DAR-2015.07.04-10Q


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 July 4, 2015
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)

 
 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 165,207,424 shares of common stock, $0.01 par value, outstanding at August 6, 2015.

1



DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 4, 2015
 
 
TABLE OF CONTENTS   

 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  62
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2






DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
July 4, 2015 and January 3, 2015
(in thousands, except share data)

 
July 4,
2015
 
January 3,
2015
ASSETS
(unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
126,020

 
$
108,784

Restricted cash
340

 
343

Accounts receivable, net
368,434

 
409,779

Inventories
396,423

 
401,613

Prepaid expenses
53,218

 
44,629

Income taxes refundable
24,855

 
22,140

Other current assets
24,102

 
21,324

Deferred income taxes
43,114

 
45,001

Total current assets
1,036,506

 
1,053,613

Property, plant and equipment, less accumulated depreciation of
   $581,537 at July 4, 2015 and $525,699 at January 3, 2015
1,515,573

 
1,574,116

Intangible assets, less accumulated amortization of
   $219,324 at July 4, 2015 and $184,909 at January 3, 2015
852,490

 
932,413

Goodwill
1,261,610

 
1,320,419

Investment in unconsolidated subsidiaries
177,036

 
202,712

Other assets
79,833

 
71,009

Deferred income taxes
15,752

 
16,431

 
$
4,938,800

 
$
5,170,713

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
50,884

 
$
54,401

Accounts payable, principally trade
164,424

 
168,518

Income taxes payable
6,015

 
4,363

Accrued expenses
242,358

 
256,119

Deferred income taxes
1,338

 
642

Total current liabilities
465,019

 
484,043

Long-term debt, net of current portion
1,994,417

 
2,098,039

Other non-current liabilities
110,918

 
114,700

Deferred income taxes
399,335

 
422,797

Total liabilities
2,969,689

 
3,119,579

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

     Common stock, $0.01 par value; 250,000,000 shares authorized;
        167,029,085 and 166,213,793 shares issued at July 4, 2015
        and at January 3, 2015, respectively
1,670

 
1,662

Additional paid-in capital
1,484,952

 
1,479,637

     Treasury stock, at cost;  1,824,535 and 1,501,130 shares at
       July 4, 2015 and at January 3, 2015, respectively
(28,265
)
 
(23,207
)
Accumulated other comprehensive loss
(266,990
)
 
(177,060
)
Retained earnings
675,147

 
671,958

Total Darling's stockholders’ equity
1,866,514

 
1,952,990

Noncontrolling interests
102,597

 
98,144

 Total stockholders' equity
$
1,969,111

 
$
2,051,134

 
$
4,938,800

 
$
5,170,713


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

3



DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
Three and six months months ended July 4, 2015 and June 28, 2014
(in thousands, except per share data)
(unaudited)


 
 
Three Months Ended
 
Six Months Ended
 
July 4,
2015
 
June 28,
2014
 
July 4,
2015
 
June 28,
2014
Net sales
$
859,315

 
$
1,031,283

 
$
1,734,009

 
$
1,977,575

Costs and expenses:
 

 
 

 
 
 
 
Cost of sales and operating expenses
668,276

 
789,505

 
1,352,797

 
1,564,711

Selling, general and administrative expenses
84,294

 
94,630

 
170,925

 
184,663

Acquisition and integration costs
1,208

 
4,165

 
6,527

 
20,113

Depreciation and amortization
66,245

 
67,498

 
132,643

 
133,167

Total costs and expenses
820,023

 
955,798

 
1,662,892

 
1,902,654

Operating income
39,292

 
75,485

 
71,117

 
74,921

 
 
 
 
 
 
 
 
Other expense:
 

 
 

 
 
 
 
Interest expense
(34,285
)
 
(26,571
)
 
(57,394
)
 
(85,428
)
Foreign currency gain/(loss)
1,622

 
11

 
(838
)
 
(13,803
)
Other income/(expense), net
(1,199
)
 
(887
)
 
(1,708
)
 
(2,025
)
Total other expense
(33,862
)
 
(27,447
)
 
(59,940
)
 
(101,256
)
 
 
 
 
 
 
 
 
Equity in net income of unconsolidated subsidiaries
4,172

 
2,040

 
2,364

 
7,117

Income/(loss) before income taxes
9,602

 
50,078

 
13,541

 
(19,218
)
 
 
 
 
 
 
 
 
Income tax expense/(benefit)
4,665

 
15,503

 
6,780

 
(2,787
)
 
 
 
 
 
 
 
 
Net income/(loss)
4,937

 
34,575

 
6,761

 
(16,431
)
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
(1,857
)
 
(1,818
)
 
(3,572
)
 
(3,615
)
 
 
 
 
 
 
 
 
Net income/(loss) attributable to Darling
$
3,080

 
$
32,757

 
$
3,189

 
$
(20,046
)
 
 
 
 
 
 
 
 
Basic income/(loss) per share
$
0.02

 
$
0.20

 
$
0.02

 
$
(0.12
)
Diluted income/(loss) per share
$
0.02

 
$
0.20

 
$
0.02

 
$
(0.12
)


 



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 and six months months ended July 4, 2015 and June 28, 2014
(in thousands)
(unaudited)


 
Three Months Ended
 
Six Months Ended
 
July 4, 2015
 
June 28, 2014
 
July 4, 2015
 
June 28, 2014
Net income/(loss)
$
4,937

 
$
34,575

 
$
6,761

 
$
(16,431
)
Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation
8,452

 
(6,931
)
 
(90,190
)
 
13,684

Pension adjustments
778

 
321

 
1,547

 
641

Natural gas swap derivative adjustments

 
(11
)
 

 
(124
)
Corn option derivative adjustments
(1,325
)
 
621

 
(1,287
)
 
(977
)
Total other comprehensive income/(loss), net of tax
7,905

 
(6,000
)
 
(89,930
)
 
13,224

Total comprehensive income/(loss)
$
12,842

 
$
28,575

 
$
(83,169
)
 
$
(3,207
)
Comprehensive income/(loss) attributable to noncontrolling interests
848

 
2,242

 
$
7,890

 
$
3,110

Comprehensive income/(loss) attributable to Darling
$
11,994

 
$
26,333

 
$
(91,059
)
 
$
(6,317
)






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


5



DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended July 4, 2015 and June 28, 2014
(in thousands)
(unaudited)
 
July 4,
2015
 
June 28,
2014
Cash flows from operating activities:
 
 
 
Net income/(loss)
$
6,761

 
$
(16,431
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
132,643

 
133,167

Loss/(gain) on disposal of property, plant, equipment and other assets
233

 
(839
)
Gain on insurance proceeds from insurance settlements
(341
)
 

Deferred taxes
(3,225
)
 
(12,882
)
Increase/(decrease) in long-term pension liability
350

 
(6,519
)
Stock-based compensation expense
4,642

 
14,583

Write-off deferred loan costs
10,633

 
4,330

Deferred loan cost amortization
4,868

 
4,911

Equity in net (income)/loss of unconsolidated subsidiaries
(2,364
)
 
(7,117
)
Distributions of earnings from unconsolidated subsidiaries
26,155

 

Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
Accounts receivable
22,582

 
(36,920
)
Income taxes refundable/payable
(1,368
)
 
(3,181
)
Inventories and prepaid expenses
(21,451
)
 
(2,806
)
Accounts payable and accrued expenses
(1,505
)
 
(25,218
)
Other
8,937

 
(4,054
)
Net cash provided by operating activities
187,550

 
41,024

Cash flows from investing activities:
 
 
 
Capital expenditures
(98,722
)
 
(103,531
)
       Acquisitions, net of cash acquired

 
(2,075,651
)
Gross proceeds from disposal of property, plant and equipment and other assets
1,484

 
2,308

Proceeds from insurance settlement
341

 

Payments related to routes and other intangibles
(2,242
)
 
(7,312
)
Net cash used by investing activities
(99,139
)
 
(2,184,186
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt
579,974

 
1,821,196

Payments on long-term debt
(583,736
)
 
(287,066
)
Borrowings from revolving credit facility
41,244

 
170,143

Payments on revolving credit facility
(83,506
)
 
(257,254
)
Net cash overdraft financing
(880
)
 
9,529

Deferred loan costs
(11,629
)
 
(44,865
)
Issuance of common stock
171

 
417

Minimum withholding taxes paid on stock awards
(4,775
)
 
(5,495
)
Excess tax benefits from stock-based compensation
(12
)
 
1,329

Distributions to noncontrolling interests
(1,866
)
 

Net cash provided/(used) by financing activities
(65,015
)
 
1,407,934

Effect of exchange rate changes on cash
(6,160
)
 
8,156

Net increase/(decrease) in cash and cash equivalents
17,236

 
(727,072
)
Cash and cash equivalents at beginning of period
108,784

 
870,857

Cash and cash equivalents at end of period
$
126,020

 
$
143,785

Supplemental disclosure of cash flow information:
 
 
 
Accrued capital expenditures
$
274

 
$
(2,300
)
Cash paid during the period for:
 
 
 
Interest, net of capitalized interest
$
37,524

 
$
47,851

Income taxes, net of refunds
$
11,436

 
$
11,301

Non-cash financing activities
 
 
 
Debt issued for service contract assets
$
2,521

 
$


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

6



DARLING INGREDIENTS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
July 4, 2015
(unaudited)

(1)
General

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. The Company’s business is 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. See Note 13 to the consolidated financial statements.

The accompanying consolidated financial statements for the three and six month periods ended July 4, 2015 and June 28, 2014, have been prepared by the Company in accordance with generally accepted accounting principles in the United States ("GAAP") 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 GAAP 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 January 3, 2015

(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 Consolidated 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 subsidiaries' net assets held by parties other than the Company. These ownership interests are presented separately as "Noncontrolling interests" within "Stockholders' Equity." All significant intercompany balances and transactions have been eliminated in consolidation.

(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 July 4, 2015, and include the 13 and 26 weeks ended July 4, 2015, and the 13 and 26 weeks ended June 28, 2014.


7



(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 recognizes service revenue in the fiscal month the service occurs.

(d)
Long-Lived Assets

Property, Plant and Equipment
 
Property, plant and equipment are recorded at cost.  Depreciation is computed by the straight-line method over the estimated useful lives of assets:  1) Buildings and improvements, 15 to 30 years; 2) Machinery and equipment, 3 to 10 years; 3) Vehicles, 3 to 8 years; and 4) Aircraft, 7 to 10 years.
         
Maintenance and repairs are charged to expense as incurred and expenditures for major renewals and improvements are capitalized.

Intangible Assets
 
Intangible assets with indefinite lives, and therefore, not subject to amortization, consist of trade names acquired in the acquisition of Griffin Industries Inc. on December 17, 2010 (which was subsequently converted to a limited liability company) and its subsidiaries ("Griffin") and trade names acquired in the VION Acquisition.  In the first quarter of fiscal 2015, the Company has determined that due to a global re-branding strategy, the Griffin Industries trade name in the amount of approximately $65.1 million has been determined to have a limited useful life and therefore the Company has started to amortize the Griffin Industries name over a useful life of 10 years. Intangible assets subject to amortization consist of: 1) collection routes which are made up of groups of suppliers of raw materials in similar geographic areas from which the Company derives collection fees and a dependable source of raw materials for processing into finished products; 2) permits that represent licensing of operating plants that have been acquired, giving those plants the ability to operate; 3) non-compete agreements that represent contractual arrangements with former competitors whose businesses were acquired; 4) trade names; and 5) royalty, consulting, land use rights and leasehold agreements.   Amortization expense is calculated using the straight-line method over the estimated useful lives of the assets ranging from:  5 to 21 years for collection routes; 10 to 20 years for permits; 3 to 7 years for non-compete covenants; and 4 to 15 years for trade names.  Royalty, consulting, land use rights and leasehold agreements are amortized over the term of the agreement.

(e)
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 average exchange rates occurring during the period. Changes in exchange rates that affect cash flows and the related receivables or payables are recognized as transaction gains and losses in determining net income. The Company incurred net foreign currency translation losses of approximately $90.2 million and translation gains of approximately $13.7 million for the six months ended July 4, 2015 and June 28, 2014, respectively. In addition, the Company incurred foreign currency losses in the statement of operations of approximately $0.8 million and $13.8 million in the six months ended July 4, 2015 and June 28, 2014, with $12.6 million in fiscal 2014 representing a loss on a hedge transaction during the first quarter of fiscal 2014.


8



(f)
Reclassifications

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

(g)
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 per Common Share (in thousands, except per share data)
 
Three Months Ended
 
 
 
July 4, 2015
 
 
 
 
 
June 28, 2014
 
 
 
Income
 
Shares
 
Per Share
 
Income
 
Shares
 
Per Share
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net Income attributable to Darling
$
3,080

 
165,228

 
$
0.02

 
$
32,757

 
164,600

 
$
0.20

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Effect of dilutive securities:
 

 
 

 
 

 
 

 
 

 
 

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

 
188

 
 

 
 

 
1,071

 
 

Less: Pro forma treasury shares
 

 
(118
)
 
 

 
 

 
(574
)
 
 

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Net income attributable to Darling
$
3,080

 
165,298

 
$
0.02

 
$
32,757

 
165,097

 
$
0.20

 
Net Income/ (loss) per Common Share (in thousands, except per share data)
 
Six Months Ended
 
 
 
July 4, 2015
 
 
 
 
 
June 28, 2014
 
 
 
Loss
 
Shares
 
Per Share
 
Income
 
Shares
 
Per Share
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net Income/(loss) attributable to Darling
$
3,189

 
165,077

 
$
0.02

 
$
(20,046
)
 
164,469

 
$
(0.12
)
Diluted:
 

 
 

 
 

 
 

 
 

 
 

Effect of dilutive securities:
 

 
 

 
 

 
 

 
 

 
 

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

 
303

 
 

 
 

 

 
 

Less: Pro forma treasury shares
 

 
(136
)
 
 

 
 

 

 
 

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Net income/(loss) attributable to Darling
$
3,189

 
165,244

 
$
0.02

 
$
(20,046
)
 
164,469

 
$
(0.12
)

For the three months ended July 4, 2015 and June 28, 2014, respectively, 825,711 and 163,078 outstanding stock options were excluded from diluted income/(loss) per common share as the effect was antidilutive. For the three months ended July 4, 2015 and June 28, 2014, respectively, 582,559 and 740,988 shares of non-vested stock and stock equivalents were excluded from diluted income/(loss) per common share as the effect was antidilutive.

For the six months ended July 4, 2015 and June 28, 2014, respectively, 674,834 and 975,799 outstanding stock options were excluded from diluted income/(loss) per common share as the effect was antidilutive. For the six months ended July 4, 2015 and June 28, 2014, respectively, 578,899 and 919,798 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 68 production facilities across five continents

9



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.

On October 1, 2014, the Company acquired substantially all of the assets of Custom Blenders Arkansas, LLC, an Indiana limited liability company, Custom Blenders Georgia, LLC, a Georgia limited liability company, Custom Blenders Indiana, Inc., an Indiana corporation, and Custom Blenders Texas, LLC, an Indiana limited liability company (collectively "Custom Blenders"), one of the leading bakery residuals recyclers in the United States. The acquisition includes Custom Blenders' operations in Indiana, Georgia, Texas, and Arkansas. The acquisition will provide significant synergies to the Company's suppliers and customers in the Feed Ingredients segment. The Company paid approximately $18.8 million in cash less a second quarter 2015 contingent receivable of $0.8 million recorded against goodwill for a claim against the hold back amount originally paid in escrow as part of the original purchase price. The purchase price for assets consisting of property, plant and equipment of approximately $3.2 million, intangible assets of approximately $8.6 million, goodwill of approximately $4.6 million and inventory of approximately $1.6 million. The identifiable intangibles have a weighted average life of 14 years.

(4)
Inventories

A summary of inventories follows (in thousands):

        
 
July 4, 2015
 
January 3, 2015
Finished product
$
252,871

 
$
255,130

Work in process
95,282

 
98,936

Supplies and other
48,270

 
47,547

 
$
396,423

 
$
401,613


(5)
Investment in Unconsolidated Subsidiaries

The Company announced on January 21, 2011 that a wholly-owned subsidiary of Darling entered into a limited liability company agreement with 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 processing approximately 11,000 barrels per day of input feedstock to produce renewable diesel fuel and certain other co-products, and is located adjacent to Valero's refinery in Norco, Louisiana. The DGD Joint Venture reached mechanical completion and began the production of renewable diesel in late June 2013.

On May 31, 2011, the DGD Joint Venture and Diamond Green Diesel LLC, a wholly-owned subsidiary of the DGD Joint Venture (“Opco”), entered into (i) a facility agreement (the “Facility Agreement”) with Diamond Alternative Energy, LLC, a wholly-owned subsidiary of Valero (the “Lender”), and (ii) a loan agreement (the “Loan Agreement”) with the Lender, which provided the DGD Joint Venture with a 14 year multiple advance term loan facility of approximately $221.3 million (the “JV Loan”) to support the design, engineering and construction of the DGD Facility, which is now in production. The Facility Agreement and the Loan Agreement prohibit the Lender from assigning all or any portion of the Facility Agreement or the Loan Agreement to unaffiliated third parties. Opco has also pledged 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.

10




In addition to the DGD Joint Venture, the Company has investments in other unconsolidated subsidiaries that were acquired in the VION Acquisition that are insignificant to the Company. Selected financial information for the Company's DGD Joint Venture is as follows (in thousands):
(in thousands)
 
June 30, 2015
December 31, 2014
Assets:
 
 
 
Total current assets
 
$
131,385

$
216,991

Property, plant and equipment, net
 
360,688

373,117

Other assets
 
1,150

2,092

Total assets
 
$
493,223

$
592,200

Liabilities and members' equity:
 
 
 
Total current portion of long term debt
 
$
20,679

$
57,514

Total other current liabilities
 
21,002

21,313

Total long term debt
 
140,330

155,273

Total other long term liabilities
 
361

339

Total members' equity
 
310,851

357,761

Total liabilities and member's equity
 
$
493,223

$
592,200


 
 
Three Months Ended
 
Six Months Ended
(in thousands)
 
June 30, 2015

June 30, 2014

 
June 30, 2015

June 30, 2014

Revenues:
 
 
 
 
 
 
Operating revenues
 
$
156,160

$
148,064

 
$
272,888

$
267,721

Expenses:
 
 
 
 
 
 
Total costs and expenses
 
145,299

140,654

 
262,343

246,555

Operating income
 
10,861

7,410

 
10,545

21,166

Other income
 
32

24

 
52

42

Interest and debt expense, net
 
(3,352
)
(4,475
)
 
(7,508
)
(8,901
)
Net income
 
$
7,541

$
2,959

 
$
3,089

$
12,307


As of July 4, 2015 under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $155.4 million on the consolidated balance sheet and has recorded approximately $1.5 million and $6.2 million in equity net income in the unconsolidated subsidiary for the six months ended July 4, 2015 and June 28, 2014, respectively. In addition, in April 2015, the Company received a $25.0 million dividend distribution from the DGD Joint Venture.

(6)
Debt

Debt consists of the following (in thousands): 
        
 
July 4, 2015
 
January 3, 2015
Amended Credit Agreement:
 
 
 
Revolving Credit Facility ($25.5 million and $36.9 million denominated in CAD at July 4, 2015 and January 3, 2015, respectively and $11.1 million denominated in Euro at July 4, 2015)
$
57,553

 
$
101,863

Term Loan A ($110.4 million and $122.2 million denominated in CAD at July 4, 2015 and January 3, 2015, respectively)
295,370

 
312,161

Term Loan B ($610.2 million denominated in Euro at January 3, 2015)
592,500

 
1,205,669

5.375% Senior Notes due 2022
500,000

 
500,000

4.75% Senior Notes due 2022 - Denominated in euro
571,521

 

Other Notes and Obligations
28,357

 
32,747

 
2,045,301

 
2,152,440

Less Current Maturities
50,884

 
54,401

 
$
1,994,417

 
$
2,098,039



11



As of July 4, 2015, the Company had outstanding debt under a term loan facility and revolving credit facility denominated in Canadian dollars of CAD$138.8 million and CAD$32.0 million, respectively. See below for discussion relating to the Company's debt agreements. In addition, as of July 4, 2015, the Company had capital lease obligations denominated in Canadian dollars included in debt. The current and long-term capital lease obligation was approximately CAD$2.4 million and CAD$3.7 million, respectively.

As of July 4, 2015, the Company had outstanding debt under a revolving credit facility and the Company's 4.75% Senior Notes due 2022 denominated in euros of €10.0 million and €515.0 million, respectively. See below for discussion relating to the Company's debt agreements. In addition, at July 4, 2015, the Company had capital lease obligations denominated in euros included in debt. The current and long-term capital lease obligation was approximately €0.4 million and €0.7 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 dated September 27, 2013 (the "Former Credit Agreement"), 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 by Darling Canada in Canadian dollars and to be borrowed by Darling NL, Darling Ingredients International Holding B.V. ("Darling BV") and CTH Germany GmbH ("CTH") in U.S. dollars, euros and other currencies to be agreed and available to each applicable lender. On January 6, 2014, $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. 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 July 4, 2015, 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 following January 6, 2014, 1.25% of the original principal amount of the term loan A facility, for the ninth through sixteenth quarters following January 6, 2014, 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 July 4, 2015, 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 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 following January 6, 2014 and continuing until the last day of each quarter period ending immediately prior to January 7, 2021; and one final installment in the amount of the relevant term loan B facility then outstanding, due on January 7, 2021. The term loan B facility will mature on January 7, 2021. On June 3, 2015, the Company refinanced €504.9 million of the outstanding euro borrowings under the term loan B facility (the “Euro Term Loan B”) using the proceeds from the 4.75% Senior Notes due 2022. As a result of the refinance, the Company incurred a charge of approximately $10.6 million from the write-off of deferred loan costs related to Euro Term Loan B.

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%.


12



As of July 4, 2015, the Company had $185.0 million outstanding under the term loan A facility and $18.0 million outstanding under the revolver at LIBOR plus a margin of 2.50% per annum for a total of 2.6875% per annum and $3.0 million outstanding under the revolver at base rate plus a margin of 1.50% per annum for a total of 4.75% per annum. The Company had $592.5 million outstanding under the term loan B facility at LIBOR plus a margin of 2.50% per annum for a total of 3.25% per annum. The Company had CAD$138.8 million outstanding under the term loan A facility and CAD$32.0 million outstanding under the revolver at CDOR plus a margin of 2.5% per annum for a total of 3.5763% per annum. The Company had €10.0 million outstanding under the revolver at LIBOR plus a margin of 2.50% per annum for a total of 2.438% per annum. As of July 4, 2015, the Company had revolver availability of $908.4 million under the Credit Agreement taking into account amounts borrowed and letters of credit issued of $34.0 million.

The Amended Credit Agreement contains various customary representations and warranties by the Company, which include customary use of materiality, material adverse effect and knowledge qualifiers. The Amended Credit Agreement also contains (a) certain affirmative covenants that impose certain reporting and/or performance obligations on Darling and its 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. Effective May 13, 2015, Darling and the other borrowers party to the Amended Credit Agreement entered into the First Amendment to the Second Amended and Restated Credit Agreement (the “First Amendment”) with the administrative agent and certain of the lenders. The First Amendment removes the previously existing requirement under the Amended Credit Agreement that the maximum total leverage ratio under one of the financial covenants must continue to step down over the life of the Senior Secured Credit Facilities. After giving effect to the First Amendment, the maximum total leverage ratio shall remain 5.0 to 1.0 for the duration of the loans under the Amended Credit Agreement.

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, Darling BV, CTH and any other foreign borrower under the Senior Secured Credit Facilities are also secured by a first priority lien on certain assets of certain of Darling’s foreign subsidiaries 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, Darling BV, CTH 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 (collectively, the "Credit Agreement Guarantors").

5.375 % 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 5.375% 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% Private 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 5.375% Indenture"), among Darling Escrow Sub, the Subsidiary Guarantors (as defined in the Original 5.375% Indenture) party thereto from time to time and U.S. Bank National Association, as trustee (the "5.375% Trustee"), with the gross proceeds from the offering of the 5.375% Private Notes and certain additional amounts deposited into 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.


13



In connection with the completion of the Notes Merger, pursuant to the provisions of the Original 5.375% Indenture and the Original 5.375% Purchase Agreement, Darling Escrow Sub, Darling and certain of Darling’s subsidiaries: Craig Protein Division, Inc. ("Craig Protein"), Darling AWS LLC, Darling National LLC ("Darling National"), Darling Northstar LLC, Darling Global Holdings Inc., EV Acquisition, Inc., Griffin Industries LLC ("Griffin"), Terra Holding Company and TRS (such subsidiaries and together with any other Darling subsidiaries that guarantee the 5.375% Notes, the "Notes Guarantors") entered into a supplemental indenture with the Trustee (the "Supplemental 5.375% Indenture," and together with the Original 5.375% Indenture, the "5.375% Indenture"), pursuant to which, upon effectiveness of the Notes Merger, Darling assumed all the obligations of Darling Escrow Sub under the 5.375% Private Notes and the 5.375% Indenture and the Notes Guarantors guaranteed the 5.375% Private Notes and agreed to be bound by the terms of the 5.375% Indenture applicable to subsidiary guarantors of the 5.375% Private Notes. In addition, in accordance with the provisions of the Original 5.375% Purchase Agreement, upon the completion of the Notes Merger, Darling and the Notes Guarantors became parties to the Original 5.375% Purchase Agreement, by entering into a Joinder to the Purchase Agreement, dated as of the Notes Closing Date (together with the Original 5.375% Purchase Agreement, the "5.375% Purchase Agreement"), with the Initial Purchasers. Upon satisfaction of the escrow release conditions on the Notes Closing Date, the proceeds from the offering of the 5.375% Private 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% Private Notes to pay the Initial Purchasers’ commission related to the offering of the 5.375% Private 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% Private 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.

The Purchase Agreement contains customary representations, warranties and agreements by Darling and the Notes Guarantors. In addition, Darling and the Notes 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.

In connection with the assumption of the 5.375% Private Notes by Darling and the guarantee of the 5.375% Private Notes by the Notes Guarantors, on the Notes Closing Date, Darling and the Notes 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 "Registration Rights Agreement"). In satisfaction of Darling’s obligations under the Registration Rights Agreement, Darling and the Notes Guarantors completed a registered exchange offer for the 5.375% Private Notes under the Securities Act during the third quarter of 2014. The terms of the notes issued in exchange for the 5.375% Private Notes and guaranteed by the Notes Guarantors (the “5.375% Public Notes” and together with the 5.375% Private Notes, the “5.375% Notes") are substantially identical in all material respects to the 5.375% Private Notes, except that transfer restrictions, registration rights and additional interest provisions relating to the 5.375% Private Notes do not apply to the 5.375% Public Notes.
 
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. Other than for extraordinary events such as change of control and defined assets sales, the Company is not required to make mandatory redemption or sinking fund payments on the 5.375% Notes.

The 5.375% Notes are currently guaranteed on an unsecured senior basis by the Notes Guarantors, which constitute all of Darling’s existing restricted subsidiaries that are Credit Agreement Guarantors (other than Darling’s foreign subsidiaries). Under the 5.375% 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 and the guarantees thereof rank equally in right of payment to any existing and future senior debt of Darling and the Notes Guarantors, including debt that is secured by the collateral for the Amended Credit Agreement. The 5.375% Notes and the guarantees thereof will be effectively junior to existing and future debt of Darling and the Notes Guarantors that is secured by assets that do not constitute collateral for the Amended Credit Agreement, 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.

14



 
Darling may at any time and from time to time purchase the 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 specified in the 5.375% Indenture.

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), upon not less than 30 nor more than 60 days' notice 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.

The 5.375% Indenture contains covenants limiting Darling’s ability and the ability of its restricted subsidiaries to, among other things: incur additional indebtedness or issue preferred stock; pay dividends on or make other distributions or repurchases of Darling’s capital stock or make other restricted payments; create restrictions on the payment of dividends or other amounts from Darling’s restricted subsidiaries to Darling or Darling’s other restricted subsidiaries; make loans or investments; enter into certain transactions with affiliates; create liens; designate Darling’s subsidiaries as unrestricted subsidiaries; and sell certain assets or merge with or into other companies or otherwise dispose of all or substantially all of Darling’s assets.

The 5.375% 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 5.375% 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 5.375% Indenture to be due and payable immediately.

4.75 % Senior Notes due 2022. On May 29, 2015, Darling Global Finance B.V. (the "Note Issuer"), a wholly-owned indirect finance subsidiary of Darling incorporated as a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) under the laws of The Netherlands, the Company and the subsidiary guarantors named therein entered into a Purchase Agreement (the "4.75% Purchase Agreement") with Goldman Sachs International ("Goldman Sachs") and J.P. Morgan Securities plc ("J.P. Morgan"), for themselves and on behalf of the other several initial purchasers named therein (together with Goldman Sachs and J.P. Morgan, the "4.75% Initial Purchasers"), for the sale by the Note Issuer, and the purchase by the 4.75% Initial Purchasers, severally, of €515.0 million aggregate principal amount of the Note Issuer’s 4.75% Senior Notes due 2022 (the "4.75% Notes"). The 4.75% Purchase Agreement contains customary representations, warranties and agreements by the Note Issuer, Darling and the subsidiary guarantors named therein. In addition, the Note Issuer, Darling and such subsidiary guarantors have agreed to indemnify the 4.75% Initial Purchasers against certain liabilities, including liabilities under the Securities Act, as amended, or to contribute to payments the 4.75% Initial Purchasers may be required to make because of any of those liabilities.

On June 3, 2015, the 4.75% Notes, which were offered in a private offering, were issued pursuant to a Senior Notes Indenture, dated as of June 3, 2015 (the "4.75% Indenture"), among the Note Issuer, Darling, the subsidiary guarantors

15



party thereto from time to time, Citibank, N.A., London Branch, as trustee (the "4.75% Trustee") and principal paying agent, and Citigroup Global Markets Deutschland AG, as principal registrar.
 
The gross proceeds from the sale of the 4.75% Notes were €515.0 million. Darling used the gross proceeds from the sale of the 4.75% Notes to refinance outstanding the Euro Term Loan B under the Company’s Senior Secured Credit Facilities, to pay the 4.75% Initial Purchasers’ commission related to the offering of the 4.75% Notes and to pay certain fees and expenses related to the offering of the 4.75% Notes and the refinancing of the Euro Term Loan B. Darling intends to use any remaining proceeds for general corporate purposes. In addition, the Company capitalized as deferred loan costs approximately $12.8 million, which are included in other long-term assets from the issuance of the 4.75% Notes and the First Amendment to the Amended Credit Agreement in the three months ended July 4, 2015.

The 4.75% Notes will mature on May 30, 2022. The Note Issuer will pay interest on the 4.75% Notes on May 30 and November 30 of each year, commencing on November 30, 2015. Interest on the 4.75% Notes will accrue from June 3, 2015 at a rate of 4.75% per annum and be payable in cash. Other than for extraordinary events such as change of control and defined assets sales, the Note Issuer is not required to make mandatory redemption or sinking fund payments on the 4.75% Notes.
 
The 4.75% Notes are currently guaranteed on an unsecured senior basis by Darling and the Note Guarantors (collectively, the "4.75% Guarantors"). Under the 4.75% Indenture, each restricted subsidiary of Darling (other than Darling’s foreign subsidiaries, the Note Issuer 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 4.75% 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 4.75% Indenture provides that all payments on the 4.75% Notes or the guarantees of the 4.75% Notes must be made without withholding or deduction for taxes imposed by any relevant tax jurisdiction (as defined in the 4.75% Indenture) unless required by law. In the event that any taxes imposed by any relevant tax jurisdiction are required to be to be withheld or deducted from payments on the 4.75% Notes or the guarantees of the 4.75% Notes, the Note Issuer or the relevant 4.75% Guarantor, as the case may be, is required, subject to certain exceptions, to pay such additional amounts (“additional amounts”) as may be necessary so that the net amounts received by the holders of the 4.75% Notes after such withholding or deduction are equal to the amounts that would have been received in the absence of any such withholding or deduction.

The 4.75% Notes are senior unsecured obligations of the Note Issuer and rank equally in right of payment to all of the Note Issuer’s existing and future senior unsecured indebtedness. The 4.75% Notes are effectively junior to all of the Note Issuer’s existing and future secured indebtedness, including its guarantee of the current Senior Secured Credit Facilities (and any secured indebtedness incurred to refinance the borrowings thereunder), to the extent of the value of the assets securing such indebtedness. The 4.75% Notes are effectively junior to all existing and future indebtedness and other liabilities (including trade payables and capital lease obligations) of all subsidiaries of Darling (other than the Note Issuer) that do not guarantee the 4.75% Notes, including current and future foreign subsidiaries that guarantee the Senior Secured Credit Facilities but not the 4.75% Notes. The 4.75% Notes are senior in right of payment to all of the Note Issuer’s existing and future subordinated indebtedness, if any.
 
The guarantees are senior unsecured obligations of the 4.75% Guarantors and rank equally in right of payment to each 4.75% Guarantor’s existing and future senior unsecured indebtedness (including, in the case of Darling, its outstanding 5.375% Notes and, in the case of any restricted subsidiary of Darling that is a 4.75% Guarantor, such restricted subsidiary’s guarantee of the 5.375% Notes). The guarantees of the 4.75% Notes are effectively junior to all of each 4.75% Guarantor’s existing and future secured indebtedness, including the current Senior Secured Credit Facilities (and any secured indebtedness incurred to refinance borrowings thereunder), to the extent of the value of the assets securing such indebtedness. The guarantees are effectively junior to all existing and future indebtedness and other liabilities (including trade payables and capital lease obligations) of each 4.75% Guarantor’s subsidiaries that do not guarantee the 4.75% Notes (other than the Note Issuer), including current and future foreign subsidiaries that guarantee the Senior Secured Credit Facilities but not the 4.75% Notes. The guarantees are senior in right of payment to all of each 4.75% Guarantor’s existing and future subordinated indebtedness, if any.

The Note Issuer may at any time and from time to time purchase the 4.75% Notes in the open market or otherwise. The Note Issuer may redeem some or all of the 4.75% Notes at any time prior to May 30, 2018, at a redemption price equal to 100% of the principal amount of the 4.75% Notes redeemed, plus accrued and unpaid interest to the redemption date and an Applicable Premium as specified in the 4.75% Indenture and all additional amounts (if any) then due or which

16



will become due on the redemption date as a result of the redemption or otherwise (subject to the rights of holders on the relevant record dates to receive interest due on the relevant interest payment date and additional amounts (if any) in respect thereof).

On and after May 30, 2018, the Note Issuer may redeem all or, from time to time, a part of the 4.75% Notes at the following redemption prices (expressed as a percentage of principal amount) plus accrued and unpaid interest on the 4.75% Notes, if any, to, but excluding, the applicable redemption date and all additional amounts (if any) then due or which will become due on the applicable redemption date as a result of the redemption or otherwise (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date and additional amounts (if any) in respect thereof), if redeemed during the twelve-month period beginning on May 30 of the years indicated below:
Year
Percentage
2018
102.3750%
2019
101.1875%
2020 and thereafter
100.0000%

In addition, prior to May 30, 2018, the Note Issuer may on any one or more occasions redeem up to 40% of the original principal amount of the 4.75% Notes (calculated after giving effect to the issuance of any additional 4.75% Notes), with the net cash proceeds of one or more equity offerings at a redemption price equal to 104.75% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date and all additional amounts (if any) then due or which will become due on the redemption date as a result of the redemption or otherwise (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date and additional amounts (if any) in respect thereof); provided that at least 50% of the original principal amount of the 4.75% Notes (calculated after giving effect to any issuance of any additional 4.75% Notes) remains outstanding after each such redemption; and provided further that the redemption occurs within 90 days after the closing of such equity offering.

The Note Issuer may redeem the 4.75% Notes, in whole but not in part, at its option at a redemption price equal to 100% of the principal amount thereof, together with accrued and unpaid interest to the redemption date and all additional amounts (if any) then due or which will become due on the redemption date as a result of the redemption or otherwise (subject to the right of holders on the relevant record dates to receive interest due on the relevant interest payment dates and additional amounts (if any) in respect thereof), if the Issuer or any 4.75% Guarantor is or would be required to pay additional amounts on the 4.75% Notes as the result of certain changes in relevant tax laws after the date on which the 4.75% Notes were first issued and if the requirement to pay such additional amounts cannot be avoided by taking reasonable measures available to the Note Issuer or such guarantor of the 4.75% Notes.

The 4.75% Indenture contains covenants limiting Darling's ability and the ability of its restricted subsidiaries (including the Note Issuer) to, among other things: incur additional indebtedness or issue preferred stock; pay dividends on or make other distributions or repurchases of Darling’s capital stock or make other restricted payments; create restrictions on the payment of dividends or certain other amounts from Darling’s restricted subsidiaries to Darling or Darling’s other restricted subsidiaries; make loans or investments; enter into certain transactions with affiliates; create liens; designate Darling’s subsidiaries as unrestricted subsidiaries; and sell certain assets or merge with or into other companies or otherwise dispose of all or substantially all of Darling’s assets.

The 4.75% 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 4.75% Indenture, the 4.75% Trustee or the holders of at least 25% in principal amount of the total outstanding 4.75% Notes may declare the principal, premium, if any, interest and additional amounts, if any, on all the then outstanding 4.75% Notes to be due and payable immediately or, in the case of certain events of bankruptcy and insolvency, the principal, premium, if any, interest and additional amounts, if any, on all the then outstanding 4.75% Notes shall become immediately due and payable without any declaration or other act on the part of the 4.75% Trustee or the holders.

As of July 4, 2015, the Company believes it is in compliance with all of the financial covenants under the Amended Credit Agreement, as well as all of the other covenants contained in the Amended Credit Agreement, the 5.375% Indenture and the 4.75% Indenture. 


17



(7)
Income Taxes
 
The Company has provided income taxes for the three and six month periods ended July 4, 2015 and June 28, 2014, based on its estimate of the effective tax rate for the entire 2015 and 2014 fiscal years. For fiscal 2015, the Company’s effective tax rate is significantly affected by Subpart F income 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 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 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. As of July 4, 2015, the Company had $5.6 million of gross unrecognized tax benefits and $2.3 million of related accrued interest and penalties. An indemnity receivable of $5.9 million has been recorded for the uncertain tax positions related to the VION Acquisition. It is reasonably possible within the next twelve months that the Company’s gross unrecognized tax benefits may decrease by up to $2.1 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 United States (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 2005 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 rate swap derivative adjustments. The components of other comprehensive income (loss) and the related tax impacts for the three and six months months ended July 4, 2015 and June 28, 2014 are as follows (in thousands):


18



 
Three Months Ended
 
Before-Tax
Tax (Expense)
Net-of-Tax
 
Amount
or Benefit
Amount
 
July 4, 2015
June 28, 2014
July 4, 2015
June 28, 2014
July 4, 2015
June 28, 2014
Defined benefit pension plans
 
 
 
 
 
 
Amortization of prior service cost
$
(20
)
$
4

$
10

$
(2
)
$
(10
)
$
2

Amortization of actuarial loss
1,284

520

(496
)
(201
)
788

319

Total defined benefit pension plans
1,264

524

(486
)
(203
)
778

321

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






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

(17
)

6


(11
)
Total natural gas swap derivatives

(17
)

6


(11
)
Corn option derivatives
 
 
 
 
 
 
Loss/(gain) reclassified to net income
(347
)
(32
)
134

12

(213
)
(20
)
Gain/(loss) activity recognized in other comprehensive income (loss)
(1,819
)
1,046

707

(405
)
(1,112
)
641

Total corn option derivatives
(2,166
)
1,014

841

(393
)
(1,325
)
621

 
 
 
 
 
 
 
Foreign currency translation
8,452

(6,931
)


8,452

(6,931
)
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
7,550

$
(5,410
)
$
355

$
(590
)
$
7,905

$
(6,000
)
 
Six Months Ended
 
Before-Tax
Tax (Expense)
Net-of-Tax
 
Amount
or Benefit
Amount
 
July 4, 2015
June 28, 2014
July 4, 2015
June 28, 2014
July 4, 2015
June 28, 2014
Defined benefit pension plans
 
 
 
 
 
 
Amortization of prior service cost
$
(40
)
$
8

$
20

$
(4
)
$
(20
)
$
4

Amortization of actuarial loss
2,569

1,039

(1,002
)
(402
)
1,567

637

Total defined benefit pension plans
2,529

1,047

(982
)
(406
)
1,547

641

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

(357
)

139


(218
)
Gain/(loss) activity recognized in other comprehensive income (loss)

155


(61
)

94

Total natural gas swap derivatives

(202
)

78


(124
)
Corn option derivatives
 
 
 
 
 
 
Loss/(gain) reclassified to net income
(581
)
(1,324
)
225

513

(356
)
(811
)
Gain/(loss) activity recognized in other comprehensive income (loss)
(1,523
)
(273
)
592

107

(931
)
(166
)
Total corn option derivatives
(2,104
)
(1,597
)
817

620

(1,287
)
(977
)
 
 
 
 
 
 
 
Foreign currency translation
(90,190
)
13,684



(90,190
)
13,684

 
 
 
 
 
 
 
Other Comprehensive income (loss)
$
(89,765
)
$
12,932

$
(165
)
$
292

$
(89,930
)
$
13,224


The following table presents the amounts reclassified out of each component of other comprehensive income (loss), net of tax for the three and six months months ended July 4, 2015 and June 28, 2014 as follows (in thousands):


19



 
Three Months Ended
Six Months Ended
 
 
July 4, 2015
June 28, 2014
July 4, 2015
June 28, 2014
Statement of Operations Classification
Derivative instruments
 
 
 
 
 
Natural gas swap derivatives
$

$

$

$
357

Cost of sales and operating expenses
Corn option derivatives
347

32

581

1,324

Cost of sales and operating expenses
 
347

32

581

1,681

Total before tax
 
(134
)
(12
)
(225
)
(652
)
Income taxes
 
213

20

356

1,029

Net of tax
Defined benefit pension plans
 
 
 
 
 
Amortization of prior service cost
$
20

$
(4
)
$
40

$
(8
)
(a)
Amortization of actuarial loss
(1,284
)
(520
)
(2,569
)
(1,039
)
(a)
 
(1,264
)
(524
)
(2,529
)
(1,047
)
Total before tax
 
486

203

982

406

Income taxes
 
(778
)
(321
)
(1,547
)
(641
)
Net of tax
Total reclassifications
$
(565
)
$
(301
)
$
(1,191
)
$
388

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 July 4, 2015 as follows (in thousands):

 
 
Six Months Ended July 4, 2015
 
 
Foreign Currency
Derivative
Defined Benefit
 
 
 
Translation
Instruments
Pension Plans
Total
Accumulated Other Comprehensive Income (loss) January 3, 2015, net of tax
 
$
(140,386
)
$
76

$
(36,750
)
$
(177,060
)
Other comprehensive gain before reclassifications
 
(90,190
)
(931
)

(91,121
)
Amounts reclassified from accumulated other comprehensive income (loss)
 

(356
)
1,547

1,191

Net current-period other comprehensive income
 
(90,190
)
(1,287
)
1,547

(89,930
)
Accumulated Other Comprehensive Income (loss) July 4, 2015, net of tax
 
(230,576
)
$
(1,211
)
$
(35,203
)
$
(266,990
)

(9)    Employee Benefit Plans

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

Net pension cost for the three and six months months ended July 4, 2015 and June 28, 2014 includes the following components (in thousands):


20



 
Pension Benefits
 
Pension Benefits
 
Three Months Ended

Six Months Ended
 
July 4,
2015
June 28,
2014

July 4,
2015
June 28,
2014
Service cost
$
1,667

$
1,496

 
$
3,345

$
2,986

Interest cost
2,638

3,353

 
5,285

6,700

Expected return on plan assets
(3,051
)
(3,612
)
 
(6,116
)
(7,220
)
Amortization of prior service cost
(20
)
4

 
(40
)
8

Amortization of net loss
1,284

520

 
2,569

1,040

Net pension cost
$
2,518

$
1,761

 
$
5,043

$
3,514


  
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 expected to be earned in the future. Based on actuarial estimates at July 4, 2015, the Company expects to contribute approximately $7.5 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 six months ended July 4, 2015 and June 28, 2014 of approximately $2.5 million and $8.0 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, two plans have certified as endangered or yellow zone and one plan has certified as seriously endangerd or orange 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 July 4, 2015, the Company has an accrued liability of approximately $0.8 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

21



mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency. At July 4, 2015, the Company had corn option contracts outstanding that qualified and were designated for hedge accounting as well as heating oil swap contracts, corn option and forward contracts and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.

Entities are required to report all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding the instrument. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair value, cash flows or foreign currencies. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside of earnings) and is subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness, as well as the ineffective portion of the gain or loss are reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change.

Cash Flow Hedges

In fiscal 2014 and the first six months of fiscal 2015, 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 the second quarter of fiscal 2016. As of July 4, 2015, 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 July 4, 2015, the Company had the following outstanding forward contract amounts that were entered into to hedge the future payments of intercompany note transactions, foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency. All of these transactions are currently not designated for hedge accounting. (in thousands):

Functional Currency
 
Contract Currency
Type
Amount
 
Type
Amount
Brazilian real
15,910

 
Euro
4,550

Brazilian real
40,100

 
U.S. dollar
12,750

Euro
264,533

 
U.S. dollar
300,494

Euro
23,330

 
Polish zloty
98,000

Euro
4,968

 
Japanese yen
663,043

Euro
36,981

 
Chinese renminbi
254,055

Euro
25,326

 
Australian dollar
37,350

Euro
5,331

 
British pound
3,848

Polish zloty
24,978

 
Euro
6,065

British pound
74

 
Euro
100

British pound
131

 
U.S. dollar
200

Japanese yen
12,217

 
U.S. dollar
102


The Company estimates the amount that will be reclassified from accumulated other comprehensive gain at July 4, 2015 into earnings over the next 12 months will be approximately $2.0 million. As of July 4, 2015, 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 July 4, 2015 and January 3, 2015 (in thousands):



22



Derivatives Designated
Balance Sheet
Asset Derivatives Fair Value
as Hedges
Location
July 4, 2015
January 3, 2015
Corn options
Other current assets
$

$
247

 
 
 
 
Total asset derivatives designated as hedges
$

$
247

 
 
 
 
Derivatives Not
Designated as
Hedges
 
 

 

Foreign currency contracts
Other current assets
$
7,783

$
11,559

Heating oil swaps and options
Other current assets
129

353

Corn options and futures
Other current assets

69

 
 
 
 
Total asset derivatives not designated as hedges
$
7,912

$
11,981

 
 
 
 
Total asset derivatives
 
$
7,912

$
12,228


Derivatives Designated
Balance Sheet
Liability Derivatives Fair Value
as Hedges
Location
July 4, 2015
January 3, 2015
Corn options
Accrued expenses
$
2,531

$

 
 
 
 
Total liability derivatives designated as hedges
$
2,531

$

 
 
 
 
Derivatives Not
Designated as
Hedges
 
 

 

Foreign currency contracts
Accrued expenses
$
743

$
2,019

Heating oil swaps and options
Accrued expenses
491

993

Corn options and futures
Accrued expenses
1,116

3

 
 
 
 
Total liability derivatives not designated as hedges
$
2,350

$
3,015

 
 
 
 
Total liability derivatives
$
4,881

$
3,015


The effect of the Company’s derivative instruments on the consolidated financial statements as of and for the three months ended July 4, 2015 and June 28, 2014 is as follows (in thousands):

 
 
 
Derivatives
Designated as
Cash Flow Hedges
 
Gain or (Loss)
Recognized in Other Comprehensive Income ("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)
 
2015
2014
2015
2014
2015
2014
Corn options
$
(1,819
)
$
1,046

$
347

$
32

$
672

$
355

Natural gas swaps

(17
)



(4
)
 
 
 
 
 
 
 
Total
$
(1,819
)
$
1,029

$
347

$
32

$
672

$
351


(a)
Amount recognized in accumulated OCI (effective portion) is reported as accumulated other comprehensive income/(loss) of approximately $(1.8) million and approximately $1.0 million recorded net of taxes of approximately $0.7 million and $(0.4) million as of July 4, 2015 and June 28, 2014, 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.

23



(c)
Gains and (losses) recognized in income on derivatives (ineffective portion) for corn options and natural gas swaps is included in other income/ (expense), net in the Company’s consolidated statements of operations.

The effect of the Company’s derivative instruments on the consolidated financial statements as of and for the six months ended July 4, 2015 and June 28, 2014 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)
 
2015
2014
2015
2014
2015
2014
Corn options
$
(1,523
)
$
(273
)
$
581

$
1,324

$
727

$
731

Natural gas swaps

155


357


(5
)
 
 
 
 
 
 
 
Total
$
(1,523
)
$
(118
)
$
581

$
1,681

$
727

$
726


(a)
Amount recognized in accumulated OCI (effective portion) is reported as accumulated other comprehensive income/(loss) of approximately $(1.5) million and approximately $(0.1) million recorded net of taxes of approximately $0.6 million and less than $0.1 million as of July 4, 2015 and June 28, 2014, 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.

The table below summarizes the effect of derivatives not designated as hedges on the Company's consolidated statements of operations for the three and six months ended July 4, 2015 and June 28, 2014 (in thousands):

 
 
 
 
Gain or (loss) Recognized in Income on Derivatives Not Designated as Hedges
 
 
 
 
Three Months Ended
Six Months Ended
Derivatives not designated as hedging instruments
 
Location
 
July 4, 2015
June 28, 2014
July 4, 2015
June 28, 2014
 
 
 
 
 
 
 
 
Foreign Exchange
 
Foreign currency gain/(loss)
 
$
(2,262
)
$
2,372

$
25,437

$
(11,350
)
Foreign Exchange
 
Cost of sales and operating expenses
 
(5
)
15

(1
)
1

Foreign Exchange
 
Selling, general and administrative expense
 
(361
)
465

1,456

258

Corn options and futures
 
Net sales
 
(81
)

(70
)

Corn options and futures
 
Cost of sales and operating expenses
 
(633
)
94

(378
)
(78
)
Heating Oil swaps and options
 
Cost of sales and operating expenses
 
(35
)
8

(130
)
18

Total
 
 
 
$
(3,377
)
$
2,954

$
26,314

$
(11,151
)

At July 4, 2015, the Company had forward purchase agreements in place for purchases of approximately $2.5 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.


24



(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 July 4, 2015 and are categorized using the fair value hierarchy under FASB authoritative guidance.  The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value. 

 
 
Fair Value Measurements at July 4, 2015 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
$
7,912

$

$
7,912

$

Total Assets
$
7,912

$

$
7,912

$

 
 
 
 
 
Liabilities:
 
 
 
 
Derivative instruments
$
4,881

$

$
4,881

$

5.375% Senior notes
496,250


496,250


4.75% Senior notes
560,091


560,091


Term loan A
298,324


298,324


Term loan B
595,092


595,092


Revolver debt
56,689


56,689


Total Liabilities
$
2,011,327

$

$
2,011,327

$


Derivative assets consist of the Company’s heating oil swap and option contracts, corn option and future 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 heating oil swap and option contracts, corn option and future 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 employment related matters and 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, litigation and tax matters. At July 4, 2015 and January 3, 2015, the reserves for insurance, environmental, litigation and tax contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities were approximately

25



$57.5 million and $54.9 million, respectively.  The Company has insurance recovery receivables of approximately $11.4 million as of July 4, 2015 and January 3, 2015, 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. 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. The Company’s designation as a potentially responsible party is based upon the operation of a former plant site located in Newark, New Jersey by Standard Tallow Company, an entity that the Company acquired in 1996. In the letter, EPA requested that the Company join a group of other parties in funding a remedial investigation and feasibility study at the site. As of the date of this report, the Company has not agreed to participate in the funding group. 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 this matter will have a material effect on the Company's financial position, results of operations or cash flows.

Fresno Facility Permit Issue. The Company has been named as a defendant and a real party in interest in a lawsuit filed on April 9, 2012 in the Superior Court of the State of California, Fresno County, styled Concerned Citizens of West Fresno vs. Darling International Inc. The complaint, as subsequently amended, alleges that the Company's Fresno facility is operating without a proper use permit and seeks, among other things, injunctive relief. The complaint had at one time also alleged that the Company's Fresno facility constitutes a continuing private and public nuisance, 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.

(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 residuals business. Feed Ingredients operations process animal by-products and used cooking oil into fats, protein and hides.


26



Food Ingredients
Food Ingredients consists principally of (i) the gelatin and collagen hydrolysates business conducted by Darling Ingredients International under the Rousselot name, (ii) the natural casings and meat-by-products business conducted by Darling Ingredients International under the CTH name and (iii) certain specialty products businesses conducted by Darling Ingredients International under the Sonac name.

Fuel Ingredients
The Company's Fuel Ingredients segment consists of (i) the Company's biofuel business conducted under the Dar Pro® and Rothsay names (ii) the bioenergy business conducted by Darling Ingredients International under the Ecoson and Rendac names and (iii) the Company's investment in the DGD Joint Venture.

Business Segments (in thousands):
 
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Three Months Ended July 4, 2015
 
 
 
 
 
Net Sales
$
529,429

$
283,354

$
46,532

$

$
859,315

Cost of sales and operating expenses
404,899

223,190

40,190

(3
)
668,276

Gross Margin
124,530

60,164

6,342

3

191,039

 
 
 
 
 
 
Selling, general and administrative expense
48,656

27,867

(2,295
)
10,066

84,294

Acquisition costs



1,208

1,208

Depreciation and amortization
40,485

16,785

6,599

2,376

66,245

Segment operating income/ (loss)
35,389

15,512

2,038

(13,647
)
39,292

 
 
 
 
 
 
Equity in net income of unconsolidated subsidiaries
402


3,770


4,172

Segment income/(loss)
35,791

15,512

5,808

(13,647
)
43,464

 
 
 
 
 
 
Total other expense
 
 
 
 
(33,862
)
Income before income taxes
 
 
 
 
$
9,602


 
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Three Months Ended June 28, 2014
 
 
 
 
 
Net Sales
$
622,110

$
331,443

$
77,730

$

$
1,031,283

Cost of sales and operating expenses
458,167

269,522

61,830

(14
)
789,505

Gross Margin
163,943

61,921

15,900

14

241,778

 
 
 
 
 
 
Selling, general and administrative expense
49,371

30,982

4,839

9,438

94,630

Acquisition costs



4,165

4,165

Depreciation and amortization
39,866

19,628

5,818

2,186

67,498

Segment operating income/ (loss)
74,706

11,311

5,243

(15,775
)
75,485

 
 
 
 
 
 
Equity in net income of unconsolidated subsidiaries
561


1,479


2,040

Segment income/(loss)
75,267

11,311

6,722

(15,775
)
77,525

 
 
 
 
 
 
Total other expense
 
 
 
 
(27,447
)
Income before income taxes
 
 
 
 
$
50,078




27



 
 
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Six Months Ended July 4, 2015
 
 
 
 
 
Net Sales
$
1,076,927

$
553,511

$
103,571

$

$
1,734,009

Cost of sales and operating expenses
828,905

439,827

84,065


1,352,797

Gross Margin
248,022

113,684

19,506


381,212

 
 
 
 
 
 
Selling, general and administrative expense
96,679

53,342

1,745

19,159

170,925