
|
$
|
128,468
|
|
166,730
|
$
|
0.77
|
|
|
$
|
102,313
|
|
165,212
|
$
|
0.62
|
|
|
$
|
78,531
|
|
165,119
|
$
|
0.48
|
|
For
fiscal 2017
,
2016
and
2015
, respectively,
340,504
,
1,148,707
and
790,092
outstanding stock options were excluded from diluted income per common share as the effect was antidilutive. For
fiscal 2017
,
2016
and
2015
, respectively,
288,616
,
758,557
and
587,961
non-vested stock were excluded from diluted income per common share as the effect was antidilutive.
|
|
(12)
|
Stock Based Compensation
|
The Company recognizes compensation expense ratably over the vesting period in an amount equal to the fair value of the share-based payments (e.g., stock options and non-vested and restricted stock) granted to employees and non-employee directors or by incurring liabilities to an employee or other supplier (a) in amounts based, at least in part, on the price of the entity’s shares or other equity instruments, or (b) that require or may require settlement by issuing the entity’s equity shares or other equity instruments.
In March 2016, the FASB issued Accounting Standards Update (
“
ASU
”
) No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU amends Topic 718,
Compensation- Stock Compensation
, which simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees' maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. The Company adopted this standard in the first quarter ended April 1, 2017 and prior periods were not recasted. The impact of the adoption resulted in the following:
|
|
•
|
The Company recorded a tax benefit of approximately $
0.1 million
within income tax expense for the year ended December 30, 2017 related to the excess tax expense on stock options, nonvested stock, director restricted stock units and performance units. Prior to the adoption this amount would have been recorded as reduction of additional paid-in capital.
|
|
|
•
|
The Company has made a policy election to account for forfeitures in the period they occur, rather than estimating a forfeiture rate. Applying this guidance on a modified retrospective basis resulted in an insignificant adjustment to opening retained earnings.
|
|
|
•
|
The Company no longer reclassifies the excess tax benefit from operating activities to financing activities in the statement of cash flows. The Company elected to apply this change in presentation prospectively and thus prior periods have not been adjusted. For the year ended December 31, 2016 and January 2, 2016, the Company recognized $
0.4 million
, respectively of such tax benefit as a decrease in operating cash flow.
|
|
|
•
|
The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares of common stock in the computation of the Company's diluted earnings per share for the year ended December 30, 2017. This increased the Company's diluted weighted average common shares outstanding by approximately
367,000
shares for the year ended December 30, 2017.
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
Total stock-based compensation recognized in the statement of operations for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
was approximately $
17.6 million
, $
10.3 million
and $
9.0 million
, respectively, which is included in selling, general and administrative expenses, and the related income tax benefit recognized was approximately $
3.7 million
, $
3.4 million
and $
3.3 million
, respectively. See Note 13 for further information on the Company’s stock-based compensation plans.
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
If it is at least reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that exist at the date of the financial statements will change in the near term due to one or more future confirming events, and the effect of the change would be material to the financial statements, the Company will disclose the nature of the uncertainty and include an indication that it is at least reasonably possible that a change in the estimate will occur in the near term. If the estimate involves certain loss contingencies, the disclosure will also include an estimate of the probable loss or range of loss or state that an estimate cannot be made.
|
|
(14)
|
Financial Instruments
|
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the short maturity of these instruments. The Company's 5.375% Senior Notes due 2022, 4.75% Senior Notes due 2022, term loans and revolver borrowings outstanding at
December 30, 2017
, as described in Note 10 have a fair value based on market valuation from a third-party banks. The carrying amount for the Company’s other debt is not deemed to be significantly different than the carrying value. See Note 17 for financial instruments' fair values.
|
|
(15)
|
Derivative Instruments
|
The Company makes limited use of derivative instruments to manage cash flow risks related to interest expense, natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. Interest rate swaps are entered into with the intent of managing overall borrowing costs by reducing the potential impact of increases in interest rates on floating-rate long-term debt. Natural gas swaps and options are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential impact of seasonal weather demands on natural gas that increases natural gas prices. Heating oil swaps and options are entered into with the intent of managing the overall cost of diesel fuel usage by reducing the potential impact of seasonal weather demands on diesel fuel that increases diesel fuel prices. Corn options and future contracts are entered into with the intent of managing forecasted sales of BBP by reducing the impact of changing prices. Foreign currency forward contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency.
Entities are required to report all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding the instrument. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair value, cash flows or foreign currencies. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside of earnings) and is subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss is reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change. Hedge accounting
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
treatment ceases if or when the hedge transaction is no longer probable of occurring or the hedge relationship correlation no longer qualifies for hedge accounting.
At
December 30, 2017
, the Company had corn options and natural gas swap contracts outstanding that qualified and were designated for hedge accounting as well as corn options and futures and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.
The Company recognizes revenue on sales when products are shipped and the customer takes ownership and assumes risk of loss. Certain customers may be required to prepay prior to shipment in order to maintain payment protection against certain foreign and domestic sales. These amounts are recorded as unearned revenue and revenue is recognized when the products have shipped and the customer takes ownership and assumes risk of loss. The Company recognizes revenue related to grease trap servicing and industrial residual removal in the fiscal month the trap service or industrial residual removal occurs.
|
|
(17)
|
Related Party Transactions
|
The Company announced in January 2011 that a wholly-owned subsidiary of Darling entered into a limited liability company agreement with a wholly-owned subsidiary of Valero Energy Corporation (“Valero”) to form Diamond Green Diesel Holdings LLC (the “DGD Joint Venture”). The Company has related party sale transactions and loan transactions with the DGD Joint Venture. See Note 22 for further information on the Company's related party transactions.
|
|
(18)
|
Foreign Currency Translation and Remeasurement
|
Foreign currency translation is included as a component of accumulated other comprehensive income and reflects the adjustments resulting from translating the foreign currency denominated financial statements of foreign subsidiaries into U.S. dollars. The functional currency of the Company's foreign subsidiaries is the currency of the primary economic environment in which the entity operates, which is generally the local currency of the country. Accordingly, assets and liabilities of the foreign subsidiaries are translated into U.S. dollars at fiscal year end exchange rates, including intercompany foreign currency transactions that are of long-term investment nature. Income and expense items are translated at average exchange rates occurring during the period. Changes in exchange rates that affect cash flows and the related receivables or payables are recognized as transaction gains and losses in determining net income. The Company incurred net foreign currency translation gain of approximately $
125.7 million
in fiscal 2017 and losses of approximately $
3.7 million
and $
164.8 million
in fiscal 2016 and fiscal 2015, respectively.
Certain prior year immaterial amounts have been reclassified to conform to the current year presentation. Previously reported amounts have been adjusted to reflect the correction of an immaterial classification error in net sales and cost of sales, as described in Note 21.
The Company evaluates subsequent events from the end of the most recent fiscal year through the date the consolidated financial statements are issued.
NOTE 2. ACQUISITIONS AND DISPOSITIONS
In fiscal 2017, the Company, through a wholly-owned international subsidiary, acquired the minority interest in one of its international subsidiaries for approximately $
19.1 million
, including transaction costs. Additionally, the Company made other immaterial acquisitions in fiscal 2017, fiscal 2016 and fiscal 2015.
In January 2018, the Company through a wholly-owned international subsidiary, sold a portion of its interest in a majority owned consolidated subsidiary for approximately $
2.8 million
. This transaction will result in the foreign subsidiary being deconsolidated and accounted for using the equity method of accounting, effective January 2018. In fiscal 2017, as part of this transaction, the Company recorded $
37.8 million
of assets held for sale and $
19.2 million
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
of liabilities held for sale, which are included in other current assets and accrued liabilities, respectively. In addition, the Company recorded a loss of approximately $
0.9 million
in fiscal 2017.
NOTE 3. INVENTORIES
A summary of inventories follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
Finished product
|
$
|
171,277
|
|
|
$
|
156,542
|
|
Work in process
|
101,540
|
|
|
87,284
|
|
Raw material
|
33,173
|
|
|
39,859
|
|
Supplies and other
|
52,193
|
|
|
47,130
|
|
|
$
|
358,183
|
|
|
$
|
330,815
|
|
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. This ASU amends Topic 330,
Inventory
. The ASU simplifies the measurement of inventory by requiring certain inventory to be measured at the lower of cost and net realizable value. The adoption of this standard on January 1, 2017 did not have a material impact on the Company's consolidated financial statements. The Company's work in process inventory represents inventory in the Food Ingredients segment that is in various stages of processing.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
Land
|
$
|
165,847
|
|
|
$
|
152,949
|
|
Buildings and improvements
|
513,078
|
|
|
464,957
|
|
Machinery and equipment
|
1,617,008
|
|
|
1,385,694
|
|
Vehicles
|
229,995
|
|
|
204,995
|
|
Aircraft
|
13,504
|
|
|
13,504
|
|
Construction in process
|
181,838
|
|
|
135,662
|
|
|
2,721,270
|
|
|
2,357,761
|
|
Accumulated depreciation
|
(1,075,448
|
)
|
|
(842,186
|
)
|
|
$
|
1,645,822
|
|
|
$
|
1,515,575
|
|
NOTE 5. INTANGIBLE ASSETS
The gross carrying amount of intangible assets not subject to amortization and intangible assets subject to amortization is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
Indefinite Lived Intangible Assets
|
|
|
|
Trade names
|
$
|
54,682
|
|
|
$
|
51,687
|
|
|
54,682
|
|
|
51,687
|
|
Finite Lived Intangible Assets:
|
|
|
|
|
|
Routes
|
397,808
|
|
|
374,989
|
|
Permits
|
512,659
|
|
|
493,311
|
|
Non-compete agreements
|
3,963
|
|
|
3,638
|
|
Trade names
|
76,558
|
|
|
76,033
|
|
Royalty, consulting, land use rights and leasehold
|
14,666
|
|
|
13,456
|
|
|
1,005,654
|
|
|
961,427
|
|
Accumulated Amortization:
|
|
|
|
Routes
|
(136,592
|
)
|
|
(105,934
|
)
|
Permits
|
(211,264
|
)
|
|
(170,165
|
)
|
Non-compete agreements
|
(2,387
|
)
|
|
(1,788
|
)
|
Trade names
|
(30,235
|
)
|
|
(21,042
|
)
|
Royalty, consulting, land use rights and leasehold
|
(3,358
|
)
|
|
(2,258
|
)
|
|
(383,836
|
)
|
|
(301,187
|
)
|
Total Intangible assets, less accumulated amortization
|
$
|
676,500
|
|
|
$
|
711,927
|
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
Gross intangible routes, permits, trade names, non-compete agreements and other intangibles partially decreased in fiscal 2017 and fiscal 2016 by approximately $
6.7 million
and $
27.7 million
, respectively as a result of asset retirements.
In addition, gross intangible routes, permits, trade names, non-compete agreements and other intangibles partially increased in fiscal 2017 and fiscal 2016 due to acquired intangibles of approximately $
9.0 million
and $
7.1 million
, respectively. Amortization expense for the three years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
, was approximately $
78.0 million
, $
77.7 million
and $
83.3 million
, respectively. Amortization expense for the next five fiscal years is estimated to be $
77.3 million
, $
76.1 million
, $
75.6 million
, $
75.0 million
and $
74.0 million
.
NOTE 6. GOODWILL
Changes in the carrying amount of goodwill (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feed Ingredients
|
Food Ingredients
|
Fuel Ingredients
|
Total
|
Balance at January 2, 2016
|
|
|
|
|
Goodwill
|
$
|
812,797
|
|
$
|
323,385
|
|
$
|
112,834
|
|
$
|
1,249,016
|
|
Accumulated impairment losses
|
(15,914
|
)
|
—
|
|
—
|
|
(15,914
|
)
|
|
796,883
|
|
323,385
|
|
112,834
|
|
1,233,102
|
|
Goodwill acquired during year
|
827
|
|
—
|
|
2
|
|
829
|
|
Foreign currency translation
|
(3
|
)
|
(6,377
|
)
|
(1,658
|
)
|
(8,038
|
)
|
Balance at December 31, 2016
|
|
|
|
|
Goodwill
|
813,621
|
|
317,008
|
|
111,178
|
|
1,241,807
|
|
Accumulated impairment losses
|
(15,914
|
)
|
—
|
|
—
|
|
(15,914
|
)
|
|
797,707
|
|
317,008
|
|
111,178
|
|
1,225,893
|
|
Goodwill acquired during year
|
1,880
|
|
—
|
|
—
|
|
1,880
|
|
Goodwill disposed of during year
|
(2,894
|
)
|
—
|
|
—
|
|
(2,894
|
)
|
Foreign currency translation
|
35,560
|
|
27,463
|
|
13,191
|
|
76,214
|
|
Balance at December 30, 2017
|
|
|
|
|
|
|
|
Goodwill
|
848,167
|
|
344,471
|
|
124,369
|
|
1,317,007
|
|
Accumulated impairment losses
|
(15,914
|
)
|
—
|
|
—
|
|
(15,914
|
)
|
|
$
|
832,253
|
|
$
|
344,471
|
|
$
|
124,369
|
|
$
|
1,301,093
|
|
Certain of the Company's rendering facilities are highly dependent on one or few suppliers. It is reasonably possible that certain of those suppliers could cease their operations or choose a competitor’s services, which could have a significant impact on these facilities.
The process of evaluating goodwill for impairment involves the determination of the fair value of the Company's reporting units. In
fiscal 2017
,
fiscal 2016
and
fiscal 2015
, the fair values of the Company’s reporting units containing goodwill exceeded the related carrying value pursuant to a quantitative assessment completed as of October 28, 2017, October 29, 2016 and October 31, 2015, respectively.
NOTE 7. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
The Company announced on January 21, 2011 that a wholly-owned subsidiary of Darling entered into a limited liability company agreement with Valero to form the DGD Joint Venture. The DGD Joint Venture is owned
50% / 50%
with Valero and was formed to design, engineer, construct and operate a renewable diesel plant (the “DGD Facility”), which is capable of processing approximately
12,000
barrels per day of input feedstock to produce renewable diesel fuel and certain other co-products, and is located adjacent to Valero's refinery in Norco, Louisiana. The DGD Joint Venture reached mechanical completion and began the production of renewable diesel in late June 2013.
On May 31, 2011, the DGD Joint Venture and Diamond Green Diesel LLC, a wholly-owned subsidiary of the DGD Joint Venture (“Opco”), entered into (i) a facility agreement (the “Facility Agreement”) with Diamond Alternative Energy, LLC, a wholly-owned subsidiary of Valero (the “Lender”), and (ii) a loan agreement (the “Loan Agreement”) with the Lender, which will provide the DGD Joint Venture with a
14
year multiple advance term loan facility of approximately $
221.3 million
(the "JV Loan") to support the design, engineering and construction of the DGD Facility, which is now in production. The Facility Agreement and the Loan Agreement prohibit the Lender from assigning all or any portion of the Facility Agreement or the Loan Agreement to unaffiliated third parties. Opco has also pledged
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
substantially all of its assets to the Lender, and the DGD Joint Venture has pledged all of Opco's equity interests to the Lender, until the JV Loan has been paid in full and the JV Loan has terminated in accordance with its terms.
In addition to the DGD Joint Venture, the Company has investments in other unconsolidated subsidiaries that were acquired in the VION Acquisition that are insignificant to the Company. Selected financial information for the Company's DGD Joint Venture is as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2017
|
December 31, 2016
|
Assets:
|
|
|
|
Total current assets
|
|
$
|
202,778
|
|
$
|
268,734
|
|
Property, plant and equipment, net
|
|
435,328
|
|
354,871
|
|
Other assets
|
|
4,655
|
|
12,164
|
|
Total assets
|
|
$
|
642,761
|
|
$
|
635,769
|
|
Liabilities and members' equity:
|
|
|
|
Total current portion of long term debt
|
|
$
|
17,023
|
|
$
|
17,023
|
|
Total other current liabilities
|
|
40,705
|
|
23,200
|
|
Total long term debt
|
|
36,730
|
|
53,753
|
|
Total other long term liabilities
|
|
450
|
|
418
|
|
Total members' equity
|
|
547,853
|
|
541,375
|
|
Total liabilities and member's equity
|
|
$
|
642,761
|
|
$
|
635,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
|
2017
|
2016
|
2015
|
Revenues:
|
|
|
|
|
Operating revenues
|
|
$
|
633,908
|
|
$
|
527,670
|
|
$
|
475,934
|
|
Expenses:
|
|
|
|
|
Total costs and expenses less depreciation, amortization and accretion expense
|
|
547,512
|
|
353,222
|
|
298,946
|
|
Depreciation, amortization and accretion expense
|
|
28,955
|
|
27,821
|
|
19,714
|
|
Operating income
|
|
57,441
|
|
146,627
|
|
157,274
|
|
Other income
|
|
1,343
|
|
551
|
|
120
|
|
Interest and debt expense, net
|
|
(2,306
|
)
|
(7,354
|
)
|
(13,604
|
)
|
Net income
|
|
$
|
56,478
|
|
$
|
139,824
|
|
$
|
143,790
|
|
As of
December 30, 2017
, under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $
273.9 million
on the consolidated balance sheet and has recorded approximately $
28.2 million
, $
69.9 million
and $
71.9 million
in equity net income in the unconsolidated subsidiary for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
, respectively. Biodiesel blenders registered with the Internal Revenue Service were eligible for a tax incentive in the amount of $
1.00
per gallon of renewable diesel blended with petroleum diesel to produce a mixture containing
0.1%
diesel fuel for fiscal years ended December 31, 2016 and December 31, 2015. These biodiesel blenders tax credits expired on December 31, 2016, as a result the DGD Joint Venture fiscal 2017 results do not include any blenders tax credits. As a blender, the DGD Joint Venture has recorded approximately $
160.6 million
and $
156.6 million
in blender credits, for its fiscal years ended December 31, 2016 and December 31, 2015, respectively. These blenders credits were recorded by the DGD Joint Venture as a reduction of total costs and expenses in the above table. In fiscal 2015, the DGD Joint Venture booked all blenders tax credits in the fourth quarter. In addition, for each of the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
, the Company received $
25.0 million
in dividend distributions from the DGD Joint Venture.
In February 2018, the blender tax credits for calendar year 2017 were retroactively reinstated by the U.S. Congress. The DGD Joint Venture is expected to receive approximately $
160.4 million
in fiscal 2018 for these reinstated blenders tax credits.
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
NOTE 8. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
Compensation and benefits
|
$
|
102,474
|
|
|
$
|
83,355
|
|
Utilities and sewage
|
18,077
|
|
|
16,446
|
|
Accrued income, ad valorem, and franchise taxes
|
30,546
|
|
|
19,179
|
|
Reserve for self insurance, litigation, environmental and tax matters (Note 19)
|
13,101
|
|
|
12,479
|
|
Medical claims liability
|
8,502
|
|
|
5,070
|
|
Accrued operating expenses
|
61,230
|
|
|
55,128
|
|
Accrued interest payable
|
16,125
|
|
|
15,961
|
|
Liabilities for sale
|
19,172
|
|
|
—
|
|
Other accrued expense
|
44,396
|
|
|
35,178
|
|
|
$
|
313,623
|
|
|
$
|
242,796
|
|
NOTE 9. LEASES
The Company leases 14 processing plants and storage locations, land surrounding certain processing plants and three office locations under operating leases and a portion of its transportation equipment under operating and capital leases. Leases are noncancellable and expire at various times through the year
2104
. Minimum rental commitments under noncancellable leases as of
December 30, 2017
, are as follows (in thousands):
|
|
|
|
|
|
|
|
Period Ending Fiscal
|
Operating Leases
|
Capital Leases
|
2018
|
$
|
45,345
|
|
$
|
927
|
|
2019
|
39,414
|
|
311
|
|
2020
|
26,180
|
|
157
|
|
2021
|
14,770
|
|
—
|
|
2022
|
6,130
|
|
—
|
|
Thereafter
|
13,186
|
|
—
|
|
|
$
|
145,025
|
|
$
|
1,395
|
|
Less amounts representing interest
|
|
(60
|
)
|
Capital lease obligations included in current and long-term debt
|
|
$
|
1,335
|
|
Rent expense was approximately $
48.7 million
, $
43.6 million
and $
41.5 million
, for the fiscal years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
, respectively.
The Company's capital lease assets are included in property, plant and equipment and the capital lease obligations are included in the Company's current and long-term debt obligations on the consolidated balance sheet.
NOTE 10. DEBT
Debt consists of the following (in thousands):
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
Amended Credit Agreement:
|
|
|
|
Revolving Credit Facility ($5.3 million denominated in euro at December 31, 2016)
|
$
|
—
|
|
|
$
|
5,280
|
|
Term Loan A ($53.1 million and $76.9 million denominated in CAD at December 30, 2017 and December 31, 2016, respectively)
|
96,365
|
|
|
120,103
|
|
Less unamortized deferred loan costs
|
(671
|
)
|
|
(1,083
|
)
|
Carrying value Term Loan A
|
95,694
|
|
|
119,020
|
|
|
|
|
|
Term Loan B
|
505,000
|
|
|
583,500
|
|
Less unamortized deferred loan costs
|
(10,578
|
)
|
|
(6,298
|
)
|
Carrying value Term Loan B
|
494,422
|
|
|
577,202
|
|
|
|
|
|
5.375% Senior Notes due 2022 with effective interest of 5.72%
|
500,000
|
|
|
500,000
|
|
Less unamortized deferred loan costs
|
(6,638
|
)
|
|
(7,667
|
)
|
Carrying value 5.375% Senior Notes due 2022
|
493,362
|
|
|
492,333
|
|
|
|
|
|
4.75% Senior Notes due 2022 - Denominated in euro with effective interest of 5.10%
|
617,356
|
|
|
543,840
|
|
Less unamortized deferred loan costs - Denominated in euro
|
(8,675
|
)
|
|
(8,956
|
)
|
Carrying value 4.75% Senior Notes due 2022
|
608,681
|
|
|
534,884
|
|
|
|
|
|
Other Notes and Obligations
|
22,034
|
|
|
22,224
|
|
|
1,714,193
|
|
|
1,750,943
|
|
Less Current Maturities
|
16,143
|
|
|
23,247
|
|
|
$
|
1,698,050
|
|
|
$
|
1,727,696
|
|
As of
December 30, 2017
, the Company had outstanding debt under a term loan facility denominated in Canadian dollars of CAD$
66.6 million
. See below for discussion relating to the Company's debt agreements. In addition, at
December 30, 2017
, the Company had capital lease obligations denominated in Canadian dollars included in debt. The current and long-term capital lease obligation was approximately CAD$
0.8 million
and CAD$
0.4 million
, respectively.
As of
December 30, 2017
, the Company had outstanding debt under the Company's
4.75%
Senior Notes due 2022 denominated in euros of €
515.0 million
. See below for discussion relating to the Company's debt agreements. In addition, at
December 30, 2017
, the Company had capital lease obligations denominated in euros included in debt. The current and long-term capital lease obligation was approximately €
0.2 million
and €
0.1 million
, respectively.
Senior Secured Credit Facilities
. On January 6, 2014, Darling, Darling International Canada Inc. (“Darling Canada”) and Darling International NL Holdings B.V. (“Darling NL”) entered into a Second Amended and Restated Credit Agreement (as subsequently amended, the “Amended Credit Agreement”), restating its then existing Amended and Restated Credit Agreement dated September 27, 2013, with the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents from time to time party thereto.
Effective
December 18, 2017
, the Company, and certain of its subsidiaries entered into an amendment (the “Fifth Amendment”) with its lenders to the Amended Credit Agreement. Among other things, the Fifth Amendment (i) refinances the term B loans under the Amended Credit Agreement with new term B loans in an aggregate principal amount of $
525.0 million
with a maturity date of
December 18, 2024
; (ii) adjusts the applicable margin pricing on borrowings under the term B loan; (iii) modifies certain of the negative covenants to increase the allowances for certain actions, including debt and investments; and (iv) makes other updates and changes.
Effective
December 16, 2016
, the Company, and certain of its subsidiaries entered into an amendment (the “Fourth Amendment”) with its lenders to the Amended Credit Agreement. Among other things, the Fourth Amendment (i) extended the maturity date of the term A loans and revolving credit facility loans under the Amended Credit Agreement from
September 27, 2018
to
December 16, 2021
, subject to a
91
-day “springing” adjustment if the term B loans are outstanding
91
days prior to the maturity date of the term B loans; (ii) reset the amortization schedule of the term A loans to their original schedule; (iii) adjusted the applicable margin pricing grid on borrowings under the term A Loan and revolving credit facility which adjusts based on the Company’s total leverage ratio as set forth in the Amended Credit Agreement; (iv) eliminated the secured leverage ratio financial maintenance covenant so that from and after
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
the effective date of the Fourth Amendment the Company’s financial covenants consist of maintaining of total leverage ratio not to exceed
5.50
to
1.00
and maintaining an interest coverage ratio of not less than
3.00
to
1.00
; (v) modified certain of the negative covenants to include a senior leverage ratio incurrence-based test and to increase the allowances for certain actions, including debt, investments and restricted payments; and (vi) made other updates and changes.
The Amended Credit Agreement provides for senior secured credit facilities in the aggregate principal amount of $
1.88 billion
comprised of (i) the Company's $
350.0 million
term loan A facility (ii) the Company's $
525.0 million
term loan B facility and (iii) the Company's $
1.0 billion
five
-year revolving loan facility (approximately $
150.0 million
of which will be available for a letter of credit sub-facility and $
50.0 million
of which will be available for a swingline sub-facility) (collectively, the “Senior Secured Credit Facilities”). The Amended Credit Agreement also permits Darling and the other borrowers thereunder to incur ancillary facilities provided by any revolving lender party to the Senior Secured Credit Facilities (with certain restrictions). Up to $
948.3 million
of the revolving loan facility is available to be borrowed by (x) Darling in U.S. dollars, Canadian dollars, euros and other currencies to be agreed and available to each applicable lender, (y) Darling Canada in Canadian dollars and (z) Darling NL, Darling Ingredients International Holding B.V. (“Darling BV”) and CTH Germany GmbH (“CTH”) in U.S. dollars, Canadian dollars, euros and other currencies to be agreed and available to each applicable lender. The revolving loan facility and term loan A facility will mature on December 16, 2021. The revolving loan facility will be used for working capital needs, general corporate purposes and other purposes not prohibited by the Amended Credit Agreement.
The interest rate applicable to any borrowings under the term loan A facility and the revolving loan facility will equal either LIBOR/euro interbank offered rate/CDOR plus
2.00%
per annum or base rate/Canadian prime rate plus
1.00%
per annum, subject to certain step-ups or step-downs based on the Company's total leverage ratio. The interest rate applicable to any borrowings under the term loan B facility will equal the base rate plus
1.00%
or LIBOR plus
2.00%
.
As of
December 30, 2017
, the Company had $
43.3 million
outstanding under the term loan A facility at LIBOR plus a margin of
2.00%
per annum for a total of
3.57%
per annum. The Company had $
500.0 million
outstanding under the term loan B facility at LIBOR plus a margin of
2.00%
per annum for a total of
3.57%
per annum and $
5.0 million
outstanding under the term loan B facility at base rate plus a margin of
1.00%
per annum for a total of
5.50%
per annum. The Company had CAD$
66.6 million
outstanding under the term loan A Facility at CDOR plus a margin of
2.00%
per annum for a total of
3.5257%
per annum. As of
December 30, 2017
, the Company had availability of $
976.0 million
under the Amended Credit Agreement taking into account amounts borrowed and letters of credit issued of $
24.0 million
. The Company also has foreign bank guarantees that are not part of the Company's Amended Credit Agreement in the amount of approximately $
12.3 million
at
December 30, 2017
. In addition, the Company capitalized $
6.3 million
of deferred loan costs in fiscal year 2017 in connection with the Fifth Amendment.
The Amended Credit Agreement contains various customary representations and warranties by the Company, which include customary use of materiality, material adverse effect and knowledge qualifiers. The Amended Credit Agreement also contains (a) certain affirmative covenants that impose certain reporting and/or performance obligations on Darling and its restricted subsidiaries, (b) certain negative covenants that generally prohibit, subject to various exceptions, Darling and its restricted subsidiaries from taking certain actions, including, without limitation, incurring indebtedness, making investments, incurring liens, paying dividends and engaging in mergers and consolidations, sale and leasebacks and asset dispositions, (c) financial covenants, which include a maximum total leverage ratio and a minimum interest coverage ratio and (d) customary events of default (including a change of control) for financings of this type. Obligations under the Senior Secured Credit Facilities may be declared due and payable upon the occurrence and during the continuance of customary events of default.
5.375% Senior Notes due 2022.
On
January 2, 2014
, Darling Escrow Corporation, a wholly-owned subsidiary of Darling, issued $
500.0 million
aggregate principal amount of its
5.375%
Notes due 2022 (the “
5.375%
Notes”) pursuant to a 5.375% Notes Indenture, dated as of January 2, 2014 (the “Original 5.375% Indenture”), among Darling Escrow Corporation, the subsidiary guarantors party thereto from time to time, and U.S. Bank National Association, as trustee (the “5.375% Trustee”). On
January 8, 2014
, Darling Escrow Corporation merged with and into Darling and entered into a supplemental indenture with Darling, the subsidiary guarantors party thereto and the 5.375% Trustee (the “Supplemental 5.375% Indenture,” and together with the Original 5.375% Indenture, the “5.375% Indenture”), pursuant to which Darling assumed all obligations under the 5.375% Notes and the 5.375% Indenture. Darling and the 5.375% Guarantors completed a registered exchange offer for the 5.375% Notes under the Securities Act during the third quarter of 2014. Darling used a portion of the proceeds from the offering of the 5.375% Notes to pay certain fees and expenses (including bank fees and expenses) related to the offering and the financing of its acquisition of its Darling Ingredients International business and for purposes of satisfying, discharging and redeeming its
8.5%
Notes due 2018. Darling used the remaining proceeds of the 5.375% Notes to pay certain other fees and expenses related
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
to the completion of the acquisition of its Darling Ingredients International business and its related financings, to repay a portion of the borrowings under its revolving credit facility used to fund a portion of the consideration for the acquisition of its Darling Ingredients International business and for general corporate purposes.
The 5.375% Notes will mature on
January 15, 2022
. Darling pays interest on the 5.375% Notes on January 15 and July 15 of each year, commencing on July 15, 2014. Interest on the 5.375% Notes accrues at a rate of
5.375%
per annum and is payable in cash. The 5.375% Notes are guaranteed on an unsecured senior basis by all of Darling's restricted subsidiaries (other than any foreign subsidiary or any receivables entity) that guarantee the Senior Secured Credit Facilities (the “5.375% Guarantors”). The 5.375% Notes and the guarantees thereof are senior unsecured obligations of Darling and the 5.375% Guarantors and rank equally in right of payment to all of Darling's and the 5.375% Guarantors' existing and future senior unsecured indebtedness. The 5.375% Indenture contains covenants limiting Darling's ability and the ability of its restricted subsidiaries to, among other things: incur additional indebtedness or issue preferred stock; pay dividends on or make distributions or repurchases of Darling's capital stock or make other restricted payments; create restrictions on the payment of dividends or other amounts from Darling's restricted subsidiaries to Darling or Darling's other restricted subsidiaries; make loans or investments; enter into certain transactions with affiliates; create liens; designate Darling's subsidiaries as unrestricted subsidiaries; and sell certain assets or merge with or into other companies or otherwise dispose of all or substantially all of Darling's assets.
Other than for extraordinary events such as change of control and defined assets sales, Darling is not required to make mandatory redemption or sinking fund payments on the 5.375% Notes. The 5.375% Notes are redeemable, in whole or in part, at any time on or after January 15, 2017 at the redemption prices specified in the 5.375% Indenture.
4.75 % Senior Notes due 2022.
On June 3, 2015, Darling Global Finance B.V. (the “4.75% Issuer”), a wholly-owned subsidiary of Darling, issued €
515.0 million
aggregate principal amount of the
4.75%
Senior Notes due 2022 (the “
4.75%
Notes”) pursuant to a Senior Notes Indenture, dated as of June 3, 2015 (the “4.75% Indenture”), among the 4.75% Issuer, Darling (as guarantor), the subsidiary guarantors party thereto from time to time, Citibank, N.A., London Branch, as trustee (the “4.75% Trustee”) and principal paying agent, and Citigroup Global Markets Deutschland AG, as principal registrar. Darling used the gross proceeds from the sale of the 4.75% Notes to refinance a portion of the term loan B outstanding under Darling's Senior Secured Credit Facilities and to pay certain fees and expenses related to the offering of the 4.75% Notes and the refinancing of the term loan B. Darling intends to use any remaining proceeds for general corporate purposes.
The 4.75% Notes will mature on May 30, 2022. The 4.75% Issuer pays interest on the 4.75% Notes on May 30 and November 30 of each year, commencing on November 30, 2015. Interest on the 4.75% Notes accrues from June 3, 2015 at a rate of 4.75% per annum and is payable in cash. The 4.75% Notes are guaranteed on a senior unsecured basis by Darling and all of Darling's restricted subsidiaries (other than any foreign subsidiary, the 4.75% Issuer or any receivables entity) that guarantee the Senior Secured Credit Facilities (collectively “4.75% Guarantors”). The 4.75% Notes and the guarantees thereof are senior unsecured obligations of the 4.75% Issuer and the 4.75% Guarantors and rank equally in right of payment to all of the 4.75% Issuer's and the 4.75% Guarantors' existing and future senior unsecured indebtedness. The 4.75% Indenture contains covenants limiting Darling's ability and the ability of its restricted subsidiaries (including the 4.75% Issuer) to, among other things: incur additional indebtedness or issue preferred stock; pay dividends on or make other distributions or repurchases of Darling's capital stock or make other restricted payments; create restrictions on the payment of dividends or certain other amounts from Darling's restricted subsidiaries to Darling or Darling's other restricted subsidiaries; make loans or investments; enter into certain transactions with affiliates; create liens; designate Darling's subsidiaries as unrestricted subsidiaries; and sell certain assets or merge with or into other companies or otherwise dispose of all of substantially all of Darling's assets.
Other than for extraordinary events such as change of control and defined assets sales, the 4.75% Issuer is not required to make mandatory redemption or sinking fund payments on the 4.75% Notes. The 4.75% Notes are redeemable, in whole or in part, at any time on or after May 30, 2018 at the redemption prices specified in the 4.75% Indenture. The 4.75% Issuer may redeem some or all of the 4.75% Notes at any time prior to May 30, 2018, at a redemption price equal to
100%
of the principal amount of the 4.75% Notes redeemed, plus accrued and unpaid interest to the redemption date and an Applicable Premium as specified in the 4.75% Indenture and all additional amounts (if any) then due or which will become due on the redemption date as a result of the redemption or otherwise (subject to the rights of holders on the relevant record dates to receive interest due on the relevant interest payment date and additional amounts (if any) in respect thereof).
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
As of
December 30, 2017
, the Company believes it is in compliance with all financial covenants under the Amended Credit Agreement, as well as all of the other covenants contained in the Amended Credit Agreement, the 5.375% Indenture and the 4.75% Indenture.
Maturities of long-term debt at
December 30, 2017
follow (in thousands):
|
|
|
|
|
|
Contractual
Debt Payment
|
2018
|
$
|
16,143
|
|
2019
|
2,274
|
|
2020
|
1,751
|
|
2021
|
98,947
|
|
2022
|
1,122,636
|
|
thereafter
|
499,004
|
|
|
$
|
1,740,755
|
|
NOTE 11. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
Accrued pension liability (Note 15)
|
$
|
52,771
|
|
|
$
|
53,152
|
|
Reserve for self insurance, litigation, environmental and tax
matters (Note 19)
|
51,903
|
|
|
41,251
|
|
Other
|
1,613
|
|
|
1,711
|
|
|
$
|
106,287
|
|
|
$
|
96,114
|
|
NOTE 12. INCOME TAXES
During fiscal 2017 the Company recorded an income tax benefit of $
69.2 million
, which included a tax benefit of $
88.9 million
due to tax law changes enacted in December 2017 in several of the Company’s major tax jurisdictions.
On December 22, 2017, U.S. tax reform was signed into law. The Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from
35%
to
21%
, eliminating certain deductions, enhancing the option for claiming accelerated depreciation deductions through
2026
, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries (also referred to as the toll charge or transition tax), and changing how foreign earnings are subject to U.S. tax. ASC 740, Accounting for Income Taxes, requires companies to recognize the effects of changes in tax laws and tax rates on deferred tax assets and liabilities in the period in which the new legislation is enacted. Due to the timing of the Tax Act and the substantial changes it brings, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(SAB 118), which provides registrants a measurement period to report the impact of the new U.S. tax law. During the measurement period, provisional amounts for the effects of the tax law are recorded to the extent a reasonable estimate can be made. To the extent that all information necessary is not available, prepared or analyzed, companies may recognize provisional estimated amounts for a period of up to one year following enactment of the Tax Act.
The effects of the Tax Act on Darling include
two
major categories: (i) mandatory deemed repatriation, and (ii) remeasurement of deferred taxes. As described further below, we recorded a net tax benefit of $
75.0 million
for the impact of the Tax Act in the year ended December 30, 2017. As the Company does not have all the necessary information to analyze all income tax effects of the Act, this is a provisional amount which the Company believes represents a reasonable estimate of the accounting implications of this tax reform. The Company will continue to evaluate the Act and adjust the provisional amounts as additional information is obtained and analyzed. The ultimate impact of tax reform may differ from the Company's provisional amounts due to changes in the Company's interpretations and assumptions, as well as additional regulatory guidance that may be issued.
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
The Company expects to complete its detailed analysis no later than the fourth quarter of 2018. Below is a brief description of the
two
categories of effects from U.S. tax reform and its impact on the Company:
(i) Mandatory deemed repatriation - under the Tax Act, a company’s accumulated foreign earnings are deemed to be repatriated into the U.S. The Company recorded a provisional estimate of federal and state tax related to deemed repatriation in the amount of approximately $
26.2 million
. However, the Company had an existing U.S. deferred tax liability associated with foreign earnings that were not permanently reinvested outside the U.S. in the amount of $
38.3 million
. It is now expected that these foreign earnings can be repatriated to the U.S. without any additional U.S. tax above the amount accrued related to the mandatory deemed repatriation. Accordingly, the Company released the entire $
38.3 million
liability. This $
38.3 million
release combined with the $
26.2 million
amount related the mandatory deemed repatriation resulted in the Company recognizing a net provisional tax benefit of $
12.1 million
for this item. No material cash impact is expected from the deemed repatriation due to existing tax loss carryforwards.
(ii) Remeasurement of deferred taxes - under the Tax Act, the U.S. corporate income tax rate was reduced from
35%
to
21%
. Accordingly, Darling remeasured the Company's net U.S. deferred tax liability as of December 30, 2017 using the new
21%
federal rate, which resulted in a provisional tax benefit of $
62.9 million
. The Company has significant net operating loss carryforwards to offset the mandatory one-time repatriation; therefore, the Company reduced its deferred tax asset related to its net operating loss carryforwards rather than incurring a toll charge liability for which a cash payment would otherwise be required.
These provisional amounts for the mandatory repatriation and its impact on the Company’s deferred taxes represent reasonable estimates, which required significant effort to determine based on numerous assumptions with respect to analyzing the Company’s post-
1986
accumulated untaxed foreign earnings including historical practices, judgments made in the interpretation of the provisions in the Tax Act and estimates used in the calculations. The Company considers it likely that the U.S. Treasury Department, the IRS and other standard-setting bodies will issue technical guidance on how provisions of the Tax Act will be applied or otherwise administered, which may be different from the Company’s interpretation.
Also, in December 2017, Belgium and France enacted tax law changes resulting in a tax benefit of approximately $
13.9 million
. This amount is comprised of a benefit of approximately $
4.4 million
from the re-measurement of net deferred tax liabilities due to a reduction in the corporate tax rate in each country. Additionally, Belgium enacted a new provision increasing its participation exemption to
100%
, which generally allows tax-free dividends to be received from subsidiaries resulting in a tax benefit of approximately $
9.6 million
.
U.S. and foreign income from operations before income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
January 2, 2016
|
United States
|
$
|
179
|
|
|
$
|
48,869
|
|
|
$
|
50,473
|
|
Foreign
|
64,021
|
|
|
73,670
|
|
|
48,307
|
|
Income from operations before income taxes
|
$
|
64,200
|
|
|
$
|
122,539
|
|
|
$
|
98,780
|
|
Income tax expense attributable to income from continuing operations before income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
January 2, 2016
|
Current:
|
|
|
|
|
|
Federal
|
$
|
274
|
|
|
$
|
65
|
|
|
$
|
(21,775
|
)
|
State
|
(80
|
)
|
|
(332
|
)
|
|
411
|
|
Foreign
|
31,256
|
|
|
27,992
|
|
|
29,871
|
|
Total current
|
31,450
|
|
|
27,725
|
|
|
8,507
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
(76,056
|
)
|
|
(8,056
|
)
|
|
13,057
|
|
State
|
622
|
|
|
(649
|
)
|
|
(1,521
|
)
|
Foreign
|
(25,170
|
)
|
|
(3,705
|
)
|
|
(6,542
|
)
|
Total deferred
|
(100,604
|
)
|
|
(12,410
|
)
|
|
4,994
|
|
|
$
|
(69,154
|
)
|
|
$
|
15,315
|
|
|
$
|
13,501
|
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
Income tax expense for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
, differed from the amount computed by applying the statutory U.S. federal income tax rate to income from continuing operations before income taxes as a result of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
January 2, 2016
|
Computed "expected" tax expense
|
$
|
22,470
|
|
|
$
|
42,888
|
|
|
$
|
34,573
|
|
Change in valuation allowance
|
1,609
|
|
|
1,039
|
|
|
4,421
|
|
Deferred tax on unremitted foreign earnings
|
641
|
|
|
2,546
|
|
|
4,848
|
|
Sub-Part F income
|
6,284
|
|
|
6,159
|
|
|
4,923
|
|
Foreign rate differential
|
(8,292
|
)
|
|
(9,982
|
)
|
|
(5,653
|
)
|
Biofuel tax incentives
|
—
|
|
|
(28,435
|
)
|
|
(28,143
|
)
|
Change in tax law
|
|
|
|
|
|
One-time U.S. transition tax
|
26,243
|
|
|
—
|
|
|
—
|
|
Deferred tax effects
|
(115,169
|
)
|
|
2,169
|
|
|
—
|
|
Other, net
|
(2,940
|
)
|
|
(1,069
|
)
|
|
(1,468
|
)
|
|
$
|
(69,154
|
)
|
|
$
|
15,315
|
|
|
$
|
13,501
|
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at
December 30, 2017
and
December 31, 2016
are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
Deferred tax assets:
|
|
|
|
Loss contingency reserves
|
$
|
8,546
|
|
|
$
|
11,998
|
|
Employee benefits
|
8,471
|
|
|
9,586
|
|
Pension liability
|
12,224
|
|
|
18,200
|
|
Intangible assets amortization, including taxable goodwill
|
1,475
|
|
|
2,317
|
|
Net operating losses
|
89,660
|
|
|
119,602
|
|
Tax credits
|
7,057
|
|
|
3,473
|
|
Inventory
|
6,295
|
|
|
8,523
|
|
Accrued liabilities and other
|
13,764
|
|
|
13,340
|
|
Total gross deferred tax assets
|
147,492
|
|
|
187,039
|
|
Less valuation allowance
|
(24,530
|
)
|
|
(20,150
|
)
|
Net deferred tax assets
|
122,962
|
|
|
166,889
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets amortization, including taxable goodwill
|
(170,294
|
)
|
|
(189,233
|
)
|
Property, plant and equipment depreciation
|
(166,217
|
)
|
|
(207,729
|
)
|
Investment in DGD Joint Venture
|
(29,516
|
)
|
|
(47,607
|
)
|
Tax on unremitted foreign earnings
|
(8,045
|
)
|
|
(49,196
|
)
|
Other
|
(1,555
|
)
|
|
(4,268
|
)
|
Total gross deferred tax liabilities
|
(375,627
|
)
|
|
(498,033
|
)
|
Net deferred tax liability
|
$
|
(252,665
|
)
|
|
$
|
(331,144
|
)
|
|
|
|
|
Amounts reported on Consolidated Balance Sheets:
|
|
|
|
Non-current deferred tax asset
|
$
|
14,043
|
|
|
$
|
14,990
|
|
Non-current deferred tax liability
|
(266,708
|
)
|
|
(346,134
|
)
|
Net deferred tax liability
|
$
|
(252,665
|
)
|
|
$
|
(331,144
|
)
|
At
December 30, 2017
, the Company had net operating loss carryforwards for federal income tax purposes of approximately $
138.2 million
, which begin to expire in
2020
through
2036
. As a result of the change in ownership which occurred pursuant to the May 2002 recapitalization, utilization of approximately $
2.1 million
of the federal net operating loss carryforwards is limited to approximately $
0.7 million
per year for the remaining life of the net operating losses. The Company had approximately $
203.9 million
of net operating loss carryforwards for state income tax purposes, which expire in
2019
through
2036
. The Company had foreign net operating loss carryforwards of about
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
$
192.0 million
, $
102.7 million
of which expire in 2018 through
2037
and $
89.3 million
of which can be carried forward indefinitely. Also at
December 30, 2017
, the Company had U.S. federal and state tax credit carryforwards of approximately $
1.4 million
, and tax credit carryforwards with respect to its foreign tax jurisdictions of approximately $
5.6 million
. As of
December 30, 2017
, the Company had a valuation allowance of $
2.8 million
due to uncertainties in respect to its ability to utilize its U.S. (federal and state) net operating loss and tax credit carryforwards before they expire. The Company also had a valuation allowance of $
21.7 million
due to uncertainties in its ability to utilize foreign net operating loss carryforwards, tax credit carryforwards and other foreign deferred tax assets.
At
December 30, 2017
, the Company had unrecognized tax benefits of approximately $
2.4 million
. During fiscal 2017, the Company entered into a settlement agreement with the Darling Ingredients International business seller in which an indemnity receivable of $
3.0 million
was collected and the Company generally accepted responsibility for any remaining tax liabilities in pre-acquisition tax years. All of the unrecognized tax benefits would favorably impact the Company's effective tax rate if recognized. The Company believes it is reasonably possible that unrecognized tax benefits could change by $
2.0 million
in the next twelve months. The possible change in unrecognized tax benefits relates to the expiration of certain statutes of limitation and the possible settlement of an ongoing income tax audit. The Company recognizes accrued interest and penalties, as appropriate, related to unrecognized tax benefits as a component of income tax expense. As of
December 30, 2017
, interest and penalties related to unrecognized tax benefits were $
1.3 million
.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
Balance at beginning of Year
|
$
|
4,667
|
|
|
$
|
5,604
|
|
Change in tax positions related to current year
|
290
|
|
|
—
|
|
Change in tax positions related to prior years
|
(198
|
)
|
|
99
|
|
Change in tax positions due to settlement with tax authorities
|
(1,949
|
)
|
|
—
|
|
Expiration of the Statute of Limitations
|
(426
|
)
|
|
(1,036
|
)
|
Balance at end of year
|
$
|
2,384
|
|
|
$
|
4,667
|
|
In fiscal 2017, the Company's major taxing jurisdictions are U.S. (federal and state), Belgium, Brazil, Canada, China, France, Germany and the Netherlands. The Company is subject to regular examination by various tax authorities. Although the final outcome of these examinations is not yet determinable, the Company does not anticipate that any of the examinations will have a significant impact on the Company's results of operations or financial position. The statute of limitations for the Company's major jurisdictions is open for varying periods, but is generally closed through the 2010 tax year.
Many of the Company's operations are conducted outside the United States. As a result of the Tax Act and the mandatory repatriation, the Company expects to have access to its offshore earnings with minimal to no additional U.S. tax impact. Therefore, the Company will no longer consider these earnings to be permanently reinvested offshore. As of
December 30, 2017
, a deferred tax liability of approximately $
8.0 million
has been recorded for any incremental taxes, including foreign withholding taxes, that are estimated to be incurred when those earnings are distributed to the U.S. in future years.
NOTE 13. STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION
On August 7, 2017, the Company's Board of Directors approved the extension for an additional
two
years of its previously announced share repurchase program of up to an aggregate of $
100.0 million
of the Company's Common Stock depending on market conditions. As of
December 30, 2017
, the Company has approximately $
100 million
remaining under the share repurchase program approved in August 2017.
On May 9, 2017, the shareholders approved the Company's 2017 Omnibus Incentive Plan (the “2017 Omnibus Plan”). The 2017 Omnibus Plan replaced the Company's 2012 Omnibus Incentive Plan (the “2012 Omnibus Plan”) for future grants. Under the 2017 Omnibus Plan, the Company can grant stock options, stock appreciation rights, non-vested and restricted stock (including performance stock), restricted stock units (including performance units), other stock-based awards, non-employee director awards, dividend equivalents and cash-based awards. There are up
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
to
20,166,500
common shares available under the 2017 Omnibus Plan which may be granted to participants in any plan year (as such term is defined in the 2017 Omnibus Plan). Some of those shares are subject to outstanding awards as detailed in the tables below. To the extent these outstanding awards are forfeited or expire without exercise, the shares will be returned to and available for future grants under the 2017 Omnibus Plan. The 2017 Omnibus Plan’s purpose is to attract, retain and motivate employees, directors and third party service providers of the Company and to encourage them to have a financial interest in the Company. The 2017 Omnibus Plan is administered by the Compensation Committee (the “Committee”) of the Board of Directors. The Committee has the authority to select plan participants, grant awards, and determine the terms and conditions of such awards as provided in the 2017 Omnibus Plan. Beginning fiscal 2017, the Committee has adopted an executive compensation program that includes a long-term incentive component (the “LTIP”) for the Company's key employees, as a subplan under the terms of the 2017 Omnibus Plan. The principal purpose of the LTIP is to encourage the participants to enhance the value of the Company and, hence, the price of the Company’s stock and the stockholders' return. In addition, the LTIP is designed to create retention incentives for the individual and to provide an opportunity for increased equity ownership by participants. The Committee adopted similar LTIPs for fiscal 2015 and 2016, as subplans under the terms of the 2012 Omnibus Plan. At
December 30, 2017
, the number of common shares available for issuance under the 2017 Omnibus Plan was
16,576,999
.
For fiscal 2015, the Committee awarded dollar value performance based restricted stock and stock option opportunities under the LTIP to certain of the Company's key employees, including the Chief Executive Officer and other executive officers, and such restricted stock and stock options were issued only if predetermined financial objectives were met by the Company. The Company met the financial objectives for fiscal 2015 and those shares and options were issued in accordance with the terms of the LTIP.
Beginning in fiscal 2016, a shift was made in the LTIP from backward-looking performance-based restricted stock and stock options to a combination of (i) annual, overlapping grants of performance share units (“PSUs”) tied to a
three
-year, forward-looking performance metric and (ii) annual stock option grants that vest
33.33%
on the first, second and third anniversaries of grant; provided that a small portion of fiscal 2016 LTIP value was granted as one-time, non-incremental transition PSUs to facilitate the switch to a forward-looking program, with these grants tied to a
two
-year, forward-looking performance metric. See “Stock Option Awards”, “Fiscal 2017 LTIP PSU Awards” and “Fiscal 2016 LTIP PSU Awards” below for more information regarding the stock options and PSU awards under the 2017 LTIP and 2016 LTIP.
The following is a summary of stock-based compensation awards granted during the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
.
Stock Option Awards
. Stock options to purchase Darling common shares are granted by the Committee to certain of the Company's employees as part of the Company's LTIPs under the 2012 Omnibus Plan and the 2017 Omnibus Plan, as the case may be. For the options granted under the fiscal 2015 LTIP, the exercise price was equal to the market value of Darling common shares on the close of the trading day immediately preceding the grant date, and such options vest
25
percent upon grant and
25
percent each of the first three anniversary dates of the grant thereafter. The Company met the requisite performance measure under the 2015 LTIP, accordingly, in accordance with the terms of the 2015 LTIP, the Company granted
452,878
stock options to participants on March 7, 2016. For the options granted under the fiscal 2017 LTIP and 2016 LTIP, the exercise price was equal to the closing price of Darling common shares on the date of grant, which was February 6, 2017 and February 25, 2016, respectively and such options vest
33.33%
on the first, second and third anniversaries of the grant. The Company granted
956,809
stock options under the 2017 LTIP and
1,094,306
stock options under the 2016 LTIP.
During
fiscal 2017
,
2016
and
2015
only nonqualified stock options were issued and none of the options were incentive stock options. The Company’s stock options granted under the LTIPs generally terminate
10
years after the date of grant.
A summary of all stock option activity as of
December 30, 2017
and changes during the year ended is as follows:
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
Number of
shares
|
|
Weighted-avg.
exercise price
per share
|
|
Weighted-avg.
remaining
contractual life
|
Options outstanding at January 3, 2015
|
696,176
|
|
|
$
|
13.88
|
|
|
6.2 years
|
Granted
|
422,386
|
|
|
14.76
|
|
|
|
Exercised
|
(131,653
|
)
|
|
4.13
|
|
|
|
Forfeited
|
(136,177
|
)
|
|
16.68
|
|
|
|
Expired
|
—
|
|
|
—
|
|
|
|
Options outstanding at January 2, 2016
|
850,732
|
|
|
15.38
|
|
|
7.7 years
|
Granted
|
1,547,184
|
|
|
9.53
|
|
|
|
Exercised
|
(28,000
|
)
|
|
6.71
|
|
|
|
Forfeited
|
(4,000
|
)
|
|
16.20
|
|
|
|
Expired
|
—
|
|
|
—
|
|
|
|
Options outstanding at December 31, 2016
|
2,365,916
|
|
|
11.65
|
|
|
8.4 years
|
Granted
|
956,809
|
|
|
12.29
|
|
|
|
Exercised
|
(27,968
|
)
|
|
8.51
|
|
|
|
Forfeited
|
(4,000
|
)
|
|
13.55
|
|
|
|
Expired
|
—
|
|
|
—
|
|
|
|
Options outstanding at December 30, 2017
|
3,290,757
|
|
|
$
|
11.86
|
|
|
7.3 years
|
Options exercisable at December 30, 2017
|
1,516,605
|
|
|
$
|
12.90
|
|
|
5.9 years
|
The fair value of each stock option grant under the LTIPs was estimated on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions and results for
fiscal 2017
,
2016
and
2015
.
|
|
|
|
|
|
Weighted Average
|
|
2017
|
2016
|
2015
|
Expected dividend yield
|
|
0.0%
|
0.0%
|
0.0%
|
Risk-free interest rate
|
|
2.00%
|
1.35%
|
1.82%
|
Expected term
|
|
5.82 years
|
5.76 years
|
5.75 years
|
Expected volatility
|
|
33.4%
|
34.4%
|
38.0%
|
Fair value of options granted
|
|
$4.34
|
$3.34
|
$5.59
|
The expected lives for options granted during
fiscal 2017
,
2016
and
2015
were computed using the simplified method since the current option plans historical exercise data has not provided a reasonable basis for estimating the expected term for the current option grants.
At
December 30, 2017
, $
7.8 million
of total future equity-based compensation expense (determined using the Black-Scholes option pricing model and Monte Carlo model for non-vested stock grants with performance based incentives) related to outstanding non-vested options and stock awards is expected to be recognized over a weighted average period of
1.1
years.
For the year ended
December 30, 2017
, the amount of cash received from the exercise of options was less than $
0.1 million
and the related tax benefit was less than $
0.1 million
. For the year ended
December 31, 2016
, the amount of cash received from the exercise of options was approximately $
0.2 million
and the related tax benefit was less than $
0.1 million
. For the year ended
January 2, 2016
the amount of cash received from the exercise of options was approximately $
0.2 million
and the related tax benefits were approximately $
0.4 million
. The total intrinsic value of options exercised for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
was approximately $
0.2 million
, $
0.2 million
and $
1.4 million
, respectively. The fair value of shares vested for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
was approximately $
11.3 million
, $
8.3 million
and $
7.5 million
, respectively. At
December 30, 2017
, the aggregate intrinsic value of options outstanding was approximately $
20.8 million
and the aggregate intrinsic value of options exercisable was approximately $
8.1 million
.
Non-Vested Stock, Restricted Stock Unit and Performance Share Unit Awards
. The Company has in the past granted non-vested stock and restricted stock unit (RSU) awards to certain of the Company's employees as part of the LTIP under the 2012 Omnibus Plan, and beginning in 2016, the Company grants performance share unit awards as part of the LTIP. In addition, the Company has granted performance share unit awards, individual non-vested stock and RSU awards to key employees from time to time at the discretion of the Committee. Non-vested stock is generally granted
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
to U.S. based employees, while RSUs are generally granted to foreign based employees, with each RSU equivalent to
one
share of common stock and payable upon vesting in an equivalent number of shares of Darling common stock. For grants made under the 2012 Omnibus Plan, both non-vested stock and RSUs generally vest
25
percent upon grant and
25
percent each of the first three anniversary dates of the grant thereafter. For grants made under the 2017 Omnibus Plan, both non-vested stock and RSUs generally vest on the first three anniversary dates of the grant. Generally, upon termination of employment (voluntary or with cause), non-vested stock, RSUs and discretionary performance share awards that have not vested are forfeited. Upon, death, disability or qualifying retirement, a pro-rata portion of the unvested non-vested and RSU awards will vest and be payable. Under the 2015 LTIP, the Company met the requisite performance measure, accordingly, in accordance with the 2015 LTIP, the Company granted
454,916
shares of nonvested stock and
147,390
restricted stock units in the first quarter of fiscal 2016.
A summary of the Company’s non-vested stock, restricted stock unit and performance share unit awards as of
December 30, 2017
, and changes during the year ended is as follows:
|
|
|
|
|
|
|
|
|
Non-Vested, RSU and PSU
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Stock awards outstanding January 3, 2015
|
1,257,173
|
|
|
$
|
19.98
|
|
Shares granted
|
524,225
|
|
|
14.47
|
|
Shares vested
|
(714,626
|
)
|
|
17.91
|
|
Shares forfeited
|
(32,581
|
)
|
|
19.65
|
|
Stock awards outstanding January 2, 2016
|
1,034,191
|
|
|
18.63
|
|
Shares granted
|
602,306
|
|
|
12.11
|
|
Shares vested
|
(413,654
|
)
|
|
15.11
|
|
Shares forfeited
|
(241,582
|
)
|
|
20.86
|
|
Stock awards outstanding December 31, 2016
|
981,261
|
|
|
15.56
|
|
Shares granted
|
104,750
|
|
|
12.27
|
|
Shares vested
|
(486,086
|
)
|
|
13.98
|
|
Shares forfeited
|
(239,581
|
)
|
|
20.90
|
|
Stock awards outstanding December 30, 2017
|
360,344
|
|
|
$
|
13.18
|
|
Fiscal 2017 LTIP PSU Awards
. On February 6, 2017, the Committee granted
559,388
PSUs under the Company's 2017 LTIP. The PSUs are tied to a
three
-year forward-looking performance period and will be earned based on the Company's average return on capital employed (ROCE), as calculated in accordance with the terms of the award agreement, relative to the average ROCE of the Company's performance peer group companies over the same performance period, with the earned award to be determined in the first quarter of fiscal 2020, after the final results for the relevant performance period are determined.
Fiscal 2016 LTIP PSU Awards
. On February 25, 2016, the Committee granted
664,120
PSUs under the Company's 2016 LTIP,
153,000
of which are tied to a
two
-year forward-looking performance period and
511,120
of which are tied to a
three
-year, forward-looking performance period and all of which will be earned based on the Company's average ROCE, as calculated in accordance with the terms of the award agreement, relative to the average ROCE of the Company's performance peer group companies over the same performance periods, with the earned award to be determined in the first quarter of fiscal 2018 and fiscal 2019, respectively, after the final results for the relevant performance period are determined.
Under the 2017 LTIP and 2016 LTIP, PSUs were granted at target level; however, actual awards may vary between
0%
and
225%
of the target number of PSUs, depending on the performance level achieved. In addition, the number of PSUs earned may be reduced (up to
30%
) or increased (capped at the maximum payout) based on the Company's total shareholder return (TSR) over the performance period. In addition, certain of the PSUs have a
two
-year holding requirement after vesting before the PSUs are settled in shares of the Company's Common Stock.
The fair value of each 2017 LTIP and 2016 LTIP PSU award under the Company's 2017 LTIP and 2016 LTIP was estimated on the date of grant using a Monte Carlo model with the following weighted average assumptions for
fiscal 2017
and fiscal 2016, except for the illiquidity discount, which only pertains to the 2017 LTIP and 2016 LTIP PSU's with a holding period requirement.
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
Weighted Average
|
|
2017
|
2016
|
Expected dividend yield
|
|
0.0%
|
0.0%
|
Risk-free interest rate
|
|
1.40%
|
0.80%
|
Expected term
|
|
2.89 years
|
2.62 years
|
Expected volatility
|
|
32.7%
|
29.3%
|
Illiquidity discount
|
|
14.0%
|
16.1%
|
A summary of the Company’s 2017 and 2016 LTIP PSU awards as of
December 30, 2017
, and changes during the year ended is as follows:
|
|
|
|
|
|
|
|
|
LTIP PSU
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
LTIP PSU awards outstanding January 2, 2016
|
—
|
|
|
$
|
—
|
|
Granted
|
664,120
|
|
|
7.17
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
LTIP PSU awards outstanding December 31, 2016
|
664,120
|
|
|
$
|
7.17
|
|
Granted
|
559,388
|
|
|
11.14
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
(82,492
|
)
|
|
9.99
|
|
LTIP PSU awards outstanding December 30, 2017
|
1,141,016
|
|
|
$
|
8.91
|
|
Nonemployee Director Restricted Stock and Restricted Stock Unit Awards.
On February 24, 2011, the Company's Board of Directors approved an Amended and Restated Non-Employee Director Restricted Stock Award Plan (the “Director Restricted Stock Plan”) pursuant to and in accordance with the Company's 2004 Omnibus Incentive Plan (the “2004 Omnibus Plan”) in order to attract and retain highly qualified persons to serve as non-employee directors and to more closely align such directors' interests with the interests of the stockholders of the Company by providing a portion of their compensation in the form of Company common stock. Under the Director Restricted Stock Plan, $
60,000
in restricted Company common stock was awarded to each non-employee director on the fourth business day after the Company released its earnings for its prior completed fiscal year (the “Date of Award”). The amount of restricted stock to be issued was calculated using the closing price of the Company’s common stock on the third business day after the Company released its earnings. The restricted stock was subject to a right of repurchase at $
0.01
per share upon termination of the holder as a member of the Company's board of directors for cause and was not transferable. These restrictions lapse with respect to
100%
of the restricted stock upon the earliest to occur of (i)
10
years after the date of award, (ii) a Change of Control (as defined in the 2004 Omnibus Plan), and (iii) termination of the non-employee director's service with the Company, other than for “cause” (as defined in the Director Restricted Stock Plan).
Beginning in fiscal 2014, the Board discontinued grants to non-employee directors under the Director Restricted Stock Plan described above, and in lieu thereof, as an additional element of annual non-employee director compensation, pursuant to the 2012 Omnibus Plan, each non-employee director received $
90,000
of restricted stock units immediately following the Company’s annual meeting of stockholders at which such directors are elected. Beginning in fiscal 2017, the Board increased the dollar amount of the annual grant of restricted stock units to $
110,000
, and such grants are now made under the 2017 Omnibus Plan. The number of restricted stock units to be issued is calculated using the closing price of the Company’s stock on the date of its annual meeting. The award vests (and is no longer subject to forfeiture) on the first to occur of (i) the first anniversary of the grant date, (ii) the grantee’s separation from service as a result of death or disability, or (iii) a change of control. The award will become “payable” in shares of the Company’s stock in a single lump sum payment as soon as possible following a grantee’s separation from service, subject to a grantee’s right to elect earlier distributions under certain circumstances. If a grantee ceases to be a director for any reason other than death or disability prior to vesting, the grantee will receive a prorated amount of the award up to the date of separation.
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
A summary of the Company’s non-employee director restricted stock awards as of
December 30, 2017
, and changes during the year ended is as follows:
|
|
|
|
|
|
|
|
|
Restricted stock and Restricted Stock Unit
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Stock awards outstanding January 3, 2015
|
155,916
|
|
|
$
|
12.22
|
|
Restricted shares granted
|
46,910
|
|
|
13.80
|
|
Restricted shares where the restriction lapsed
|
(50,322
|
)
|
|
12.25
|
|
Restricted shares forfeited
|
—
|
|
|
—
|
|
Stock awards outstanding January 2, 2016
|
152,504
|
|
|
12.69
|
|
Restricted shares granted
|
43,421
|
|
|
14.51
|
|
Restricted shares where the restriction lapsed
|
(81,031
|
)
|
|
11.55
|
|
Restricted shares forfeited
|
(3,535
|
)
|
|
14.51
|
|
Stock awards outstanding December 31, 2016
|
111,359
|
|
|
14.18
|
|
Restricted shares granted
|
60,575
|
|
|
15.63
|
|
Restricted shares where the restriction lapsed
|
(14,915
|
)
|
|
12.42
|
|
Restricted shares forfeited
|
(2,210
|
)
|
|
14.51
|
|
Stock awards outstanding December 30, 2017
|
154,809
|
|
|
$
|
14.91
|
|
NOTE 14. COMPREHENSIVE INCOME
The Company follows FASB authoritative guidance for reporting and presentation of comprehensive income or loss and its components. Other comprehensive income (loss) is derived from adjustments that reflect pension adjustments, natural gas derivative adjustments, corn option adjustments and foreign currency translation adjustments. The components of other comprehensive income (loss) and the related tax impacts for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
are as follows (in thousands):
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before-Tax
|
|
Tax (Expense)
|
|
Net-of-Tax
|
|
Amount
|
|
or Benefit
|
|
Amount
|
Year Ended January 2, 2016
|
|
|
|
|
|
Defined Benefit Pension Plans
|
|
|
|
|
|
Actuarial (loss)/gain recognized
|
$
|
(3,822
|
)
|
|
$
|
1,499
|
|
|
$
|
(2,323
|
)
|
Amortization of actuarial loss
|
5,101
|
|
|
(1,986
|
)
|
|
3,115
|
|
Amortization of prior service costs
|
(67
|
)
|
|
36
|
|
|
(31
|
)
|
Amortization of curtailment
|
(1,181
|
)
|
|
328
|
|
|
(853
|
)
|
Amortization of settlement
|
5,291
|
|
|
(1,468
|
)
|
|
3,823
|
|
Other
|
471
|
|
|
—
|
|
|
471
|
|
Total defined benefit pension plans
|
5,793
|
|
|
(1,591
|
)
|
|
4,202
|
|
Corn option derivatives
|
|
|
|
|
|
Loss/(gain) reclassified to net income
|
(1,517
|
)
|
|
589
|
|
|
(928
|
)
|
Gain/(loss) recognized in other comprehensive income (loss)
|
4,405
|
|
|
(1,710
|
)
|
|
2,695
|
|
Total corn options
|
2,888
|
|
|
(1,121
|
)
|
|
1,767
|
|
Foreign currency translation
|
|
|
|
|
|
Other comprehensive income/(loss)
|
(162,436
|
)
|
|
—
|
|
|
(162,436
|
)
|
Other comprehensive income/(loss)
|
$
|
(153,755
|
)
|
|
$
|
(2,712
|
)
|
|
$
|
(156,467
|
)
|
Year Ended December 31, 2016
|
|
|
|
|
|
Defined Benefit Pension Plans
|
|
|
|
|
|
Actuarial (loss)/gain recognized
|
$
|
(5,257
|
)
|
|
$
|
1,396
|
|
|
$
|
(3,861
|
)
|
Amortization of actuarial loss
|
4,632
|
|
|
(1,786
|
)
|
|
2,846
|
|
Amortization of prior service costs
|
36
|
|
|
(12
|
)
|
|
24
|
|
Amortization of settlement
|
(114
|
)
|
|
45
|
|
|
(69
|
)
|
Other
|
44
|
|
|
—
|
|
|
44
|
|
Total defined benefit pension plans
|
(659
|
)
|
|
(357
|
)
|
|
(1,016
|
)
|
Corn option derivatives
|
|
|
|
|
|
Loss/(gain) reclassified to net income
|
(3,868
|
)
|
|
1,501
|
|
|
(2,367
|
)
|
Gain/(Loss) recognized in other comprehensive income
|
4,889
|
|
|
(1,897
|
)
|
|
2,992
|
|
Total corn options
|
1,021
|
|
|
(396
|
)
|
|
625
|
|
Foreign currency translation
|
(5,593
|
)
|
|
—
|
|
|
(5,593
|
)
|
Other comprehensive income/(loss)
|
$
|
(5,231
|
)
|
|
$
|
(753
|
)
|
|
$
|
(5,984
|
)
|
Year Ended December 30, 2017
|
|
|
|
|
|
Defined Benefit Pension Plans
|
|
|
|
|
|
Actuarial (loss)/gain recognized
|
$
|
4,027
|
|
|
$
|
(1,264
|
)
|
|
$
|
2,763
|
|
Amortization of actuarial loss
|
4,786
|
|
|
(1,801
|
)
|
|
2,985
|
|
Amortization of prior service costs
|
35
|
|
|
(11
|
)
|
|
24
|
|
Amortization of settlement
|
42
|
|
|
(15
|
)
|
|
27
|
|
Other
|
30
|
|
|
—
|
|
|
30
|
|
Total defined benefit pension plans
|
8,920
|
|
|
(3,091
|
)
|
|
5,829
|
|
Natural gas swap derivatives
|
|
|
|
|
|
Loss/(gain) reclassified to net income
|
35
|
|
|
(14
|
)
|
|
21
|
|
Gain/(loss) recognized in other comprehensive income (loss)
|
(65
|
)
|
|
26
|
|
|
(39
|
)
|
Total natural gas derivatives
|
(30
|
)
|
|
12
|
|
|
(18
|
)
|
Corn option derivatives
|
|
|
|
|
|
Loss/(gain) reclassified to net income
|
(5,255
|
)
|
|
2,039
|
|
|
(3,216
|
)
|
Gain/(Loss) recognized in other comprehensive income
|
3,494
|
|
|
(1,356
|
)
|
|
2,138
|
|
Total corn options
|
(1,761
|
)
|
|
683
|
|
|
(1,078
|
)
|
Foreign currency translation
|
121,810
|
|
|
—
|
|
|
121,810
|
|
Other comprehensive income/(loss)
|
$
|
128,939
|
|
|
$
|
(2,396
|
)
|
|
$
|
126,543
|
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 30, 2017
|
December 31, 2016
|
January 2, 2016
|
Statement of Operations Classification
|
Derivative instruments
|
|
|
|
|
Natural gas swap derivatives
|
$
|
(35
|
)
|
$
|
—
|
|
$
|
—
|
|
Cost of sales and operating expenses
|
Corn option derivatives
|
5,255
|
|
3,868
|
|
1,517
|
|
Cost of sales and operating expenses
|
|
5,220
|
|
3,868
|
|
1,517
|
|
Total before tax
|
|
(2,025
|
)
|
(1,501
|
)
|
(589
|
)
|
Income taxes
|
|
3,195
|
|
2,367
|
|
928
|
|
Net of tax
|
Defined benefit pension plans
|
|
|
|
|
Amortization of prior service cost
|
$
|
(35
|
)
|
$
|
(36
|
)
|
$
|
67
|
|
(a)
|
Amortization of actuarial loss
|
(4,786
|
)
|
(4,632
|
)
|
(5,101
|
)
|
(a)
|
Amortization of curtailment
|
—
|
|
—
|
|
1,181
|
|
(a)
|
Amortization of settlement
|
(42
|
)
|
114
|
|
(5,291
|
)
|
(a)
|
|
(4,863
|
)
|
(4,554
|
)
|
(9,144
|
)
|
Total before tax
|
|
1,827
|
|
1,753
|
|
3,090
|
|
Income taxes
|
|
(3,036
|
)
|
(2,801
|
)
|
(6,054
|
)
|
Net of tax
|
Total reclassifications
|
$
|
159
|
|
$
|
(434
|
)
|
$
|
(5,126
|
)
|
Net of tax
|
|
|
(a)
|
These items are included in the computation of net periodic pension cost. See Note 15 Employee Benefit Plans for additional information.
|
The following table presents changes in each component of accumulated comprehensive income (loss) as of
December 30, 2017
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 30, 2017
|
|
|
Foreign Currency
|
Derivative
|
Defined Benefit
|
|
|
|
Translation
|
Instruments
|
Pension Plans
|
Total
|
Accumulated Other Comprehensive Income/(loss) December 31, 2016, attributable to Darling, net of tax
|
|
$
|
(308,910
|
)
|
$
|
2,468
|
|
$
|
(33,564
|
)
|
$
|
(340,006
|
)
|
Other comprehensive gain before reclassifications
|
|
121,810
|
|
2,099
|
|
2,793
|
|
126,702
|
|
Amounts reclassified from accumulated other comprehensive income/(loss)
|
|
—
|
|
(3,195
|
)
|
3,036
|
|
(159
|
)
|
Net current-period other comprehensive income
|
|
121,810
|
|
(1,096
|
)
|
5,829
|
|
126,543
|
|
Noncontrolling interest
|
|
(3,939
|
)
|
—
|
|
—
|
|
(3,939
|
)
|
Accumulated Other Comprehensive Income/(loss) December 30, 2017, attributable to Darling, net of tax
|
|
$
|
(183,161
|
)
|
$
|
1,372
|
|
$
|
(27,735
|
)
|
$
|
(209,524
|
)
|
NOTE 15. EMPLOYEE BENEFIT PLANS
The Company has retirement and pension plans covering a substantial number of its domestic and foreign employees. Most retirement benefits are provided by the Company under separate final-pay noncontributory and contributory defined benefit and defined contribution plans for all salaried and hourly employees (excluding those covered by union-sponsored plans) who meet service and age requirements. Although various defined benefit formulas exist for employees, generally these are based on length of service and earnings patterns during employment. Effective January 1, 2012, the Company's Board of Directors authorized the Company to proceed with the restructuring of its domestic retirement benefit program to include the closing of Darling's domestic salaried and hourly defined benefit plans to new participants as well as the freezing of service and wage accruals thereunder effective December 31, 2011 (a curtailment of these plans for financial reporting purposes) and the enhancing of benefits under the Company's domestic defined contribution plans. The Company-sponsored domestic hourly union plan has not been curtailed; however, several locations of the Company-sponsored domestic hourly union plan have been curtailed as a result of collective bargaining renewals for those sites.
The Company maintains defined contribution plans both domestically and at its foreign entities. The Company's matching portion and annual employer contributions to the Company's domestic defined contribution plans for
fiscal 2017
,
2016
and
2015
were approximately $
9.6 million
, $
9.2 million
and $
9.3 million
, respectively. The Company's matching portion and annual employer contributions to the Company's foreign defined contribution plans for fiscal 2017, 2016 and 2015 were approximately $
7.5 million
, $
6.2 million
and $
3.0 million
, respectively.
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
The Company recognizes the over-funded or under-funded status of the Company's defined benefit post-retirement plans as an asset or liability in the Company's balance sheet, with changes in the funded status recognized through comprehensive income in the year in which they occur. The Company uses the month-end date of December 31 as the measurement date for all of the Company's defined benefit plans, which is the closest month-end to the Company's fiscal year-end. The following table sets forth the plans’ funded status for the Company's domestic and foreign defined benefit plans and amounts recognized in the Company's consolidated balance sheets based on the measurement date (December 31, 2017 and December 31, 2016) (in thousands):
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
Change in projected benefit obligation:
|
|
|
|
Projected benefit obligation at beginning of period
|
$
|
189,290
|
|
|
$
|
182,276
|
|
Service cost
|
3,043
|
|
|
2,549
|
|
Interest cost
|
6,711
|
|
|
6,950
|
|
Employee contributions
|
436
|
|
|
439
|
|
Plan amendments
|
(8
|
)
|
|
101
|
|
Actuarial loss/(gain)
|
8,051
|
|
|
7,905
|
|
Benefits paid
|
(7,063
|
)
|
|
(7,146
|
)
|
Effect of curtailment
|
—
|
|
|
(1,286
|
)
|
Effect of settlement
|
(884
|
)
|
|
(953
|
)
|
Other
|
5,152
|
|
|
(1,545
|
)
|
Projected benefit obligation at end of period
|
204,728
|
|
|
189,290
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
134,909
|
|
|
127,970
|
|
Actual return on plan assets
|
19,030
|
|
|
10,138
|
|
Employer contributions
|
4,214
|
|
|
5,250
|
|
Employee contributions
|
436
|
|
|
439
|
|
Benefits paid
|
(7,063
|
)
|
|
(7,146
|
)
|
Effect of settlement
|
(884
|
)
|
|
(953
|
)
|
Divestiture
|
(2,262
|
)
|
|
—
|
|
Other
|
2,137
|
|
|
(789
|
)
|
Fair value of plan assets at end of period
|
150,517
|
|
|
134,909
|
|
|
|
|
|
Funded status
|
(54,211
|
)
|
|
(54,381
|
)
|
Net amount recognized
|
$
|
(54,211
|
)
|
|
$
|
(54,381
|
)
|
|
|
|
|
Amounts recognized in the consolidated balance
sheets consist of:
|
|
|
|
|
|
Current liability
|
$
|
(1,440
|
)
|
|
$
|
(1,229
|
)
|
Noncurrent liability
|
(52,771
|
)
|
|
(53,152
|
)
|
Net amount recognized
|
$
|
(54,211
|
)
|
|
$
|
(54,381
|
)
|
|
|
|
|
Amounts recognized in accumulated other
comprehensive loss consist of:
|
|
|
|
|
|
Net actuarial loss
|
$
|
43,651
|
|
|
$
|
52,525
|
|
Prior service cost/(credit)
|
371
|
|
|
417
|
|
Net amount recognized (a)
|
$
|
44,022
|
|
|
$
|
52,942
|
|
|
|
(a)
|
Amounts do not include deferred taxes of $
16.3 million
and $
19.4 million
at
December 30, 2017
and
December 31, 2016
, respectively.
|
The amounts included in “Other” in the above table reflect the impact of foreign exchange translation for plans in Argentina, Brazil, Belgium, Canada, France, Germany, Japan, Netherlands and United Kingdom. The Company's domestic pension plan benefits comprise approximately
74%
and
75%
of the projected benefit obligation for fiscal 2017 and fiscal 2016, respectively. Additionally, the Company has made required and tax deductible discretionary contributions to its domestic pension plans in fiscal 2017 and fiscal 2016 of approximately $
1.0 million
and
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
approximately $
0.6 million
, respectively. The Company made required and tax deductible discretionary contributions to its foreign pension plans in fiscal 2017 and fiscal 2016 of approximately $
3.3 million
and $
4.7 million
, respectively.
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
Projected benefit obligation
|
$
|
204,728
|
|
|
$
|
189,290
|
|
Accumulated benefit obligation
|
192,192
|
|
|
181,340
|
|
Fair value of plan assets
|
150,517
|
|
|
134,909
|
|
Net pension cost includes the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
|
January 2,
2016
|
Service cost
|
$
|
3,043
|
|
|
$
|
2,549
|
|
|
$
|
6,638
|
|
Interest cost
|
6,711
|
|
|
6,950
|
|
|
10,536
|
|
Expected return on plan assets
|
(7,181
|
)
|
|
(7,552
|
)
|
|
(12,229
|
)
|
Net amortization and deferral
|
4,821
|
|
|
4,668
|
|
|
5,034
|
|
Curtailment
|
—
|
|
|
(1,285
|
)
|
|
(1,181
|
)
|
Settlement
|
42
|
|
|
(114
|
)
|
|
(2,353
|
)
|
Net pension cost
|
$
|
7,436
|
|
|
$
|
5,216
|
|
|
$
|
6,445
|
|
Amounts recognized in accumulated other comprehensive income (loss) for the year ended (in thousands):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Actuarial (loss)/gain recognized:
|
|
|
|
Reclassification adjustments
|
$
|
2,985
|
|
|
$
|
2,846
|
|
Actuarial (loss)/gain recognized during the period
|
2,763
|
|
|
(3,861
|
)
|
Amortization of settlement
|
27
|
|
|
(69
|
)
|
Prior service (cost) credit recognized:
|
|
|
|
|
|
Reclassification adjustments
|
24
|
|
|
24
|
|
Other
|
30
|
|
|
44
|
|
|
$
|
5,829
|
|
|
$
|
(1,016
|
)
|
The estimated amount that will be amortized from accumulated other comprehensive loss into net periodic pension cost in
fiscal 2018
is as follows (in thousands):
|
|
|
|
|
|
2018
|
Net actuarial loss
|
$
|
3,556
|
|
Prior service cost
|
35
|
|
|
$
|
3,591
|
|
Weighted average assumptions used to determine benefit obligations were:
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
|
January 2,
2016
|
|
|
|
|
|
|
Discount rate
|
3.40%
|
|
3.81%
|
|
4.13%
|
Rate of compensation increase
|
0.38%
|
|
0.38%
|
|
0.31%
|
Weighted average assumptions used to determine net periodic benefit cost for the employee benefit pension plans were:
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
|
January 2,
2016
|
Discount rate
|
3.49%
|
|
3.55%
|
|
3.47%
|
Rate of increase in future compensation levels
|
0.43%
|
|
0.84%
|
|
0.38%
|
Expected long-term rate of return on assets
|
6.17%
|
|
6.52%
|
|
6.62%
|
Consideration was made to the long-term time horizon for the (U.S. and Canada's) plans' benefit obligations as well as the related asset class mix in determining the expected long-term rate of return. Historical returns are also considered, over the long-term time horizon, in determining the expected return. Considering the overall asset mix of approximately
60%
equity and
40%
fixed income with equity exposure on a declining trend since the implementation of the glide path for
two
of the U.S. plans, the Company believes it is reasonable to expect a long-term rate of return of
6.4%
for the (U.S. and Canada's) plans' investments as a whole. The remaining foreign plans' assets are principally invested under insurance contracts arrangements which have weighted average expected long-term rate of returns of
3.3%
.
The investment objectives have been established in conjunction with a comprehensive review of the current and projected financial requirements. The primary investment objectives are: 1) to have the ability to pay all benefit and expense obligations when due; 2) to maximize investment returns within reasonable and prudent levels of risk in order to minimize contributions; and 3) to maintain flexibility in determining the future level of contributions.
Investment results and changing discount rates are the most critical elements in achieving funding objectives; however, contributions are used as a supplemental source of funding as deemed appropriate.
The investment guidelines are based upon an investment horizon of greater than ten years; therefore, interim fluctuations are viewed with this perspective. The strategic asset allocation is based on this long-term perspective and the plans' funded status. However, because the participants’ average age is somewhat older than the typical average plan age, consideration is given to retaining some short-term liquidity. Analysis of the cash flow projections of the plans indicates that benefit payments will continue to exceed contributions. The results of a thorough asset-liability study completed during 2012 established a dynamic asset allocation glide path (the “Glide Path”) by which the U.S. plans' asset allocations are determined. The Glide Path designates intervals based on funded status which contain a corresponding allocation to equities/real assets and fixed income. As the U.S. plans' funded status improves, the allocations become more conservative, and the opposite is true when the funded status declines.
|
|
|
Fixed Income
|
35% - 80%
|
Equities
|
20% - 65%
|
The equity allocation is invested in stocks traded on one of the U.S. stock exchanges or in foreign companies whose stock is traded outside the U.S. and/or companies that conduct the major portion of their business outside the U.S. Securities convertible into such stocks, convertible bonds and preferred stock, may also be purchased. The portfolio may invest in American Depository Receipts (“ADR”). The majority of the equities are invested in mutual funds that are well-diversified among growth and value stocks, as well as large, mid, and small cap assets. This mix is balanced based on the understanding that large cap stocks are historically less volatile than small cap stocks: however, smaller cap stocks have historically outperformed larger cap stocks. The emerging markets portion of the equity allocation is held below
10%
due to greater volatility in the asset class. Risk adjusted returns are the primary driver of allocation choices within these asset classes. The portfolio is well-diversified in terms of companies, industries and countries.
The diversified asset portion of the allocation will invest in securities with a goal to out pace inflation and preserve their value. The securities in this allocation may consist of inflation-indexed bonds, securities of real estate companies, commodity index-linked notes, fixed-income securities, securities of natural resource companies, master limited partnerships, publicly-listed infrastructure companies, and floating rate debt.
All investment objectives are expected to be achieved over a market cycle anticipated to be a period of five to seven years. Reallocations are performed on a monthly basis to retain target allocation ranges. On a quarterly basis the plans' funded status will be recalculated to determine which Glide Path interval allocation is appropriate.
The following table presents fair value measurements for the Company's defined benefit plans’ assets as categorized using the fair value hierarchy under FASB authoritative guidance (in thousands):
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
(In thousands of dollars)
|
Fair Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Balances as December 31, 2016
|
|
|
|
|
|
|
|
Fixed Income:
|
|
|
|
|
|
|
|
Long Term
|
$
|
17,408
|
|
|
$
|
17,408
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short Term
|
2,825
|
|
|
2,825
|
|
|
—
|
|
|
—
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Domestic equities
|
41,300
|
|
|
41,300
|
|
|
—
|
|
|
—
|
|
International equities
|
24,403
|
|
|
24,403
|
|
|
—
|
|
|
—
|
|
Insurance contracts
|
10,670
|
|
|
—
|
|
|
7,887
|
|
|
2,783
|
|
Total categorized in fair value hierarchy
|
96,606
|
|
|
85,936
|
|
|
7,887
|
|
|
2,783
|
|
Other investments measured at NAV
|
38,303
|
|
|
|
|
|
|
|
Totals
|
$
|
134,909
|
|
|
$
|
85,936
|
|
|
$
|
7,887
|
|
|
$
|
2,783
|
|
|
|
|
|
|
|
|
|
Balances as December 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income:
|
|
|
|
|
|
|
|
|
|
|
|
Long Term
|
$
|
23,231
|
|
|
$
|
23,231
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short Term
|
1,869
|
|
|
1,869
|
|
|
—
|
|
|
—
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Domestic equities
|
44,173
|
|
|
44,173
|
|
|
—
|
|
|
—
|
|
International equities
|
28,152
|
|
|
28,152
|
|
|
—
|
|
|
—
|
|
Insurance contracts
|
9,876
|
|
|
—
|
|
|
6,501
|
|
|
3,375
|
|
Total categorized in fair value hierarchy
|
107,301
|
|
|
97,425
|
|
|
6,501
|
|
|
3,375
|
|
Other investments measured at NAV
|
43,216
|
|
|
|
|
|
|
|
Totals
|
$
|
150,517
|
|
|
$
|
97,425
|
|
|
$
|
6,501
|
|
|
$
|
3,375
|
|
The majority of the U.S. and Canada plan pension assets are invested in mutual funds; however, some assets are invested in pooled separate accounts (“PSA”) which have similar mutual fund counterparts. PSA accounts are generally used to access lower fund management expenses when compared to their mutual fund counterparts. The mutual funds are generally invested in institutional shares, retirement shares, or A-shares with no loads. The fair value of each mutual fund and PSA is based on the market value of the underlying investments. The U.S. pension plans PSA for fiscal 2017 and fiscal 2016 utilized net asset value (“NAV”) per share (or its equivalent) to measure its investments, as a practical expedient in accordance with ASC Topic 820,
Fair Value Measurements
and have not been classified in the fair value hierarchy in the above table. The majority of the foreign pension assets are held under insurance contracts where the investment risk for the accumulated benefit obligation rests with the insurer, which the Company has no specific detailed asset information.
The fair value measurement of plan assets using significant unobservable inputs (level 3) changed due to the following:
|
|
|
|
|
|
|
|
Insurance
|
(in thousands of dollars)
|
|
Contracts
|
Balance as of January 2, 2016
|
|
$
|
2,320
|
|
Unrealized gains/(losses) relating to instruments still held in the reporting period.
|
|
316
|
|
Purchases, sales, and settlements
|
|
244
|
|
Exchange rate changes
|
|
(97
|
)
|
Balance as of December 31, 2016
|
|
2,783
|
|
Unrealized gains/(losses) relating to instruments still held in the reporting period.
|
|
203
|
|
Purchases, sales, and settlements
|
|
—
|
|
Exchange rate changes
|
|
389
|
|
Balance as of December 30, 2017
|
|
$
|
3,375
|
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
Contributions
The Company's funding policy for employee benefit pension plans is to contribute annually not less than the minimum amount required nor more than the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.
Based on current actuarial estimates, the Company expects to make payments of approximately $
5.0 million
to meet funding requirements for its domestic and foreign pension plans in
fiscal 2018
.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
|
|
|
|
|
Year Ending
|
Pension Benefits
|
2018
|
$
|
9,780
|
|
2019
|
9,790
|
|
2020
|
9,641
|
|
2021
|
11,385
|
|
2022
|
11,098
|
|
Years 2023 – 2027
|
61,843
|
|
Multiemployer Pension Plans
The Company participates in various multiemployer pension plans which provide defined benefits to certain employees covered by labor contracts in the United States. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts to meet their pension benefit obligations to their participants. The FASB issued guidance requiring companies to provide additional disclosures related to individually significant multiemployer pension plans. The Company's contributions to each individual multiemployer plan represent less than 5% of the total contributions to each such plan. Based on the most currently available information, the Company has determined that, if a withdrawal were to occur, withdrawal liabilities on
two
of the plans in which the Company currently participates could be material to the Company. The following table provides more detail on these significant multiemployer plans (contributions in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
|
Pension
|
EIN Pension
|
Pension Protection Act Zone Status
|
FIP/RP Status Pending/
|
Contributions
|
Date of Collective Bargaining
|
Fund
|
Plan Number
|
2017
|
2016
|
Implemented
|
2017
|
2016
|
2015
|
Agreement
|
Western Conference of Teamsters Pension Plan
|
91-6145047 / 001
|
Green
|
Green
|
No
|
$
|
1,524
|
|
$
|
1,456
|
|
$
|
1,387
|
|
April 2020 (b)
|
Central States, Southeast and Southwest Areas Pension Plan (a)
|
36-6044243 / 001
|
Red
|
Red
|
Yes
|
968
|
|
934
|
|
858
|
|
August 2018 (c)
|
All other multiemployer plans
|
|
|
|
|
980
|
|
983
|
|
986
|
|
|
|
|
Total Company Contributions
|
$
|
3,472
|
|
$
|
3,373
|
|
$
|
3,231
|
|
|
|
|
(a)
|
In July 2005 this plan received a 10 year extension from the IRS for amortizing unfunded liabilities. In April 2016 the IRS approved a modification of the amortization extension.
|
|
|
(b)
|
The Company has several plants that participate in the Western Conference of Teamsters Pension Plan under collective bargaining agreements that require minimum funding contributions. Certain of these agreements have expired and are being renegotiated with others having expiration dates through April 1, 2020.
|
|
|
(c)
|
The Company has several processing plants that participate in the Central States, Southeast and Southwest Areas Pension Plan under collective bargaining agreements that require minimum funding contributions. Certain of these agreements have expired and are being renegotiated with others having expiration dates through August 6, 2018.
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
With respect to the other multiemployer pension plans in which the Company participates and which are not individually significant,
six
plans have certified as critical or red zone,
one
plan have certified as endangered or yellow zone, as defined by the Pension Protection Act of 2006. The Company's portion of contributions to all plans amounted to $
3.5 million
, $
3.4 million
and $
3.2 million
for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
, respectively.
The Company has received notices in prior years of withdrawal liability from
two
U.S. multiemployer plans in which it participated. As of
December 30, 2017
, the Company has an aggregate accrued liability of approximately $
1.7 million
representing the present value of scheduled withdrawal liability payments under these multiemployer plans. While the Company has no ability to calculate a possible current liability for under-funded multiemployer plans that could terminate or could require
additional funding under the Pension Protection Act of 2006, the amounts could be material.
NOTE 16. DERIVATIVES
The Company’s operations are exposed to market risks relating to commodity prices that affect the Company’s cost of raw materials, finished product prices and energy costs and the risk of changes in interest rates and foreign currency exchange rates.
The Company makes limited use of derivative instruments to manage cash flow risks related natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. Natural gas swaps and options are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential impact of seasonal weather demands on natural gas that increases natural gas prices. Heating oil swaps and options are entered into with the intent of managing the overall cost of diesel fuel usage by reducing the potential impact of seasonal weather demands on diesel fuel that increases diesel fuel prices. Corn options and future contracts are entered into with the intent of managing forecasted sales of BBP by reducing the impact of changing prices. Foreign currency forward contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency. At
December 30, 2017
, the Company had natural gas swap contracts and corn option contracts outstanding that qualified and were designated for hedge accounting as well as corn options and forward contracts and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.
Entities are required to report all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding the instrument. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair value, cash flows or foreign currencies. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside of earnings) and is subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss are reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change.
Cash Flow Hedges
In
fiscal 2017
, the Company entered into natural gas swap contracts that are considered cash flow hedges. Under the terms of the natural gas swap contracts , the Company fixed the expected purchase cost of a portion of its U.S plants' forecasted natural gas usage into the first quarter of fiscal 2018. As of
December 30, 2017
, some of the contracts have expired and settled according to the contracts while the remaining contract positions and activity are disclosed below.
In
fiscal 2016
and
fiscal 2017
, the Company entered into corn option contracts that are considered cash flow hedges. Under the terms of the corn option contracts the Company hedged a portion of it's forecasted sales of BBP into the fourth quarter of
fiscal 2018
. As of
December 30, 2017
, all
fiscal 2016
contracts and some of the
fiscal 2017
contracts have settled while the remaining contract positions and activity are disclosed below. From time to time, the Company may enter into corn option contracts in the future.
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
As of
December 30, 2017
, the Company had the following outstanding forward contract amounts that were entered into to hedge the future payments of intercompany note transactions, foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency. All of these transactions are currently not designated for hedge accounting. (in thousands):
|
|
|
|
|
|
|
|
Functional Currency
|
|
Contract Currency
|
Type
|
Amount
|
|
Type
|
Amount
|
Brazilian real
|
28,792
|
|
|
Euro
|
7,457
|
|
Brazilian real
|
67,834
|
|
|
U.S. Dollar
|
20,590
|
|
Euro
|
65,457
|
|
|
U.S. Dollar
|
77,795
|
|
Euro
|
9,017
|
|
|
Polish zloty
|
38,000
|
|
Euro
|
5,030
|
|
|
Japanese yen
|
673,000
|
|
Euro
|
28,077
|
|
|
Chinese renminbi
|
222,612
|
|
Euro
|
11,363
|
|
|
Australian dollar
|
17,800
|
|
Euro
|
2,890
|
|
|
British pound
|
2,565
|
|
Polish zloty
|
18,062
|
|
|
Euro
|
4,259
|
|
British pound
|
196
|
|
|
Euro
|
220
|
|
Japanese yen
|
280,608
|
|
|
U.S. dollar
|
2,505
|
|
The Company estimates the amount that will be reclassified from accumulated other comprehensive gain at
December 30, 2017
into earnings over the next
12
months will be approximately $
2.2 million
. As of
December 30, 2017
,
no
amounts have been reclassified into earnings as a result of the discontinuance of cash flow hedges.
The following table presents the fair value of the Company’s derivative instruments as of
December 30, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated
|
|
Balance Sheet
|
|
Asset Derivatives Fair Value
|
as Hedges
|
|
Location
|
|
December 30, 2017
|
|
December 31, 2016
|
Corn options
|
|
Other current assets
|
|
$
|
3,418
|
|
|
$
|
4,235
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedges
|
|
|
|
$
|
3,418
|
|
|
$
|
4,235
|
|
|
|
|
|
|
|
|
Derivatives not
Designated as
Hedges
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other current assets
|
|
$
|
332
|
|
|
$
|
8,939
|
|
Corn options and futures
|
|
Other current assets
|
|
596
|
|
|
151
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedges
|
|
|
|
$
|
928
|
|
|
$
|
9,090
|
|
|
|
|
|
|
|
|
Total asset derivatives
|
|
|
|
$
|
4,346
|
|
|
$
|
13,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated
|
|
Balance Sheet
|
|
Liability Derivatives Fair Value
|
as Hedges
|
|
Location
|
|
December 30, 2017
|
|
December 31, 2016
|
Natural gas swaps
|
|
Accrued expenses
|
|
$
|
24
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedges
|
|
|
|
$
|
24
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Derivatives not
Designated as
Hedges
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Accrued Expenses
|
|
$
|
2,288
|
|
|
$
|
608
|
|
Corn options and futures
|
|
Accrued Expenses
|
|
14
|
|
|
122
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedges
|
|
|
|
$
|
2,302
|
|
|
$
|
730
|
|
|
|
|
|
|
Total liability derivatives
|
|
|
|
$
|
2,326
|
|
|
$
|
730
|
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
The effect of the Company's derivative instruments on the consolidated financial statements for the fiscal years ended
December 30, 2017
and
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
Designated as
Cash Flow Hedges
|
Gain or (Loss)
Recognized in OCI
on Derivatives
(Effective Portion) (a)
|
|
Gain or (Loss)
Reclassified From
Accumulated OCI
into Income
(Effective Portion) (b)
|
|
Gain or (Loss)
Recognized in Income
On Derivatives
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing) (c)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn options
|
$
|
3,494
|
|
|
$
|
4,889
|
|
|
$
|
5,255
|
|
|
$
|
3,868
|
|
|
$
|
711
|
|
|
$
|
331
|
|
Natural gas swaps
|
(65
|
)
|
|
—
|
|
|
(35
|
)
|
|
—
|
|
|
(25
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
3,429
|
|
|
$
|
4,889
|
|
|
$
|
5,220
|
|
|
$
|
3,868
|
|
|
$
|
686
|
|
|
$
|
331
|
|
|
|
(a)
|
Amount recognized in accumulated OCI (effective portion) is reported as accumulated other comprehensive gain of approximately $
3.4 million
and approximately $
4.9 million
recorded net of taxes of approximately $
(1.3) million
and approximately $
(1.9) million
for the year ended
December 30, 2017
and
December 31, 2016
, respectively.
|
|
|
(b)
|
Gains and (losses) reclassified from accumulated OCI into income (effective portion) for corn options and natural gas swaps is included in interest expense and cost of sales, respectively, in the Company’s consolidated statements of operations.
|
|
|
(c)
|
Gains and (losses) recognized in income on derivatives (ineffective portion) for corn options and natural gas swaps is included in other income/(expense), net in the Company’s consolidated statements of operations.
|
The table below summarizes the effect of derivatives not designated as hedges on the Company's consolidated statements of operations for the year ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss or (Gain) Recognized in Income on Derivatives Not Designated as Hedges
|
|
|
|
|
For The Year Ended
|
Derivatives not designated as hedging instruments
|
|
Location
|
|
December 30, 2017
|
December 31, 2016
|
January 2, 2016
|
Foreign exchange
|
|
Foreign currency loss/(gain)
|
|
$
|
13,460
|
|
$
|
(1,542
|
)
|
$
|
(27,321
|
)
|
Foreign exchange
|
|
Selling, general and administrative expense
|
|
(2,763
|
)
|
(8,543
|
)
|
7,508
|
|
Corn options and futures
|
|
Net sales
|
|
212
|
|
472
|
|
(2
|
)
|
Corn options and futures
|
|
Cost of sales and operating expenses
|
|
(1,659
|
)
|
(1,411
|
)
|
(2,067
|
)
|
Natural gas and heating oil swaps and options
|
|
Cost of sales and operating expenses
|
|
—
|
|
—
|
|
132
|
|
Heating oil swaps and options
|
|
Net sales
|
|
492
|
|
455
|
|
—
|
|
Soybean meal
|
|
Net sales
|
|
(405
|
)
|
7
|
|
—
|
|
Soybean oil
|
|
Net sales
|
|
45
|
|
—
|
|
—
|
|
Total
|
|
|
|
$
|
9,382
|
|
$
|
(10,562
|
)
|
$
|
(21,750
|
)
|
At
December 30, 2017
, the Company had forward purchase agreements in place for purchases of approximately $
19.1 million
of natural gas and diesel fuel. These forward purchase agreements have no net settlement provisions and the Company intends to take physical delivery. Accordingly, the forward purchase agreements are not subject to the requirements of fair value accounting because they qualify as normal purchases as defined.
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
NOTE 17. FAIR VALUE MEASUREMENT
FASB authoritative guidance
which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements including guidance related to nonrecurring measurements of nonfinancial assets and liabilities.
The following tables presents the Company's financial instruments that are measured at fair value on a recurring and nonrecurring basis as of
December 30, 2017
and
December 31, 2016
and are categorized using the fair value hierarchy under FASB authoritative guidance. The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 30, 2017 Using
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
Significant Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
(In thousands of dollars)
|
Total
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Assets
|
|
|
|
|
Derivative assets
|
$
|
4,346
|
|
$
|
—
|
|
$
|
4,346
|
|
$
|
—
|
|
Total Assets
|
4,346
|
|
—
|
|
4,346
|
|
—
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Derivative liabilities
|
2,326
|
|
—
|
|
2,326
|
|
—
|
|
5.375% Senior Notes
|
513,100
|
|
—
|
|
513,100
|
|
—
|
|
4.75% Senior Notes
|
646,681
|
|
—
|
|
646,681
|
|
—
|
|
Term Loan A
|
95,883
|
|
—
|
|
95,883
|
|
—
|
|
Term Loan B
|
511,616
|
|
—
|
|
511,616
|
|
—
|
|
Total Liabilities
|
$
|
1,769,606
|
|
$
|
—
|
|
$
|
1,769,606
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2016 Using
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
Significant Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
(In thousands of dollars)
|
Total
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Assets
|
|
|
|
|
Derivative assets
|
$
|
13,325
|
|
$
|
—
|
|
$
|
13,325
|
|
$
|
—
|
|
Total Assets
|
13,325
|
|
—
|
|
13,325
|
|
—
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Derivative liabilities
|
730
|
|
—
|
|
730
|
|
—
|
|
5.375% Senior Notes
|
520,300
|
|
—
|
|
520,300
|
|
—
|
|
4.75% Senior Notes
|
575,111
|
|
—
|
|
575,111
|
|
—
|
|
Term Loan A
|
120,403
|
|
—
|
|
120,403
|
|
—
|
|
Term Loan B
|
593,347
|
|
—
|
|
593,347
|
|
—
|
|
Revolver
|
5,201
|
|
—
|
|
5,201
|
|
—
|
|
Total Liabilities
|
$
|
1,815,092
|
|
$
|
—
|
|
$
|
1,815,092
|
|
$
|
—
|
|
Derivative assets and liabilities consist of the Company's natural gas swap contracts and corn option and future contracts and foreign currency contracts, which represent the difference between the observable market rates of commonly quoted intervals for similar assets and liabilities in active markets and the fixed swap rate considering the instrument’s term, notional amount and credit risk. See Note 16 Derivatives for breakdown by instrument type.
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the short maturity of these instruments and as such have been excluded from the table above. The carrying amount for the Company's other debt is not deemed to be significantly different than the fair value and all other instruments have been recorded at fair value.
The fair value of the senior notes, term loan A, term loan B and revolver debt is based on market quotation from third-party banks.
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
NOTE 18. CONCENTRATION OF CREDIT RISK
Concentration of credit risk is limited due to the Company's diversified customer base and the fact that the Company sells commodities.
No
single customer accounted for more than
10%
of the Company’s net sales in fiscal years
2017
,
2016
and
2015
.
NOTE 19. CONTINGENCIES
The Company is a party to various lawsuits, claims and loss contingencies arising in the ordinary course of its business, including insured worker's compensation, auto, and general liability claims, assertions by certain regulatory and governmental agencies related to permitting requirements and/or air, wastewater and storm water discharges from the Company's processing facilities, litigation involving tort, contract, statutory, labor, employment, and other claims, and tax matters.
The Company’s workers compensation, auto and general liability policies contain significant deductibles or self-insured retentions. The Company estimates and accrues its expected ultimate claim costs related to accidents occurring during each fiscal year under these insurance policies and carries this accrual as a reserve until these claims are paid by the Company.
As a result of the matters discussed above, the Company has established loss reserves for insurance, environmental, litigation and tax contingencies. At
December 30, 2017
and
December 31, 2016
, the reserves for insurance, environmental, litigation and tax contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities were approximately $
61.4 million
and $
51.9 million
, respectively. The Company has insurance recovery receivables of approximately $
25.0 million
and $
15.9 million
, as of
December 30, 2017
and
December 31, 2016
, related to the insurance contingencies. The Company's management believes these reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management; however, there can be no assurance that final costs related to these contingencies will not exceed current estimates. The Company believes that the likelihood is remote that any additional liability from the lawsuits and claims that may not be covered by insurance would have a material effect on the Company's financial position, results of operations or cash flows.
Lower Passaic River Area
. In December 2009, the Company, along with numerous other entities, received notice from the United States Environmental Protection Agency (“EPA”) that the Company (as successor-in-interest to Standard Tallow Company) is considered a potentially responsible party (a “PRP”) with respect to alleged contamination in the lower Passaic River area which is part of the Diamond Alkali Superfund Site located in Newark, New Jersey. The Company’s designation as a PRP is based upon the operation of a former plant site located in Newark, New Jersey by Standard Tallow Company, an entity that the Company acquired in 1996. In the letter, EPA requested that the Company join a group of other parties in funding a remedial investigation and feasibility study at the site. As of the date of this report, the Company has not agreed to participate in the funding group. In March 2016, the Company received another letter from EPA notifying the Company that it had issued a Record of Decision selecting a remedy for the lower
8.3
miles of the lower Passaic River area at an estimated cost of $
1.38 billion
. The EPA letter makes no demand on the Company and lays out a framework for remedial design/remedial action implementation in which the EPA will first seek funding from major PRPs. The letter indicates that the EPA has sent the letter to over
100
parties, which include large chemical and refining companies, manufacturing companies, foundries, plastic companies, pharmaceutical companies and food and consumer product companies. The Company's ultimate liability, if any, for investigatory costs, remedial costs and/or natural resource damages in connection with the lower Passaic River area cannot be determined at this time; however, as of the date of this report, the Company has found no evidence that the former Standard Tallow Company plant site contributed any of the primary contaminants of concern to the Passaic River and, therefore, there is nothing that leads the Company to believe that this matter will have a material effect on the Company's financial position, results of operations or cash flows.
Fresno Facility Permit Issue.
The Company has been named as a defendant and a real party in interest in a lawsuit filed on April 9, 2012 in the Superior Court of the State of California, Fresno County, styled
Concerned Citizens of West Fresno vs. Darling International Inc.
The complaint, as subsequently amended, alleges that the Company's Fresno facility is operating without a proper use permit and seeks, among other things, injunctive relief. The complaint had at one time also alleged that the Company's Fresno facility constitutes a continuing private and public nuisance,
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
but the plaintiff has since amended the complaint to drop these allegations. The City of Fresno was also named as a defendant in the original complaint but has since had a judgment entered in its favor and is no longer a defendant in the lawsuit; however, in December 2013 the City of Fresno filed a motion to intervene as a plaintiff in this matter. The Superior Court heard the motion on February 4, 2014, and entered an order on February 18, 2014 denying the motion. Rendering operations have been conducted on the site since 1955, and the Company believes that it possesses all of the required federal, state and local permits to continue to operate the facility in the manner currently conducted and that its operations do not constitute a private or public nuisance. Accordingly, the Company intends to defend itself vigorously in this matter. Discovery has begun and this matter was scheduled for trial in July 2014; however, the parties have agreed to stay the litigation while they participate in a mediation process, which remains ongoing. In January 2017, the Company entered into a non-binding letter of intent with the City of Fresno pursuant to which the City and the Company will work toward the execution of a definitive agreement to relocate the facility to a different location in Fresno. Whether an agreement to relocate the facility ultimately gets executed is subject to the Company’s receipt of certain incentives and an agreement by the Concerned Citizens of West Fresno to settle and dismiss the aforementioned litigation. While management cannot predict the ultimate outcome of this matter, management does not believe the outcome will have a material effect on the Company's financial condition, results of operations or cash flows.
NOTE 20. BUSINESS SEGMENTS
The Company sells its products domestically and internationally and operates within
three
industry segments: Feed Ingredients, Food Ingredients and Fuel Ingredients. The measure of segment profit (loss) includes all revenues, operating expenses (excluding certain amortization of intangibles), and selling, general and administrative expenses incurred at all operating locations and excludes general corporate expenses.
Included in corporate activities are general corporate expenses and the amortization of intangibles. Assets of corporate activities include cash, unallocated prepaid expenses, deferred tax assets, prepaid pension, and miscellaneous other assets.
Feed Ingredients
Feed Ingredients consists principally of (i) the Company's U.S. ingredients business, including the Company's fats and proteins, used cooking oil, trap grease and food residuals collection businesses, the Rothsay ingredients business, and the ingredients and specialty products businesses conducted by Darling Ingredients International under the Sonac name (proteins, fats, and plasma products) and (ii) the Company's bakery residuals business.
Food Ingredients
Food Ingredients consists principally of (i) the gelatin and collagen hydrolysates business conducted by Darling Ingredients International under the Rousselot name, (ii) the natural casings and meat-by-products business conducted by Darling Ingredients International under the CTH name and (iii) certain specialty products businesses conducted by Darling Ingredients International under the Sonac name.
Fuel Ingredients
The Company's Fuel Ingredients segment consists of (i) the Company's biofuel business conducted under the Dar Pro® and Rothsay names (ii) the bioenergy business conducted by Darling Ingredients International under the Ecoson and Rendac names and (iii) the Company's investment in the DGD Joint Venture.
The Fuel Ingredients segment results did not include any blenders tax credits in fiscal 2017. In February 2018, the blender tax credits for calendar year 2017 were retroactively reinstated by the U.S. Congress. The Fuel Ingredients segment is expected to receive approximately $
12.6 million
in fiscal 2018 for these reinstated blenders tax credits.
Business Segments (in thousands):
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feed Ingredients
|
Food Ingredients
|
Fuel Ingredients
|
Corporate
|
Total
|
Fiscal Year Ended December 30, 2017
|
|
|
|
|
|
Net Sales
|
$
|
2,239,492
|
|
$
|
1,156,976
|
|
$
|
265,783
|
|
$
|
—
|
|
$
|
3,662,251
|
|
Cost of sales and operating expenses
|
1,744,768
|
|
920,575
|
|
210,508
|
|
—
|
|
2,875,851
|
|
Gross Margin
|
494,724
|
|
236,401
|
|
55,275
|
|
—
|
|
786,400
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
180,866
|
|
104,982
|
|
10,467
|
|
51,172
|
|
347,487
|
|
Depreciation and amortization
|
184,172
|
|
75,010
|
|
31,019
|
|
11,899
|
|
302,100
|
|
Segment operating income/(loss)
|
129,686
|
|
56,409
|
|
13,789
|
|
(63,071
|
)
|
136,813
|
|
|
|
|
|
|
|
Equity in net income of unconsolidated subsidiaries
|
265
|
|
—
|
|
28,239
|
|
—
|
|
28,504
|
|
Segment income
|
129,951
|
|
56,409
|
|
42,028
|
|
(63,071
|
)
|
165,317
|
|
|
|
|
|
|
|
Total other expense
|
|
|
|
|
(101,117
|
)
|
Income before income taxes
|
|
|
|
|
$
|
64,200
|
|
|
|
|
|
|
|
Segment assets at December 30, 2017
|
$
|
2,614,545
|
|
$
|
1,499,027
|
|
$
|
688,890
|
|
$
|
155,763
|
|
$
|
4,958,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feed Ingredients
|
Food Ingredients
|
Fuel Ingredients
|
Corporate
|
Total
|
Fiscal Year Ended December 31, 2016
|
|
|
|
|
|
Net Sales
|
$
|
2,089,145
|
|
$
|
1,055,725
|
|
$
|
247,058
|
|
$
|
—
|
|
$
|
3,391,928
|
|
Cost of sales and operating expenses
|
1,624,858
|
|
828,223
|
|
182,466
|
|
—
|
|
2,635,547
|
|
Gross Margin
|
464,287
|
|
227,502
|
|
64,592
|
|
—
|
|
756,381
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
169,648
|
|
96,170
|
|
6,895
|
|
41,292
|
|
314,005
|
|
Acquisition costs
|
—
|
|
—
|
|
—
|
|
401
|
|
401
|
|
Depreciation and amortization
|
178,845
|
|
70,120
|
|
28,531
|
|
12,412
|
|
289,908
|
|
Segment operating income/(loss)
|
115,794
|
|
61,212
|
|
29,166
|
|
(54,105
|
)
|
152,067
|
|
|
|
|
|
|
|
Equity in net income of unconsolidated subsidiaries
|
467
|
|
—
|
|
69,912
|
|
—
|
|
70,379
|
|
Segment income
|
116,261
|
|
61,212
|
|
99,078
|
|
(54,105
|
)
|
222,446
|
|
|
|
|
|
|
|
Total other expense
|
|
|
|
|
(99,907
|
)
|
Income before income taxes
|
|
|
|
|
$
|
122,539
|
|
|
|
|
|
|
|
Segment assets at December 31, 2016
|
$
|
2,464,509
|
|
$
|
1,414,409
|
|
$
|
657,637
|
|
$
|
161,462
|
|
$
|
4,698,017
|
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feed Ingredients
|
Food Ingredients
|
Fuel Ingredients
|
Corporate
|
Total
|
Fiscal Year Ended January 2, 2016
|
|
|
|
|
|
Net Sales
|
$
|
2,074,333
|
|
$
|
1,088,727
|
|
$
|
228,195
|
|
$
|
—
|
|
$
|
3,391,255
|
|
Cost of sales and operating expenses
|
1,613,402
|
|
863,562
|
|
177,061
|
|
—
|
|
2,654,025
|
|
Gross Margin
|
460,931
|
|
225,165
|
|
51,134
|
|
—
|
|
737,230
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
178,624
|
|
97,110
|
|
7,264
|
|
33,385
|
|
316,383
|
|
Acquisition costs
|
—
|
|
—
|
|
—
|
|
8,299
|
|
8,299
|
|
Depreciation and amortization
|
165,854
|
|
66,817
|
|
26,711
|
|
10,522
|
|
269,904
|
|
Segment operating income/(loss)
|
116,453
|
|
61,238
|
|
17,159
|
|
(52,206
|
)
|
142,644
|
|
|
|
|
|
|
|
Equity in net income of unconsolidated subsidiaries
|
1,521
|
|
—
|
|
71,895
|
|
—
|
|
73,416
|
|
Segment income
|
117,974
|
|
61,238
|
|
89,054
|
|
(52,206
|
)
|
216,060
|
|
|
|
|
|
|
|
Total other expense
|
|
|
|
|
(117,280
|
)
|
Income before income taxes
|
|
|
|
|
$
|
98,780
|
|
|
|
|
|
|
|
Business Segment Property, Plant and Equipment
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
|
January 2,
2016
|
Depreciation and amortization:
|
|
|
|
|
|
Feed Ingredients
|
$
|
184,172
|
|
|
$
|
178,845
|
|
|
$
|
165,854
|
|
Food Ingredients
|
75,010
|
|
|
70,120
|
|
|
66,817
|
|
Fuel Ingredients
|
31,019
|
|
|
28,531
|
|
|
26,711
|
|
Corporate Activities
|
11,899
|
|
|
12,412
|
|
|
10,522
|
|
Total
|
$
|
302,100
|
|
|
$
|
289,908
|
|
|
$
|
269,904
|
|
Capital expenditures:
|
|
|
|
|
|
Feed Ingredients
|
$
|
191,953
|
|
|
$
|
167,313
|
|
|
$
|
153,894
|
|
Food Ingredients
|
50,099
|
|
|
50,020
|
|
|
49,066
|
|
Fuel Ingredients
|
24,707
|
|
|
22,323
|
|
|
19,478
|
|
Corporate Activities
|
7,409
|
|
|
3,867
|
|
|
7,410
|
|
Total (a)
|
$
|
274,168
|
|
|
$
|
243,523
|
|
|
$
|
229,848
|
|
|
|
(a)
|
Excludes immaterial capital assets acquired by acquisition in fiscal 2017, fiscal 2016 and fiscal 2015.
|
Geographic Area Net Trade Revenues
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
|
January 2,
2016
|
North America
|
$
|
1,937,027
|
|
|
$
|
1,817,659
|
|
|
$
|
1,951,421
|
|
Europe
|
1,372,750
|
|
|
1,225,397
|
|
|
1,066,779
|
|
China
|
209,780
|
|
|
218,480
|
|
|
234,978
|
|
South America
|
60,111
|
|
|
55,089
|
|
|
62,035
|
|
Other
|
82,583
|
|
|
75,303
|
|
|
76,042
|
|
Total
|
$
|
3,662,251
|
|
|
$
|
3,391,928
|
|
|
$
|
3,391,255
|
|
The Company attributes revenues from external customers to individual foreign countries based on the origin of the Company's shipments.
Long-lived assets related to the Company's operations in North America, Europe, China, South American and other were as follows (in thousands):
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
FY 2017
|
FY 2016
|
|
Long-Lived Assets
|
Long-Lived Assets
|
North America
|
$
|
2,468,111
|
|
$
|
2,411,489
|
|
Europe
|
1,292,020
|
|
1,158,087
|
|
China
|
151,760
|
|
152,150
|
|
South America
|
81,247
|
|
74,837
|
|
Other
|
8,642
|
|
8,152
|
|
Total
|
$
|
4,001,780
|
|
$
|
3,804,715
|
|
NOTE 21. QUARTERLY FINANCIAL DATA (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE AMOUNTS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 30, 2017
|
|
First
Quarter (a)
|
|
Second
Quarter (a)
|
|
Third
Quarter (a)
|
|
Fourth
Quarter (b)
|
Net sales
|
$
|
878,510
|
|
|
$
|
894,930
|
|
|
$
|
936,262
|
|
|
$
|
952,549
|
|
Operating income
|
31,414
|
|
|
37,063
|
|
|
33,310
|
|
|
35,026
|
|
Income from operations before income taxes
|
9,216
|
|
|
18,070
|
|
|
14,980
|
|
|
21,934
|
|
Net income
|
7,398
|
|
|
10,328
|
|
|
8,684
|
|
|
106,944
|
|
Net (income)/loss attributable to minority interests
|
(1,569
|
)
|
|
(1,179
|
)
|
|
(923
|
)
|
|
(1,215
|
)
|
Net income/(loss) attributable to Darling
|
5,829
|
|
|
9,149
|
|
|
7,761
|
|
|
105,729
|
|
Basic earnings per share
|
0.04
|
|
|
0.06
|
|
|
0.05
|
|
|
0.64
|
|
Diluted earnings per share
|
0.04
|
|
|
0.05
|
|
|
0.05
|
|
|
0.63
|
|
|
|
(a)
|
Previously reported amounts have been adjusted to reflect the correction of an immaterial classification error in net sales and cost of sales. Net sales and cost of sales were each decreased by approximately $
1.6 million
in the first quarter of fiscal 2017, approximately $
1.4 million
in the second quarter of fiscal 2017, approximately $
1.4 million
in the third quarter of fiscal 2017.
|
(b) Included in net income is a net tax benefit relating to the U.S. tax reform passed by congress in December 2017 of approximately $
75.0 million
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
First
Quarter (c)
|
|
Second
Quarter (c)
|
|
Third
Quarter (c)
|
|
Fourth
Quarter (c), (d)
|
Net sales
|
$
|
778,375
|
|
|
$
|
875,777
|
|
|
$
|
852,018
|
|
|
$
|
885,758
|
|
Operating income
|
26,692
|
|
|
54,467
|
|
|
35,528
|
|
|
35,380
|
|
Income from operations before income taxes
|
4,526
|
|
|
41,974
|
|
|
28,146
|
|
|
47,893
|
|
Net income
|
2,663
|
|
|
33,991
|
|
|
28,890
|
|
|
41,680
|
|
Net (income)/loss attributable to minority interests
|
(1,584
|
)
|
|
(1,992
|
)
|
|
(196
|
)
|
|
(1,139
|
)
|
Net income/(loss) attributable to Darling
|
1,079
|
|
|
31,999
|
|
|
28,694
|
|
|
40,541
|
|
Basic earnings per share
|
0.01
|
|
|
0.19
|
|
|
0.17
|
|
|
0.25
|
|
Diluted earnings per share
|
0.01
|
|
|
0.19
|
|
|
0.17
|
|
|
0.25
|
|
|
|
(c)
|
Previously reported amounts have been adjusted to reflect the correction of an immaterial classification error in net sales and cost of sales. Net sales and cost of sales were each decreased by approximately $
1.3 million
in the first quarter of fiscal 2016, approximately $
1.6 million
in the second quarter of fiscal 2016, approximately $
1.8 million
in the third quarter of fiscal 2016 and $
1.5 million
in the fourth quarter of fiscal 2016.
|
|
|
(d)
|
Included in net income is approximately $
5.6 million
related to a recorded insurance settlement gain in the Netherlands relating to a December 2015 casualty fire.
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
NOTE 22. RELATED PARTY TRANSACTIONS
Raw Material Agreement
The Company has entered into a Raw Material Agreement with the DGD Joint Venture pursuant to which the Company will offer to supply certain animal fats and used cooking oil at market prices, up to the DGD Joint Venture's full operational requirement of feedstock, but the DGD Joint Venture is not obligated to purchase the raw material offered by the Company. Additionally, the Company may offer other feedstocks to the DGD Joint Venture, such as inedible corn oil, purchased on a resale basis. For the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
, the Company has recorded sales to the DGD Joint Venture of approximately $
171.3 million
, $
150.5 million
and $
158.7 million
, respectively. At
December 30, 2017
and
December 31, 2016
, the Company has approximately $
5.6 million
and $
6.3 million
in outstanding receivables due from the DGD Joint Venture, respectively. In addition, the Company has eliminated additional sales of approximately $
4.1 million
, $
4.1 million
and $
5.0 million
for the year ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
, respectively to the DGD Joint Venture and deferred the Company's portion of profit on those sales relating to inventory assets still remaining on the DGD Joint Venture's balance sheet at
December 30, 2017
,
December 31, 2016
and
January 2, 2016
of approximately $
0.9 million
, $
0.7 million
and $
0.8 million
, respectively.
Revolving Loan Agreement
On February 23, 2015, Darling through its wholly owned subsidiary Darling Green Energy LLC, (“Darling Green”) and a third party Diamond Alternative Energy, LLC (“Diamond Alternative” and together with Darling Green, the “DGD Lenders”) entered into a revolving loan agreement (the “DGD Loan Agreement”) with the DGD Joint Venture Opco. The DGD Lenders have committed to make loans available to Opco in the total amount of $
10.0 million
with each lender committed to $
5.0 million
of the total commitment. Any borrowings by Opco under the DGD Loan Agreement are at the applicable annum rate equal to the sum of (a) the LIBO Rate (meaning Reuters BBA Libor Rates Page 3750) on such day plus (b)
2.50%
. The DGD Loan Agreement matures on December 31, 2018, unless extended by agreement of the parties. The Opco borrowed and repaid $
2.5 million
and $
3.5 million
in fiscal 2016 and fiscal 2015, respectively plus an insignificant amount of interest to Darling Green. As of December 30, 2017,
no
amounts are owed to Darling Green under the DGD Loan Agreement.
NOTE 23. NEW ACCOUNTING PRONOUNCEMENTS
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU amends Topic 220,
Income Statement - Reporting Comprehensive Income
, which will allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The ASU is effective for fiscal years beginning after December 15, 2018 and for interim periods therein with early adoption permitted. The Company is currently evaluating the impact of this standard.
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvement to Accounting for Hedging Activities. This ASU amends Topic 815,
Derivatives and Hedging
, which is intended to more closely align hedge accounting with companies' risk management strategies and simplify the application of hedge accounting. The guidance includes certain targeted improvements to ease the operational burden of applying hedge accounting. The ASU is effective for fiscal years beginning after December 15, 2018 and for interim periods therein with early adoption permitted. The Company will be required to apply the guidance on a cumulative-effect basis with adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this standard.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU amends Topic 715,
Compensation - Retirement Benefits
, which requires that an employer report the service cost component of net benefit costs to be disaggregated from all other components and reported in the same line item or items as other compensation costs. The other components of net benefit cost are required to be presented in the income statement separately from the service cost. The ASU is effective for fiscal years beginning after December 15, 2017 and for interim periods therein. The initial adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In January 2017, the
FASB
issued
ASU No. 2017-04 Simplifying the Test for Goodwill Impairment. This ASU amends Topic 350,
Intangibles-Goodwill and Other
, which will simplify the goodwill impairment calculation by eliminating
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
Step 2 from the current goodwill impairment test. Under the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of the assets and liabilities as if that reporting unit had been acquired in a business combination. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.
The initial adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. This ASU amends Topic 805,
Business Combinations
, which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. This ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively, the set) is not a business. In order to be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs. This ASU is effective for fiscal year beginning after December 15, 2017 and interim periods within those fiscal years.
The initial adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash. This ASU amends Topic 230,
Statement of Cash Flows
, which includes new guidance on the classification and presentation of restricted cash in the statement of cash flows in order to eliminate the discrepancies that currently exist in how companies present these changes. This ASU requires restricted cash to be included with cash and cash equivalents when explaining the changes in cash in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years.
The initial adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. This ASU amends Topic 230,
Statement of Cash Flows
, which is intended to reduce the existing diversity in practice for classifying various types of cash flows including debt extinguishment costs, zero-coupon debt, contingent consideration related to business combinations, insurance proceeds, equity method distributions and beneficial interest in securitizations. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years.
The initial adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new ASU, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance lessor accounting is largely unchanged. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. This ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is assessing the impact of this new standard, specifically on its consolidated balance sheets and disclosures, and does not expect adoption to significantly change the recognition, measurement or presentation of lease expense within the consolidated statements of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance under GAAP. The new ASU introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this ASU requires disclosures sufficient to enable the users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
judgments, and assets recognized from the costs to obtain or fulfill a contract. In July 2015, the FASB deferred the elective date of the standard by one year. This ASU allows for either full retrospective or modified retrospective adoption and will become effective for the Company for the fiscal years beginning after December 15, 2017. The Company has completed its assessment of this ASU to identify any potential changes in the amount and timing of revenue recognition for its current contracts and the expected impact on the Company's business processes, systems and controls. Based on this assessment, the Company has elected to adopt this standard on a modified retrospective basis beginning in fiscal 2018. The adoption will not change the timing of revenues as the Company's revenues have been determined to be recognized at a point in time and not over time. The Company has elected not to capitalize contract fulfillment costs as the recovery of such costs are for a period of less than one year's time and are not material to the Company. Additionally, the Company has elected to treat shipping and handling as fulfillment costs, which will result in a reduction of revenue and a reduction of cost of sales for fiscal 2017 and fiscal 2016 of approximately $
161.1 million
and $
149.0 million
, respectively with no impact on overall earnings. The Company is currently reviewing the expanded incremental disclosures and the disaggregation of revenues disclosures as required under ASU No. 2014-09.
NOTE 24. GUARANTOR FINANCIAL INFORMATION
The Company's 5.375% Notes and 4.75% Notes (see Note 10) are guaranteed on a senior unsecured basis by the following Notes Guarantors, each of which is a
100%
directly or indirectly owned subsidiary of Darling and which constitute all of Darling's existing restricted subsidiaries that are Credit Agreement Guarantors (other than Darling's foreign subsidiaries, Darling Global Finance B.V., which issued the 4.75% Notes and is discussed further below, or any receivables entity): Darling National, Griffin and its subsidiary Craig Protein, Darling AWS LLC, Terra Holding Company, Darling Global Holdings Inc., Darling Northstar LLC, TRS, EV Acquisition, Inc., Rousselot Inc., Rousselot Dubuque Inc., Sonac USA LLC and Rousselot Peabody Inc. In addition, the 4.75% Notes, which were issued by Darling Global Finance B.V., a wholly-owned indirect subsidiary of Darling, are guaranteed on a senior unsecured basis by Darling. The Notes Guarantors, and Darling in the case of the 4.75% Notes, fully and unconditionally guaranteed the 5.375% Notes and 4.75% Notes on a joint and several basis. The following financial statements present condensed consolidating financial data for (i) Darling, (ii) the combined Notes Guarantors, (iii) the combined other subsidiaries of the Company that did not guarantee the 5.375% Notes or the 4.75% Notes (the “Non-guarantors”), and (iv) eliminations necessary to arrive at the Company's consolidated financial statements, which include condensed consolidated balance sheets as of
December 30, 2017
and
December 31, 2016
, and the condensed consolidating statements of operations, the condensed consolidating statements of comprehensive income and the condensed consolidating statements of cash flows for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
. Separate financial information is not presented for Darling Global Finance B.V. since it was formed as a special purpose finance subsidiary for the purpose of issuing the 4.75% Notes and therefore does not have any substantial operations or assets.
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
Condensed Consolidating Balance Sheet
As of December 30, 2017
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantors
|
Non-guarantors
|
Eliminations
|
Consolidated
|
ASSETS
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,724
|
|
$
|
2,993
|
|
$
|
102,057
|
|
$
|
—
|
|
$
|
106,774
|
|
Restricted cash
|
103
|
|
—
|
|
39
|
|
—
|
|
142
|
|
Accounts receivable
|
37,453
|
|
465,653
|
|
436,874
|
|
(548,133
|
)
|
391,847
|
|
Inventories
|
18,049
|
|
84,805
|
|
255,329
|
|
—
|
|
358,183
|
|
Income taxes refundable
|
1,591
|
|
—
|
|
2,918
|
|
—
|
|
4,509
|
|
Prepaid expenses
|
10,787
|
|
3,141
|
|
24,398
|
|
—
|
|
38,326
|
|
Other current assets
|
7,117
|
|
923
|
|
48,624
|
|
—
|
|
56,664
|
|
Total current assets
|
76,824
|
|
557,515
|
|
870,239
|
|
(548,133
|
)
|
956,445
|
|
Investment in subsidiaries
|
4,734,618
|
|
1,167,246
|
|
844,044
|
|
(6,745,908
|
)
|
—
|
|
Property, plant and equipment, net
|
278,121
|
|
501,842
|
|
865,859
|
|
—
|
|
1,645,822
|
|
Intangible assets, net
|
17,034
|
|
258,970
|
|
400,496
|
|
—
|
|
676,500
|
|
Goodwill
|
21,860
|
|
551,837
|
|
727,396
|
|
—
|
|
1,301,093
|
|
Investment in unconsolidated subsidiaries
|
4,341
|
|
—
|
|
297,697
|
|
—
|
|
302,038
|
|
Other assets
|
42,078
|
|
314,166
|
|
193,923
|
|
(487,883
|
)
|
62,284
|
|
Deferred income taxes
|
—
|
|
—
|
|
14,043
|
|
—
|
|
14,043
|
|
|
$
|
5,174,876
|
|
$
|
3,351,576
|
|
$
|
4,213,697
|
|
$
|
(7,781,924
|
)
|
$
|
4,958,225
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
$
|
115
|
|
$
|
—
|
|
$
|
16,028
|
|
$
|
—
|
|
$
|
16,143
|
|
Accounts payable
|
555,894
|
|
37,466
|
|
169,033
|
|
(544,976
|
)
|
217,417
|
|
Income taxes payable
|
32
|
|
373
|
|
11,895
|
|
—
|
|
12,300
|
|
Accrued expenses
|
105,625
|
|
30,542
|
|
180,613
|
|
(3,157
|
)
|
313,623
|
|
Total current liabilities
|
661,666
|
|
68,381
|
|
377,569
|
|
(548,133
|
)
|
559,483
|
|
Long-term debt, net of current portion
|
1,030,736
|
|
—
|
|
1,155,197
|
|
(487,883
|
)
|
1,698,050
|
|
Other noncurrent liabilities
|
69,711
|
|
—
|
|
36,576
|
|
—
|
|
106,287
|
|
Deferred income taxes
|
106,543
|
|
—
|
|
160,165
|
|
—
|
|
266,708
|
|
Total liabilities
|
1,868,656
|
|
68,381
|
|
1,729,507
|
|
(1,036,016
|
)
|
2,630,528
|
|
Total stockholders' equity
|
3,306,220
|
|
3,283,195
|
|
2,484,190
|
|
(6,745,908
|
)
|
2,327,697
|
|
|
$
|
5,174,876
|
|
$
|
3,351,576
|
|
$
|
4,213,697
|
|
$
|
(7,781,924
|
)
|
$
|
4,958,225
|
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
Condensed Consolidating Balance Sheet
As of December 31, 2016
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantors
|
Non-guarantors
|
Eliminations
|
Consolidated
|
ASSETS
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,470
|
|
$
|
5,754
|
|
$
|
107,340
|
|
$
|
—
|
|
$
|
114,564
|
|
Restricted cash
|
103
|
|
—
|
|
190
|
|
—
|
|
293
|
|
Accounts receivable
|
39,209
|
|
97,220
|
|
339,251
|
|
(87,283
|
)
|
388,397
|
|
Inventories
|
16,573
|
|
85,890
|
|
228,352
|
|
—
|
|
330,815
|
|
Income taxes refundable
|
3,566
|
|
—
|
|
3,913
|
|
—
|
|
7,479
|
|
Prepaid expenses
|
11,152
|
|
2,769
|
|
16,063
|
|
—
|
|
29,984
|
|
Other current assets
|
5,859
|
|
3,165
|
|
19,221
|
|
(6,475
|
)
|
21,770
|
|
Total current assets
|
77,932
|
|
194,798
|
|
714,330
|
|
(93,758
|
)
|
893,302
|
|
Investment in subsidiaries
|
4,296,200
|
|
1,154,398
|
|
909,263
|
|
(6,359,861
|
)
|
—
|
|
Property, plant and equipment, net
|
233,456
|
|
497,312
|
|
784,807
|
|
—
|
|
1,515,575
|
|
Intangible assets, net
|
13,746
|
|
291,724
|
|
406,457
|
|
—
|
|
711,927
|
|
Goodwill
|
21,860
|
|
549,960
|
|
654,073
|
|
—
|
|
1,225,893
|
|
Investment in unconsolidated subsidiary
|
1,438
|
|
—
|
|
291,279
|
|
—
|
|
292,717
|
|
Other assets
|
36,063
|
|
396,222
|
|
160,505
|
|
(549,177
|
)
|
43,613
|
|
Deferred income taxes
|
—
|
|
—
|
|
14,990
|
|
—
|
|
14,990
|
|
|
$
|
4,680,695
|
|
$
|
3,084,414
|
|
$
|
3,935,704
|
|
$
|
(7,002,796
|
)
|
$
|
4,698,017
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
$
|
4,220
|
|
$
|
—
|
|
$
|
25,502
|
|
$
|
(6,475
|
)
|
$
|
23,247
|
|
Accounts payable
|
116,075
|
|
18,142
|
|
130,718
|
|
(84,040
|
)
|
180,895
|
|
Income tax payable
|
(383
|
)
|
373
|
|
4,923
|
|
—
|
|
4,913
|
|
Accrued expenses
|
86,581
|
|
33,834
|
|
125,624
|
|
(3,243
|
)
|
242,796
|
|
Total current liabilities
|
206,493
|
|
52,349
|
|
286,767
|
|
(93,758
|
)
|
451,851
|
|
Long-term debt, net of current portion
|
1,109,523
|
|
—
|
|
1,167,349
|
|
(549,176
|
)
|
1,727,696
|
|
Other noncurrent liabilities
|
63,072
|
|
—
|
|
33,042
|
|
—
|
|
96,114
|
|
Deferred income taxes
|
140,543
|
|
—
|
|
205,591
|
|
—
|
|
346,134
|
|
Total liabilities
|
1,519,631
|
|
52,349
|
|
1,692,749
|
|
(642,934
|
)
|
2,621,795
|
|
Total stockholders' equity
|
3,161,064
|
|
3,032,065
|
|
2,242,955
|
|
(6,359,862
|
)
|
2,076,222
|
|
|
$
|
4,680,695
|
|
$
|
3,084,414
|
|
$
|
3,935,704
|
|
$
|
(7,002,796
|
)
|
$
|
4,698,017
|
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
Condensed Consolidating Statements of Operations
For the year ended December 30, 2017
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantors
|
Non-guarantors
|
Eliminations
|
Consolidated
|
Net sales
|
$
|
545,699
|
|
$
|
1,464,920
|
|
$
|
1,893,304
|
|
$
|
(241,672
|
)
|
$
|
3,662,251
|
|
Cost and expenses:
|
|
|
|
|
|
Cost of sales and operating expenses
|
429,681
|
|
1,198,271
|
|
1,489,571
|
|
(241,672
|
)
|
2,875,851
|
|
Selling, general and administrative expenses
|
151,896
|
|
55,053
|
|
140,538
|
|
—
|
|
347,487
|
|
Depreciation and amortization
|
42,366
|
|
106,406
|
|
153,328
|
|
—
|
|
302,100
|
|
Total costs and expenses
|
623,943
|
|
1,359,730
|
|
1,783,437
|
|
(241,672
|
)
|
3,525,438
|
|
Operating income
|
(78,244
|
)
|
105,190
|
|
109,867
|
|
—
|
|
136,813
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(55,336
|
)
|
15,818
|
|
(49,408
|
)
|
—
|
|
(88,926
|
)
|
Foreign currency gains/(losses)
|
(234
|
)
|
114
|
|
(6,778
|
)
|
—
|
|
(6,898
|
)
|
Other income/(expense), net
|
(13,635
|
)
|
37
|
|
8,305
|
|
—
|
|
(5,293
|
)
|
Equity in net income of unconsolidated subsidiaries
|
(1,847
|
)
|
—
|
|
30,351
|
|
—
|
|
28,504
|
|
Earnings in investments in subsidiaries
|
438,580
|
|
—
|
|
—
|
|
(438,580
|
)
|
—
|
|
Income/(loss) from operations before taxes
|
289,284
|
|
121,159
|
|
92,337
|
|
(438,580
|
)
|
64,200
|
|
Income taxes (benefit)
|
160,816
|
|
(130,508
|
)
|
(99,462
|
)
|
—
|
|
(69,154
|
)
|
Net (income)/loss attributable to noncontrolling interests
|
—
|
|
—
|
|
(4,886
|
)
|
—
|
|
(4,886
|
)
|
Net income/(loss) attributable to Darling
|
$
|
128,468
|
|
$
|
251,667
|
|
$
|
186,913
|
|
$
|
(438,580
|
)
|
$
|
128,468
|
|
Condensed Consolidating Statements of Operations
For the year ended December 31, 2016
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantors
|
Non-guarantors
|
Eliminations
|
Consolidated
|
Net sales
|
$
|
501,856
|
|
$
|
1,341,925
|
|
$
|
1,746,657
|
|
$
|
(198,510
|
)
|
$
|
3,391,928
|
|
Cost and expenses:
|
|
|
|
|
|
Cost of sales and operating expenses
|
392,876
|
|
1,085,582
|
|
1,355,599
|
|
(198,510
|
)
|
2,635,547
|
|
Selling, general and administrative expenses
|
130,573
|
|
51,029
|
|
132,403
|
|
—
|
|
314,005
|
|
Depreciation and amortization
|
41,106
|
|
105,261
|
|
143,541
|
|
—
|
|
289,908
|
|
Acquisition and integration costs
|
—
|
|
—
|
|
401
|
|
—
|
|
401
|
|
Total costs and expenses
|
564,555
|
|
1,241,872
|
|
1,631,944
|
|
(198,510
|
)
|
3,239,861
|
|
Operating income
|
(62,699
|
)
|
100,053
|
|
114,713
|
|
—
|
|
152,067
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(60,971
|
)
|
17,492
|
|
(50,708
|
)
|
—
|
|
(94,187
|
)
|
Foreign currency gains/(losses)
|
122
|
|
(283
|
)
|
(1,693
|
)
|
—
|
|
(1,854
|
)
|
Other income/(expense), net
|
(13,538
|
)
|
106
|
|
9,566
|
|
—
|
|
(3,866
|
)
|
Equity in net income of unconsolidated subsidiaries
|
(1,236
|
)
|
—
|
|
71,615
|
|
—
|
|
70,379
|
|
Earnings in investments in subsidiaries
|
223,347
|
|
—
|
|
—
|
|
(223,347
|
)
|
—
|
|
Income/(loss) from operations before taxes
|
85,025
|
|
117,368
|
|
143,493
|
|
(223,347
|
)
|
122,539
|
|
Income taxes (benefit)
|
(17,288
|
)
|
14,669
|
|
17,934
|
|
—
|
|
15,315
|
|
Net (income)/loss attributable to noncontrolling interests
|
—
|
|
—
|
|
(4,911
|
)
|
—
|
|
(4,911
|
)
|
Net income/(loss) attributable to Darling
|
$
|
102,313
|
|
$
|
102,699
|
|
$
|
120,648
|
|
$
|
(223,347
|
)
|
$
|
102,313
|
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
Condensed Consolidating Statements of Operations
For the year ended January 2 2016
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantors
|
Non-guarantors
|
Eliminations
|
Consolidated
|
Net sales
|
$
|
475,213
|
|
$
|
1,363,279
|
|
$
|
1,753,609
|
|
$
|
(200,846
|
)
|
$
|
3,391,255
|
|
Cost and expenses:
|
|
|
|
|
|
Cost of sales and operating expenses
|
369,928
|
|
1,108,864
|
|
1,376,079
|
|
(200,846
|
)
|
2,654,025
|
|
Selling, general and administrative expenses
|
122,509
|
|
55,691
|
|
138,183
|
|
—
|
|
316,383
|
|
Depreciation and amortization
|
34,889
|
|
98,400
|
|
136,615
|
|
—
|
|
269,904
|
|
Acquisition costs
|
3,177
|
|
—
|
|
5,122
|
|
—
|
|
8,299
|
|
Total costs and expenses
|
530,503
|
|
1,262,955
|
|
1,655,999
|
|
(200,846
|
)
|
3,248,611
|
|
Operating income
|
(55,290
|
)
|
100,324
|
|
97,610
|
|
—
|
|
142,644
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(60,945
|
)
|
18,839
|
|
(63,424
|
)
|
—
|
|
(105,530
|
)
|
Foreign currency gains/(losses)
|
(123
|
)
|
(1,649
|
)
|
(3,139
|
)
|
—
|
|
(4,911
|
)
|
Other income/(expense), net
|
(22,455
|
)
|
435
|
|
15,181
|
|
—
|
|
(6,839
|
)
|
Equity in net income of unconsolidated subsidiary
|
—
|
|
—
|
|
73,416
|
|
—
|
|
73,416
|
|
Earnings in investments in subsidiaries
|
198,371
|
|
—
|
|
—
|
|
(198,371
|
)
|
—
|
|
Income/(loss) from operations before taxes
|
59,558
|
|
117,949
|
|
119,644
|
|
(198,371
|
)
|
98,780
|
|
Income taxes (benefit)
|
(18,973
|
)
|
16,121
|
|
16,353
|
|
—
|
|
13,501
|
|
Net (income)/loss attributable to noncontrolling interests
|
—
|
|
—
|
|
(6,748
|
)
|
—
|
|
(6,748
|
)
|
Net income/(loss) attributable to Darling
|
$
|
78,531
|
|
$
|
101,828
|
|
$
|
96,543
|
|
$
|
(198,371
|
)
|
$
|
78,531
|
|
Condensed Consolidating Statements of Comprehensive Income/(Loss)
For the year ended December 30, 2017
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantors
|
Non-guarantors
|
Eliminations
|
Consolidated
|
Net income
|
$
|
133,354
|
|
$
|
251,667
|
|
$
|
186,913
|
|
$
|
(438,580
|
)
|
$
|
133,354
|
|
Other comprehensive income/(loss), net of tax:
|
|
|
|
|
|
Foreign currency translation
|
—
|
|
—
|
|
121,810
|
|
—
|
|
121,810
|
|
Pension adjustments
|
4,797
|
|
—
|
|
1,032
|
|
—
|
|
5,829
|
|
Natural gas swap derivative adjustments
|
(18
|
)
|
—
|
|
—
|
|
—
|
|
(18
|
)
|
Corn option derivative adjustments
|
(1,078
|
)
|
—
|
|
—
|
|
—
|
|
(1,078
|
)
|
Total other comprehensive income, net of tax
|
3,701
|
|
—
|
|
122,842
|
|
—
|
|
126,543
|
|
Total comprehensive income/(loss)
|
137,055
|
|
251,667
|
|
309,755
|
|
(438,580
|
)
|
259,897
|
|
Comprehensive income attributable to noncontrolling interests
|
—
|
|
—
|
|
947
|
|
—
|
|
$
|
947
|
|
Comprehensive income/(loss) attributable to Darling
|
$
|
137,055
|
|
$
|
251,667
|
|
$
|
308,808
|
|
$
|
(438,580
|
)
|
$
|
258,950
|
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
Condensed Consolidating Statements of Comprehensive Income/(Loss)
For the year ended December 31, 2016
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantors
|
Non-guarantors
|
Eliminations
|
Consolidated
|
Net income
|
$
|
107,224
|
|
$
|
102,699
|
|
$
|
120,648
|
|
$
|
(223,347
|
)
|
$
|
107,224
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
Foreign currency translation
|
—
|
|
—
|
|
(5,593
|
)
|
—
|
|
(5,593
|
)
|
Pension adjustments
|
1,766
|
|
—
|
|
(2,782
|
)
|
—
|
|
(1,016
|
)
|
Corn option derivative adjustments
|
625
|
|
—
|
|
—
|
|
—
|
|
625
|
|
Total other comprehensive income, net of tax
|
2,391
|
|
—
|
|
(8,375
|
)
|
—
|
|
(5,984
|
)
|
Total comprehensive income (loss)
|
$
|
109,615
|
|
$
|
102,699
|
|
$
|
112,273
|
|
$
|
(223,347
|
)
|
$
|
101,240
|
|
Comprehensive income attributable to noncontrolling interests
|
—
|
|
—
|
|
3,015
|
|
—
|
|
3,015
|
|
Comprehensive income/(loss) attributable to Darling
|
$
|
109,615
|
|
$
|
102,699
|
|
$
|
109,258
|
|
$
|
(223,347
|
)
|
$
|
98,225
|
|
Condensed Consolidating Statements of Comprehensive Income/(Loss)
For the year ended January 2, 2016
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantors
|
Non-guarantors
|
Eliminations
|
Consolidated
|
Net income
|
$
|
85,279
|
|
$
|
101,828
|
|
$
|
96,543
|
|
$
|
(198,371
|
)
|
$
|
85,279
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
Foreign currency translation
|
—
|
|
—
|
|
(162,436
|
)
|
—
|
|
(162,436
|
)
|
Pension adjustments
|
83
|
|
109
|
|
4,010
|
|
—
|
|
4,202
|
|
Natural gas swap derivative adjustments
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Corn option derivative adjustments
|
1,767
|
|
—
|
|
—
|
|
—
|
|
1,767
|
|
Total other comprehensive income, net of tax
|
1,850
|
|
109
|
|
(158,426
|
)
|
—
|
|
(156,467
|
)
|
Total comprehensive income (loss)
|
$
|
87,129
|
|
$
|
101,937
|
|
$
|
(61,883
|
)
|
$
|
(198,371
|
)
|
$
|
(71,188
|
)
|
Comprehensive income attributable to noncontrolling interests
|
—
|
|
—
|
|
9,139
|
|
—
|
|
9,139
|
|
Comprehensive income/(loss) attributable to Darling
|
$
|
87,129
|
|
$
|
101,937
|
|
$
|
(71,022
|
)
|
$
|
(198,371
|
)
|
$
|
(80,327
|
)
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
Condensed Consolidating Statements of Cash Flows
For the year ended December 30, 2017
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantors
|
Non-guarantors
|
Eliminations
|
Consolidated
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
133,354
|
|
$
|
251,667
|
|
$
|
186,913
|
|
$
|
(438,580
|
)
|
$
|
133,354
|
|
Earnings in investments in subsidiaries
|
(438,580
|
)
|
—
|
|
—
|
|
438,580
|
|
—
|
|
Other operating cash flows
|
489,302
|
|
(240,494
|
)
|
28,425
|
|
—
|
|
277,233
|
|
Net cash provided/(used) by operating activities
|
184,076
|
|
11,173
|
|
215,338
|
|
—
|
|
410,587
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital expenditures
|
(83,520
|
)
|
(74,384
|
)
|
(116,264
|
)
|
—
|
|
(274,168
|
)
|
Acquisitions, net of cash acquired
|
—
|
|
(12,144
|
)
|
—
|
|
—
|
|
(12,144
|
)
|
Investment in subsidiaries and affiliates
|
(6,309
|
)
|
(13,386
|
)
|
—
|
|
14,945
|
|
(4,750
|
)
|
Note receivable from affiliates
|
—
|
|
82,000
|
|
(82,000
|
)
|
—
|
|
—
|
|
Gross proceeds from sale of property, plant and equipment and other assets
|
2,577
|
|
3,980
|
|
1,533
|
|
—
|
|
8,090
|
|
Proceeds from insurance settlements
|
—
|
|
—
|
|
6,054
|
|
—
|
|
6,054
|
|
Payments related to routes and other intangibles
|
(7,135
|
)
|
—
|
|
—
|
|
—
|
|
(7,135
|
)
|
Net cash provide/(used) in investing activities
|
(94,387
|
)
|
(13,934
|
)
|
(190,677
|
)
|
14,945
|
|
(284,053
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from long-term debt
|
—
|
|
—
|
|
33,401
|
|
—
|
|
33,401
|
|
Payments on long-term debt
|
(79,706
|
)
|
—
|
|
(69,917
|
)
|
—
|
|
(149,623
|
)
|
Borrowings from revolving credit facility
|
170,000
|
|
—
|
|
29,495
|
|
—
|
|
199,495
|
|
Payments on revolving credit facility
|
(170,000
|
)
|
—
|
|
(34,935
|
)
|
—
|
|
(204,935
|
)
|
Net overdraft financing
|
—
|
|
—
|
|
(714
|
)
|
—
|
|
(714
|
)
|
Deferred loan costs
|
(6,717
|
)
|
—
|
|
—
|
|
—
|
|
(6,717
|
)
|
Issuance of common stock
|
22
|
|
—
|
|
—
|
|
—
|
|
22
|
|
Contributions from parent
|
—
|
|
—
|
|
14,945
|
|
(14,945
|
)
|
—
|
|
Minimum withholding taxes paid on stock awards
|
(3,034
|
)
|
—
|
|
(15
|
)
|
—
|
|
(3,049
|
)
|
Deduction of noncontrolling interest
|
—
|
|
—
|
|
(5,281
|
)
|
—
|
|
(5,281
|
)
|
Distributions to noncontrolling interests
|
—
|
|
—
|
|
(17,451
|
)
|
—
|
|
(17,451
|
)
|
Net cash provided/(used) in financing activities
|
(89,435
|
)
|
—
|
|
(50,472
|
)
|
(14,945
|
)
|
(154,852
|
)
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalent
|
—
|
|
—
|
|
20,528
|
|
—
|
|
20,528
|
|
Net increase/(decrease) in cash and cash equivalents
|
254
|
|
(2,761
|
)
|
(5,283
|
)
|
—
|
|
(7,790
|
)
|
Cash and cash equivalents at beginning of year
|
1,470
|
|
5,754
|
|
107,340
|
|
—
|
|
114,564
|
|
Cash and cash equivalents at end of year
|
$
|
1,724
|
|
$
|
2,993
|
|
$
|
102,057
|
|
$
|
—
|
|
$
|
106,774
|
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2016
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantors
|
Non-guarantors
|
Eliminations
|
Consolidated
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income/(loss)
|
$
|
107,224
|
|
$
|
102,699
|
|
$
|
120,648
|
|
$
|
(223,347
|
)
|
$
|
107,224
|
|
Earnings in investments in subsidiaries
|
(223,347
|
)
|
—
|
|
—
|
|
223,347
|
|
—
|
|
Other operating cash flows
|
317,040
|
|
(100,970
|
)
|
67,742
|
|
—
|
|
283,812
|
|
Net cash provided by operating activities
|
200,917
|
|
1,729
|
|
188,390
|
|
—
|
|
391,036
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital expenditures
|
(51,330
|
)
|
(91,340
|
)
|
(100,853
|
)
|
—
|
|
(243,523
|
)
|
Acquisitions, net of cash acquired
|
—
|
|
—
|
|
(8,511
|
)
|
—
|
|
(8,511
|
)
|
Investment in subsidiaries and affiliates
|
—
|
|
(12,754
|
)
|
—
|
|
12,754
|
|
—
|
|
Note receivable from affiliates
|
—
|
|
103,056
|
|
(103,056
|
)
|
—
|
|
—
|
|
Gross proceeds from sale of property, plant and equipment and other assets
|
2,784
|
|
1,070
|
|
3,475
|
|
—
|
|
7,329
|
|
Proceeds from insurance settlements
|
—
|
|
—
|
|
1,537
|
|
—
|
|
1,537
|
|
Payments related to routes and other intangibles
|
—
|
|
—
|
|
(23
|
)
|
—
|
|
(23
|
)
|
Net cash provided/(used) in investing activities
|
(48,546
|
)
|
32
|
|
(207,431
|
)
|
12,754
|
|
(243,191
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from long-term debt
|
—
|
|
—
|
|
36,327
|
|
—
|
|
36,327
|
|
Payments on long-term debt
|
(143,935
|
)
|
—
|
|
(60,493
|
)
|
—
|
|
(204,428
|
)
|
Borrowings from revolving credit facility
|
94,000
|
|
—
|
|
5,276
|
|
—
|
|
99,276
|
|
Payments on revolving credit facility
|
(94,000
|
)
|
—
|
|
(10,028
|
)
|
—
|
|
(104,028
|
)
|
Net overdraft financing
|
—
|
|
—
|
|
1,071
|
|
—
|
|
1,071
|
|
Deferred loan costs
|
(3,879
|
)
|
—
|
|
—
|
|
—
|
|
(3,879
|
)
|
Issuances of common stock
|
188
|
|
—
|
|
—
|
|
—
|
|
188
|
|
Repurchase of common stock
|
(5,000
|
)
|
—
|
|
—
|
|
—
|
|
(5,000
|
)
|
Contributions from parent
|
—
|
|
—
|
|
12,754
|
|
(12,754
|
)
|
—
|
|
Minimum withholding taxes paid on stock awards
|
(1,718
|
)
|
—
|
|
(125
|
)
|
—
|
|
(1,843
|
)
|
Distributions to noncontrolling interests
|
—
|
|
—
|
|
(1,552
|
)
|
—
|
|
(1,552
|
)
|
Net cash provided/(used) in financing activities
|
(154,344
|
)
|
—
|
|
(16,770
|
)
|
(12,754
|
)
|
(183,868
|
)
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
—
|
|
(6,297
|
)
|
—
|
|
(6,297
|
)
|
Net increase/(decrease) in cash and cash equivalents
|
(1,973
|
)
|
1,761
|
|
(42,108
|
)
|
—
|
|
(42,320
|
)
|
Cash and cash equivalents at beginning of year
|
3,443
|
|
3,993
|
|
149,448
|
|
—
|
|
156,884
|
|
Cash and cash equivalents at end of year
|
$
|
1,470
|
|
$
|
5,754
|
|
$
|
107,340
|
|
$
|
—
|
|
$
|
114,564
|
|
DARLING INGREDIENTS INC.
Notes to Consolidated Financial Statements (continued)
Condensed Consolidating Statements of Cash Flows
For the year ended January 2, 2016
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantors
|
Non-guarantors
|
Eliminations
|
Consolidated
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income/(loss)
|
$
|
85,279
|
|
$
|
101,828
|
|
$
|
96,543
|
|
$
|
(198,371
|
)
|
$
|
85,279
|
|
Earnings in investments in subsidiaries
|
(198,371
|
)
|
—
|
|
—
|
|
198,371
|
|
—
|
|
Other operating cash flows
|
250,597
|
|
(53,098
|
)
|
138,181
|
|
—
|
|
335,680
|
|
Net cash provided/(used) by operating activities
|
137,505
|
|
48,730
|
|
234,724
|
|
—
|
|
420,959
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital expenditures
|
(46,574
|
)
|
(91,702
|
)
|
(91,572
|
)
|
—
|
|
(229,848
|
)
|
Acquisitions, net of cash acquired
|
—
|
|
—
|
|
(377
|
)
|
—
|
|
(377
|
)
|
Investment in subsidiaries and affiliates
|
(20
|
)
|
(45,103
|
)
|
29,541
|
|
15,582
|
|
—
|
|
Note receivable from affiliates
|
—
|
|
76,019
|
|
(76,019
|
)
|
—
|
|
—
|
|
Gross proceeds from sale of property, plant and equipment and other assets
|
1,035
|
|
1,154
|
|
1,651
|
|
—
|
|
3,840
|
|
Proceeds from insurance settlements
|
71
|
|
490
|
|
—
|
|
—
|
|
561
|
|
Payments related to routes and other intangibles
|
—
|
|
—
|
|
(3,845
|
)
|
—
|
|
(3,845
|
)
|
Net cash provided/(used) in investing activities
|
(45,488
|
)
|
(59,142
|
)
|
(140,621
|
)
|
15,582
|
|
(229,669
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from long-term debt
|
—
|
|
—
|
|
590,745
|
|
—
|
|
590,745
|
|
Payments on long-term debt
|
(16,111
|
)
|
(55
|
)
|
(593,089
|
)
|
—
|
|
(609,255
|
)
|
Borrowing from revolving credit facility
|
25,000
|
|
—
|
|
53,244
|
|
—
|
|
78,244
|
|
Payments on revolving credit facility
|
(90,000
|
)
|
—
|
|
(76,755
|
)
|
—
|
|
(166,755
|
)
|
Net overdraft financing
|
—
|
|
—
|
|
(1,261
|
)
|
—
|
|
(1,261
|
)
|
Deferred loan costs
|
(7,295
|
)
|
—
|
|
(10,015
|
)
|
—
|
|
(17,310
|
)
|
Issuances of common stock
|
171
|
|
—
|
|
—
|
|
—
|
|
171
|
|
Repurchase of common stock
|
(5,912
|
)
|
—
|
|
—
|
|
—
|
|
(5,912
|
)
|
Contributions from parent
|
—
|
|
—
|
|
15,582
|
|
(15,582
|
)
|
—
|
|
Minimum withholding taxes paid on stock awards
|
(4,874
|
)
|
—
|
|
—
|
|
—
|
|
(4,874
|
)
|
Deductions to noncontrolling interest
|
—
|
|
—
|
|
(87
|
)
|
—
|
|
(87
|
)
|
Distributions to noncontrolling interests
|
—
|
|
—
|
|
(3,295
|
)
|
—
|
|
(3,295
|
)
|
Net cash provided/(used) in financing activities
|
(99,021
|
)
|
(55
|
)
|
(24,931
|
)
|
(15,582
|
)
|
(139,589
|
)
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
—
|
|
(3,601
|
)
|
—
|
|
(3,601
|
)
|
Net increase/(decrease) in cash and cash equivalents
|
(7,004
|
)
|
(10,467
|
)
|
65,571
|
|
—
|
|
48,100
|
|
Cash and cash equivalents at beginning of year
|
10,447
|
|
14,460
|
|
83,877
|
|
—
|
|
108,784
|
|
Cash and cash equivalents at end of year
|
$
|
3,443
|
|
$
|
3,993
|
|
$
|
149,448
|
|
$
|
—
|
|
$
|
156,884
|
|
PART II