DAR-2014.03.29-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
 
FORM 10-Q
 
 (Mark One)      
/X/  QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 29, 2014
OR
 
/  /  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
  For the transition period from _______ to _______
 
Commission File Number   001-13323

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

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

Large accelerated filer     
X
 
Accelerated filer    
 
 
Non-accelerated filer 
 
 
Smaller reporting company       
 
 
 
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes            No  X  
 
There were 164,575,897 shares of common stock, $0.01 par value, outstanding at May 1, 2014.

1



DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 29, 2014
 
 
TABLE OF CONTENTS   

 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  45
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2






DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
March 29, 2014 and December 28, 2013
(in thousands, except share data)

 
March 29,
2014
 
December 28,
2013
ASSETS
(unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
143,422

 
$
870,857

Restricted cash
364

 
354

Accounts receivable, net
435,386

 
112,844

Inventories
410,521

 
65,133

Prepaid expenses
30,479

 
14,223

Income taxes refundable
25,355

 
14,512

Other current assets
32,978

 
32,290

Deferred income taxes
19,933

 
17,289

Total current assets
1,098,438

 
1,127,502

Property, plant and equipment, less accumulated depreciation of
   $425,024 at March 29, 2014 and $381,314 at December 28, 2013
1,681,636

 
666,573

Intangible assets, less accumulated amortization of
   $125,327 at March 29, 2014 and $105,070 at December 28, 2013
1,054,608

 
588,664

Goodwill
1,476,541

 
701,637

Investment in unconsolidated subsidiary
149,025

 
115,114

Other assets
79,984

 
44,643

Deferred income taxes
9,627

 

 
$
5,549,859

 
$
3,244,133

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
62,451

 
$
19,888

Accounts payable, principally trade
316,080

 
43,742

Accrued expenses
149,432

 
113,174

Deferred income taxes
1,764

 

Total current liabilities
529,727

 
176,804

Long-term debt, net of current portion
2,330,494

 
866,947

Other non-current liabilities
106,200

 
40,671

Deferred income taxes
487,686

 
138,759

Total liabilities
3,454,107

 
1,223,181

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

     Common stock, $0.01 par value; 250,000,000 shares authorized;
        165,793,391 and 165,261,003 shares issued at March 29, 2014
        and at December 28, 2013, respectively
1,658

 
1,653

Additional paid-in capital
1,463,965

 
1,454,250

     Treasury stock, at cost;  1,220,037 and 993,578 shares at
       March 29, 2014 and at December 28, 2013, respectively
(17,900
)
 
(13,271
)
Accumulated other comprehensive loss
(10,199
)
 
(29,423
)
Retained earnings
554,940

 
607,743

Total Darling's stockholders’ equity
1,992,464

 
2,020,952

Noncontrolling interests
103,288

 

 Total stockholders' equity
$
2,095,752

 
$
2,020,952

 
$
5,549,859

 
$
3,244,133


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

3



DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 29, 2014 and March 30, 2013
(in thousands, except per share data)
(unaudited)


 
 
Three Months Ended
 
March 29,
2014
 
March 30,
2013
Net sales
$
931,435

 
$
445,422

Costs and expenses:
 

 
 

Cost of sales and operating expenses
755,453

 
322,686

Selling, general and administrative expenses
94,929

 
42,293

Acquisition costs
15,948

 

Depreciation and amortization
65,669

 
21,867

Total costs and expenses
931,999

 
386,846

Operating income
(564
)
 
58,576

 
 
 
 
Other expense:
 

 
 

Interest expense
(58,857
)
 
(5,625
)
Foreign currency loss
(13,814
)
 

Other income/(expense), net
(1,138
)
 
1,067

Total other expense
(73,809
)
 
(4,558
)
 
 
 
 
Equity in net income/(loss) of unconsolidated subsidiary
5,077

 
(1,195
)
Income/ (loss) before income taxes
(69,296
)
 
52,823

 
 
 
 
Income taxe expense/ (benefit)
(18,290
)
 
20,418

 
 
 
 
Net income / (Loss)
(51,006
)
 
32,405

 
 
 
 
Net (income)/ loss attributable to noncontrolling interests
(1,797
)
 

 
 
 
 
Net income/ (loss) attributable to Darling
$
(52,803
)
 
$
32,405

 
 
 
 
Basic income/ (loss) per share
$
(0.32
)
 
$
0.27

Diluted income/ (loss) per share
$
(0.32
)
 
$
0.27



 



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

4



DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS)
Three months ended March 29, 2014 and March 30, 2013
(in thousands)
(unaudited)


 
Three Months Ended
 
March 29, 2014
 
March 30, 2013
Net income/ (loss)
$
(51,006
)
 
$
32,405

Other comprehensive income, net of tax:
 
 
 
Foreign currency translation
20,615

 

Pension adjustments
320

 
805

Natural gas swap derivative adjustments
(113
)
 
148

Corn option derivative adjustments
(1,598
)
 
949

Total other comprehensive income, net of tax
19,224

 
1,902

Total comprehensive income / (loss)
$
(31,782
)
 
$
34,307







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


5



DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 29, 2014 and March 30, 2013
(in thousands)
(unaudited)

 
March 29,
2014
 
March 30,
2013
Cash flows from operating activities:
 
 
 
Net income/(loss)
$
(51,006
)
 
$
32,405

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
65,669

 
21,867

Gain on disposal of property, plant, equipment and other assets
(916
)
 
(210
)
Gain on insurance proceeds from insurance settlements

 
(1,531
)
Deferred taxes
(9,499
)
 
16,494

Decrease in long-term pension liability
(688
)
 
330

Stock-based compensation expense
8,459

 
2,883

Write-off deferred loan costs
4,330

 

Deferred loan cost amortization
2,452

 
768

Equity in net (income)/loss of unconsolidated subsidiary
(5,077
)
 
1,195

Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
Accounts receivable
7,018

 
1,451

Income taxes refundable/payable
(11,739
)
 
(3,313
)
Inventories and prepaid expenses
16,700

 
(390
)
Accounts payable and accrued expenses
(63,824
)
 
(6,333
)
Other
7,617

 
(6,134
)
Net cash provided/(used) by operating activities
(30,504
)
 
59,482

Cash flows from investing activities:
 
 
 
Capital expenditures
(51,360
)
 
(26,392
)
       Acquisitions, net of cash acquired
(2,081,690
)
 

       Investment in unconsolidated subsidiary

 
(12,535
)
Gross proceeds from disposal of property, plant and equipment and other assets
1,324

 
412

Payments related to routes and other intangibles
(6,812
)
 
(613
)
Net cash used by investing activities
(2,138,538
)
 
(39,128
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt
1,797,509

 

Payments on long-term debt
(263,971
)
 
(21
)
Borrowings from revolving credit facility
223,310

 

Payments on revolving credit facility
(273,474
)
 

Deferred loan costs
(38,786
)
 

Issuance of common stock
2,504

 
16

Minimum withholding taxes paid on stock awards
(4,709
)
 
(2,523
)
Excess tax benefits from stock-based compensation
960

 
702

Net cash provided/ (used) by financing activities
1,443,343

 
(1,826
)
Effect of exchange rate changes on cash and cash equivalents
(1,736
)
 

Net increase/(decrease) in cash and cash equivalents
(727,435
)
 
18,528

Cash and cash equivalents at beginning of period
870,857

 
103,249

Cash and cash equivalents at end of period
$
143,422

 
$
121,777

Supplemental disclosure of cash flow information:
 
 
 
Accrued capital expenditures
$
1,437

 
$
2,341

Cash paid during the period for:
 
 
 
Interest, net of capitalized interest
$
35,472

 
$
167

Income taxes, net of refunds
$
5,466

 
$
8,118

 
 
 
 

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

6



DARLING INGREDIENTS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
March 29, 2014
(unaudited)

(1)
General

On May 6, 2014, the stockholders of Darling International Inc. approved changing the name of the company from Darling International Inc. to Darling Ingredients Inc. The change became effective on May 7, 2014. 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, technical, fuel, bioenergy and fertilizer industries. As further discussed in Note 3, on January 7, 2014, the Company acquired the VION Ingredients business division (“VION Ingredients”) of VION Holding, N.V., a Dutch limited liability company (“VION”), by purchasing all of the shares of VION Ingredients International (Holding) B.V., and VION Ingredients Germany GmbH, and 60% of Best Hides GmbH (collectively, the "VION Companies"), pursuant to a Sale and Purchase Agreement dated October 5, 2013, as amended, between Darling and VION (the “VION Acquisition”). The VION Ingredients business is now conducted under the name Darling Ingredients International. In addition, on October 28, 2013, Darling completed the acquisition of substantially all of the assets of Rothsay ("Rothsay"), a division of Maple Leaf Foods, Inc. ("MFI"), a Canadian corporation, pursuant to an Acquisition Agreement between MFI and Darling dated August 23, 2013 (the "Rothsay Acquisition").

The Company’s business is now conducted through a global network of over 200 locations across five continents. Effective December 29, 2013, the Company's business operations were reorganized into three new segments, Feed Ingredients, Food Ingredients and Fuel Ingredients, in order to better align its business with the underlying markets and customers that the Company serves. All historical periods have been recast to reflect the changes to the segment reporting structure. Comparative segment revenues and related financial information are presented in Note 13 to the consolidated financial statements.

The accompanying consolidated financial statements for the three month periods ended March 29, 2014 and March 30, 2013, have been prepared by the Company in accordance with generally accepted accounting principles in the United States without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The information furnished herein reflects all adjustments (consisting only of normal recurring accruals) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations.  However, management of the Company believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading.  The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Form 10-K for the fiscal year ended December 28, 2013.  Note that because of the 2013 and 2014 acquisitions described above, the audited consolidated financial statements contained in the Company's Form 10-K for the fiscal year ended December 28, 2013 may not be comparable to the unaudited consolidated financial statements contained herein.

(2)
Summary of Significant Accounting Policies

(a)
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 Consoldiated Statements of Operations, the noncontrolling interest in net income (loss) of the consolidated subsidiaries is shown as an allocation of the Company's net income and is presented separately as "Net income/(loss) attributable to noncontrolling interests". In the Company's Consolidated Balance Sheets, noncontrolling interests represents the ownership interests in the Company consolidated subsidairies' 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.


7



(b)
Fiscal Periods

The Company has a 52/53 week fiscal year ending on the Saturday nearest December 31.  Fiscal periods for the consolidated financial statements included herein are as of March 29, 2014, and include the 13 ended March 29, 2014, and the 13 weeks ended March 30, 2013.

(c)
Revenue Recognition

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

(d)
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 to U.S. dollars at fiscal period end exchange rates, including intercompany foreign currency transactions that are of long-term investment nature. Income and expense items are translated at daily or average monthly exchange rates. 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 gains of approximately $20.6 million in the three months ended March 29, 2014 and no currency translation gains and losses in the three months ended March 30, 2013. In addition, the Company incurred foreign currency losses in the statement of operations of approximately $13.8 million in the three months ended March 29, 2014, with $12.6 million representing a loss on a hedge transaction during the first quarter of fiscal 2014.

(e)
Reclassifications

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

(f)
Earnings Per Share

Basic income/ (loss) 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 outstanding during the period.  Diluted income/ (loss) 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.
 
Net Income/ (loss) per Common Share (in thousands, except per share data)
 
Three Months Ended
 
 
 
March 29, 2014
 
 
 
 
 
March 30, 2013
 
 
 
Loss
 
Shares
 
Per Share
 
Income
 
Shares
 
Per Share
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net Income/ (loss) allocable to Darling
$
(52,803
)
 
164,386

 
$
(0.32
)
 
$
32,405

 
117,915

 
$
0.27

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Effect of dilutive securities:
 

 
 

 
 

 
 

 
 

 
 

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

 

 
 

 
 

 
690

 
 

Less: Pro forma treasury shares
 

 

 
 

 
 

 
(312
)
 
 

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Net income/ (loss)
$
(52,803
)
 
164,386

 
$
(0.32
)
 
$
32,405

 
118,293

 
$
0.27


8



 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended March 29, 2014 and March 30, 2013, respectively, 942,956 and 191,628 outstanding stock options were excluded from diluted income/ (loss) per common share as the effect was antidilutive. For the three months ended March 29, 2014 and March 30, 2013, respectively, 856,568 and 64,180 shares of non-vested stock and stock equivalents were excluded from diluted income/ (loss) per common share as the effect was antidilutive.

(3)
Acquisitions

On January 7, 2014, the Company acquired the VION Ingredients business division from VION by purchasing shares of the VION Companies as described in Note 1, pursuant to a Sale and Purchase Agreement dated October 5, 2013, as amended, between Darling and VION. The VION Ingredients business is now conducted under the name Darling Ingredients International. Darling Ingredients International is a worldwide leader in the development and production of specialty ingredients from animal by-products for applications in pharmaceuticals, food, pet food, feed, fuel, bioenergy and fertilizer. Darling Ingredients International operates a global network of 67 production facilities across five continents covering all aspects of animal by-product processing through six brands: Rendac (bioenergy), Sonac (bone products, proteins, fats, edible fats and plasma products), Ecoson (bioenergy), Rousselot (gelatin and collagen hydrolysates), CTH (natural casings) and Best Hides (hides and skins). Darling Ingredients International’s specialized portfolio of over 400 products covers all animal origin raw material types and thereby offers a comprehensive, single source solution for suppliers. Darling Ingredients International’s business has leading positions across Europe with operations in the Netherlands, Belgium, Germany, Poland and Italy under the Rendac and Sonac brand names. Value-added products include edible fats, blood plasma powder, hemoglobin, bone products, protein meals and fats. Rousselot is a global leading market provider of gelatin for the pharmaceutical, food and technical industries with operations in Europe, the United States, South America and China. CTH is a market leader in natural casings for the sausage industry with operations in Europe, China and the United States. The purchase of the VION Companies allows the Company to have a global reach. The purchase price for the transaction was approximately €1.6 billion in cash (approximately $2.2 billion at the exchange rate of €1.00:USD$1.3605). The purchase price was financed through (i) borrowings under the Company’s senior secured revolving credit facility and term loan facilities; (ii) proceeds from the Company’s $874.0 million public common stock offering in the fourth quarter of fiscal 2013; and (iii) proceeds from the private offering of $500.0 million aggregate principal amount of the Company’s 5.375% Senior Notes due 2022, that closed on January 2, 2014.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed in the VION Acquisition as of January 7, 2014 (unaudited) (in thousands):

            
Accounts receivable
$
318,272

Inventory
374,970

Deferred tax asset
18,132

Property and equipment
1,008,282

Identifiable intangibles
481,833

Goodwill
774,778

Investment in unconsolidated subsidiaries
28,493

Other long term assets
1,101

Accounts payable
(358,013
)
Current portion of long-term debt
(16,360
)
Accrued expenses
(19,241
)
Deferred tax liability
(361,817
)
Long debt obligations
(6,906
)
Other non-current liabilities
(62,039
)
Noncontrolling interests
(100,440
)
Purchase price, net of cash acquired
$
2,081,045


Preliminarily, $247.2 million of the goodwill was assigned to the Feed Ingredients segment, $410.3 million to the Food Ingredients segment and $117.3 million to the Fuel Ingredients segment. Of the VION Acquisition goodwill approximately 31% is expected to be deductible for tax purposes.  Identifiable intangibles include trademarks and trade names with indefinite lives of approximately $31.8 million and definite lived intangible assets including routes of approximately $211.4 million with a weighted average useful life of 10 years, $223.1 million in permits with a weighted average useful life of 15 years and patents and other intangibles of approximately $15.5 million with a weighted average useful life of 8 years. The VION Acquisition is a taxable stock sale and as a result there were deferred taxes that were created. Due to the complexity and timing of the VION Acquisition, the Company is still assessing the provisional amounts recorded

9



for assets acquired and accrued liabilities assumed; thus, the final determination of the value of assets acquired and liabilities assumed may result in retrospective adjustments to the values presented above with a corresponding adjustment to goodwill and if material, retrospective adjustments to earnings would be required.

The Company also incurred selling and general administrative expenses as part of the Rothsay Acquisition and the VION Acquisition for consulting and legal expenses in the amount of approximately $15.9 million during the first quarter of fiscal 2014.

The amount of revenue and net income/loss from the VION Acquisition included in the Company’s consolidated statement of operations for the three months ended March 29, 2014 were $489.6 million and a loss of approximately $19.9 million, respectively.

On October 28, 2013, Darling completed the acquisition of substantially all of the assets of Rothsay for approximately CAD $640.2 million (approximately USD$612.6 million at the exchange rate of CAD$1.00:USD$0.9569) comprised of cash of CAD$644.5 million less a contingent receivable of approximately CAD$4.3 million due to over payment for working capital, which was returned by MFI in the first quarter of fiscal 2014. The cash portion of the Rothsay Acquisition was funded through a combination of borrowings under Darling's senior secured revolving credit facility and term loan facility. Rothsay has a network of five rendering plants in Manitoba, Ontario and Nova Scotia and a biodiesel operation in Quebec, Canada. The Rothsay Acquisition not only adds significant scale by expanding the Company's geographic footprint into Canada, but also provides the Company with an opportunity for synergies by sharing best practices between Rothsay and the Company's existing operations and by improving efficiencies.

As a result of the Rothsay Acquisition and the VION Acquisition, effective October 28, 2013 and January 7, 2014, respectively, the Company began including the operations of the Rothsay Acquisition and the VION Acquisition into the Company's consolidated financial statements. The following table presents selected pro forma information, for comparative purposes, assuming the Rothsay Acquisition and the VION Acquisition had occurred on December 30, 2012 for the periods presented (unaudited) (in thousands, except per share data):

        
 
March 30, 2013
Net sales
$
1,037,714

Income from continuing operations
82,514

Net income
64,916

Earnings per share
 
Basic
$
0.39

Diluted
$
0.39


The selected unaudited pro forma information is not necessarily indicative of the consolidated results of operations for future periods or the results of operations that would have been realized had the VION Acquisition and the Rothsay Acquisition actually occurred on December 30, 2012 and excludes certain nonrecurring transactions directly related to the acquisitions.

The Company notes the acquisitions discussed below are not considered related businesses and therefore, are not required to be treated as a single business combination.  Pro forma results of operations for these acquisitions have not been presented because the effect of each acquisition individually is not deemed material to revenues and net income of the Company for any fiscal period presented.

On August 26, 2013, a wholly-owned subsidiary of Darling, Darling AWS LLC, a Delaware limited liability company, acquired all of the shares of Terra Holding Company, a Delaware corporation, and its wholly owned subsidiaries, Terra Renewal Services, Inc., an Arkansas corporation ("TRS"), and EV Acquisition, Inc., an Arkansas corporation (the "Terra Transaction"). The Terra Transaction increased the Company's rendering portfolio by adding an additional grease collection business to the Company's existing Feed Ingredients segment and adding an industrial residuals business as a new line of service for the Company's feed raw material suppliers within the Feed Ingredients segment.
 
Effective August 26, 2013, the Company began including the operations acquired in the Terra Transaction into the Company's consolidated financial statements.  The Company paid approximately $122.1 million in cash including an additional $0.7 million for working capital in the first quarter of fiscal 2014, for assets and assumed liabilities consisting of property, plant and equipment of $27.7 million, intangible assets of $46.2 million, goodwill of $65.7 million, deferred tax liability of $24.1 million and working capital of $6.6 million on the closing date.  The goodwill from the Terra

10



Transaction was assigned to the Feed Ingredients segment and is not deductible for tax purposes, though TRS has approximately $5.2 million of goodwill deductible for tax purposes related to prior acquisitions. The identifiable intangibles have a weighted average life of 12 years. Final determination of the value of assets acquired and liabilities assumed may result in adjustments to the values presented above with a corresponding adjustment to goodwill.

(4)
Inventories

A summary of inventories follows (in thousands):

        
 
March 29, 2014
 
December 28, 2013
Finished product
$
285,019

 
$
57,681

WIP
76,727

 

Supplies and other
48,775

 
7,452

 
$
410,521

 
$
65,133


Following the VION Acquisition, the Company began to carry larger amounts of inventories as compared to historical periods because the gelatin and casing usiness purchased in the VION Acquisition traditionally have required longer processing periods to produce the end product and greater available inventory than Darling's historical products require. The Company's work in process inventory represents inventory in the Food Ingredients segment that is in various stages of processing.

(5)
Investment in Unconsolidated Subsidiary

The Company announced on January 21, 2011 that a wholly-owned subsidiary of Darling entered into a limited liability company agreement with a wholly-owned subsidiary of Valero Energy Corporation (“Valero”) to form Diamond Green Diesel Holdings LLC (the “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 producing approximately 9,300 barrels per day of 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 provided the DGD Joint Venture with a 14 year multiple advance term loan facility of approximately $221,300,000 (the “JV Loan”) to support the design, engineering and construction of the 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 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:
 
 
 
 
Three Months Ended
 
Three Months Ended
As of March 31, 2014
 
March 31, 2014
 
March 31, 2013
Total Assets
 
Members' Equity
 
Revenues
 
Net Income
 
Revenues
 
Net Loss
 
 
 
 
 
 
 
 
 
 
 
$
491,826

 
$
239,576

 
$
119,657

 
$
9,348

 
$

 
$
(1,195
)

As of March 29, 2014 under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $119.8 million on the consolidated balance sheet and has recorded approximately $4.7 million of income and $1.2 million in losses in the unconsolidated subsidiary for the three months ended March 29, 2014 and March 30, 2013, respectively.


11



(6)
Debt

Debt consists of the following (in thousands):
 
        
 
March 29, 2014
 
December 28, 2013
Amended Credit Agreement and Former Credit Agreement:
 
 
 
Revolving Credit Facility
$
219,015

 
$
286,676

Term Loan A
333,964

 
340,030

Term Loan B
1,300,536

 

5.375% Senior Notes due 2022
500,000

 

8.5% Senior Notes due 2018

 
250,000

Other Notes and Obligations
39,430

 
10,129

 
2,392,945

 
886,835

Less Current Maturities
62,451

 
19,888

 
$
2,330,494

 
$
866,947


At March 29, 2014, the Company had outstanding debt under a term loan facility and revolving credit facility denominated in Canadian dollars of CAD$148.1 million and CAD$48.0 million, respectively. See below for discussion relating to the Company's debt agreements. In addition, at March 29, 2014, the Company had capital lease obligations denominated in Canadian dollars included in debt. The current capital lease obligation and long-term capital lease obligation in Canadian dollars was approximately CAD$3.1 million and CAD$6.9 million, respectively.

At March 29, 2014, the Company had outstanding debt under a term loan facility and revolving credit facility denominated in euros of €510.0 million and €15.0 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 (the "Amended Credit Agreement"), restating its then existing Amended and Restated Credit Agreement (the "Former 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.

The Amended Credit Agreement provides for senior secured credit facilities in the aggregate principal amount of $2.65 billion comprised of (i) the Company's $350.0 million term loan A facility, (ii) the Company's $1.3 billion term loan B facility and (iii) the Company's $1.0 billion five-year revolving loan facility (approximately $250.0 million of which is available for a letter of credit sub-facility and $50.0 million of which is 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 $350.0 million of the revolving loan facility is available to be borrowed by Darling in U.S. dollars, Canadian dollars, euros and other currencies to be agreed and available to each applicable lender, to be borrowed in Canadian dollars by Darling Canada and to be borrowed in U.S. dollars, euros and other currencies to be agreed and available to each applicable lender by Darling NL and certain other foreign subsidiaries of Darling who were added as borrowers following January 6, 2014. On January 6, 2013, $600.0 million of the term loan B facility was borrowed in U.S. dollars by Darling and the euro equivalent of $700.0 million of the term loan B facility was borrowed in euros by Darling NL. Those borrowings under the term loan B facility are currently outstanding. The proceeds of the term loan B facility and a portion of the revolving loan facility were used by Darling to pay a portion of the consideration for the VION Acquisition. The revolving loan facility will also be used for working capital needs, general corporate purposes and other purposes not prohibited by the Amended Credit Agreement.

As of March 29, 2014, the Company has borrowed all $350.0 million of the term loan A facility which, when repaid, cannot be reborrowed. The term loan A facility is repayable in quarterly installments as follows: for the first eight quarters, 1.25% of the original principal amount of the term loan A facility, for the ninth through sixteenth quarters, 1.875% of the original principal amount of the term loan A facility, and for each quarterly installment after such sixteenth installment until September 27, 2018, 3.75% of the original principal amount of the term loan A facility. The term loan A facility will mature on September 27, 2018.

As of March 29, 2014, the Company has borrowed all $1.3 billion under the terms of the term loan B facility, which when repaid, cannot be reborrowed. The term loan B facility is repayable in quarterly installments of 0.25% of the

12



aggregate principal amount of the relevant term loan B facility on the last day of each March, June, September and December of each year commencing on the last day of each month falling on or after the last day of the first full quarter of the closing date of the VION Acquisition and continuing until the last day of each quarter period ending immediately prior to the term loan B maturity date; and one final installment in the amount of the relevant term loan B facility then outstanding, due on the term loan B maturity date. The term loan B facility will mature on January 7, 2021.

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 2.50% per annum or base rate/Canadian prime rate plus 1.50% per annum, subject to certain 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 (a) for U.S. dollar term loans, either the base rate plus 1.50% or LIBOR plus 2.50%, and (b) for euro term loans, the euro interbank offered rate plus 2.75%, in each case subject to a step-down based on Darling’s total leverage ratio. For term loan B loans, the LIBOR rate shall not be less than 0.75%.

At March 29, 2014, the Company had $200.0 million outstanding under the term loan A facility and $155.0 million under the revolver at LIBOR plus a margin of 2.5% per annum for a total of 2.6875% per annum. The Company had $600.0 million outstanding under the term loan B facility at LIBOR plus a margin of 2.5% per annum for a total of 3.25% per annum. The Company had CAD$148.1 million outstanding under the term loan A facility and CAD$48.0 million outstanding under the revolver at CDOR plus a margin of 2.5% per annum for a total of 3.82% per annum. The Company had €510.0 million outstanding under the term loan B facility at LIBOR plus a margin of 2.75% per annum for a total of 3.5% per annum. The Company had €15.0 million outstanding under the revolver at LIBOR plus a margin of 2.5% per annum for a total of 2.737% per annum. As of March 29, 2014, the Company had availability of $748.3 million under the Credit Agreement taking into account amounts borrowed and letters of credit issued of $32.7 million. In addition, the Company has capitalized approximately $35.4 million of deferred loan costs during the first quarter of fiscal 2014.

The Amended Credit Agreement contains various customary representations and warranties by Darling and its subsidiaries, 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 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, a maximum secured 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.

Pursuant to the Second Amended and Restated Security Agreement, dated as of January 6, 2014 (the "Security Agreement"), by and among Darling, its domestic subsidiaries signatory thereto and any other domestic subsidiary who may become a party thereto and JPMorgan Chase Bank, N.A., as administrative agent, the Senior Secured Credit Facilities are secured, subject to certain carveouts and exceptions, by a first priority lien on substantially all of the assets of Darling and such domestic subsidiaries. The obligations of Darling Canada, Darling NL and any other foreign borrower under the Senior Secured Credit Facilities will also be secured by a first priority lien on certain assets of certain of Darling’s foreign subsidiaries (including, after the VION Acquisition, certain of the subsidiaries acquired from VION) organized in Canada, Belgium, Germany, the Netherlands and Brazil, subject to certain carveouts and exceptions.
 
Pursuant to the Second Amended and Restated Guaranty Agreement, dated as of January 6, 2014 (the "Guaranty Agreement"), (a) the obligations of Darling under the Senior Secured Credit Facilities are guaranteed by certain of Darling’s wholly-owned domestic subsidiaries and (b) the obligations of Darling Canada, Darling NL and any other foreign borrower under the Senior Secured Credit Facilities are guaranteed by Darling and certain of its domestic and foreign wholly-owned subsidiaries, in each case subject to certain carveouts and exceptions.

Senior Notes due 2022. On December 18, 2013, Darling Escrow Corporation ("Darling Escrow Sub"), a Delaware corporation and wholly-owned subsidiary of Darling entered into a purchase agreement (the “Original Purchase Agreement”) with the initial purchasers party thereto (the "Initial Purchasers"), for the sale of $500.0 million aggregate principal amount of its 5.375% Notes due 2022 (the "5.375% Notes"). On January 2, 2014, the 5.375% Notes, which were offered in a private offering in connection with the VION Acquisition, were issued pursuant to a 5.375% Notes Indenture, dated as of January 2, 2014 (the "Original Indenture"), among Darling Escrow Sub, the Subsidiary Guarantors (as defined in the Original Indenture) party thereto from time to time and U.S. Bank National Association, as trustee (the "Trustee"), with the gross proceeds from the offering of the 5.375% Notes and certain additional amounts deposited in

13



an escrow account pending the satisfaction of certain conditions, including the completion of the VION Acquisition, which occurred on January 7, 2014.

On January 8, 2014 (the "Notes Closing Date"), Darling Escrow Sub merged (the "Notes Merger") with and into Darling (with Darling as the survivor of the Notes Merger), pursuant to an Agreement and Plan of Merger, dated January 8, 2014, between Darling Escrow Sub and Darling.

In connection with the completion of the Notes Merger, pursuant to the provisions of the Original Indenture and the Original Purchase Agreement, Darling Escrow Sub, Darling and certain of Darling’s subsidiaries: Craig Protein Division, Inc., Darling AWS LLC, Darling National LLC, Darling Northstar LLC, Darling Global Holdings Inc., EV Acquisition, Inc., Griffin Industries LLC, Terra Holding Company and Terra Renewal Services Inc. (such subsidiaries, the "Guarantors") entered into a supplemental indenture with the Trustee (the "Supplemental Indenture," and together with the Original Indenture, the "Indenture"), pursuant to which, upon effectiveness of the Notes Merger, Darling assumed all the obligations of Darling Escrow Sub under the 5.375% Notes and the Indenture and the Guarantors guaranteed the 5.375% Notes and agreed to be bound by the terms of the Indenture applicable to subsidiary guarantors of the 5.375% Notes. In addition, in accordance with the provisions of the Original Purchase Agreement, upon the completion of the Notes Merger, Darling and the Guarantors became parties to the Original Purchase Agreement, by entering into a Joinder to the Purchase Agreement, dated as of the Notes Closing Date (together with the Original Purchase Agreement, the "Purchase Agreement"), with the Initial Purchasers. Upon satisfaction of the escrow release conditions on the Closing Date, the proceeds from the offering of the 5.375% Notes were released from the escrow account in accordance with Darling’s written instructions. Darling used a portion of the proceeds from the offering of the 5.375% Notes to pay the Initial Purchasers’ commission related to the offering of the 5.375% Notes and certain fees and expenses (including bank fees and expenses) related to the financing of the VION Acquisition and for purposes of satisfying, discharging and redeeming its 8.5% Notes due 2018 discussed below.

Darling used the remaining proceeds of the 5.375% Notes to pay certain other fees and expenses related to the completion of the VION Acquisition 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 VION Acquisition and for general corporate purposes, which may include the repayment of indebtedness.

The Purchase Agreement contains customary representations, warranties and agreements by Darling and the Guarantors. In addition, Darling and the Guarantors have agreed to indemnify the Initial Purchasers against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"), or to contribute to payments the Initial Purchasers may be required to make because of any of those liabilities.

The 5.375% Notes will mature on January 15, 2022. Darling will pay 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 will accrue at a rate of 5.375% per annum and be payable in cash.

The 5.375% Notes are currently guaranteed on an unsecured senior basis by the Guarantors, which constitute all of Darling’s existing restricted subsidiaries that guarantee the Amended Credit Agreement (other than Darling’s foreign subsidiaries). Under the Indenture, each restricted subsidiary of Darling (other than Darling’s foreign subsidiaries and certain of Darling’s subsidiaries that engage solely in the financing of receivables and are so designated by Darling) is required to guarantee the 5.375% Notes (a) if the Amended Credit Agreement is outstanding and such restricted subsidiary guarantees the Amended Credit Agreement and (b) if the Amended Credit Agreement is not outstanding, if such restricted subsidiary incurs or guarantees certain indebtedness in excess of $50.0 million.

The 5.375% Notes will rank senior in right of payment to all existing and future debt of Darling that is expressly subordinated in right of payment to the 5.375% Notes. The 5.375% Notes will rank equally in right of payment with all existing and future liabilities of Darling that are not so subordinated. The 5.375% Notes will be effectively subordinated to all of the existing and future secured debt of Darling and the Guarantors, including debt under the Amended Credit Agreement, to the extent of the value of the assets securing such debt. The 5.375% Notes will be structurally subordinated to all of the existing and future liabilities (including trade payables) of each of the subsidiaries of Darling that do not guarantee the 5.375% Notes.
 
The guarantees by the Guarantors (the "5.375% Note Guarantees") will rank senior in right of payment to all existing and future debt of the Guarantors that is expressly subordinated in right of payment to the 5.375% Note Guarantees. The 5.375% Note Guarantees will rank equally in right of payment with all existing and future liabilities of the Guarantors that are not so subordinated. The 5.375% Note Guarantees will be effectively subordinated to all of the existing and future

14



secured debt of the Guarantors including debt under the Amended Credit Agreement, to the extent of the value of the assets securing such debt. Each 5.375% Note Guarantee will be structurally subordinated to all of the existing and future liabilities (including trade payables) of each of the subsidiaries of such Guarantor that do not guarantee the 5.375% Notes.

Darling is not required to make any mandatory redemption or sinking fund payments with respect to the 5.375% Notes. However, under certain circumstances, Darling may be required to offer to purchase 5.375% Notes as described under "Change of Control" and "Asset Sale Proceeds" below. Darling may at any time and from time to time purchase 5.375% Notes in the open market or otherwise.

Darling may redeem some or all of the 5.375% Notes at any time prior to January 15, 2017, at a redemption price equal to 100% of the principal amount of the 5.375% Notes redeemed, plus accrued and unpaid interest to the redemption date and an Applicable Premium (as defined below) as of the date of redemption, subject to the rights of holders on the relevant record date to receive interest due on the relevant interest payment date. The “Applicable Premium” means, with respect to any 5.375% Note at any redemption date, the greater of: (i) 1.0% of the principal amount of such 5.375% Note; and (ii) the excess, if any, of (A) the present value as of such redemption date of (1) the redemption price of such 5.375% Note at January 15, 2017 (such redemption price being set forth in the table below), plus (2) all required interest payments due on such 5.375% Note through January 15, 2017 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the applicable treasury rate as of such redemption date plus 50 basis points, over (B) the principal amount of such 5.375% Note.

On and after January 15, 2017, Darling may redeem all or, from time to time, a part of the 5.375% Notes (including any additional 5.375% Notes), at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest on the 5.375% Notes, if any, to, but excluding, the applicable redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the twelve-month period beginning on January 15 of the years indicated below:
 
Year
Percentage
2017
104.031%
2018
102.688%
2019
101.344%
2020 and thereafter
100.000%

In addition, prior to January 15, 2017, Darling may on one or more occasions redeem up to 40% of the original principal amount of the 5.375% Notes (calculated after giving effect to the issuance of any additional 5.375% Notes) with the net cash proceeds of one or more equity offerings at a redemption price equal to 105.375% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided that at least 50% of the original principal amount of the 5.375% Notes (calculated after giving effect to the issuance of any additional 5.375% Notes) remains outstanding after each such redemption; provided further that the redemption occurs within 90 days after the closing of such equity offering.
 
Change of Control. If a Change of Control (as defined in the Indenture) occurs, unless Darling has exercised its right to redeem all the 5.375% Notes as described above under “Optional Redemption,” each holder will have the right to require Darling to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder’s 5.375% Notes at a purchase price in cash equal to 101% of the principal amount of the 5.375% Notes, plus accrued and unpaid interest, if any, to, but excluding, the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).
 
Asset Sale Proceeds. If Darling or its subsidiaries engage in certain Asset Dispositions (as defined in the Indenture), Darling generally must, within specific periods of time, either prepay, repay or repurchase certain of its or its Restricted Subsidiaries’ indebtedness or make an offer to purchase a principal amount of the 5.375% Notes and certain other debt equal to the excess net cash proceeds, or invest the net cash proceeds from such sales in additional assets. The purchase price of the 5.375% Notes will be 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase.

The Indenture contains covenants limiting Darling’s ability and the ability of its restricted subsidiaries to, among other things: incur additional indebtedness or issue preferred stock; pay dividends on or make other distributions or repurchase of Darling’s capital stock or make other restricted payments; create restrictions on the payment of dividends or other

15



amounts from Darling’s restricted subsidiaries to Darling or Darling’s other restricted subsidiaries; make loans or investments; enter into certain transactions with affiliates; create liens; designate Darling’s subsidiaries as unrestricted subsidiaries; and sell certain assets or merge with or into other companies or otherwise dispose of all or substantially all of Darling’s assets.

The Indenture also provides for customary events of default, including, without limitation, payment defaults, covenant defaults, cross acceleration defaults to certain other indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency and judgment defaults in excess of specified amounts. If any such event of default occurs and is continuing under the Indenture, the Trustee or the holders of at least 25% in principal amount of the total outstanding 5.375% Notes may declare the principal, premium, if any, interest and any other monetary obligations on all the then outstanding 5.375% Notes issued under the Indenture to be due and payable immediately.

Holders of the 5.375% Notes have the benefit of registration rights. In connection with the assumption of the 5.375% Notes by Darling and the guarantee of the 5.375% Notes by the Guarantors, on the Notes Closing Date, Darling and the Guarantors became parties to, and Darling assumed all of Darling Escrow Sub’s obligations under, a registration rights agreement, dated as of January 2, 2014 (the "Original Registration Rights Agreement"), among Darling Escrow Sub, and the Initial Purchasers, by entering into a Joinder to the Registration Rights Agreement, dated as of the Closing Date (the "Registration Rights Agreement Joinder” and together with the Original Registration Rights Agreement, the “Registration Rights Agreement"), with the Initial Purchasers. Under the Registration Rights Agreement, Darling and the Guarantors have agreed to consummate a registered exchange offer for the 5.375% Notes under the Securities Act within 270 days after the Notes Closing Date. Darling and the Guarantors have agreed to file and keep effective for a certain time period under the Securities Act a shelf registration statement for the resale of the 5.375% Notes if an exchange offer cannot be effected and under certain other circumstances. Darling will be required to pay additional interest on the 5.375% Notes if it fails to timely comply with its obligations under the Registration Rights Agreement until such time as it complies.

Senior Notes due 2018. On December 17, 2010, Darling issued $250.0 million aggregate principal amount of its 8.5% Senior Notes due 2018 (the "8.5% Notes") under an indenture with U.S. Bank National Association, as trustee. On February 7, 2014, the Company completed the redemption of the 8.5% Notes for $280.4 million, which included a redemption premium of approximately $27.3 million and accrued and unpaid interest of approximately $3.1 million.

The Credit Agreement and the Senior Notes due 2022 and 2018 consisted of the following elements at March 29, 2014 and December 28, 2013, respectively (in thousands):

 
 
March 29,
2014
December 28,
2013
Senior Notes:
 
 
5.375% Senior Notes due 2022
$
500,000

$

8.5% Senior Notes due 2018
$

$
250,000

Senior Secured Credit Facilities:
 
 
Term Loan A
$
333,964

$
340,030

Term Loan B
$
1,300,536

$

Revolving Credit Facility:
 

 

Maximum availability
$
1,000,000

$
1,000,000

Borrowings outstanding
219,015

286,676

Letters of credit issued
32,662

32,662

Availability
$
748,323

$
680,662


The obligations of the Company under the Amended Credit Agreement are guaranteed by Darling National LLC, a Delaware limited liability company ("Darling National"), Griffin Industries LLC, a Kentucky limited liability company ("Griffin"), and its subsidiary, Craig Protein Division, Inc ("Craig Protein"), Darling AWS LLC, Terra Holding Company, Darling Global Holdings Inc., Darling Northstar LLC, Terra Renewal Services, Inc. and EV Acquisition, Inc., each of which is a wholly-owned subsidiary of the Company, and are secured, subject to certain exceptions, by a perfected first priority security interest in all tangible and intangible personal property of the Company and the guarantors, including a pledge of 100% of the equity interests of certain domestic subsidiaries and 65% of the equity interests of certain foreign subsidiaries. The 5.375% Notes are guaranteed by each of the foregoing subsidiaries, and effective as of January 6, 2014, the 5.375% Notes are secured on an equal and ratable basis with the Company's and the guarantors' obligations under the Amended Credit Agreement. The 5.375% Notes and the guarantees thereof rank equally in right of payment to any

16



existing and future senior debt of Darling and the guarantors, including debt that is secured by the collateral for the Amended Credit Agreement and the 5.375% Notes. The 5.375% Notes and the guarantees thereof will be effectively junior to existing and future debt of Darling and the guarantors that is secured by assets that do not constitute collateral for the Amended Credit Agreement and the 5.375% Notes, to the extent of the value of the assets securing such debt. The 5.375% Notes and the guarantees thereof will be structurally subordinated to all of the existing and future liabilities (including trade payables) of each of the subsidiaries of Darling that do not guarantee the 5.375% Notes.

The Company's financial covenants are first effective for fiscal quarter ending June 28, 2014, which is the first full fiscal quarter after January 6, 2014. As of March 29, 2014, the Company believes it is in compliance with all of the financial covenants, as well as all of the other covenants, contained in the Credit Agreement and the Indenture. 

(7)
Income Taxes
 
The Company has provided income taxes for the three-month periods ended March 29, 2014 and March 30, 2013, based on its estimate of the effective tax rate for the entire 2014 and 2013 fiscal years. For fiscal 2014, the Company’s effective tax rate is significantly affected by the VION Acquisition including non-deductible acquisition costs, Subpart F and entities that are subject to income tax at various tax rates in their countries of operation that differ from the U.S. statutory tax rate.
 
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’s net deferred tax liability increased by approximately $338.4 million in the three month period ended March 29, 2014 principally due to deferred tax liabilities acquired in the stock acquisition resulting in carryover tax basis in the VION Acquisition including the accumulated earnings of certain foreign joint ventures. The Company expects to indefinitely reinvest the earnings of its foreign subsidiaries outside of the United States and has generally not provided deferred income taxes on the accumulated earnings of its foreign subsidiaries.

The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable income to realize its deferred income tax assets.  In making this determination, the Company considers all available positive and negative evidence and makes certain assumptions.  The Company considers, among other things, its deferred tax liabilities, the overall business environment, its historical earnings and losses, current industry trends and its outlook for future years.  Certain VION Companies acquired as part of the VION Acquisition have deferred tax assets for tax loss carryforwards, and the Company has recorded valuation allowances in respect to those losses in the purchase accounting for the acquisition to the extent it has been determined that it is not more likely than not that the deferred tax assets will be realized.

Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. The Company’s uncertain tax positions increased by $8.2 million during the three month period ended March 29, 2014 primarily related to the recording of positions from the VION Acquisition in purchase accounting. At March 29, 2014, the Company had $5.8 million of gross unrecognized tax benefits and $3.1 million of related accrued interest and penalties. It is reasonably possible within the next twelve months that the Company’s gross unrecognized tax benefits may decrease by up to $3.3 million, excluding interest and penalties, primarily due to potential settlements and expiration of certain statutes of limitations.

The Company’s major taxing jurisdictions include the U.S. (federal and state), Canada, the Netherlands, Belgium, Brazil, Germany, France and China. The Company is subject to regular examination by various tax authorities and 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 tax jurisdictions is open for varying periods, but is generally closed through the 2006 tax year.

(8)  
Other Comprehensive Income

The Company follows Financial Accounting Standards Board ("FASB") authoritative guidance for reporting and presentation of comprehensive income or loss and its components.  Other comprehensive income (loss) is derived from adjustments that reflect pension adjustments, natural gas derivative adjustments, corn option adjustments and interest

17



rate swap derivative adjustments. The components of other comprehensive income (loss) and the related tax impacts for the three months ended March 29, 2014 and March 30, 2013 are as follows (in thousands):

 
Three Months Ended
 
Before-Tax
Tax (Expense)
Net-of-Tax
 
Amount
or Benefit
Amount
 
March 29, 2014
March 30, 2013
March 29, 2014
March 30, 2013
March 29, 2014
March 30, 2013
Defined benefit pension plans
 
 
 
 
 
 
Amortization of prior service cost
$
4

$
15

$
(2
)
$
(6
)
$
2

$
9

Amortization of actuarial loss
519

1,300

(201
)
(504
)
318

796

Total defined benefit pension plans
523

1,315

(203
)
(510
)
320

805

Natural gas swap derivatives
 
 
 
 
 
 
Loss/(gain) reclassified to net income
(357
)
57

139

(22
)
(218
)
35

Gain/(loss) activity recognized in other comprehensive income (loss)
172

184

(67
)
(71
)
105

113

Total natural gas swap derivatives
(185
)
241

72

(93
)
(113
)
148

Corn option derivatives
 
 
 
 
 
 
Loss/(gain) reclassified to net income
(1,292
)
(42
)
501

16

(791
)
(26
)
Gain/(loss) activity recognized in other comprehensive income (loss)
(1,319
)
1,591

512

(616
)
(807
)
975

Total corn option derivatives
(2,611
)
1,549

1,013

(600
)
(1,598
)
949

 
 
 
 
 
 
 
Foreign currency translation
20,615




20,615


 
 
 
 
 
 
 
Other comprehensive income (loss)
$
18,342

$
3,105

$
882

$
(1,203
)
$
19,224

$
1,902

 
 
 
 
 
 
 
The following table presents the amounts reclassified out of each component of other comprehensive income (loss), net of tax for the three months ended March 29, 2014 and March 30, 2013 as follows (in thousands):

 
Three Months Ended
 
 
March 29, 2014
March 30, 2013
Statement of Operations Classification
Derivative instruments
 
 
 
Natural gas swap derivatives
$
357

$
(57
)
Cost of sales and operating expenses
Corn option derivatives
1,292

42

Cost of sales and operating expenses
 
1,649

(15
)
Total before tax
 
(640
)
6

Income taxes
 
1,009

(9
)
Net of tax
Defined benefit pension plans
 
 
 
Amortization of prior service cost
$
(4
)
$
(15
)
(a)
Amortization of actuarial loss
(519
)
(1,300
)
(a)
 
(523
)
(1,315
)
Total before tax
 
203

510

Income taxes
 
(320
)
(805
)
Net of tax
Total reclassifications
$
689

$
(814
)
Net of tax

(a)
These items are included in the computation of net periodic pension cost. See Note 9 Employee Benefit Plans for additional information.

The following table presents changes in each component of accumulated comprehensive income (loss) as of March 29, 2014 as follows (in thousands):


18



 
 
Three Months Ended March 29, 2014
 
 
Foreign Currency
Derivative
Defined Benefit
 
 
 
Translation
Instruments
Pension Plans
Total
Accumulated Other Comprehensive Income (loss) December 28, 2013, net of tax
 
$
(14,502
)
$
1,448

$
(16,369
)
$
(29,423
)
Other comprehensive gain before reclassifications
 
20,615

(62
)

20,553

Amounts reclassified from accumulated other comprehensive income (loss)
 

(1,649
)
320

(1,329
)
Net current-period other comprehensive income
 
20,615

(1,711
)
320

19,224

Accumulated Other Comprehensive Income (loss) March 29, 2014, net of tax
 
6,113

$
(263
)
$
(16,049
)
$
(10,199
)

(9)    Employee Benefit Plans

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

As a result of the Rothsay Acquisition, certain employees of MFI became employees of the Company. Pursuant to the terms of the purchase and sale agreement, the pension benefits of these employees in respect to service prior to October 28, 2013 remain the responsibility of MFI. Benefits and rights accruing to these employees on and after October 28, 2013 (including earning increases on benefits accrued for non-Quebec employees prior to October 28, 2013) are the responsibility of the Company. The three plans created with an initial date of October 28, 2013 are the Darling International Canada Inc. Pension Plan for Eligible Salaried and Hourly Non-Union Employees (the "DICI Non-Union Plan"); the Darling International Canada Inc. Pension Plan for Eligible Unionized Employees; and the Darling Supplemental Employees Retirement Plan.

Additionally, as a result of the VION Acquisition, employees of VION Ingredients became employees of Darling Ingredients International. Pursuant to the terms of the sale and purchase agreement of the VION Acquistion, Darling assumed approximately $31.7 million of pension and postretirement benefit plan obligations.

Net pension cost for the three months ended March 29, 2014 and March 30, 2013 includes the following components (in thousands):

 
Pension Benefits
 
Other Post Retirement Benefits
 
Three Months Ended
 
Three Months Ended
 
March 29,
2014
March 30,
2013
 
March 29,
2014
March 30,
2013
Service cost
$
1,446

$
77

 
$
44

$

Interest cost
3,326

1,318

 
21


Expected return on plan assets
(383
)
(1,819
)
 


Amortization of prior service cost
4

15

 


Amortization of net loss
520

1,300

 


Net pension cost
$
4,913

$
891

 
$
65

$

  
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 and foreign income tax purposes.  Contributions are intended to provide not only for benefits attributed to service to date, but also for those

19



expected to be earned in the future. Based on actuarial estimates at March 29, 2014, the Company expects to contribute approximately $19.1 million to its pension plans to meet funding requirements during the next twelve months. Additionally, the Company has made tax deductible discretionary and required contributions to its pension plans for the three months ended March 29, 2014 and March 30, 2013 of approximately $5.2 million and $0.1 million, respectively.  

The Company participates in various multiemployer pension plans which provide defined benefits to certain employees covered by labor contracts.  These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts to meet their pension benefit obligations to their participants.   The Company's contributions to each individual 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, with one of these material plans certified as critical or red zone. With respect to the other multiemployer pension plans in which the Company participates and which are not individually significant, four plans have certified as critical or red zone and three plans have certified as endangered or yellow zone as defined by the Pension Protection Act of 2006.

In June 2009, the Company received a notice of a mass withdrawal termination and a notice of initial withdrawal liability from a multiemployer plan in which it participated. The Company had anticipated this event and as a result had accrued approximately $3.2 million as of January 3, 2009 based on the most recent information that was probable and estimable for this plan. The plan had given a notice of redetermination liability in December 2009. In fiscal 2010, the Company received further third party information confirming the future payout related to this multiemployer plan. As a result, the Company reduced its liability to approximately $1.2 million. In fiscal 2010, another under-funded multiemployer plan in which the Company participates gave notification of partial withdrawal liability. As of March 29, 2014, the Company has an accrued liability of approximately $0.9 million representing the present value of scheduled withdrawal liability payments under this multiemployer plan. 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.

(10)
Derivatives

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

The Company makes limited use of derivative instruments to manage cash flow risks related to 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 U.S. forecasted sales of bakery by-products ("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 March 29, 2014, the Company had corn option contracts outstanding that qualified and were designated for hedge accounting as well as heating oil swap contracts, soybean oil options 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.


20



Cash Flow Hedges

In fiscal 2013, 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 2014. As of March 29, 2014, all of the contracts have expired and settled according to the contracts.

In fiscal 2013 and the first three months of fiscal 2014, 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 its U.S. forecasted sales of BBP through fiscal 2014. As of March 29, 2014, some of the 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.

As of March 29, 2014, 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 function currency. All of these transactions are currently not designated for hedge accounting. (in thousands):

Functional Currency
 
Contract Currency
Type
Amount
 
Type
Amount
Brazilian real
16,866

 
Euro
5,350

Brazilian real
17,223

 
U.S. dollar
7,250

Euro
245,890

 
U.S. dollar
336,886

Euro
28,995

 
Polish zloty
121,698

Euro
4,889

 
Japanese yen
686,916

Euro
21,185

 
Chinese renminbi
176,512

Euro
19,905

 
Australian dollar
29,850

Euro
6,985

 
British pound
5,773


The Company estimates the amount that will be reclassified from accumulated other comprehensive gain at March 29, 2014 into earnings over the next 12 months will be approximately $0.4 million. As of March 29, 2014, 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 under FASB authoritative guidance as of March 29, 2014 and December 28, 2013 (in thousands):


Derivatives Designated
Balance Sheet
Asset Derivatives Fair Value
as Hedges
Location
March 29, 2014
December 28, 2013
Corn options
Other current assets
$
16

$
2,349

Natural gas swaps
Other current assets

120

 
 
 
 
Total asset derivatives designated as hedges
$
16

$
2,469

 
 
 
 
Derivatives Not
Designated as
Hedges
 
 

 

Foreign currency contracts
Other current assets
$
1,449

$
27,516

Heating oil swaps and options
Other current assets
18

43

Soybean oil options
Other current assets
28


 
 
 
 
Total asset derivatives not designated as hedges
$
1,495

$
27,559

 
 
 
 
Total asset derivatives
 
$
1,511

$
30,028



21



Derivatives Designated
Balance Sheet
Liability Derivatives Fair Value
as Hedges
Location
March 29, 2014
December 28, 2013
Corn options and futures
Accrued expenses
$
696

$
1

 
 
 
 
Total liability derivatives designated as hedges
$
696

$
1

 
 
 
 
Derivatives Not
Designated as
Hedges
 
 

 

Foreign currency contracts
Accrued expenses
$
1,671

$

Heating oil swaps and options
Accrued expenses
5

2

Corn options
Accrued expenses
166


 
 
 
 
Total liability derivatives not designated as hedges
$
1,842

$
2

 
 
 
 
Total liability derivatives
$
2,538

$
3


The effect of the Company’s derivative instruments on the consolidated financial statements as of and for the three months ended March 29, 2014 and March 30, 2013 is as follows (in thousands):

 
 
 
Derivatives
Designated as
Cash Flow Hedges
 
Gain or (Loss)
Recognized in OCI
on Derivatives
(Effective Portion) (a)
Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion) (b)
Gain or (Loss)
Recognized in Income
on Derivatives
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing) (c)
 
2014
2013
2014
2013
2014
2013
Corn options
$
(1,319
)
$
1,591

$
1,292

$
42

$
376

$
254

Natural gas swaps
172

184

357

(57
)
1

(1
)
 
 
 
 
 
 
 
Total
$
(1,147
)
$
1,775

$
1,649

$
(15
)
$
377

$
253


(a)
Amount recognized in accumulated OCI (effective portion) is reported as accumulated other comprehensive income/(loss) of approximately $1.1 million and approximately $1.8 million recorded net of taxes of approximately $0.4 million and less than $0.7 million as of March 29, 2014 and March 30, 2013, respectively.
(b)
Gains and (losses) reclassified from accumulated OCI into income (effective portion) for corn options and natural gas swaps are included in 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.
 
 
 
 
 
 
 
At March 29, 2014, the Company had forward purchase agreements in place for purchases of approximately $5.4 million of natural gas and diesel fuel.  These forward purchase agreements have no net settlement provisions and the Company intends to take physical delivery of the underlying product.  Accordingly, the forward purchase agreements are not subject to the requirements of fair value accounting because they qualify and the Company has elected to account for these as normal purchases as defined in the FASB authoritative guidance.

(11)    Fair Value Measurements

FASB authoritative guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The following table presents the Company’s financial instruments that are measured at fair value on a recurring and nonrecurring basis as of March 29, 2014 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. 


22



 
 
Fair Value Measurements at March 29, 2014 Using
 
 
Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable
Inputs
Significant
Unobservable
Inputs
(In thousands of dollars)
Total
(Level 1)
(Level 2)
(Level 3)
Assets:
 
 
 
 
Derivative instruments
$
1,511

$

$
1,511

$

Total Assets
$
1,511

$

$
1,511

$

 
 
 
 
 
Liabilities:
 
 
 
 
Derivative instruments
$
2,538

$

$
2,538

$

Senior notes
511,250


511,250


Term loan A
335,634


335,634


Term loan B
1,302,647


1,302,647


Revolver debt
215,730


215,730


Total Liabilities
$
2,367,799

$

$
2,367,799

$


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

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

The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the short maturity of these instruments and as such have been excluded from the table above. The carrying amount for the Company's other debt is not deemed to be significantly different than the fair value and all other instruments have been recorded at fair value. 

The fair value of the senior notes, term loan A, term loan B and revolver debt is based on market quotation from a third-party bank.

(12)
Contingencies 

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

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

As a result of the matters discussed above, the Company has established loss reserves for insurance, environmental and litigation matters.  At March 29, 2014 and December 28, 2013, the reserves for insurance, environmental and litigation contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities were approximately $76.2 million and $35.5 million, respectively.  The Company has insurance recovery receivables of approximately $8.8 million as of March 29, 2014 and December 28, 2013, related to these liabilities. The Company's management believes these reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management; however, there can be no assurance that final costs related to these matters will not exceed current estimates. The Company believes that the likelihood is remote that any additional liability from these lawsuits and claims that may not be covered by insurance would have a material effect on the Company's financial position, results of operations or cash flows.

Lower Passaic River Area. The Company has been named as a third party defendant in a lawsuit pending in the Superior Court of New Jersey, Essex County, styled New Jersey Department of Environmental Protection, The Commissioner of

23



the New Jersey Department of Environmental Protection Agency and the Administrator of the New Jersey Spill Compensation Fund, as Plaintiffs, vs. Occidental Chemical Corporation, Tierra Solutions, Inc., Maxus Energy Corporation, Repsol YPF, S.A., YPF, S.A., YPF Holdings, Inc., and CLH Holdings, as Defendants (Docket No. L-009868-05) (the “Tierra/Maxus Litigation”). In the Tierra/Maxus Litigation, which was filed on December 13, 2005, the plaintiffs seek to recover from the defendants past and future cleanup and removal costs, as well as unspecified economic damages, punitive damages, penalties and a variety of other forms of relief, purportedly arising from the alleged discharges into the Passaic River of a particular type of dioxin and other unspecified hazardous substances. The damages being sought by the plaintiffs from the defendants are likely to be substantial. On February 4, 2009, two of the defendants, Tierra Solutions, Inc. (“Tierra”) and Maxus Energy Corporation (“Maxus”), filed a third-party complaint against over 300 entities, including the Company, seeking to recover all or a proportionate share of cleanup and removal costs, damages or other loss or harm, if any, for which Tierra or Maxus may be held liable in the Tierra/Maxus Litigation. Tierra and Maxus allege that Standard Tallow Company, an entity that the Company acquired in 1996, contributed to the discharge of the hazardous substances that are the subject of this case while operating a former plant site located in Newark, New Jersey. The Company is a party to a settlement in this matter pursuant to which it will pay the State of New Jersey $195,000 and be dismissed from the case. This amount was accrued in the first quarter of 2013. The Superior Court approved the settlement on December 12, 2013 and entered an order dismissing participating third-party defendants from the litigation. We have paid the Company's settlement amount into escrow where it will be held by the Superior Court pending any appeal of the Superior Court’s order. Additionally, in December 2009, the Company, along with numerous other entities, received notice from the United States Environmental Protection Agency (EPA) that the Company (as successor-in-interest to Standard Tallow Company) is considered a potentially responsible party with respect to alleged contamination in the lower Passaic River area which is part of the Diamond Alkali Superfund Site located in Newark, New Jersey. In the letter, EPA requested that the Company join a group of other parties in funding a remedial investigation and feasibility study at the site. As of the date of this report, the Company has not agreed to participate in the funding group. The Company's ultimate liability for investigatory costs, remedial costs and/or natural resource damages in connection with the lower Passaic River area cannot be determined at this time; however, as of the date of this report, there is nothing that leads the Company to believe that these matters will have a material effect on the Company's financial position, 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, 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. 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.


24



(13)
Business Segments

Effective December 29, 2013, the Company's business operations were reorganized into three industry segments: Feed Ingredients, Food Ingredients and Fuel Ingredients, in order to better align its business with the underlying markets and customers that the Company serves. All historical periods have been recast for the changes to the segment reporting structure. The Company sells its products domestically and internationally. 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 certain 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 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 by-products business. Feed Ingredients operations process animal by-products and used cooking oil into fats, protein and hides.

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 and (ii) the bioenergy business conducted by Darling Ingredients International under the Ecoson and Rendac names.

Business Segments (in thousands):

 
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Three Months Ended March 29, 2014
 
 
 
 
 
Net Sales
$
571,936

$
271,082

$
88,417

$

$
931,435

Cost of sales and operating expenses
446,039

235,358

74,177

(121
)
755,453

Gross Margin
125,897

35,724

14,240

121

175,982

 
 
 
 
 
 
Selling, general and administrative expense
52,376

27,795

4,815

9,943

94,929

Acquisition costs



15,948

15,948

Depreciation and amortization
37,730

16,471

7,212

4,256

65,669

Segment operating income/ (loss)
35,791

(8,542
)
2,213

(30,026
)
(564
)
 
 
 
 
 
 
Equity in net income of unconsolidated subsidiaries
403


4,674


5,077

Segment income
36,194

(8,542
)
6,887

(30,026
)
4,513

 
 
 
 
 
 
Total other expense
 
 
 
 
(73,809
)
Income before income taxes
 
 
 
 
$
(69,296
)
 
 
 
 
 
 
Segment assets at March 29, 2014
$
2,708,147

$
1,841,634

$
719,644

$
280,434

$
5,549,859





25



 
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Three Months Ended March 30, 2013
 
 
 
 
 
Net Sales
$
443,782

$

$
1,640

$

$
445,422

Cost of sales and operating expenses
321,192


1,361

133

322,686

Gross Margin
122,590


279

(133
)
122,736

 
 
 
 
 
 
Selling, general and administrative expense
34,086


96

8,111

42,293

Acquisition costs





Depreciation and amortization
20,477


31

1,359

21,867

Segment operating income/ (loss)
68,027


152

(9,603
)
58,576

 
 
 
 
 
 
Equity in net income of unconsolidated subsidiaries


(1,195
)

(1,195
)
Segment income
68,027


(1,043
)
(9,603
)
57,381

 
 
 
 
 
 
Total other expense
 
 
 
 
(4,558
)
Income before income taxes
 
 
 
 
$
52,823

 
 
 
 
 
 
Segment assets at December 28, 2013
$
1,986,564

$

$
179,722

$
1,077,847

$
3,244,133

 
(14)
Related Party Transactions

Lease Agreements

Darling through its wholly-owned subsidiary Griffin Industries LLC, leases two real properties located in Butler, Kentucky and real properties located in each of Jackson, Mississippi and Henderson, Kentucky from Martom Properties, LLC, an entity owned in part by Martin W. Griffin, the Company's Executive Vice President – Chief Operations Officer, North America. Each of these leases was entered into as of December 17, 2010. The lease term for each of the Butler properties and the Jackson property is thirty years, and the Company has the right to renew such leases for two additional terms of ten years each.  The annual rental payment for each of the Butler properties is $30,000 for the first five years of the lease term and is increased by the increase in the consumer price index every five years thereafter.  The annual rental payment for the Jackson property is $221,715 for the first five years of the lease term and is increased by the increase in the consumer price index every five years thereafter.  The lease term for the Henderson property is ten years, and the Company has the right to renew such lease for four additional terms of five years each.  The annual rental payment for the Henderson property is $60,000 for the first five years of the lease term and is increased by the increase in the consumer price index every five years thereafter.  Under the terms of each lease, the Company has a right of first offer and right of first refusal for each of the properties.

Raw Material Agreement

The Company entered into a Raw Material Agreement with the DGD Joint Venture in May 2011 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 three months ended March 29, 2014 and March 30, 2013, the Company has recorded sales to the DGD Joint Venture of approximately $41.6 million and $5.2 million, respectively. At March 29, 2014 and December 28, 2013, the Company has $17.1 million and $14.6 million in outstanding receivables due from the DGD Joint Venture, respectively. In addition, the Company has eliminated additional sales for the three months ended March 29, 2014, of approximately $9.2 million to the DGD Joint Venture to defer the Company's portion of profit on those sales relating to inventory assets still remaining on the DGD Joint Venture's balance sheet at March 29, 2014 of approximately $2.3 million.


26



(15)     New Accounting Pronouncements

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The ASU amends ASC Topic 740, Income Taxes The new standard requires, unless certain conditions exist, an unrecognized tax benefit to be presented as a reduction to a deferred tax asset in the financial statements for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The standard will become effective for the Company prospectively for annual periods beginning after December 15, 2013, and interim periods within those years, with early adoption permitted. Retrospective application is also permitted. The Company adopted this standard in the first quarter of fiscal 2014. The adoption did not have a material impact on the Company's consolidated financial statements.

(16)     Guarantor Financial Information

The Company's 5.375% Notes (see Note 6) are guaranteed on an unsecured basis by the Company's 100% directly and indirectly owned subsidiaries Darling National, Griffin and its subsidiary Craig Protein , Darling AWS LLC, Terra Holding Company, Darling Global Holdings Inc., Darling Northstar LLC, Terra Renewal Services, Inc., EV Acquisition, Inc., Rousselot Inc., Rousselot Peabody Inc., Rousselot Dubuque Inc. and Sonac USA LLC. (collectively, the "Guarantors"). The Guarantors fully and unconditionally guaranteed the 5.375% Notes on a joint and several basis. The following financial statements present condensed consolidating financial data for (i) Darling, the issuer of the 5.375% Notes, (ii) the combined Guarantors, (iii) the combined other subsidiaries of the Company that did not guarantee the 5.375% 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 March 29, 2014 and December 28, 2013, and the condensed consolidating statements of operations, the condensed consolidating statements of comprehensive income and the condensed consolidating statements of cash flows for the three ended March 29, 2014 and March 30, 2013.



27



Condensed Consolidating Balance Sheet
As of March 29, 2014
(in thousands)

 
Issuer
Guarantors
Non-guarantors
Eliminations
Consolidated
ASSETS
 
 
 
 
 
Cash and cash equivalents
$
54,293

$
13,451

$
75,678

$

$
143,422

Restricted cash
102


262


364

Accounts receivable
75,149

551,127

293,012

(483,902
)
435,386

Inventories
15,183

85,269

310,069


410,521

Income taxes refundable
28,569

3,732

(6,946
)

25,355

Prepaid expenses
16,157

1,544

12,778


30,479

Other current assets
1,280

57

31,641


32,978

Deferred income taxes
15,731


4,202


19,933

Total current assets
206,464

655,180

720,696

(483,902
)
1,098,438

Investment in subsidiaries
3,655,852

1,974,799

7,994,506

(13,625,157
)

Property, plant and equipment, net
201,459

392,624

1,087,553


1,681,636

Intangible assets, net
22,848

333,316

698,444


1,054,608

Goodwill
21,860

617,243

837,438


1,476,541

Investment in unconsolidated subsidiary


149,025


149,025

Other assets
73,870

588,801

(211,690
)
(370,997
)
79,984

Deferred taxes
(847
)
847

9,627


9,627

 
$
4,181,506

$
4,562,810

$
11,285,599

$
(14,480,056
)
$
5,549,859

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 

 
 
 

Current portion of long-term debt
$
18,500

$
86

$
43,865

$

$
62,451

Accounts payable
492,596

35,099

266,800

(478,415
)
316,080

Accrued expenses
74,197

15,920

64,802

(5,487
)
149,432

Deferred taxes


1,764


1,764

Total current liabilities
$
585,293

$
51,105

$
377,231

$
(483,902
)
$
529,727

Long-term debt, net of current portion
1,436,500

13,359

1,251,631

(370,996
)
2,330,494

Other noncurrent liabilities
35,876

5,893

64,431


106,200

Deferred income taxes
131,373

7,726

348,587


487,686

 Total liabilities
2,189,042

78,083

2,041,880

(854,898
)
3,454,107

Total stockholders’ equity
1,992,464

4,484,727

9,243,719

(13,625,158
)
2,095,752

 
$
4,181,506

$
4,562,810

$
11,285,599

$
(14,480,056
)
$
5,549,859



28



Condensed Consolidating Balance Sheet
As of December 28, 2013
(in thousands)

 
Issuer
Guarantors
Non-guarantors
Eliminations
Consolidated
ASSETS
 
 
 
 
 
Cash and cash equivalents
$
857,267

$
6,117

$
7,473

$

$
870,857

Restricted cash
102


252


354

Accounts receivable
41,464

484,091

16,092

(428,803
)
112,844

Inventories
20,799

36,314

8,020


65,133

Income taxes refundable
14,397


115


14,512

Prepaid expenses
9,347

3,794

1,082


14,223

Other current assets
31,248

15

1,027


32,290

Deferred income taxes
15,107


2,182


17,289

Total current assets
989,731

530,331

36,243

(428,803
)
1,127,502

Investment in subsidiaries
2,140,869

63,116


(2,203,985
)

Property, plant and equipment, net
172,533

356,772

137,268


666,573

Intangible assets, net
15,896

340,611

232,157


588,664

Goodwill
21,860

424,244

255,533


701,637

Investment in unconsolidated subsidiary


115,114


115,114

Other assets
40,588

373,699

1,352

(370,996
)
44,643

 
$
3,381,477

$
2,088,773

$
777,667

$
(3,003,784
)
$
3,244,133

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 

 
 
 

Current portion of long-term debt
$
10,000

$
87

$
9,801

$

$
19,888

Accounts payable
425,117

21,236

22,939

(425,550
)
43,742

Accrued expenses
85,165

20,178

11,084

(3,253
)
113,174

Total current liabilities
520,282

41,501

43,824

(428,803
)
176,804

Long-term debt, net of current portion
680,000

55

557,888

(370,996
)
866,947

Other noncurrent liabilities
36,381


4,290


40,671

Deferred income taxes
123,862


14,897


138,759

 Total liabilities
1,360,525

41,556

620,899

(799,799
)
1,223,181

 Total stockholders’ equity
2,020,952

2,047,217

156,768

(2,203,985
)
2,020,952

 
$
3,381,477

$
2,088,773

$
777,667

$
(3,003,784
)
$
3,244,133





29



Condensed Consolidating Statements of Operations
For the three months ended March 29, 2014
(in thousands)

 
Issuer
Guarantors
Non-guarantors
Eliminations
Consolidated
Net sales
$
147,055

$
389,107

$
484,046

$
(88,773
)
$
931,435

Cost and expenses:
 
 
 
 
 
Cost of sales and operating expenses
110,794

313,008

420,424

(88,773
)
755,453

Selling, general and administrative expenses
37,552

13,876

43,501


94,929

Acquisition costs
14,381


1,567


15,948

Depreciation and amortization
7,518

19,511

38,640


65,669

Total costs and expenses
170,245

346,395

504,132

(88,773
)
931,999

Operating income
(23,190
)
42,712

(20,086
)

(564
)
 
 

 

 
 
 

Interest expense
(50,301
)
5,225

(13,781
)

(58,857
)
Foreign currency gains/ (losses)
(12,228
)
(92
)
(1,494
)

(13,814
)
Other, net
(1,453
)
(797
)
1,112


(1,138
)
Equity in net income of unconsolidated subsidiary


5,077


5,077

Earnings in investments in subsidiaries
11,361



(11,361
)

Income/(loss) before taxes
(75,811
)
47,048

(29,172
)
(11,361
)
(69,296
)
Income taxes (benefit)
(23,008
)
12,418

(7,700
)

(18,290
)
Net income/(loss) attributable to noncontrolling interests


(1,797
)

(1,797
)
Net income (loss) attributable to Darling
$
(52,803
)
$
34,630

$
(23,269
)
$
(11,361
)
$
(52,803
)






Condensed Consolidating Statements of Operations
For the three months ended March 30, 2013
(in thousands)

 
Issuer
Guarantors
Non-guarantors
Eliminations
Consolidated
Net sales
$
161,872

$
319,411

$
4,134

$
(39,995
)
$
445,422

Cost and expenses:
 
 
 
 
 
Cost of sales and operating expenses
124,104

234,521

4,056

(39,995
)
322,686

Selling, general and administrative expenses
22,567

19,686

40