Darling International Inc.
251 O’Connor Ridge Blvd.
Suite 300
Irving, Texas 75038
sustaining
innovating
renewing
2010 Annual Report
Connecting opportunities for dynamic results
In 2010, Darling International set a remarkable tone with several forward-thinking advancements, each
reinforcing a pioneer legacy built by more than 128 years of industry survival and leadership. We have
re-energized, re-invented, and re-positioned Darling International for the next generation. That said, our strategic
focus on our business today, as well as in the future, positions us to enhance our business model to capture
the next generation of profitable markets. This year alone, we merged with Griffin Industries, a strong industry
leader that significantly expands our geographic footprint and offers a host of new product mixes and
margin opportunities. Additionally, in January 2011, our joint venture with Valero Energy Corporation – the
Diamond Green Diesel refinery for renewable diesel fuel – took a strong step forward when the U.S.
Department of Energy granted a conditional commitment toward a loan guarantee. This partnership will
enable us to capitalize on emerging alternative fuel markets, creating additional end uses for our feed
stocks in a sustainable way. Looking back at a year punctuated by such expansive growth has not made us
complacent about our vision for the future. At Darling, our progress is taking recycling into a new era of
success. Come with us.
Connecting opportunities for dynamic results
In 2010, Darling International set a remarkable tone with several forward-thinking advancements, each
reinforcing a pioneer legacy built by more than 128 years of industry survival and leadership. We have
re-energized, re-invented, and re-positioned Darling International for the next generation. That said, our strategic
focus on our business today, as well as in the future, positions us to enhance our business model to capture
the next generation of profitable markets. This year alone, we merged with Griffin Industries, a strong indus-
try leader that significantly expands our geographic footprint and offers a host of new product mixes and
margin opportunities. Additionally, in January 2011, our joint venture with Valero Energy Corporation – the
Diamond Green Diesel refinery for renewable diesel fuel – took a strong step forward when the U.S.
Department of Energy granted a conditional commitment toward a loan guarantee. This partnership will
enable us to capitalize on emerging alternative fuel markets, creating additional end uses for our feed
stocks in a sustainable way. Looking back at a year punctuated by such expansive growth has not made us
complacent about our vision for the future. At Darling, our progress is taking recycling into a new era of
success. Come with us.
sustaining
innovating
renewing
thinking ahead for renewed success
Letter To Our
Shareholders
Fiscal 2010 was a defining and transformational year for Darling International – a year in which
we firmly positioned the company as America’s leading provider of rendering, recycling,
and recovery solutions to the nation’s food industry. Not only did we deliver exceptional
results, we completed two strategic acquisitions, further fueling our long-term growth
strategy. We are very pleased with our overall fiscal 2010 financial performance, posting
net income of $44.2 million, or $0.53 per diluted share, compared to $41.8 million,
or $0.51 per diluted share, for the 2009 period. Additionally, transaction-related
innovating
expenses related to the Griffin Industries acquisition accounted for a $0.10 per
share charge.
During the year, we successfully managed our operations through a myriad of moving parts against the backdrop of
fluctuating economic conditions. For the year, raw material tonnage improved. We even saw several suppliers re-open
their facilities after the 2008 credit crunch. For the year, higher finished product prices and improved raw material
volumes drove solid results, while an early and extremely hot summer impacted our product
quality and held down earnings until the fourth quarter. We did see growing global
mandates for biofuels, increased ethanol production, and a weaker U.S. dollar – all
positively impacting finished product prices.
Achieving A National Footprint
sustaining
The Griffin Industries merger, completed December 17, 2010, is the largest and
most significant acquisition we have made in our 128-year history. Our
combined companies will collectively operate more than 125 facilities in 42 states,
employing over 3,300 people and operating one of America’s top trucking fleets. Joining
forces with this high-caliber company creates a platform second to no one in the United States.
Griffin brings a well managed rendering business, a leading bakery waste recycling system, and a mindset for creating
value for both the customer and supplier. Griffin’s legacy is one we are proud to bring to Darling’s shareholders. We
are truly excited about the union of our two companies and believe we are fortifying our overall operating
fundamentals to drive sustainable financial performance.
In the second quarter, we made a strategic investment by acquiring the rendering business assets of Nebraska
By-Products, which is one of the largest and most efficient dead stock collection and rendering businesses
in the country.
renewing
Renewable Diesel – Creating a New Market for our Products
We achieved a significant milestone with the U.S. Department of Energy’s (DOE)
loan guarantee program. In mid-January 2011, the DOE formally offered a
conditional commitment for a $241 million loan guarantee for our
proposed joint venture project with Valero Energy Corporation to build a
renewable diesel facility at a site adjacent to Valero’s St. Charles refinery
near Norco, Louisiana. Designed to produce more than 9,300 barrels per
day, or 137 million gallons per year, of renewable diesel, the proposed
facility will convert fats, primarily animal fats and used cooking oil supplied
by Darling, into renewable diesel. We are working to finalize the definitive
loan documents, and, provided the funding for the relevant government
programs isn’t negatively impacted by the new Congress, we look
forward to commencing construction on the site during fiscal 2011.
Positioned for Sustainable Growth
In closing, let me reiterate that fiscal 2010 was a transformational year for Darling, and we
are all proud of our results. We are excited about our long-term prospects for growth and
realizing the combined value Darling and Griffin can deliver. We have fortified our capital structure with our recent
secondary stock offering to provide more flexibility to achieve our long-term growth objectives, and we are well-positioned
as we move forward into 2011.
I continue to be grateful for the unparalleled work, dedication, and expertise of our employees. As a team, we celebrate
the accomplishments of 2010 and, together, look forward to continued success in 2011. We also extend our sincere
gratitude to our shareholders, business associates, suppliers, and customers for their ongoing support.
Randall C. Stuewe
Chairman and Chief Executive Officer
Sustained performance
Operating Highlights
(in thousands)
2006
2007
2008
2009
2010
Net sales
$ 406,990
$ 645,313
$ 807,492
$597,806
$724,909
Operating Income
$ 19,239
$ 80,647
$ 92,676
$ 70,939
$ 82,513
Operating Cash Flow
$ 39,925
$ 103,861
$ 133,023
$ 96,165
$ 114,421
Net Income
$
5,107
$ 45,533
$ 54,562
$ 41,790
$ 44,243
Operating Cash Flow
(in thousands)
3
2
0
,
3
3
1
$
1
6
8
,
3
0
1
$
1
2
4
,
4
1
1
$
5
6
,1
6
9
$
5
2
9
,
9
3
$
06
07
08
09
10
Stockholders’
Equity
(in thousands)
6
9
2
,
4
6
4
$
7
7
8
,
4
8
2
$
8
7
5
,
6
3
2
$
,
4
8
9
0
0
2
$
5
2
3
1,
5
1
$
06
07
08
09
10
EBITDA/SALES
%
.1
6
1
%
5
.
6
1
%
.1
6
1
%
8
.
5
1
%
8
.
9
06
07
08
09
10
Sustaining growth with Griffin Industries
The strong performance and growth of Darling International is tied to our people
and our vision for the future as well as the geographic presence of our quality
services and products. Our merger with Griffin Industries, a company that mirrors
our forward-thinking philosophy and strong leadership team, strategically
expands our national service to nine new states and brings our total number of
facilities to more than 125. While our increased operating range and service
capacity greatly improves Darling’s market presence, the company also gains the addition
of Griffin’s market-leading bakery waste recycling business as well as its value-added pet food
ingredient product line that optimizes margin potential.
As a company committed to a sustainable financial future, we are proud to say that Griffin’s integration with the
Darling network solidifies our position as the industry leader in rendering, recycling, and recovery solutions to the
nation’s food industry. Our market-leading role is reinforced by a myriad of company-wide improvements due to
operational synergy and arbitrage, as well as positioning the company to increase feed stock output for the planned
Diamond Green Diesel refinery, our joint venture with Valero Energy Corporation.
The advantages stemming from a balanced portfolio of products and services would be of small consequence without the
leadership to capitalize on new investments and forge fresh opportunities that
stand the test of time and economic fluctuations. We believe that the
acquisition of Griffin Industries is not only compatible with Darling’s
vision for the future, but that it bolsters our ability to enhance
shareholder value for years to come.
Sustaining growth with Griffin Industries
Darling International is the largest provider of
rendering, recycling, and recovery solutions to the nation’s food industry.
Darling Locations
Griffin Locations
Darling & Griffin Locations
Expanded
Geographic Footprint
The strong performance and growth of Darling International is tied to our people
and our vision for the future as well as the geographic presence of our quality
services and products. Our merger with Griffin Industries, a company that mirrors
our forward-thinking philosophy and strong leadership team, strategically
expands our national service to nine new states and brings our total number of
facilities to more than 125. While our increased operating range and service capac-
ity greatly improves Darling’s market presence, the company also gains the addition of
Griffin’s market-leading bakery waste recycling business as well as its value-added pet food ingre-
dient product line that optimizes margin potential.
As a company committed to a sustainable financial future, we are proud to say that Griffin’s integration with the
Darling network solidifies our position as the industry leader in rendering, recycling, and recovery solutions to the
nation’s food industry. Our market-leading role is reinforced by a myriad of company-wide improvements due to
operational synergy and arbitrage, as well as positioning the company to increase feed stock output for the planned
Diamond Green Diesel refinery, our joint venture with Valero Energy Corporation.
The advantages stemming from a balanced portfolio of products and services would be of small consequence without the
leadership to capitalize on new investments and forge fresh opportunities that
stand the test of time and economic fluctuations. We believe that the
acquisition of Griffin Industries is not only compatible with Darling’s
vision for the future, but that it bolsters our ability to enhance
shareholder value for years to come.
Rendering, Restaurants & Other Services
Bakery Feed Services
Darling’s expanded geographic footprint positions us as a national leader for:
Rendering
•
Baker y waste recycling
•
Cooking oil recover y
•
Grease trap maintenance ser vices
Green diesel − a new diamond in the making
The legacy of Darling is founded on the belief that recycling is more than an
environmentally conscious thing to do – it’s a viable, revenue-generating
endeavor. As we have said before, “We were green, before green was cool!”
This fundamental value of our business is further reflected in our 50/50 joint
venture with Valero Energy Corporation, a shared vision to build and start up
the Diamond Green Diesel facility within a couple of years, thereby creating a new
market for our waste fats and greases.
Early in January 2011, the Diamond Green Diesel project took a critical step forward with a
conditional commitment from the U.S. Department of Energy for a $241 million loan. Expected
to produce approximately 137 million gallons of renewable diesel annually, the facility will
convert a portion of Darling’s fats using the renewable diesel refining process, which differs
from biodiesel in that it integrates seamlessly with the existing fuel infrastructure and
consumer base.
With the potential to fulfill as much as 14% of federally mandated biomass-sourced diesel
production, we anticipate that Darling’s products will play a key role in
launching renewable diesel as a vital tool in the nation’s alternative
fuel growth.
The joint venture with Valero Energy Corporation, endorsed by
the U.S. Department of Energy, demonstrates the perseverance
and forward-thinking posture of Darling’s leadership and the
subsequent value conferred to each of our shareholders. As
Darling sustains recycling efforts and continues to innovate, we
believe the Diamond Green Diesel project holds a promising
future for our company and the environment.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
X
EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2011
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
OR
Commission File Number
001-13323
DARLING INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
251 O'Connor Ridge Blvd., Suite 300
Irving, Texas
(Address of principal executive offices)
36-2495346
(I.R.S. Employer
Identification No.)
75038
(Zip Code)
Registrant's telephone number, including area code: (972) 717-0300
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock $0.01 par value per share
Name of Exchange on Which Registered
New York Stock Exchange (“NYSE”)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes X No ____
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No X .
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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X .
Page 1
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
(Do not check if a smaller
reporting company)
Smaller reporting company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ____ No X
As of the last day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the
shares of common stock held by nonaffiliates of the Registrant was approximately $587,955,000 based upon the closing price
of the common stock as reported on the NYSE on that day. (In determining the market value of the Registrant’s common stock
held by non-affiliates, shares of common stock beneficially owned by directors, officers and holders of more than 10% of the
Registrant’s common stock have been excluded. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.)
There were 116,753,219 shares of common stock, $0.01 par value, outstanding at February 23, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
Selected designated portions of the Registrant’s definitive Proxy Statement in connection with the Registrant’s 2011
Annual Meeting of stockholders are incorporated by reference into Part III of this Annual Report.
Page 2
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2011
TABLE OF CONTENTS
PART I.
Page No.
4
12
27
27
29
29
30
33
35
62
64
108
108
109
110
110
110
110
110
111
116
BUSINESS
Item 1.
Item 1A. RISK FACTORS
Item 1B. UNRESOLVED STAFF COMMENTS
Item 2.
Item 3.
Item 4.
PROPERTIES
LEGAL PROCEEDINGS
(REMOVED AND RESERVED)
PART II.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
Item 6.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 8.
Item 9.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Item 9A. CONTROLS AND PROCEDURES
Item 9B. OTHER INFORMATION
PART III.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 11. EXECUTIVE COMPENSATION
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
Item 14.
AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
Page 3
PART I
ITEM 1. BUSINESS
GENERAL
Founded by the Swift meat packing interests and the Darling family in 1882, Darling International Inc.
(“Darling”, and together with its subsidiaries, the “Company”) was incorporated in Delaware in 1962 under the name
“Darling-Delaware Company, Inc.” On December 28, 1993, Darling changed its name from “Darling-Delaware
Company, Inc.” to “Darling International Inc.” The address of Darling’s principal executive office is 251 O’Connor
Ridge Boulevard, Suite 300, Irving, Texas, 75038, and its telephone number at this address is (972) 717-0300.
The Company is a leading provider of rendering, cooking oil and bakery waste recycling and recovery
solutions to the nation’s food industry. The Company collects and recycles animal by-products, bakery waste and used
cooking oil from poultry and meat processors, commercial bakeries, grocery stores, butcher shops, and food service
establishments and provides grease trap cleaning services to many of the same establishments. On December 17, 2010,
Darling completed its acquisition of Griffin Industries, Inc. and its subsidiaries (“Griffin”) pursuant to the Agreement
and Plan of Merger, dated as of November 9, 2010 (the “Merger Agreement”), by and among Darling, DG
Acquisition Corp., a wholly-owned subsidiary of Darling (“Merger Sub”), Griffin and Robert A. Griffin, as the
Griffin shareholders’ representative. Merger Sub was merged with and into Griffin (the “Merger”), and Griffin
survived the Merger as a wholly-owned subsidiary of Darling. The Company operates over 125 processing and
transfer facilities located throughout the United States to process raw materials into finished products such as protein
(primarily meat and bone meal (“MBM”) and poultry meal (“PM”)), tallow (primarily bleachable fancy tallow
(“BFT”)), poultry grease (“PG”), yellow grease (“YG”), bakery by-product (“BBP”) and hides as well as a range of
branded and value-added products. The Company sells these products nationally and internationally, primarily to
producers of animal feed, pet food, fertilizer, bio-fuels and other consumer and industrial ingredients, including oleo-
chemicals, soaps and leather goods for use as ingredients in their products or for further processing.
Prior to the Merger the Company’s operations were organized into two segments: 1) Rendering, the core
business of turning inedible food by-products from meat and poultry processors, butcher shops, grocery stores and
food service establishments into high quality feed ingredients and fats for other industrial applications; and 2)
Restaurant Services, a group focused on the grease collection business, grease collection equipment sales and grease
trap servicing. Griffin historically operated in two segments, rendering (as described above) and bakery. The results
of Griffin for the period December 17, 2010 (date of Merger) to January 1, 2011, are included in the rendering and
bakery operating segments. For the financial results of the Company’s business segments, see Note 18 of Notes to
Consolidated Financial Statements.
The Company’s net external sales from continuing operations by operating segment were as follows (in
thousands):
Fiscal
2010
Fiscal
2009
Fiscal
2008
Continuing operations:
Rendering
Restaurant Services
Bakery
Total
$536,935
177,750
10,224
$724,909
74.1%
24.5
1.4
100.0%
$458,573
139,233
–
$597,806
76.7%
23.3
–
100.0%
$585,108
222,384
–
$807,492
72.5%
27.5
–
100.0%
Page 4
OPERATIONS
Rendering and restaurant services
The Company’s largest business activity is rendering. Prior to the Merger, Darling was primarily a beef
renderer. Following the acquisition of Griffin, the Company is one of the leading poultry renderers in the United
States. The Company’s rendering operations process poultry and animal by-products into protein (primarily MBM
and PM (feed grade and pet food)), tallow (primarily BFT), PG, YG, hides and a variety of other value-added
finished products. The Company also collects used cooking oil from restaurants and processes it into finished
products, such as YG, which it sells to external customers as well as internal divisions. In addition to waste cooking
oil, the Company collects trap grease from restaurants in exchange for a collection fee.
Raw materials
The Company’s rendering operations collect two primary types of protein by-products, (i) beef and pork by-
products and (ii) poultry by-products, which are collected primarily from independent meat and poultry processors,
grocery stores, butcher shops and food service establishments.
Rendering materials are collected in one of two manners. Certain large suppliers, such as large meat processors
and poultry processors, are furnished with bulk trailers in which the raw material is loaded. The Company provides
the remaining suppliers, primarily grocery stores and butcher shops, with containers in which to deposit the raw
material. The containers are picked up by or emptied into the Company’s trucks on a periodic basis. The type and
frequency of service is determined by individual supplier requirements, the volume of raw material generated by the
supplier, supplier location and weather, among other factors.
The raw materials collected by the Company are transported either directly to a processing plant or to a transfer
station where materials from several collection routes are loaded into trailers and transported to a processing plant.
Collections of animal processing by-products generally are made during the day, and materials are delivered to
plants for processing within 24 hours of collection to deter spoilage.
Certain of the Company’s rendering facilities are highly dependent on one or a few suppliers. During the 2010
fiscal year, the Company’s 10 largest raw materials suppliers accounted for approximately 23% of the total raw
material processed by the Company with no single supplier accounting for more than 4%. See “Risk factors—A
significant percentage of the Company’s revenue is attributable to a limited number of suppliers and customers.”
Should any of these suppliers choose alternate methods of disposal, cease or materially decrease their operations,
have their operations interrupted by casualty or otherwise cease using or reduce the use of the Company’s collection
services, these operating facilities would be materially and adversely affected. For a discussion of the Company’s
competition for raw materials, see “Competition.” Certain Griffin facilities are also heavily reliant on one or a few
suppliers, and an interruption in the operations of one or more of those suppliers could likewise have a material
impact on those Griffin facilities.
The restaurant services industry is highly fragmented. The Company collects used cooking oil and trap grease
from restaurants, food service establishments and grocery stores. Many of the Company’s customers operate stores
that are parts of national food chains. No single customer represents a material percentage of the Company’s total
used cooking oil raw materials volume. Used cooking oil from food service establishments is placed in various sizes
and types of containers which are supplied by the Company. In some instances, these containers are unloaded
directly onto the trucks, while in other instances the oil is pumped through a vacuum hose into the truck. The
Company sells two types of containers for used cooking oil collection to food service establishments called
CleanStar® and BOSS, both of which are proprietary self-contained collection systems that are housed either inside
or outside the establishment, with the used cooking oil pumped directly into collection vehicles via an outside valve.
The frequency of all forms of used cooking oil and trap grease raw material collection is determined by the volume
of oil generated by the food service establishment.
The Company either transports trap grease to waste treatment centers or recycles it at its facilities into a host of
environmentally safe product streams, including fuel and feed ingredients. The Company provides its customers
with a comprehensive set of solutions to their trap grease disposal needs, including manifests for regulatory
compliance, computerized routing for consistent cleaning and comprehensive trap cleaning.
Page 5
Processing operations
The Company produces finished products primarily through the grinding, cooking, separating, drying, and
blending of various raw materials. The process starts with the collection of animal processing by-products (including
fat, bones, feathers, offal and other animal by-products). The animal processing by-products are ground and heated
to extract water and separate oils and grease from animal tissue as well as to sterilize and make the material suitable
as an ingredient for animal feed. The separated oils, tallows, and greases are then centrifuged and/or refined for
purity. The remaining solid product is pressed to remove additional oils to create meals. The meal is then sifted
through screens and ground further if necessary to produce an appropriately sized protein meal.
The primary finished products derived from the processing of animal by-products are tallow, PG, MBM, PM,
feather meal, and blood meal. In addition, at certain of its facilities, the Company is able to operate multiple process
lines simultaneously which provides it with the flexibility and capacity to manufacture a line of premium and value-
added products in addition to its principal finished products. Because of these processing controls, the Company is
able to blend end products together in order to produce premium products with specific mixes that typically have
higher protein and energy content and lower moisture than principal finished products and command premium prices.
The Company’s hides and skins operations process hides and skins from hog and beef processors into outputs
used in commercial applications such as the leather industry. The Company sells treated hides and skins to external
customers, the majority of which are tanneries.
The Company’s fertilizer operations utilize finished products from the rendering division to manufacture
fertilizers from USDA approved ingredients that contain no waste by-products (i.e., sludge or sewage waste). The
Company’s primary fertilizer product line is Nature Safe®, an organic, protein based fertilizer which is produced at
its blending plant in Henderson, KY. The Company’s fertilizer products are predominately sold to golf courses,
sports facilities, organic farms and landscaping companies.
Used cooking oil, which is recovered from restaurants, is heated, settled, and purified for use as an animal feed
additive or is further processed into biodiesel. Products derived from used cooking oil include YG, biodiesel, and Fat
for Fuel®, which uses grease as a fuel source for industrial boilers and driers.
Bakery feed
The Company is a leading processor of bakery waste in the U.S. The bakery feed division collects bakery waste
materials and processes the raw materials into BBP, including Cookie Meal®, an animal feed ingredient primarily
used in poultry rations.
Raw materials
Bakery products are collected from large commercial bakeries that produce a variety of products, including
cookies, crackers, cereal, bread, dough, potato chips, pretzels, sweet goods and biscuits, among others. The
Company collects these materials by bulk loading onsite at the bakeries utilizing proprietary equipment, the majority
of which is designed, manufactured, and installed by the Company. The Company has specifically engineered bulk
collection systems for the handling of bakery waste. All of the bakery waste that the Company collects is bulk
loaded which represents a significant advantage over competitors that receive a large percentage of raw materials
from less efficient, manual methods. The receipt of bulk-loaded bakery waste allows the Company to significantly
streamline its bakery recycling process, reduce personnel, eliminate a significant source of wastewater and maximize
freight savings by hauling more tons per load.
Processing operations
The highly automated bakery feed production process involves sorting and separating raw material, mixing it to
produce the appropriate nutritional content, drying it to reduce excess moisture, and grinding it to the consistency of
animal feed. During the bakery waste process, packaging materials are removed. The packaging material is fed into
a combustion chamber, along with sawdust from nearby sawmills and heat is produced. This heat is used in the
dryers to remove moisture from the raw materials that have been partially ground. Finally, the dried meal is ground
to the specified granularity. The finished product, which is continually tested to ensure that the caloric and nutrient
contents meet specifications, is a nutritious additive used in animal feed.
Page 6
Renewable Fuels / Biodiesel
In addition to the rendering, restaurant and bakery waste services, on January 21, 2011, a wholly-owned
subsidiary of the Company entered into a limited liability company agreement (the “JV Agreement”) with a wholly-
owned subsidiary of Valero Energy Corporation (“Valero”) to form Diamond Green Diesel Holdings LLC (the
“Joint Venture”). The Joint Venture will be owned 50% / 50% with Valero and was formed to design, engineer,
construct and operate a renewable diesel plant (the “Facility”) capable of producing approximately 9,300 barrels per
day of renewable diesel, to be located adjacent to Valero’s refinery in Norco, Louisiana. The Facility is expected to
convert grease, primarily animal fats and used cooking oil supplied by the Company, and potentially other feed
stocks that become economically and commercially viable, into renewable diesel. The Facility will use an advanced
hydroprocessing-isomerization process licensed from UOP LLC, known as the Ecofining™ Process, and a
pretreatment process developed by the Desmet Ballestra Group to convert approximately 1.1 billion pounds per year
of recycled animal fats, recycled cooking oils and other feedstocks into renewable diesel product and certain other
co-products.
In addition, the Company utilizes a portion of its rendered animal fats, recycled greases and plant oils to
produce Bio G-3000TM Premium Diesel Fuel. The Company’s biodiesel operations utilize raw material inputs
sourced from its rendering and bakery feed operations as well as several third party additives in order to produce Bio
G-3000TM. The Company has the annual capacity to produce two million gallons of Bio G-3000TM. The
Company’s biodiesel product is sold to its internal divisions as well as domestic commercial biodiesel producers to
be used as biodiesel fuel, a clean burning additive for diesel fuel or as a biodegradable solvent or cleaning agent.
Bio G-3000TM is currently processed at the Company’s facility in Butler, Kentucky.
Raw materials pricing and supply contracts
The Company has two primary pricing arrangements—formula and non-formula arrangements—with its
suppliers of poultry, beef, pork and bakery waste products and used cooking oil. Under a “formula” arrangement,
the charge or credit for raw materials is tied to published finished product commodity prices after deducting a fixed
processing fee. The Company also acquires raw material under “non-formula” arrangements whereby suppliers are
either paid a fixed price, are not paid, or are charged a collection fee, depending on various economic and
competitive factors. Approximately 58% of Darling’s annual volume of raw materials is acquired on a “formula”
basis. All of Griffin’s poultry rendering and bakery feed raw materials are acquired on a “formula” basis.
The credit received or amount charged for raw material under both formula and non-formula arrangements
is based on various factors, including the type of raw materials, demand for the raw materials, the expected value of
the finished product to be produced, the anticipated yields, the volume of material generated by the supplier and
processing and transportation costs.
Formula prices are generally adjusted on a weekly, monthly or quarterly basis while non-formula prices or
charges are adjusted as needed to respond to changes in finished product prices or related operating costs.
Finished products
The Company’s finished products are predominantly proteins (primarily MBM and PM), oils (primarily
BFT, PG and YG), BBP and hides. MBM, PM and BBP are used primarily as high protein additives in pet food and
animal feed. Oils are used as ingredients in the production of pet food, animal feed, soaps and as a substitute for
traditional fuels. Oleo-chemical producers use these oils as feed stocks to produce specialty ingredients used in
paint, rubber, paper, concrete, plastics and a variety of other consumer and industrial products. Hides are sold to
leather distributors and manufacturers for the production of leather goods. Currently, substantially all of Darling’s
principal finished products and approximately half of Griffin’s finished products compete with commodities such as
corn, soybean oil and soybean meal. While the Company's finished products are generally sold at prices prevailing
at the time of sale, the Company’s ability to deliver large quantities of finished products from multiple locations and
to coordinate sales from a central location enables the Company to occasionally receive a premium over the then-
prevailing market price.
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Finished products
The Company’s finished products include the following.
Protein Meals
The Company’s meal products include MBM, PM, feather meal and blood meal. All of the Company’s meal
products are protein-rich and contain essential minerals and amino acids which are critically important components
of animal feed. MBM, blood meal, PM and feather meal are sold to feed manufacturers while higher grade poultry
meal is also sold to pet food manufacturers. Some of the Company’s meals are also used as ingredients in its
fertilizer operations.
Animal Fats
The Company produces a range of animal fats from its rendering operations. Animal fats are an additive in
livestock and pet foods that contains essential fatty acids and energy and enhances the taste of the foods. Animal fats
are also frequently sold to soap and beauty products manufacturers as well as industrial manufacturers of paint,
rubber, paper, concrete, plastics and other consumer products. The vast majority of the animal fat that the Company
produces is used as a feed additive.
Grease
The Company produces several different types of grease including YG and brown grease. Grease, similar
to tallow, is an essential ingredient in livestock and pet foods due to its fatty acid composition and high energy
content. Due to its nutritional content, the majority of the Company’s YG is sold to meat and poultry producers who
use the grease as a feed additive. In addition, some of the grease produced by the Company’s rendering operations is
burned as Fat for Fuel® or used to manufacture biodiesel.
Hides and skins
The Company processes discarded hides and skins from beef, hog and other animal processing facilities. The hides
and skins are trimmed and cured in a brine solution that prepares them for tanneries. Tanneries sell the tanned hides
and skins primarily to leather companies that use the products in a variety of consumer goods including apparel and
vehicle interiors.
Premium, value-added and branded products
The Company’s premium, value-added and branded products command significantly higher pricing relative
to its principal finished product lines due to their enhanced nutritional content, which is a function of the Company’s
proprietary processing techniques.
MARKETING, SALES AND DISTRIBUTION OF FINISHED PRODUCTS
The Company sells its finished products worldwide. Finished product sales are primarily managed through
the Company's commodity trading departments which are located at Darling’s corporate headquarters in Irving,
Texas and Griffin’s corporate headquarters in Cold Spring, Kentucky. The Company also maintains sales offices in
Des Moines, Iowa, New Orleans, Louisiana, and Memphis, Tennessee for the sale and distribution of selected
products. This sales force is in contact with several hundred customers daily and coordinates the sale and assists in
the distribution of most finished products produced at the Company's processing plants. The Company sells its
finished products internationally through commodities brokers, Company agents and directly to customers in various
countries.
The Company sells its finished products primarily to producers of livestock feed, oleo-chemicals, bio-fuels,
soaps, pet foods and leather goods for use as ingredients in their products or for further processing. Currently,
substantially all of Darling’s finished products and approximately half of Griffin’s finished products are commodities
that are priced relative to competing commodities, primarily corn, soybean oil and soybean meal. Customers for the
Company’s premium, value added and branded products include feed mills, pet food manufacturers, integrated
poultry producers, the dairy industry and golf courses, among others. Feed mills purchase meals, greases, tallows,
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and Cookie Meal® for use as feed ingredients. Oleo-chemical producers use oils as feed stocks to produce specialty
ingredients used in paint, rubber, paper, concrete, plastics and a variety of other consumer and industrial products.
Pet food manufacturers require stringent feed safety certifications and consistently demand premium additives that
are high in protein and nutritional content. As a result, pet food manufacturers typically purchase only premium or
value-added products. The Company typically enters into long-term supply contracts with pet food manufacturers.
The Company has no material foreign operations, but exports a portion of its products to customers in
various foreign countries or regions including Asia, the European Union, Latin America, the Pacific Rim, North
Africa, Mexico and South America. Total direct export sales were $71.0 million, $70.8 million and $132.2 million
for the years ended January 1, 2011, January 2, 2010 and January 3, 2009, respectively. The Company also sells to
third parties that export to various foreign countries. The level of export sales varies from year to year depending on
the relative strength of domestic versus overseas markets. The Company obtains payment protection for most of its
foreign sales by requiring payment before shipment or by requiring bank letters of credit or guarantees of payment
from U.S. government agencies. The Company ordinarily is paid for its products in U.S. dollars and has not
experienced any material currency translation losses or any material foreign exchange control difficulties. See Note
18 of Notes to Consolidated Financial Statements for a breakdown of the Company’s sales by domestic and foreign
customers.
Following diagnosis of the first U.S. case of bovine spongiform encephalopathy (“BSE”) on December 23,
2003, many countries banned imports of U.S.-produced beef and beef products, including MBM and initially BFT,
though this initial ban on tallow was relaxed to permit imports of U.S.-produced tallow with less than 0.15%
impurities. Most foreign markets that were closed to U.S. beef following the discovery of the first U.S. case of BSE
have been reopened to U.S beef, although some countries only accept boneless beef or beef from cattle less than 30
months of age. Japan is more restrictive and only permits imports of U.S. beef from cattle that are age verified to be
20 months of age or younger at slaughter. Even though the export markets for U.S. beef have been significantly re-
opened, most of these markets remain closed to MBM derived from U.S. beef.
The Company’s management monitors market conditions and prices for its finished products on a daily
basis. If market conditions or prices were to significantly change, the Company’s management would evaluate and
implement any measures that it may deem necessary to respond to the change in market conditions. For larger
formula-based pricing suppliers, the indexing of finished product price to raw material cost effectively fixes the gross
margin on finished product sales at a stable level, providing some protection to the Company from price declines.
Finished products produced by the Company are shipped primarily FOB plant by truck and rail from the
Company's plants shortly following production. While there are some temporary inventory accumulations at various
port locations for export shipments, inventories rarely exceed three weeks’ production and, therefore, the Company
uses limited working capital to carry inventories and reduces its exposure to fluctuations in commodity prices. Other
factors that influence competition, markets and the prices that the Company receives for its finished products include
the quality of the Company's finished products, consumer health consciousness, worldwide credit conditions and
U.S. government foreign aid. From time to time, the Company enters into arrangements with its suppliers of raw
materials pursuant to which these suppliers buy back the Company’s finished products.
The Company operates a fleet of trucks, trailers and railcars to transport raw materials from suppliers and
finished product to customers. It also utilizes third party freight to cost-effectively transfer materials and augment its
in-house logistics fleet. Within the Company’s bakery feed division, all inbound and outbound freight is handled by
third party logistics companies.
COMPETITION
Management of the Company believes that the most challenging aspect of the business is the procurement
of raw materials rather than the sale of finished products. Pronounced consolidation within the meat processing
industry has resulted in bigger and more efficient slaughtering operations, the majority of which utilize “captive”
renderers (rendering operations integrated with the meat or poultry packing operation). Simultaneously, the number
of small meat processors, which have historically been a dependable source of supply for non-captive renderers, such
as the Company, has decreased significantly. The slaughter rates in the meat processing industry are subject to
declined due to economic conditions, and, as a result, during such periods of decline, the availability, quantity and
Page 9
quality of raw materials available to the independent renderers decreases. These factors have been offset, in part,
however, by increasing environmental consciousness. The need for food service establishments to comply with
environmental regulations concerning the proper disposal of used restaurant cooking oil should continue to provide a
growth area for this raw material source. The rendering and restaurant services industries are highly fragmented and
very competitive. The Company competes with other rendering and restaurant services businesses, bakery waste and
alternative methods of disposal of animal processing by-products and used restaurant cooking oil provided by trash
haulers, waste management companies and bio-diesel companies, as well as the alternative of illegal disposal. In
addition, restaurants have increasingly experienced theft of used cooking oil. A number of the Company’s
competitors for the procurement of raw material are experienced, well-capitalized companies that have significant
operating experience and historic supplier relationships. Competition for raw materials is based in large part on
price and proximity to the supplier.
In marketing its finished products domestically and abroad, the Company faces competition from other
processors and from producers of other suitable commodities. Tallows and greases are, in certain instances,
substitutes for soybean oil and palm stearine, while MBM and PM are a substitute for soybean meal. Bakery feed is
a substitute for corn in animal feed. Consequently, the prices of BFT, PG, YG, MBM, PM and BBP correlate with
these substitute commodities. The markets for finished products are impacted mainly by the worldwide supply of
and demand for fats, oils, proteins and grains.
SEASONALITY
Although the amount of raw materials made available to the Company by its suppliers is relatively stable on
a weekly basis, it is impacted by seasonal factors, including holidays, during which the availability of raw materials
declines because major meat and poultry processors are not operating, and cold weather, which can hinder the
collection of raw materials. The amount of bakery raw materials the Company will process generally increases on a
seasonal basis during the summer from June to September. Warm weather can also adversely affect the quality of
raw materials processed and the Company’s yields on production because raw material deteriorates more rapidly in
warm weather than in cooler weather. Weather can vary significantly from one year to the next and may impact the
comparability of operating results of the Company between periods.
INTELLECTUAL PROPERTY
The Company maintains valuable trademarks, service marks, copyrights, trade names, trade secrets,
proprietary technologies and similar intellectual property, and considers its intellectual property to be of material
value. The Company has registered or applied for registration of certain of its intellectual property, including the
tricolor triangle used in the Company’s signage and logos and the names "Darling," "Darling Restaurant Services,"
"Griffin Industries," "Nature Safe," "CleanStar" and "Cookie Meal" and certain patents, both domestically and
internationally, relating to the process for preparing nutritional supplements and the drying and processing of raw
materials. The Company’s policy generally is to pursue intellectual property protection considered necessary or
advisable.
EMPLOYEES AND LABOR RELATIONS
As of January 1, 2011, the Company employed approximately 3,330 persons full-time. While the Company
has no national or multi-plant union contracts, approximately 44% of Darling’s employees are covered by multiple
collective bargaining agreements. None of Griffin’s employees are covered by collective bargaining agreements.
Management believes that the Company’s relations with its employees and their representatives are good. There can
be no assurance, however, that new agreements will be reached without union action or will be on terms satisfactory
to the Company.
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REGULATIONS
The Company is subject to the rules and regulations of various federal, state and local governmental
agencies. Material rules and regulations and the applicable agencies include:
The Food and Drug Administration (“FDA”), which regulates food and feed safety. Effective August 1997,
the FDA promulgated a rule prohibiting the use of mammalian proteins, with some exceptions, in feeds for
cattle, sheep and other ruminant animals (21 CFR 589.2000, referred to herein as the “BSE Feed Rule”) to
prevent further spread of BSE, commonly referred to as “mad cow disease.” With respect to BSE in the
U.S., on October 26, 2009, the FDA began enforcing new regulations intended to further reduce the risk of
spreading BSE (“Enhanced BSE Rule”). These new regulations included changes to prohibit the use of
tallow having more than a certain percentage of impurities in feed for cattle or other ruminant animals, and
prohibiting the use of brain and spinal cord material from cattle aged 30 months and older or the carcasses
of such cattle, if the brain and spinal cord are not removed, in the feed or food for all animals. Company
management believes the Company is in compliance with the provisions of these rules.
See Item 1A “Risk Factors – The Company’s business may be affected by the impact of BSE and other food
safety issues,” for more information regarding certain FDA rules that affect the Company’s business,
including changes to the BSE Feed Rule.
The United States Department of Agriculture (“USDA”), which regulates collection and production
methods. Within the USDA, two agencies exercise direct regulatory oversight of the Company’s activities:
– Animal and Plant Health Inspection Service (“APHIS”) certifies facilities and claims made for
exported materials and establishes and enforces import requirements for live animals and animal
products, and
– Food Safety Inspection Service (“FSIS”) regulates sanitation and food safety programs.
On December 30, 2003, the Secretary of Agriculture announced new beef slaughter/meat processing
regulations to assure consumers of the safety of the meat supply. These regulations prohibit non-
ambulatory animals from entering the food chain, require removal of specific risk materials at slaughter and
prohibit carcasses from cattle tested for BSE from entering the food chain until the animals are shown
negative for BSE.
On November 19, 2007, APHIS implemented revised import regulations that allowed Canadian cattle over
30 months of age and born after March 1, 1999 and bovine products derived from such cattle to be imported
into the U.S. for any use. Imports of Canadian cattle younger than 30 months of age have been allowed
since March 2005. Imports of SRM from Canadian born cattle slaughtered in Canada are not permitted.
The U.S. Environmental Protection Agency (“EPA”), which regulates air and water discharge requirements,
as well as local and state agencies governing air and water discharge.
State Departments of Agriculture, which regulate animal by-product collection and transportation
procedures and animal feed quality.
The United States Department of Transportation (“USDOT”), as well as local and state agencies, which
regulate the operation of the Company’s commercial vehicles.
Occupational Safety and Health Administration, the main federal agency charged with the enforcement of
safety and health legislation.
The Securities and Exchange Commission (“SEC”), which regulates securities and information required in
annual and quarterly reports filed by publicly traded companies.
These material rules and regulations and other rules and regulations promulgated by other agencies may
influence the Company’s operating results at one or more facilities.
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AVAILABLE INFORMATION
Under the Securities Exchange Act of 1934, the Company is required to file annual, quarterly and special
reports, proxy statements and other information with the SEC, which can be read and/or copies made at the SEC’s
Public Reference Room at 100 F Street N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information about the Public Reference Room. The SEC maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements, and other information regarding issuers that file electronically with
the SEC. The Company files electronically with the SEC.
The Company makes available, free of charge, through its investor relations web site, its reports on Forms
10-K, 10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable after they are filed
with, or furnished to, the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act.
The Company’s website is http://www.darlingii.com and the address for the Company’s investor relations
web site is http://www.darlingii.com/investors.aspx.
ITEM 1A. RISK FACTORS
Any investment in the Company will be subject to risks inherent to the Company’s business. Before making
an investment decision in the Company, you should carefully consider the specific risks described below together
with all of the other information included in or incorporated by reference into this report before making an
investment decision. Each of the risks described below could adversely and materially affect the Company’s
business, financial condition and operating results. The risks and uncertainties the Company has described are not
the only ones facing the Company. Additional risks and uncertainties not presently known to the Company or those
the Company currently deems immaterial may also affect business or operations of the Company. If any of the
events described in the following risk factors actually occurs, the Company’s business, financial condition,
prospects or results of operations could be materially and adversely affected. If any of these events occurs, the
trading price of the Company’s securities could decline and you may lose all or part of your investment. The risks
discussed below also include forward-looking statements and the Company’s actual results may differ substantially
from those discussed in these forward-looking statements. See “Forward-Looking Statements” in this filing.
The prices of the Company’s products are subject to significant volatility associated with commodities
markets.
The Company’s finished products are, with certain exceptions, commodities, the prices of which are quoted
on, or derived from prices quoted on, established commodity markets. Accordingly, the Company’s results of
operations will be affected by fluctuations in the prevailing market prices of these finished products or of other
commodities that may be substituted for the Company’s products by the Company’s customers. Historically, market
prices for commodity grains and food stocks have fluctuated in response to a number of factors, including changes in
U.S. government farm support programs or energy policies, changes in international agricultural trading policies,
impact of disease outbreaks on protein sources and the potential effect on supply and demand as well as weather
conditions during the growing and harvesting seasons. While the Company seeks to mitigate the risk associated with
price declines, including through the use of formula pricing tied to commodity prices for a substantial portion of the
Company’s raw materials, a significant decrease in the market price of the Company’s products or of other
commodities that may be substituted for the Company’s products would have a material adverse effect on the
Company’s results of operations and cash flow.
In addition, increases in the market prices of raw materials would require the Company to seek increased
selling prices for the Company’s premium, value-added and branded products to avoid margin deterioration. There
can be no assurance as to whether the Company could implement future selling price increases in response to
increases in the market prices of raw materials or how any such price increases would affect future sales volumes to
the Company’s customers. The Company’s results of operations would be adversely affected in the future by this
volatility.
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The Company’s business is dependent on the procurement of raw materials, which is the most competitive
aspect of the Company business.
Management believes that the most competitive aspect of the Company’s business is the procurement of raw
materials rather than the sale of finished products. Pronounced consolidation within the meat packing industry has
resulted in bigger and more efficient slaughtering operations, the majority of which utilize “captive” renderers.
Simultaneously, the number of small meat processors, which have historically been a dependable source of supply
for non-captive renderers, such as the Company, has decreased significantly. The slaughter rates in the meat
processing industry are subject to decline due to economic conditions, and as a result, during such periods of decline,
the availability, quantity and quality of raw materials available to the independent renderers decreases. In addition,
the Company has seen an increase in the use of restaurant grease in the production of biodiesel, which has increased
competition for the collection of used cooking oil. Furthermore, the general performance of the U.S. economy,
declining U.S. consumer confidence and the inability of consumers and companies to obtain credit due to the current
lack of liquidity in the financial markets has had a negative impact on the Company’s raw material volume, such as
through the forced closure of certain of the Company’s raw material suppliers. A significant decrease in available
raw materials or a closure of a raw material supplier could materially and adversely affect the Company’s business
and results of operations, including the carrying value of the Company’s assets.
The rendering and restaurant services industry is highly fragmented and very competitive. The Company
competes with other rendering and restaurant services businesses and alternative methods of disposal of animal
processing by-products, bakery waste processing and used cooking oil provided by trash haulers, waste management
companies and biodiesel companies, as well as the alternative of illegal disposal. See Item 1, “Competition.” In
addition, restaurants experience theft of used cooking oil. Depending on market conditions, the Company either
charges a collection fee to offset a portion of the cost incurred in collecting raw material or will pay for the raw
material. To the extent suppliers of raw materials look to alternate methods of disposal, whether as a result of the
Company’s collection fees being deemed too expensive or otherwise, the Company’s raw material supply will
decrease and the Company’s collection fee revenues will decrease, which could materially and adversely affect the
Company’s business and results of operations.
A majority of Darling’s volume of rendering raw materials and all of Griffin’s poultry rendering and bakery
feed raw materials are acquired on a “formula basis,” which in most cases is set forth in contracts with the
Company’s suppliers, generally with multi-year terms. These “formulas” allow the Company to manage the risk
associated with decreases in commodity prices by adjusting the Company’s costs of materials based on changes in
the price of the Company’s finished products, while also permitting the Company, in certain cases, to benefit from
increases in commodity prices. The formulas provided in these contracts are reviewed and modified both during the
term of, and in connection with the renewal of, the contracts to maintain an acceptable level of sharing between the
Company and the Company’s suppliers of the costs and benefits from movements in commodity prices. Changes to
these formulas or the inability to renew such contracts could have a material adverse effect on the Company’s
business, results of operations and financial condition.
The Company is highly dependent on natural gas and diesel fuel.
The Company’s operations are highly dependent on the use of natural gas and diesel fuel. The Company
consumes significant volumes of natural gas to operate boilers in the Company’s plants, which generates steam to
heat raw material. Natural gas prices represent a significant cost of facility operations included in cost of sales. The
Company also consumes significant volumes of diesel fuel to operate the Company’s fleet of tractors and trucks used
to collect raw material. Diesel fuel prices represent a significant component of cost of collection expenses included
in cost of sales. Although prices for natural gas and diesel fuel remained relatively low during 2010 as compared to
recent history, these prices can be volatile and there can be no assurance that these prices will not increase in the near
future, thereby representing an ongoing challenge to the Company’s operating results. Although the Company
continually manages these costs and hedges the Company’s exposure to changes in fuel prices through the
Company’s formula pricing and derivatives, a material increase in energy prices for natural gas and diesel fuel over a
sustained period of time could materially adversely affect the Company’s business, financial condition and results of
operations.
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A significant percentage of the Company’s revenue is attributable to a limited number of suppliers and
customers.
In fiscal 2010, Darling’s top ten customers for finished products accounted for approximately 26% of
product sales. In addition, its top ten raw material suppliers accounted for approximately 23% of its raw material
supply in the same period. A disruption to, termination of, or modifications to the Company’s relationships with any
of the Company’s significant suppliers or customers could cause the Company’s businesses to suffer significant
financial losses and could have a material adverse impact on the Company’s business, earnings, financial condition
and/or cash flows.
Certain of the Company’s operating facilities are highly dependent upon a single or a few suppliers.
Certain of the Company’s rendering facilities are highly dependent on one or a few suppliers. Should any
of these suppliers choose alternate methods of disposal, cease their operations, have their operations interrupted by
casualty or otherwise cease using the Company’s collection services, these operating facilities may be materially and
adversely affected, which could materially and adversely affect the Company’s business, earnings, financial
condition and/or cash flows.
The Company’s efforts to combine Darling’s business and Griffin’s business may not be successful.
The acquisition of Griffin is the largest and most significant acquisition Darling has undertaken. The
Company’s management will continue to be required to devote a significant amount of time and attention to the
process of integrating the operations of Darling’s business and the business of Griffin, which may decrease the time
it will have to serve existing customers, attract new customers and develop new services or strategies. Although
Darling expects that Griffin’s business will operate to a significant extent on an independent basis and that it will not
require significant integration going forward for the Company to continue the operations of Griffin’s business, this
may not prove to be the case. The size and complexity of Griffin’s business and the process of using Darling’s
existing common support functions and systems to manage Griffin’s business after the Merger, if not managed
successfully by the Company’s management, may result in interruptions in the Company’s business activities, a
decrease in the quality of the Company’s services, a deterioration in the Company’s employee and customer
relationships, increased costs of integration and harm to the Company’s reputation, all of which could have a
material adverse effect on the Company’s business, financial condition and results of operations.
The Company may not realize the growth opportunities and cost synergies that the Company anticipated
from the Merger.
The benefits that the Company expects to achieve as a result of the Merger will depend, in part, on the
Company’s ability to realize anticipated growth opportunities and cost synergies. The Company’s success in
realizing these growth opportunities and cost synergies, and the timing of this realization, depends on the successful
integration of Darling’s and Griffin’s businesses and operations and the adoption of the Company’s respective best
practices. Even if the Company is able to integrate Darling’s and Griffin’s businesses and operations successfully,
this integration may not result in the realization of the full benefits of the growth opportunities and cost synergies that
the Company currently expects from this integration within the anticipated time frame or at all. For example, the
combined company may be unable to eliminate duplicative costs. Moreover, the combined company may incur
substantial expenses in connection with the integration of Darling’s and Griffin’s businesses and operations. While
the Company anticipates that certain expenses will be incurred, such expenses are difficult to estimate accurately and
may exceed current estimates. Accordingly, the benefits from the Merger may be offset by unanticipated costs
incurred or unanticipated delays in integrating the companies.
The Company’s business may be affected by energy policies of U.S. and foreign governments.
Pursuant to the requirements established by the Energy Independence and Security Act of 2007 on February
3, 2010, the EPA finalized regulations for the National Renewable Fuel Standard Program (“RFS2”). The regulation
mandates that transportation fuels used domestically consist of biomass-based diesel (biodiesel or renewable diesel)
of 1.15 billion gallons in 2010, 0.8 billion gallons in 2011 and 1.0 billion gallons in 2012. Beyond 2012 the
regulation requires a minimum of 1.0 billion gallons of biomass-based diesel for each year through 2022 and such
amount is subject to increase by the EPA Administrator. Biomass-based diesel also qualifies to fulfill the non-
specified portion of the advanced bio-fuel requirement. In order to qualify as a “renewable fuel” each type of fuel
Page 14
from each type of feed stock is required to lower greenhouse gas emissions (“GHG”) by levels specified in the
regulation. The EPA has determined that bio-fuels (either biodiesel or renewable diesel) produced from waste oils,
fats and greases result in an 86% reduction in GHG emissions, exceeding the 50% requirement established by the
regulation. Prices for the Company’s finished products may be impacted by worldwide government policies relating
to renewable fuels and greenhouse gas emissions. Programs like RFS2 and tax credits for bio-fuels both in the
United States and abroad may positively impact the demand for the Company’s finished products. Accordingly,
changes to, a failure to enforce or discontinuing any of these programs could have a negative impact on the
Company’s business and results of operations.
The Company may incur material costs and liabilities in complying with government regulations.
The Company is subject to the rules and regulations of various federal, state and local governmental
agencies. Material rules and regulations and the applicable agencies include:
The FDA, which regulates food and feed safety;
The USDA, including its agencies APHIS and FSIS, which regulates collection and production methods:
The EPA, which regulates air and water discharge requirements, as well as local and state agencies, which
monitor air and water discharges;
State Departments of Agriculture, which regulate animal by-product collection and transportation
procedures and animal feed quality;
The USDOT, as well as local and state transportation agencies, which regulate the operation of the
Company’s commercial vehicles;
The Occupational Safety and Health Administration, which is the main federal agency charged with the
enforcement of safety and health legislation; and
The SEC, which regulates securities and information required in annual and quarterly reports filed by
publically traded companies.
The applicable rules and regulations promulgated by these agencies may influence the Company’s operating
results at one or more facilities. Furthermore, the loss of or failure to obtain necessary federal, state or local permits
and registrations at one or more of the Company’s facilities could halt or curtail operations at impacted facilities,
which could adversely affect the Company’s operating results. The Company’s failure to comply with applicable
rules and regulations could subject the Company to: (i) administrative penalties and injunctive relief; (ii) civil
remedies, including fines, injunctions and product recalls; and (iii) adverse publicity. There can be no assurance that
the Company will not incur material costs and liabilities in connection with these rules and regulations.
Seasonal factors and weather can impact the quality and volume of raw materials that the Company
processes.
The quantity of raw materials available to the Company is impacted by seasonal factors, including holidays,
when raw material volume declines, and cold weather, which can impact the collection of raw material. In addition,
warm weather can adversely affect the quality of raw material processed and the Company’s yield on production due
to more rapidly degrading raw materials. The quality and volume of finished product that the Company is able to
produce could be negatively impacted by unseasonable weather or unexpected declines in the volume of raw material
available during holidays, which in turn could have a material adverse impact on the Company’s business, results of
operations and financial condition.
Downturns and volatility in global economies and commodity and credit markets could materially adversely
affect the Company’s business and results of operations.
The Company’s results of operations are materially affected by the state of the global economies and
conditions in the credit, commodities and stock markets. Among other things, the Company may be adversely
impacted if the Company’s domestic and international customers and suppliers are not able to access sufficient
capital to continue to operate their businesses or to operate them at prior levels. A decline in consumer confidence
or changing patterns in the availability and use of disposable income by consumers can negatively affect both the
Company’s suppliers and customers. Declining discretionary consumer spending or the loss or impairment of a
Page 15
meaningful number of the Company’s suppliers or customers could lead to a dislocation in either raw material
availability or customer demand. Tightened credit supply could negatively affect the Company’s customers’ ability
to pay for the Company’s products on a timely basis or at all and could result in a requirement for additional bad
debt reserves. Although many of the Company’s customer contracts are formula-based, continued volatility in the
commodities markets could negatively impact the Company’s revenues and overall profits. Counterparty risk on
finished product sales can also impact revenue and operating profits when customers either are unable to obtain
credit or refuse to take delivery of finished product due to market price declines. In addition, a lender in the
Company’s credit facilities may be unable to fund its portion of the commitment, the impact of which could
materially affect the Company’s financial condition.
The Company’s business may be affected by the impact of BSE and other food safety issues.
Effective August 1997, the FDA promulgated a rule prohibiting the use of mammalian proteins, with some
exceptions, in feeds for cattle, sheep and other ruminant animals (referred to herein as the “BSE Feed Rule”) to
prevent further spread of BSE, commonly referred to as “mad cow disease.” Detection of the first case of BSE in the
United States in December 2003 resulted in additional U.S. government regulations, finished product export
restrictions by foreign governments, market price fluctuations for the Company’s finished products and reduced
demand for beef and beef products by consumers. Even though the export markets for U.S. beef have been
significantly re-opened, most of these markets remain closed to MBM derived from U.S. beef. Continued concern
about BSE in the United States may result in additional regulatory and market related challenges that may affect the
Company’s operations or increase the Company’s operating costs.
With respect to BSE in the United States, on October 26, 2009, the FDA began enforcing new regulations
intended to further reduce the risk of spreading BSE (“Enhanced BSE Rule”). These new regulations included
amending the BSE Feed Rule to prohibit the use of tallow having more than 0.15% insoluble impurities in feed for
cattle or other ruminant animals. In addition, the FDA implemented rules that prohibit the use of brain and spinal
cord material from cattle aged 30 months and older or the carcasses of such cattle, if the brain and spinal cord are not
removed, in the feed or food for all animals (“Prohibited Cattle Materials”). Tallow derived from Prohibited Cattle
Materials that also contains more than 0.15% insoluble impurities cannot be fed to any animal. The Company has
followed the Enhanced BSE Rule since it was first published in 2008 and has made capital expenditures and
implemented new processes and procedures to be compliant with the Enhanced BSE Rule at all of the Company’s
operations. Based on the foregoing, while the Company acknowledges that unanticipated issues may arise as the
FDA continues to implement the Enhanced BSE Rule and conducts compliance inspections, the Company does not
currently anticipate that the Enhanced BSE Rule will have a significant impact on the Company operations or
financial performance. Notwithstanding the foregoing, the Company can provide no assurance that unanticipated
costs and/or reductions in raw material volumes related to the Company’s implementation of and compliance with
the Enhanced BSE Rule will not negatively impact the Company’s operations and financial performance.
With respect to human food, pet food and animal feed safety, the Food and Drug Administration
Amendments Act of 2007 (the “Act”) was signed into law on September 27, 2007 as a result of Congressional
concern for pet and livestock food safety, following the discovery in March 2007 of pet and livestock food that
contained adulterated imported ingredients. The Act directs the Secretary of Health and Human Services and the
FDA to promulgate significant new requirements for the pet food and animal feed industries. As a prerequisite to
new requirements specified by the Act, the FDA was directed to establish a Reportable Food Registry, which was
implemented on September 8, 2009. On June 11, 2009, the FDA issued “Guidance for Industry: Questions and
Answers Regarding the Reportable Food Registry as Established by the Food and Drug Administration Amendments
Act of 2007: Draft Guidance.” Stakeholder comments and questions about the Reportable Food Registry that were
submitted to the docket or during public meetings were incorporated into a second draft guidance (“RFR Draft
Guidance”), which was published on September 8, 2009. In the RFR Draft Guidance, the FDA defined a reportable
food, which the manufacturer or distributor would be required to report in the Reportable Food Registry, to include
materials used as ingredients in animal feeds and pet foods, if there is reasonable probability that the use of such
materials will cause serious adverse health consequences or death to humans or animals. The FDA issued a second
version of its RFR Draft Guidance in May 2010 without finalizing it. On July 27, 2010, the FDA released
“Compliance Policy guide Sec. 690.800, Salmonella in Animal Feed, Draft Guidance” (“Draft CPG”), which
describes differing criteria to determine whether pet food and farmed animal feeds that are contaminated with
salmonella will be considered to be adulterated under section 402(a)(1) of the Food Drug and Cosmetic Act.
According to the Draft CPG, any finished pet food contaminated with any species of salmonella will be considered
adulterated because such feeds have direct human contact. Finished animal feeds intended for pigs, poultry and
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other farmed animals, however, will be considered to be adulterated only if the feed is contaminated with a species of
salmonella that is considered to be pathogenic for the animal species that the feed is intended for. The impact of the
Act and implementation of the Reportable Food Registry on the Company, if any, will not be clear until the FDA
finalizes its RFR Draft Guidance and the Draft CPG, neither of which were finalized as of the date of this report.
The Company believes that it has adequate procedures in place to assure that its finished products are safe to use in
animal feed and pet food and the Company does not currently anticipate that the Act will have a significant impact
on the Company’s operations or financial performance. Any pathogen, such as salmonella, that is correctly or
incorrectly associated with the Company’s finished products could have a negative impact on the demands for the
Company’s finished products.
In addition, on January 4, 2011, President Barack Obama signed the Food Safety Modernization Act
(“FSMA”) into law. As enacted, the FSMA gave the FDA new authorities, which became effective immediately.
Included among these is mandatory recall authority for adulterated foods that are likely to cause serious adverse
health consequences or death to humans or animals, if the responsible party fails to cease distribution and recall such
adulterated foods voluntarily. In addition, the FSMA requires the FDA to develop new regulations that, among other
provisions, places additional registration requirements on food and feed producing firms; requires registered
facilities to perform hazard analyses and to implement preventive plans to control those hazards identified to be
reasonably likely to occur; increases the length of time that records are required to be retained; and regulate the
sanitary transportation of food. Such new food safety provisions will require new FDA rulemaking and increased
federal appropriations before the provisions can be implemented. The Company has followed the FSMA throughout
its legislative history and implemented hazard prevention controls and other procedures that the Company believes
will be needed to comply with the FSMA. Such legislation could, among other things, require the Company to
amend certain of the Company’s other operational policies and procedures. While unforeseen issues and
requirements may arise as the FDA promulgates the new regulations provided for by the FSMA, the Company does
not anticipate that the costs of compliance with the FSMA will materially impact the Company’s business or
operations.
The Company’s business may be negatively impacted by the occurrence of any disease correctly or
incorrectly linked to animals.
The emergence of 2009 H1N1 flu (initially known as “Swine Flu”) in North America during the spring of
2009 was initially linked to hogs even though hogs have not been determined to be the source of the outbreak in
humans. The 2009 H1N1 flu has since spread to affect the human populations in countries throughout the world,
although as of the date of this report its severity is similar to seasonal flu and it has had little impact on hog
production. The occurrence of H1N1 or any other disease that is correctly or incorrectly linked to animals and which
has a negative impact on meat or poultry consumption or animal production could have a negative impact on the
volume of raw materials available to the Company or the demand for the Company’s finished products. Another such
animal disease is avian influenza (“H5N1”), or Bird Flu, which is a highly contagious disease affecting chickens and
other poultry species throughout Asia and Europe. The H5N1 strain is highly pathogenic, which has caused concern
that a pandemic could occur if the disease migrates from birds to humans. This highly pathogenic strain has not been
detected in North or South America as of the date of this report, but low pathogenic strains that are not a threat to
human health have occurred in the United States and Canada in recent years. The USDA has developed safeguards
to protect the U.S. poultry industry from H5N1. These safeguards are based on import restrictions, disease
surveillance and a response plan for isolating and depopulating infected flocks if the disease is detected.
Notwithstanding these safeguards, any significant outbreak of Bird Flu in the United States could have a material
negative impact on the Company’s business by reducing demand for MBM and reducing the availability of poultry
by-products.
The emergence of these types of diseases that are in or associated with animals and have the potential to
also threaten humans has created concern that such diseases could spread and cause a global pandemic. Even though
such a pandemic has not occurred, governments may be pressured to address these concerns and prohibit imports of
animals, meat and animal by-products from countries or regions where the disease is detected. The occurrence of
Swine Flu, Bird Flu or any other disease in the United States that is correctly or incorrectly linked to animals and has
a negative impact on meat or poultry consumption or animal production could have a material negative impact on the
volume of raw materials available to the Company or the demand for the Company’s finished products.
Page 17
If the Company or the Company’s customers are the subject of product liability claims or product recalls, the
Company may incur significant and unexpected costs and the Company’s business reputation could be
adversely affected.
The Company and its customers for whom the Company manufactures products may be exposed to product
liability claims and adverse public relations if consumption or use of the Company’s products is alleged to cause
injury or illness to humans or animals. In addition, the Company and its customers may be subject to product recalls
resulting from developments relating to the discovery of unauthorized adulterations to food additives. The
Company’s insurance may not be adequate to cover all liabilities the Company incurs in connection with product
liability claims or product recalls. The Company may not be able to maintain its existing insurance or obtain
comparable insurance at a reasonable cost, if at all. A product liability judgment against the Company or against one
of its customers for whom the Company manufactures products, or the Company’s or their agreement to settle a
product liability claim or a product recall, could also result in substantial and unexpected expenditures, which would
reduce operating income and cash flow. In addition, even if product liability claims against the Company or its
customers for whom the Company manufactures products are not successful or are not fully pursued, defending these
claims would likely be costly and time-consuming and may require management to spend time defending the claims
rather than operating the Company’s business and may result in adverse publicity.
Product liability claims, product recalls or any other events that cause consumers to no longer associate the
Company’s brands or those of the Company’s customers for whom the Company manufactures products with high
quality and safety, may hurt the value of the Company’s and the Company’s customers’ brands and lead to decreased
demand for the Company’s products. In addition, as a result of any such claims against the Company or product
recalls, the Company may be exposed to claims by the Company’s customers for damage to their reputations and
brands. Product liability claims and product recalls may also lead to increased scrutiny by federal and state
regulatory agencies of the Company’s operations and could have a material adverse effect on the Company’s brands,
business, results of operations and financial condition.
The Company’s operations are subject to various laws, rules and regulations relating to the protection of the
environment and to health and safety, and the Company could incur significant costs to comply with these
requirements or be subject to sanctions or held liable for environmental damages.
The Company’s operations subject the Company to various and increasingly stringent federal, state, and
local environmental, health and safety requirements, including those governing air emissions, wastewater discharges,
the management, storage and disposal of materials in connection with the Company’s facilities and the Company’s
handling of hazardous materials and wastes, such as gasoline and diesel fuel used by the Company’s trucking fleet
and operations. Failure to comply with these requirements could have significant consequences, including penalties,
claims for personal injury and property and natural resource damages, and negative publicity. The Company’s
operations require the control of air emissions and odor and the treatment and discharge of wastewater to municipal
sewer systems and the environment. The Company operates boilers at many of the Company’s facilities and stores
wastewater in lagoons or discharges it to publicly owned wastewater treatment systems, surface waters or through
land application. The Company operates and maintains a vehicle fleet to transport products to and from customer
locations. The Company has incurred significant capital and operating expenditures to comply with environmental
requirements, including for the upgrade of wastewater treatment facilities, and will continue to incur such costs in the
future. The Company could be responsible for the remediation of environmental contamination and may be subject
to associated liabilities and claims for personal injury and property and natural resource damages. The Company
owns or operates numerous properties, has been in business for many years and has acquired and disposed of
properties and businesses. During that time, the Company or other owners or operators may have generated or
disposed of wastes that are or may be considered hazardous or may have polluted the soil, surface water or
groundwater at or around the Company’s facilities. Under some environmental laws, such as the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, also known as CERCLA or Superfund, and
similar state statutes, responsibility for the cost of cleanup of a contaminated site can be imposed upon any current or
former site owners and operators, or upon any party that sent waste to the site, regardless of the lawfulness of the
activities that led to the contamination. There can be no assurance that the Company will not face extensive costs or
penalties that would have a material adverse effect on the Company’s financial condition and results of operations.
For example, the Company has been named as a third-party defendant in a lawsuit pending in the Tierra/Maxus
Litigation (as defined herein) and has received notice from the EPA with respect to alleged contamination in the
Lower Passaic River area. Future developments, such as more aggressive enforcement policies, new laws or
Page 18
discoveries of unknown conditions, may also require expenditures that may have a material adverse effect on the
Company’s business and financial condition.
In addition, increasing efforts to control emissions of greenhouse gases, or GHG, are likely to impact the
Company’s operations. The EPA’s recent rule establishing mandatory GHG reporting for certain activities may
apply to some of the Company’s facilities if the Company exceeds the applicable thresholds. The EPA has also
announced a finding relating to GHG emissions that may result in promulgation of GHG air quality standards.
Legislation to regulate GHG emissions has been proposed in the U.S. Congress and a growing number of states are
taking action to require reductions in GHG emissions. Future GHG emissions limits may require the Company to
incur additional capital and operational expenditures. EPA regulations limiting exhaust emissions also became more
restrictive in 2010, and on October 25, 2010, the National Highway Traffic Safety Administration and the EPA
proposed new regulations that would govern fuel efficiency and GHG emissions beginning in 2014. Compliance
with such regulations could increase the cost of new fleet vehicles and increase the Company’s operating expenses.
Compliance with future GHG regulations may require expenditures that could affect the Company’s results of
operations.
The Company’s success is dependent on its key personnel.
The Company’s success depends to a significant extent upon a number of key employees, including
members of senior management. The loss of the services of one or more of these key employees could have a
material adverse effect on the Company’s results of operations and prospects. The Company believes that its future
success will depend in part on its ability to attract, motivate and retain skilled technical, managerial, marketing and
sales personnel. Competition for these types of skilled personnel is intense and there can be no assurance that the
Company will be successful in attracting, motivating and retaining key personnel. The failure to hire and retain these
personnel could materially adversely affect the Company’s business and results of operations.
In certain markets the Company is highly dependent upon a single operating facility and various events
beyond the Company’s control can cause interruption in the operation of the Company’s facilities, which
could adversely affect its business in those markets.
The Company’s facilities are subject to various federal, state and local environmental and other permitting
requirements, depending on their locations. Periodically, these permits may be reviewed and subject to amendment
or withdrawal. Applications for an extension or renewal of various permits may be subject to challenge by
community and environmental groups and others. In the event of a casualty, condemnation, work stoppage,
permitting withdrawal or delay or other unscheduled shutdown involving one of the Company’s facilities, in a
majority of the Company’s markets it would utilize a nearby operating facility to continue to serve its customers. In
certain markets, however, the Company does not have alternate operating facilities. In the event of a casualty,
condemnation, work stoppage, permitting withdrawal or delay or other unscheduled shutdown in these markets, the
Company may experience an interruption in its ability to service its customers and to procure raw materials. This
may materially and adversely affect the Company’s business and results of operations in those markets. In addition,
after an operating facility affected by a casualty, condemnation, work stoppage, permitting withdrawal or delay or
other unscheduled shutdown is restored, there could be no assurance that customers who in the interim choose to use
alternative disposal services would return to use the Company’s services.
The renewable diesel joint venture with Valero will subject the Company to a number of risks.
The Company announced on January 21, 2011 that a wholly-owned subsidiary of Darling entered into the
JV Agreement with a wholly-owned subsidiary of Valero to form the Joint Venture. The Joint Venture will be
owned 50% / 50% with Valero and was formed to design, engineer, construct and operate the Facility, which will be
capable of producing approximately 9,300 barrels per day of renewable diesel fuel and certain other co-products, to
be located adjacent to Valero’s refinery in Norco, Louisiana. The Joint Venture intends to construct the Facility
under an engineering, procurement and construction contract (“EPC Contract”) that will fix the Company’s
maximum economic exposure for the cost of the Facility. On January 20, 2011, the U.S. Department of Energy
(“DOE”) offered to the Joint Venture a conditional commitment to issue an approximately $241 million loan
guarantee (the “DOE Guarantee”) under the Energy Policy Act of 2005 to support the construction of the Facility.
Each of Darling and Valero will be required, as a condition to the DOE Guarantee, to guarantee the completion of
the Facility on a several (but not joint and several) basis; however, the Company’s obligations under the completion
guarantee will be terminated if Congress repeals the biomass-based diesel mandate under RSF2 in its entirety.
Page 19
Through equity investments into the Joint Venture, each of Darling and Valero are committed to contributing
approximately $93.2 million (the “Equity Commitment”) of the estimated aggregate costs of approximately $427.0
million for the completion of the Facility. The ultimate cost of the Joint Venture to the Company cannot be
determined until, among other things, further detailed engineering reports and studies have been completed. As part
of the terms and conditions of the DOE Guarantee, until the Company’s Equity Commitment has been paid in full or
repayment of the DOE Guarantee, the Company has to commit to, among other things, a sponsor completion
guarantee covering certain costs of the construction of the Facility and the Company must maintain a cash balance of
approximately $27 million (less the pro rata portion of the Company’s Equity Commitment made prior to such date)
in a segregated financial account, the proceeds of which will be used solely to fund the Company’s Equity
Commitment required under the DOE Guarantee and its related documentation. The Company’s funds on deposit in
such segregated financial account cannot at any time be lower than the initial funding less one third of the portion of
the Equity Commitment that the Company has made. The Company will not have access to those funds for any other
part of the Company’s business. In addition to the segregated financial account requirement, the Company will be
required to maintain, on each business day, average availability under a debt facility and in cash and/or cash
equivalents (including any amounts in the segregated financial account) sufficient to fund the full amount of the
Company’s remaining Equity Commitment required under the DOE Guarantee and its related documentation. As a
result of the requirements that the Company maintains a minimum cash balance in a segregated financial account and
certain availability under a debt facility to cover the Company’s Equity Commitment, such committed funds will not
be available to the Company for other purposes, including other business opportunities, development costs for other
projects, working capital and general corporate needs. The Company is also required to pay for 50% of any cost
overruns incurred in connection with the construction of the Facility. Further, the Company will have to grant a
security interest in substantially all of the assets of the Joint Venture, including providing a pledge of all of the
Company’s equity interests in the Joint Venture, for the benefit of the DOE until the loan guaranteed by the DOE
Guarantee has been paid in full and the DOE Guarantee has terminated in accordance with its terms.
The Company may not be able to construct the Facility on acceptable terms or at all. If the Company
commences construction of the Facility, the Joint Venture will require investment of significant financial resources
and may require the Company to obtain additional equity financing or require the Company to incur additional
indebtedness. There is no guarantee that the Facility will be constructed in a timely manner or at all. Further, while
the two principal technologies to be licensed for the Joint Venture are established technologies, their use together in
the manner currently contemplated for the Joint Venture is innovative and has not been previously employed. If the
Facility is completed, there is no guarantee that the Joint Venture will be profitable or allow the Company to make a
return on the Company’s investment, and the Company may lose the Company’s entire investment including any
payments made under any of the Company’s guarantees.
Further, the Congress that is currently in session is under great pressure to employ significant federal budget
cuts during 2011. Certain members of Congress have suggested that the DOE’s funding of guaranties to support
construction of alternative fuel facilities should be eliminated. If the DOE funding program is eliminated prior to
entry by the Joint Venture and the DOE into definitive documentation, the Joint Venture would be forced to turn to
alternative funding sources to build the Facility. Such funding may not be available at all, or may be available at
costs that are not commercially reasonable. The Company can offer no assurance that the Joint Venture will be able
to obtain funding for the construction of the Facility at a reasonable cost, or at all.
The Joint Venture is dependent on governmental energy policies and programs, such as RFS2, which
positively impact the demand for and price of renewable diesel. Any changes to, a failure to enforce or a
discontinuation of any of these programs could have a material adverse affect on the Joint Venture. See “Risk
Factors—The Company’s business may be affected by energy policies of U.S. and foreign governments.” Similarly,
the Joint Venture is subject to the risk that new or changing technologies may be developed that could meet demand
for renewable diesel under governmental mandates in a more efficient or less costly manner than the technologies to
be used by the Joint Venture, which could negatively affect the price of renewable diesel and have a material adverse
affect on the Joint Venture.
In addition, the commencement and operation of a joint venture such as this involve a number of risks that
could harm the Company’s business and result in the Joint Venture not performing as expected, such as:
problems integrating or developing operations, personnel, technologies or products;
the breakdown or failure of equipment or processes;
Page 20
the failure of the end product to perform as anticipated;
unforeseen engineering and environmental issues;
the inaccuracy of the Company’s assumptions about the timing and amount of anticipated costs and
revenues;
the diversion of management time and resources;
obtaining permits and other regulatory issues, license revocation and changes in legal requirements;
insufficient experience with the technologies and markets involved;
difficulties in establishing relationships with suppliers and end user customers;
unanticipated cost overruns;
risks commonly associated with the start-up of “greenfield” projects;
performance below expected levels of output or efficiency;
reliance on Valero and its adjacent refinery facility for many services and processes;
subsequent impairment of the acquired assets, including intangible assets; and
being bought out and not realizing the benefits of the Joint Venture.
If any of these risks described above were to materialize and the operations of the Joint Venture were
significantly disrupted, this could have a material adverse effect on the Company’s business, financial condition and
results of operations.
The Company’s substantial level of indebtedness as a result of the Merger may adversely affect the
Company’s ability to operate its business, remain in compliance with debt covenants, react to changes in the
economy or its industry and make payments on its indebtedness.
As of January 1, 2011, the Company had total indebtedness of approximately $710.0 million, consisting of
$250.0 million of 8.5% Senior Notes due 2018 (the “Senior Unsecured Notes”) and $460.0 million of revolving and
term loan borrowings and undrawn commitments available for additional borrowings under the Company’s senior
secured credit facilities (the “Senior Secured Credit Facilities”), entered into on December 17, 2010 to fund, among
other things, a portion of the consideration for the acquisition of Griffin, of $141.6 million (after giving effect to
$23.4 million of outstanding letters of credit). In February 2011, the Company repaid an aggregate of $300.0 million
of indebtedness issued under its Senior Secured Credit Facilities. The remaining level of indebtedness will require
the Company to devote a material portion of the Company’s cash flow to the Company’s debt service obligations.
The Company’s level of indebtedness could have important consequences, including the following:
a substantial portion of the Company’s cash flows from operations will be dedicated to the payment of
principal and interest on the Company’s indebtedness and will not be available for other purposes, including
investment in the Company’s operations, future business opportunities or strategic acquisitions, capital
expenditures and other general corporate purposes;
it may limit the Company’s flexibility in planning for, or reacting to, changes in its business and the industry
in which it operates;
the Company may be more highly leveraged than some of its competitors, which may place the Company at
a competitive disadvantage;
it could make the Company more vulnerable to downturns in general economic or industry conditions or in
the Company’s business;
it may limit, along with the financial and other restrictive covenants in the agreements governing the
Company’s indebtedness, the Company’s ability in the future to obtain financing, the Company’s ability to
refinance any of its indebtedness, or the Company’s ability to dispose of assets or borrow money for its
working capital requirements, capital expenditures, acquisitions, debt service requirements and general
corporate or other purposes on commercially reasonable terms or at all; and
it may make it more difficult for the Company to satisfy its obligations with respect to its indebtedness.
Page 21
Despite the Company’s existing indebtedness, the Company may still incur more debt, which could exacerbate
the risks described above.
The Company may be able to incur substantial additional indebtedness in the future. Although the
agreements governing the Company’s indebtedness, including, without limitation, the agreements governing the
Company’s Senior Secured Credit Facilities, will limit the Company’s ability to incur certain additional
indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional
indebtedness that could be incurred in compliance with these restrictions could be substantial. To the extent that the
Company incurs additional indebtedness, the risks associated with the Company’s leverage described above,
including the Company’s possible inability to service its debt, would increase.
The Company could incur a material weakness in the Company’s internal control over financial reporting
that would require remediation.
The Company’s disclosure controls and procedures were deemed to be effective in fiscal 2010. However,
any future failures to maintain the effectiveness of the Company’s disclosure controls and procedures, including the
Company’s internal control over financial reporting, could subject the Company to a loss of public confidence in its
internal control over financial reporting and in the integrity of its public filings and financial statements and could
harm the Company’s operating results or cause the Company to fail to meet its regulatory reporting obligations in a
timely manner. The ongoing integration of the operations of Griffin following the Merger could create additional
risks to the Company’s disclosure controls, including the Company’s internal controls over financial reporting.
An impairment in the carrying value of the Company’s goodwill or other intangible assets may have a
material adverse effect on the Company’s results of operations.
As of January 1, 2011, the Company has approximately $376.3 million of goodwill. The Company is
required to annually test goodwill to determine if impairment has occurred. Additionally, impairment of goodwill
must be tested whenever events or changes in circumstances indicate that impairment may have occurred. If the
testing performed indicates that impairment has occurred, the Company is required to record a non-cash impairment
charge for the difference between the carrying value of the goodwill and the implied fair value of the goodwill in the
period the determination is made. The testing of goodwill for impairment requires the Company to make significant
estimates about its future performance and cash flows, as well as other assumptions. These estimates can be affected
by numerous factors, including changes in economic, industry or market conditions, changes in business operations
or changes in competition. Changes in these factors, or changes in actual performance compared with estimates of
the Company’s future performance, may affect the fair value of goodwill, which may result in an impairment charge.
The Company cannot accurately predict the amount and timing of any impairment of assets. Should the value of
goodwill become impaired, there may be a materially adverse effect on the Company’s results of operations.
The Company may be subject to work stoppages at its operating facilities which could cause interruptions in
the manufacturing of the Company’s products.
While the Company has no national or multi-plant union contracts, approximately 44% of Darling’s
employees are covered by multiple collective bargaining agreements. None of Griffin’s employees are covered by
collective bargaining agreements. Labor organizing activities could result in additional employees becoming
unionized and higher ongoing labor costs. Darling’s collective bargaining agreements expire at varying times over
the next five years. There can be no assurance that the Company will be able to negotiate the terms of any expiring
or expired agreement in a manner acceptable to the Company. If the Company’s unionized workers were to engage
in a strike, work stoppage or other slowdown in the future, the Company could experience a significant disruption of
its operations, which could have a material adverse effect on the Company’s business, results of operations and
financial condition.
Page 22
Litigation may materially adversely affect the Company’s businesses, financial condition and results of
operations.
The Company is a party to several lawsuits, claims and loss contingencies arising in the ordinary course of
our business, including assertions by certain regulatory and governmental agencies related to permitting requirements
and air, wastewater and storm water discharges from the Company’s processing facilities. The outcome of litigation,
particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of
lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating
to such lawsuits may remain unknown for substantial periods of time. The cost to defend future litigation may be
significant and any future litigation may divert the attention of management away from the Company’s strategic
objectives. There may also be adverse publicity associated with litigation that may decrease customer confidence in
the Company’s business, regardless of whether the allegations are valid or whether we are ultimately found liable.
As a result, litigation may have a material adverse effect on the Company’s business, financial condition and results
of operations.
Certain multi-employer defined benefit pension plans to which the Company contributes are under-funded.
The Company contributes to several multi-employer defined benefit pension plans pursuant to obligations
under collective bargaining agreements covering union-represented employees. The Company does not manage
these multi-employer plans. Based upon the most currently available information from plan administrators, some of
which is more than a year old, the Company believes that some of these multi-employer plans are under-funded due
partially to a decline in the value of the assets supporting these plans, a reduction in the number of actively
participating members for whom employer contributions are required and the level of benefits provided by the plans.
In addition, the Pension Protection Act, which was enacted in August 2006 and went into effect in January 2008,
requires under-funded pension plans to improve their funding ratios within prescribed intervals based on the level of
their under-funding. As a result, the Company’s required contributions to these plans may increase in the future.
Furthermore, under current law, a termination of, the Company’s voluntary withdrawal from or a mass withdrawal of
all contributing employers from any underfunded multi-employer defined benefit plan to which the Company
contributes would require the Company to make payments to the plan for the Company’s proportionate share of such
multi-employer plan’s unfunded vested liabilities. Also, if a multi-employer defined benefit plan fails to satisfy
certain minimum funding requirements, the Internal Revenue Service (“IRS”) may impose a nondeductible excise tax
of 5% on the amount of the accumulated funding deficiency for those employers not contributing their allocable
share of the minimum funding to the plan. Requirements to pay increased contributions, withdrawal liability and
excise taxes could negatively impact the Company’s liquidity and results of operations.
If the number or severity of claims for which the Company is self-insured increases, if the Company is
required to accrue or pay additional amounts because the claims prove to be more severe than the Company’s
recorded liabilities, if the Company’s insurance premiums increase, or if the Company is unable to obtain
insurance at acceptable rates or at all, the Company’s financial condition and results of operations may be
materially adversely affected.
The Company’s workers compensation, auto and general liability policies contain significant deductibles or
self-insured retentions. The Company develops bi-yearly and records quarterly an estimate of the Company’s
projected insurance-related liabilities. The Company estimates the liabilities associated with the risks retained by the
Company, in part, by considering historical claims experience, demographic and severity factors and other actuarial
assumptions. Any actuarial projection of losses is subject to a degree of variability. If the number or severity of
claims for which the Company is self-insured increases, or the Company is required to accrue or pay additional
amounts because the claims prove to be more severe than the Company’s original assessments, the Company’s
financial condition and results of operations may be materially adversely affected. In addition, in the future the
Company’s insurance premiums may increase and the Company may not be able to obtain similar levels of insurance
on reasonable terms or at all. Any such inadequacy of, or inability to obtain, insurance coverage could have a
material adverse effect on the Company’s business, financial condition and results of operations.
Page 23
The Company may not successfully identify and complete acquisitions on favorable terms or achieve
anticipated synergies relating to any acquisitions, and such acquisitions could result in unforeseen operating
difficulties and expenditures and require significant management resources.
The Company regularly reviews potential acquisitions of complementary businesses, services or products.
However, the Company may be unable to identify suitable acquisition candidates in the future. Even if the Company
identifies appropriate acquisition candidates, the Company may be unable to complete such acquisitions on favorable
terms, if at all. In addition, the process of integrating an acquired business, service or product into the Company’s
existing business and operations may result in unforeseen operating difficulties and expenditures. Integration of an
acquired company also may require significant management resources that otherwise would be available for ongoing
development of the Company’s business. Moreover, the Company may not realize the anticipated benefits of any
acquisition or strategic alliance and such transactions may not generate anticipated financial results. Future
acquisitions could also require the Company to incur debt, assume contingent liabilities or amortize expenses related
to intangible assets, any of which could harm the Company’s business.
Terrorist attacks or acts of war may cause damage or disruption to the Company and the Company’s
employees, facilities, information systems, security systems, suppliers and customers, which could significantly
impact the Company’s net sales, costs and expenses and financial condition.
Terrorist attacks, such as those that occurred on September 11, 2001, have contributed to economic
instability in the United States, and further acts of terrorism, bioterrorism, violence or war could affect the markets in
which the Company operates, the Company’s business operations, the Company’s expectations and other forward-
looking statements contained in this report. The threat of terrorist attacks in the United States since September 11,
2001 continues to create many economic and political uncertainties. The potential for future terrorist attacks, the
U.S. and international responses to terrorist attacks and other acts of war or hostility, including the ongoing war in
Afghanistan, may cause greater uncertainty and cause the Company’s business to suffer in ways that cannot currently
be predicted. Events such as those referred to above could cause or contribute to a general decline in investment
valuations. In addition, terrorist attacks, particularly acts of bioterrorism, that directly impact the Company’s
facilities or those of the Company’s suppliers or customers could have an impact on the Company’s sales, supply
chain, production capability and costs and the Company’s ability to deliver its finished products.
If the Company experiences difficulties or a significant disruption in the Company’s information systems or if
the Company fails to implement new systems and software successfully, the Company’s business could be
materially adversely affected.
The Company depends on information systems throughout the Company’s business to process incoming
customer orders and outgoing supplier orders, manage inventory, collect raw materials and distribute products,
process and bill shipments to and collect cash from the Company’s customers, respond to customer and supplier
inquiries, contribute to the Company’s overall internal control processes, maintain records of the Company’s
property, plant and equipment, and record and pay amounts due vendors and other creditors.
If the Company were to experience a disruption in its information systems that involve interactions with
suppliers and customers, it could result in a loss of raw material supplies, sales and customers and/or increased costs,
which could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company may also encounter difficulties in developing new systems or maintaining and upgrading existing
systems. Such difficulties may lead to significant expenses or losses due to disruption in business operations, loss of
sales or profits, or cause the Company to incur significant costs to reimburse third parties for damages, and, as a
result, may have a material adverse effect on the Company’s results of operations.
The Company’s products may infringe the intellectual property rights of others, which may cause the
Company to incur unexpected costs or prevent the Company from selling its products.
The Company maintains valuable trademarks, service marks, copyrights, trade names, trade secrets,
proprietary technologies and similar intellectual property, and considers the Company’s intellectual property to be of
material value. The Company has in the past and may in the future be subject to legal proceedings and claims in the
ordinary course of its business, including claims of alleged infringement of patents, trademarks and other intellectual
property rights of third parties by the Company or its customers. Any such claims, whether or not meritorious, could
result in costly litigation and divert the efforts of the Company’s management. Moreover, should the Company be
Page 24
found liable for infringement, the Company may be required to enter into licensing agreements (if available on
acceptable terms or at all) or to pay damages and cease making or selling certain products. Any of the foregoing
could cause the Company to incur significant costs and prevent the Company from manufacturing or selling its
products.
The recently enacted legislation on healthcare reform and proposed amendments thereto could impact the
healthcare benefits required to be provided by the Company and cause the Company’s compensation costs to
increase, potentially reducing the Company’s net income and adversely affecting its cash flows.
The recently enacted healthcare legislation and proposed amendments thereto contain provisions that could
materially impact the Company’s future healthcare costs. While the legislation’s ultimate impact is not yet known, it
is possible that these changes could significantly increase the Company’s compensation costs, which would reduce
the Company’s net income and adversely affect its cash flows.
The market value of the Company’s common stock has been and may continue to be volatile.
The market price of the Company’s common stock has been subject to volatility and, in the future, the market
price of the Company’s common stock could fluctuate widely in response to numerous factors, many of which are
beyond the Company’s control. Numerous factors, including many over which the Company has no control, may
have a significant impact on the market price of the Company’s common stock. In addition to the risk factors
discussed in this report, the price and volume volatility of the Company’s common stock may be affected by:
actual or anticipated fluctuations in commodities prices;
actual or anticipated variations in the Company’s results;
the Company’s earnings releases and financial performance;
changes in financial estimates or buy/sell recommendations by securities analysts;
the integration of Griffin’s business, the effect of the Merger on the Company’s business going forward and
the Company’s ability to realize growth opportunities as a result therefrom;
the Company’s ability to repay its debt;
the Company’s access to financial and capital markets to refinance its debt or its ability to repay
indebtedness under the Company’s Senior Secured Credit Facilities and its Senior Unsecured Notes;
the effect of future sales of substantial amounts of the Company’s common stock;
performance of the Company’s joint venture investments;
the Company’s dividend policy;
market conditions in the industry and the general state of the securities markets;
investor perceptions of the Company and the industry and markets in which it operates;
governmental legislation or regulation;
currency and exchange rate fluctuations; and
general economic and market conditions, such as recessions or significant inflation.
Future sales of the Company’s common stock or the issuance of other equity may adversely affect the market
price of the Company’s common stock.
The Company is not restricted from issuing additional common stock, including securities that are
convertible into or exchangeable for, or that represent the right to receive, common stock. The issuance of additional
shares of the Company’s common stock or convertible securities, including the Company’s outstanding options, or
otherwise, will dilute the ownership interest of the Company’s common stockholders.
Sales of a substantial number of shares of the Company’s common stock or other equity-related securities in
the public market could depress the market price of the Company’s common stock and impair the Company’s ability
Page 25
to raise capital through the sale of additional equity securities. The Company cannot predict the effect that future
sales of the Company’s common stock or other equity-related securities would have on the market price of the
Company’s common stock.
The Company’s common stock is an equity security and is subordinate to the Company’s existing and future
indebtedness.
The Company’s common stock is an equity interest and does not constitute indebtedness. As such, shares
of common stock rank junior to all of the Company’s indebtedness and to other non-equity claims on the Company
and the Company’s assets available to satisfy claims on the Company, including claims in a bankruptcy, liquidation
or similar proceeding. The Company’s existing indebtedness restricts, and future indebtedness may restrict, payment
of dividends on its common stock.
Unlike indebtedness, where principal and interest customarily are payable on specified due dates, in the
case of common stock, (i) dividends are payable only when and if declared by the Company’s board of directors or a
duly authorized committee of the board and (ii) as a corporation, the Company is restricted to only making dividend
payments and redemption payments out of legally available assets. Further, the common stock places no restrictions
on the Company’s business or operations or on the Company’s ability to incur indebtedness or engage in any
transactions, subject only to the voting rights available to stockholders generally.
In addition, any of the Company’s rights (including the rights of the holders of the Company’s common
stock) to participate in the assets of any of the Company’s subsidiaries upon any liquidation or reorganization of any
subsidiary will be subject to the prior claims of that subsidiary’s creditors (except to the extent the Company may
itself be a creditor of that subsidiary), including that subsidiary’s trade creditors and the Company’s creditors who
have obtained or may obtain guarantees from the subsidiaries. As a result, the Company’s common stock is
subordinated to the Company and the Company’s subsidiaries’ obligations and liabilities, which currently include
borrowings under the Company’s Senior Secured Credit Facilities and the Company’s Senior Unsecured Notes.
The Company’s ability to pay any dividends on its common stock may be limited.
The Company has not paid any dividends on its common stock since January 3, 1989. The Company’s
current financing arrangements permit the Company to pay cash dividends on the Company’s common stock within
limitations defined by the terms of the Company’s existing indebtedness, including the Company’s Senior Secured
Credit Facilities, Senior Unsecured Notes and any indentures or other financing arrangements that the Company
enters into in the future. For example, the agreements governing the Company’s Senior Secured Credit Facilities
restrict the Company’s ability to make payments of dividends in cash if certain coverage ratios are not met. Even if
such coverage ratios are met in the future, any determination to pay cash dividends on the Company’s common stock
will be at the discretion of the Company’s board of directors and will be based upon the Company’s financial
condition, operating results, capital requirements, plans for expansion, business opportunities, restrictions imposed
by any of the Company’s financing arrangements, provisions of applicable law and any other factors that the
Company’s board of directors determines are relevant at that point in time.
The issuance of shares of preferred stock could adversely affect holders of common stock, which may
negatively impact an investment in the Company’s common stock.
The Company’s board of directors is authorized to cause the Company to issue classes or series of preferred
stock without any action on the part of the Company’s stockholders. The board of directors also has the power,
without stockholder approval, to set the terms of any such classes or series of preferred shares that may be issued,
including the designation, preferences, limitations and relative rights over the common stock with respect to
dividends or upon the liquidation, dissolution or winding up of the Company’s business and other terms. If the
Company issues preferred shares in the future that have a preference over the common stock with respect to the
payment of dividends or upon liquidation, dissolution or winding up, or if the Company issues preferred shares with
voting rights that dilute the voting power of the common stock, the rights of holders of the Company’s common stock
or the market price of the common stock could be adversely affected. As of the date of this filing, the Company has
no outstanding shares of preferred stock but the Company has available for issuance 1,000,000 authorized but
unissued shares of preferred stock.
Page 26
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company’s corporate headquarters is located at 251 O’Connor Ridge Boulevard, Suite 300, Irving,
Texas, 75038, in an office facility where the Company leases approximately 31,000 square feet. The Company also
maintains regional offices in Cold Spring, Kentucky and Des Moines, Iowa.
As of January 1, 2011, the Company operates over 125 processing and transfer facilities including the
processing locations listed below. All of the processing facilities are owned except for ten leased facilities and the
Company owns or leases over 60 transfer stations in the U.S., some of which also process yellow grease and trap.
These transfer stations serve as collection points for routing raw material to the processing facilities set forth below.
Some locations service a single business segment while others service more than one business segment. The
following is a listing of the Company’s operating facilities by business segment:
DESCRIPTION
LOCATION
Combined Rendering and Restaurant Services Business Segments
Bastrop, TX
Bellevue, NE
Berlin, WI
Blue Earth, MN
Boise, ID
Butler, KY
Clinton, IA
Coldwater, MI
Collinsville, OK
Columbus, IN
Dallas, TX
Denver, CO
Des Moines, IA
Detroit, MI
East Dublin, GA
E. St. Louis, IL
Ellenwood, GA
Fresno, CA
Houston, TX
Jackson, MS
Kansas City, KS
Los Angeles, CA
Mason City, IL
Newark, NJ
Newberry, IN
Russellville, KY
San Francisco, CA (1)
Sioux City, IA
Starke, FL
Tacoma, WA (1)
Tampa, FL
Turlock, CA
Union City, TN
Wahoo, NE
Wichita, KS
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease/Trap
Rendering/Yellow Grease
Rendering/Yellow Grease/Trap
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease/Trap
Rendering/Yellow Grease
Rendering/Yellow Grease/Trap
Rendering/Yellow Grease/Trap
Rendering/Yellow Grease
Rendering/Yellow Grease/Trap
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease/Trap
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease/Trap
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease
Rendering/Yellow Grease/Trap
Page 27
Rendering Business Segment
Cincinnati, OH
Denver, CO
Fairfax, MO
Grand Island, NE (1)
Henderson, KY
Kansas City, KS
Kansas City, MO
Kendallville, IN
Lexington, NE
Lynn Center, IL
Omaha, NE (2)
Omaha, NE
Omaha, NE (2)
Quincy, FL
Hides
Edible Meat and Tallow
Protein Blending
Pet Food
Fertilizer Blending
Protein Blending
Hides
Specialty Rendering
Rendering & Protein Blending
Protein Blending
Rendering
Protein Blending
Technical Tallow
Hides
Restaurant Services Business Segment
Alma, GA
Calhoun, GA
Chicago, IL
Cleveland, OH
Ft. Lauderdale, FL (2)
Holden, LA
Indianapolis, IN
Little Rock, AK
No. Las Vegas, NV
San Diego, CA (1)
Santa Ana, CA (1)
Smyrna, GA
Tampa, FL (2)
Yellow Grease/Trap
Yellow Grease/Trap
Yellow Grease/Trap
Yellow Grease/Trap
Yellow Grease/Trap
Yellow Grease/Trap
Yellow Grease/Trap
Yellow Grease/Trap
Yellow Grease/Trap
Trap
Trap
Trap
Yellow Grease/Trap
Bakery Feed Segment
Albertville, AL (1)
Butler, KY (1)
Doswell, VA
Henderson, KY (1)
Honey Brook, PA
Marshville, NC
Memphis, TN (1)
North Baltimore, OH
Watts, OK (1)
Other
Butler, KY
Bakery Feed
Bakery Feed
Bakery Feed/Yellow Grease
Bakery Feed
Bakery Feed
Bakery Feed/Yellow Grease
Bakery Feed
Bakery Feed
Bakery Feed/Yellow Grease
Biodiesel
(1) Property is leased. Rent expense for these leased properties was $1.0 million in the aggregate in fiscal
2010.
(2) Property location ceased operations in January 2011. All raw materials that were processed by this plant are
now processed by another Company facility.
Substantially all assets of the Company, including real property, are either pledged or mortgaged as collateral for
borrowings under the Company’s Senior Secured Credit Facilities.
Page 28
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to several lawsuits, claims and loss contingencies arising in the ordinary course of its
business, including assertions by certain regulatory and governmental agencies related to permitting requirements and
air, wastewater and storm water discharges from the Company’s processing facilities.
The Company’s workers compensation, auto and general liability policies contain significant deductibles or
self-insured retentions. The Company estimates and accrues its expected ultimate claim costs related to accidents
occurring during each fiscal year and carries this accrual as a reserve until these claims are paid by the Company.
As a result of the matters discussed above, the Company has established loss reserves for insurance,
environmental and litigation matters. At January 1, 2011 and January 2, 2010, the reserves for insurance, environmental
and litigation contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities for which
there are no potential insurance recoveries were approximately $28.2 million and $15.6 million, respectively. 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 financial statements.
Lower Passaic River Area. The Company has been named as a third party defendant in a lawsuit pending in
the Superior Court of New Jersey, Essex County, styled New Jersey Department of Environmental Protection, The
Commissioner of the New Jersey Department of Environmental Protection Agency and the Administrator of the New
Jersey Spill Compensation Fund, as Plaintiffs, vs. Occidental Chemical Corporation, Tierra Solutions, Inc., Maxus
Energy Corporation, Repsol YPF, S.A., YPF, S.A., YPF Holdings, Inc., and CLH Holdings, as Defendants (Docket
No. L-009868-05) (the “Tierra/Maxus Litigation”). In the Tierra/Maxus Litigation, which was filed on December
13, 2005, the plaintiffs seek to recover from the defendants past and future cleanup and removal costs, as well as
unspecified economic damages, punitive damages, penalties and a variety of other forms of relief, purportedly
arising from the alleged discharges into the Passaic River of a particular type of dioxin and other unspecified
hazardous substances. The damages being sought by the plaintiffs from the defendants are likely to be substantial.
On February 4, 2009, two of the defendants, Tierra Solutions, Inc. (“Tierra”) and Maxus Energy Corporation
(“Maxus”), filed a third party complaint against over 300 entities, including the Company, seeking to recover all or a
proportionate share of cleanup and removal costs, damages or other loss or harm, if any, for which Tierra or Maxus
may be held liable in the Tierra/Maxus Litigation. Tierra and Maxus allege that Standard Tallow Company, an entity
that the Company acquired in 1996, contributed to the discharge of the hazardous substances that are the subject of
this case while operating a former plant site located in Newark, New Jersey. The Company is investigating these
allegations, has entered into a joint defense agreement with many of the other third-party defendants and intends to
defend itself vigorously. Additionally, in December 2009, the Company, along with numerous other entities,
received notice from the United States Environmental Protection Agency (EPA) that the Company (as successor-in-
interest to Standard Tallow Company) is considered a potentially responsible party with respect to alleged
contamination in the lower Passaic River area which is part of the Diamond Alkali Superfund Site located in
Newark, New Jersey. In the letter, EPA requested that the Company join a group of other parties in funding a
remedial investigation and feasibility study at the site. As of the date of this report, the Company has not agreed to
participate in the funding group. The Company’s ultimate liability for investigatory costs, remedial costs and/or
natural resource damages in connection with the lower Passaic River area cannot be determined at this time;
however, as of the date of this report, there is nothing that leads the Company to believe that these matters will have
a material effect on the Company’s financial position or results of operation.
ITEM 4. (Removed and Reserved)
Page 29
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol
“DAR”. The following table sets forth, for the quarters indicated, the high and low closing sales prices per share for the
Company’s common stock as reported on the NYSE.
Fiscal Quarter
High
Low
Market Price
2010:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2009:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 9.13
$ 9.69
$ 8.59
$ 13.59
$ 6.39
$ 8.24
$ 8.13
$ 8.39
$ 7.48
$ 7.25
$ 7.02
$ 8.31
$ 2.94
$ 4.14
$ 6.33
$ 6.80
On February 23, 2011, the closing sales price of the Company’s common stock on the NYSE was $13.91. The
Company has been notified by its stock transfer agent that as of February 23, 2011, there were 176 holders of record of
the common stock.
The Company has not paid any dividends on its common stock since January 3, 1989 and does not expect to
pay cash dividends in 2011. The agreements underlying the Company’s Senior Secured Credit Facilities and Senior
Unsecured Notes permit the Company to pay cash dividends on its common stock within limitations defined in such
agreements. Any future determination to pay cash dividends on the Company’s common stock will be at the discretion
of the Company’s board of directors and will be based upon the Company’s financial condition, operating results, capital
requirements, plans for expansion, restrictions imposed by any financing arrangements, and any other factors that the
board of directors determines are relevant.
Set forth below is a line graph comparing the change in the cumulative total stockholder return on the
Company’s common stock with the cumulative total return of the Russell 2000 Index, the Dow Jones US Waste and
Disposal Service Index, and the CS-Agribusiness Index for the period from December 31, 2005 to January 1, 2011,
assuming the investment of $100 on December 31, 2005 and the reinvestment of dividends.
The stock price performance shown on the following graph only reflects the change in the Company’s stock
price relative to the noted indices and is not necessarily indicative of future price performance.
Page 30
EQUITY COMPENSATION PLANS
The following table sets forth certain information as of January 1, 2011 with respect to the Company’s
equity compensation plans (including individual compensation arrangements) under which the Company’s equity
securities are authorized for issuance, aggregated by i) all compensation plans previously approved by the
Company’s security holders, and ii) all compensation plans not previously approved by the Company’s security
holders. The table includes:
the number of securities to be issued upon the exercise of outstanding options and granted non-vested
stock;
the weighted-average exercise price of the outstanding options and granted non-vested stock; and
the number of securities that remain available for future issuance under the plans.
Page 31
(a)
Number of securities
to be issued upon
exercise of
outstanding
options, warrants
and rights
(b)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(c)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
Plan Category
Equity compensation plans approved
by security holders
1,397,022 (1)
Equity compensation plans not
approved by security holders
Total
–
1,397,022
$5.87
–
$5.87
1,933,217
–
1,933,217
(1) Includes shares underlying options that have been issued and granted non-vested stock pursuant to the
Company’s 2004 Omnibus Incentive Plan (the “2004 Plan”) as approved by the Company’s stockholders.
See Note 12 of Notes to Consolidated Financial Statements for information regarding the material features
of the 2004 Plan.
Page 32
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated historical financial data for the periods indicated. The
selected historical consolidated financial data set forth below should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements
of the Company for the three years ended January 1, 2011, January 2, 2010, and January 3, 2009, and the related notes
thereto.
Fiscal 2010
Fifty-two
Weeks Ended
January 1,
2011 (l)
Fiscal 2009
Fifty-two
Weeks Ended
January 2,
2010 (k)
Fiscal 2008
Fifty-three
Weeks Ended
January 3,
2009 (j)
Fiscal 2007
Fifty-two
Weeks Ended
December 29,
2007
Fiscal 2006
Fifty-two
Weeks Ended
December 30,
2006 (i)
(dollars in thousands, except per share data)
Statement of Operations Data:
Net sales
Cost of sales and operating expenses
Selling, general and administrative expenses (a)
Depreciation and amortization
Acquisition costs
Goodwill impairment (b)
Operating income
Interest expense (c)
Other (income)/expense, net (d), (e)
Income from continuing operations before income
taxes
Income tax expense
Net Income
Basic earnings per common share (f)
Diluted earnings per common share (f)
Weighted average shares outstanding (f)
Diluted weighted average shares outstanding (f)
Other Financial Data:
Adjusted EBITDA (g)
Depreciation
Amortization
Capital expenditures (h)
Balance Sheet Data:
Working capital
Total assets
Current portion of long-term debt
Total long-term debt less current portion
Stockholders’ equity
$724,909
531,648
68,042
31,908
10,798
-
82,513
8,737
3,433
70,343
26,100
$ 44,243
$ 0.53
$ 0.53
82,854
83,243
$ 114,421
26,328
5,580
24,720
$ 30,756
1,382,258
3,009
707,030
464,296
$597,806
440,111
61,062
25,226
468
-
70,939
3,105
955
66,879
25,089
$ 41,790
$ 0.51
$ 0.51
82,142
82,475
$ 96,165
21,398
3,828
23,638
$ 75,100
426,171
5,009
27,539
284,877
$807,492
614,708
59,761
24,433
-
15,914
92,676
3,018
(258)
89,916
35,354
$ 54,562
$ 0.67
$ 0.66
81,685
82,246
$133,023
19,266
5,167
31,006
$ 67,446
394,375
5,000
32,500
236,578
$645,313
483,453
57,999
23,214
-
-
80,647
5,045
570
75,032
29,499
$ 45,533
$ 0.56
$ 0.56
81,091
81,916
$103,861
18,332
4,882
15,552
$ 34,385
351,338
6,250
37,500
200,984
$406,990
321,416
45,649
20,686
-
-
19,239
7,184
4,682
7,373
2,266
$ 5,107
$ 0.07
$ 0.07
74,310
75,259
$39,925
16,134
4,552
11,800
$ 17,865
320,806
5,004
78,000
151,325
(a) Included in selling, general and administrative expenses is a loss on a legal settlement of approximately $2.2 million offset by a
gain on a separate legal settlement of approximately $1.0 million in fiscal 2007.
(b) Includes a goodwill impairment charge of $15.9 million in the fourth quarter of fiscal 2008.
(c) Included in interest expense for fiscal 2010 is approximately $3.1 million for bank financing fees paid as a result of the
acquisition of Griffin.
(d) Included in other (income)/expense in fiscal 2010 and fiscal 2006 is a write-off of deferred loan costs of approximately $0.9
million and $2.6 million, respectively for the early termination of previous senior credit agreements. In addition, in fiscal 2006
other (income)/expense include early retirement fees of approximately $1.9 million for the early retirement of senior
subordinated notes.
(e) Included in other (income)/expense in fiscal 2010 is a write-off of property for fire and casualty losses of approximately $1.0
million for losses incurred in plant fires at two plant locations.
Page 33
(f) The Company has prepared fiscal 2010 and fiscal 2009 earnings per share computations and retrospectively only revised the
Company’s comparative prior period computations for fiscal 2008 and 2007 to include in basic and diluted earnings per
share non-vested and restricted share awards considered participating securities as a result of the Company’s January 4, 2009
adoption of the provisions of the Financial Accounting Standards Board’s (“FASB”) authoritative guidance pertaining to
whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore, need
to be included in the earnings allocation in computing earnings per share under the two class method.
(g) Adjusted EBITDA is presented here not as an alternative to net income, but rather as a measure of the Company’s operating
performance and is not intended to be a presentation in accordance with generally accepted accounting principles (GAAP).
Since EBITDA is not calculated identically by all companies, the presentation in this report may not be comparable to those
disclosed by other companies.
Adjusted EBITDA is calculated below and represents, for any relevant period, net income/(loss) plus depreciation and
amortization, goodwill and long-lived asset impairment, interest expense, (income)/loss from discontinued operations, net of tax,
income tax provision and other income/(expense). The Company believes adjusted EBITDA is a useful measure for investors
because it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the
Company’s industry. In addition, management believes that adjusted EBITDA is useful in evaluating the Company’s operating
performance compared to that of other companies in its industry because the calculation of adjusted EBITDA generally
eliminates the effects of financing, income taxes and certain non-cash and other items that may vary for different companies for
reasons unrelated to overall operating performance. As a result, the Company’s management uses adjusted EBITDA as a
measure to evaluate performance and for other discretionary purposes. However, adjusted EBITDA is not a recognized
measurement under U.S. GAAP, should not be considered as an alternative to net income as a measure of operating results or to
cash flow as a measure of liquidity, and is not intended to be a presentation in accordance with GAAP. Also, since adjusted
EBITDA is not calculated identically by all companies, the presentation in this report may not be comparable to those disclosed
by other companies.
In addition to the foregoing, management also uses or will use adjusted EBITDA to measure compliance with certain financial
covenants under the Company’s Senior Secured Credit Facilities and Senior Unsecured Notes. The amounts shown below for
adjusted EBITDA differ from the amounts calculated under similarly titled definitions in the Company’s Senior Secured Credit
Facilities and Senior Unsecured Notes, as those definitions permit further adjustments to reflect certain other non-cash charges.
Reconciliation of Net Income to Adjusted EBITDA
(dollars in thousands)
January 1,
2011
January 2,
2010
January 3,
2009
December 29,
2007
December 30,
2006
Net income
Depreciation and amortization
Goodwill impairment
Interest expense
Income tax expense
Other, net
Adjusted EBITDA
$ 44,243
31,908
-
8,737
26,100
3,433
$ 114,421
$ 41,790
25,226
-
3,105
25,089
955
$ 96,165
$ 54,562
24,433
15,914
3,018
35,354
(258)
$133,023
$ 45,533
23,214
-
5,045
29,499
570
$103,861
$ 5,107
20,686
-
7,184
2,266
4,682
$39,925
(h) Excludes the capital assets acquired as part of the Merger of Griffin and from Nebraska By-Products, Inc. of approximately
$243.7 million in fiscal 2010. Excludes the capital assets acquired as part of acquiring substantially all of the assets of National
By-Products, LLC (“NBP”) of approximately $51.9 million in fiscal 2006 and API Recycling’s used cooking oil collection
business of $3.4 million in fiscal 2008. Also excludes the capital assets acquired in fiscal 2009 from Boca Industries, Inc. and
Sanimax USA, Inc. of approximately $8.0 million.
(i) Fiscal 2006 includes 33 weeks of contribution from the acquired NBP assets.
(j) Fiscal 2008 includes 19 weeks of contribution from the API Recycling used cooking oil collection business.
(k) Fiscal 2009 includes 45 weeks of contribution from the acquired assets of Boca Industries, Inc. and does not include any
contribution from assets acquired from Sanimax USA, Inc. as the acquisition occurred on December 31, 2009.
(l) Fiscal 2010 includes 2 weeks of contribution from the Griffin assets and 31 weeks of contribution from the assets of Nebraska
By-Products, Inc.
Page 34
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ
materially from those anticipated in these forward-looking statements as a result of certain factors, including those
set forth in Item 1A of this report under the heading “Risk Factors.”
The following discussion should be read in conjunction with the historical consolidated financial statements
and notes thereto included in Item 8 of this report. During fiscal 2010, the Company was organized into two operating
business segments, Rendering and Restaurant Services. See Note 18 of Notes to Consolidated Financial Statements.
Overview
The Company is a leading provider of rendering, cooking oil and bakery waste recycling and recovery
solutions to the nation’s food industry. The Company collects and recycles animal by-products, bakery waste and used
cooking oil from poultry and meat processors, commercial bakeries, grocery stores, butcher shops, and food service
establishments and provides grease trap cleaning services to many of the same establishments. On December 17, 2010,
Darling completed its acquisition of Griffin Industries, Inc. and its subsidiaries (“Griffin”) pursuant to the Agreement
and Plan of Merger, dated as of November 9, 2010 (the “Merger Agreement”), by and among Darling, DG
Acquisition Corp., a wholly-owned subsidiary of Darling (“Merger Sub”), Griffin and Robert A. Griffin, as the
Griffin shareholders’ representative. Merger Sub was merged with and into Griffin (the “Merger”), and Griffin
survived the Merger as a wholly-owned subsidiary of Darling. The Company operates over 125 processing and
transfer facilities located throughout the United States to process raw materials into finished products such as protein
(primarily meat and bone meal (“MBM”) and poultry meal (“PM”)), tallow (primarily bleachable fancy tallow
(“BFT”)), poultry grease (“PG”), yellow grease (“YG”), bakery by-product (“BBP”) and hides as well as a range of
branded and value-added products. The Company sells these products nationally and internationally, primarily to
producers of animal feed, pet food, fertilizer, bio-fuels and other consumer and industrial ingredients, including oleo-
chemicals, soaps and leather goods for use as ingredients in their products or for further processing. All of the
Company’s finished products are commodities and are priced relative to competing commodities primarily corn,
soybean oil and soybean meal. Finished product prices will track as to nutritional and industry value to the ultimate
customer’s use of the product. As a result of the Merger, the Company’s year-end results for 2010 reflect 2 weeks of
contribution from Griffin. For additional information on the Company’s business, see Item 1, “Business,” and for
additional information on the Company’s segments, see Note 18 of Notes to Consolidated Financial Statements.
Fiscal 2010 will be remembered as an exceptional and transformational year for Darling International Inc.
Earnings reflect the second best year in our 128 year history only to be accented by the Company’s merger with
Griffin on December 17, 2010. For the year, the Company watched values for the global grains and oilseeds
complex approach record highs and in turn saw the Company’s finished product prices escalate throughout the year.
Overall, the Company’s raw material tonnage grew nicely in both rendering and restaurant services. On the
rendering side, the Company benefited from improved slaughter volumes driven by a return of profitability for both
the livestock producer and meat processor. The Company’s restaurant services segment benefited from increased
volumes and improved prices for finished products as the U.S. economy began to rebound and eating out
normalized. Energy costs for both natural gas and diesel were favorable. Overall operating costs were effectively
managed and reflected the Company’s higher volume of inputs.
Operating income increased by $11.6 million in fiscal 2010 compared to fiscal 2009. Operating income was
impacted in fiscal 2010 by operating expenses of approximately $10.8 million representing acquisition costs and
expenses incurred as a result of the acquisitions during fiscal 2010. The continuing challenges faced by the Company
indicate there can be no assurance that operating results achieved by the Company in fiscal 2010 are indicative of future
operating performance of the Company.
Page 35
Summary of Critical Issues Faced by the Company during Fiscal 2010
Significantly higher finished product prices for BFT and YG as compared to fiscal 2009 are a sign of
improving U.S. and world economies and increased global demand for BFT and YG for use in bio-fuels in
fiscal 2010. These higher prices were offset somewhat by lower MBM prices in fiscal 2010 as compared to
fiscal 2009. Finished product prices were favorable to the Company’s sales revenue, but this favorable
result was partially offset by the negative impact on raw material cost, due to the Company’s formula
pricing arrangements with raw material suppliers, which index raw material cost to the prices of finished
product derived from the raw material. The financial impact of finished goods prices on sales revenue and
raw material cost is summarized below in Results of Operations. Comparative sales price information from
the Jacobsen index, an established trading exchange publisher used by management, is listed below in
Summary of Key Indicators.
Higher raw material volumes were collected from suppliers during fiscal 2010 as compared to fiscal 2009.
Management believes the positive effect of the integration of current and prior year acquisition activity
excluding the effects of the acquisition of Griffin and improving conditions in the food service industry
contributed to the increase in raw material volumes collected by the Company during fiscal 2010 as
compared to fiscal 2009. The financial impact of higher raw material volumes is summarized below in
Results of Operations.
Energy prices for natural gas costs declined during fiscal 2010 as compared to fiscal 2009, but were more
than offset by an increase in diesel fuel costs during fiscal 2010 as compared to fiscal 2009.
Summary of Critical Issues and Known Trends Faced by the Company in Fiscal 2010 and Thereafter
Critical Issues and Challenges
The acquisition of Griffin is the largest and most significant acquisition Darling has undertaken. Although
Darling expects that Griffin’s business will operate to a significant extent on an independent basis and that it
will not require significant integration going forward for the Company to continue the operations of
Griffin’s business, this may not prove to be the case. See the risk factor entitled “The Company’s efforts to
combine Darling’s business and Griffin’s business may not be successful” on page 14 for more information.
Integration of smaller current and prior year acquisition activity and improving conditions in the food
service industry contributed to the increased raw material volumes collected by the Company in fiscal 2010
as compared to fiscal 2009. No assurance can be given that increased activity in the food service industry
or the U.S. and global economies will continue in the future. If further economic instability were to occur
in the future there could be a negative impact on the Company’s ability to obtain raw materials for the
Company’s operations.
Finished product prices for BFT and YG commodities increased during fiscal 2010 as compared to fiscal
2009. No assurance can be given that this increase in commodity prices for BFT and YG will continue in
the future, as commodity prices are volatile by their nature. A future decrease in commodity prices could
have a significant impact on the Company’s earnings in fiscal 2011 and into future periods.
The Company consumes significant volumes of natural gas to operate boilers in its plants, which generate
steam to heat raw material. Natural gas prices represent a significant cost of factory operation included in
cost of sales. The Company also consumes significant volumes of diesel fuel to operate its fleet of tractors
and trucks used to collect raw material. Diesel fuel prices represent a significant component of cost of
collection expenses included in cost of sales. Diesel fuel prices were higher during fiscal 2010 as compared
to the same period of fiscal 2009. These prices can be volatile and there can be no assurance that these
prices will not increase further in the near future, thereby representing an ongoing challenge to the
Company’s operating results for future periods. A material increase in energy prices for natural gas and
diesel fuel over a sustained period of time could materially adversely affect the Company’s business,
financial condition and results of operations.
Page 36
Worldwide Government Energy Policies
As previously noted, prices for the Company’s finished products may be impacted by worldwide
government policies relating to renewable fuels and greenhouse gas emissions, and programs such as RFS2
and tax credits for bio-fuels both in the U.S. and abroad may positively impact the demand for the
Company’s finished products. See the risk factor entitled “The Company’s business may be affected by
energy policies of U.S. and foreign governments,” on page 14, for more information regarding RFS2 and
how changes to these worldwide government policies could have a negative impact on the Company’s
business and results of operations.
Other Food Safety and Regulatory Issues
Effective August 1997, the FDA promulgated the BSE Feed Rule prohibiting the use of mammalian
proteins, with some exceptions, in feeds for cattle, sheep and other ruminant animals. The intent of this rule
is to prevent the spread of BSE, commonly referred to as “mad cow disease.” As previously noted, the
FDA has amended the BSE Feed Rule, which the FDA began enforcing on October 26, 2009. Management
has followed this proposed amendment throughout its history in order to assess and minimize the impact of
its implementation on the Company. See the risk factor entitled “The Company’s business may be affected
by the impact of BSE and other food safety issues,” beginning on page 16, for more information about BSE,
including the Final BSE Rule, and other food safety issues and their potential effects on the Company,
including the potential effects of additional government regulations, finished product export restrictions by
foreign governments, market price fluctuations for finished goods, reduced demand for beef and beef
products by consumers and increases in operating costs resulting from BSE-related concerns.
Even though the export markets for U.S. beef have been significantly re-opened, most of these markets
remain closed to MBM derived from U.S. beef. Continued concern about BSE in the U.S. may result in
additional regulatory and market related challenges that may affect the Company’s operations and/or
increase the Company’s operating costs.
These challenges indicate there can be no assurance that fiscal 2010 operating results are indicative of future
operating performance of the Company.
Results of Operations
Fifty-two Week Fiscal Year Ended January 1, 2011 (“Fiscal 2010”) Compared to Fifty-two Week Fiscal Year
Ended January 2, 2010 (“Fiscal 2009”)
Summary of Key Factors Impacting Fiscal 2010 Results:
Principal factors that contributed to a $11.6 million increase in operating income, which are discussed in
greater detail in the following section, were:
Changes in finished product prices and quality down grades,
Higher raw material volumes, and
Two weeks of contribution from the acquisition of Griffin.
These increases to operating income were partially offset by:
Acquisition costs and expenses from current year acquisitions,
Increased costs due to current and prior year acquisition activity other than Griffin,
Higher payroll and incentive-related benefits, and
Higher energy costs, primarily related to diesel fuel.
Page 37
Summary of Key Indicators of Fiscal 2010 Performance:
Principal indicators that management routinely monitors and compares to previous periods as an indicator
of problems or improvements in operating results include:
Finished product commodity prices,
Raw material volume,
Production volume and related yield of finished product,
Energy prices for natural gas quoted on the NYMEX index and diesel fuel,
Collection fees and collection operating expense, and
Factory operating expenses.
These indicators and their importance are discussed below in greater detail.
Finished Product Commodity Prices. Prices for finished product commodities that the Company produces
are reported each business day on the Jacobsen index, an established trading exchange price publisher. The
Jacobsen index reports industry sales from the prior day’s activity by product. The Jacobsen index includes reported
prices for feed grade and pet food PM, MBM, BFT and PG (which are end products of the Company’s Rendering
Segment) and YG (which is an end product of the Company’s Restaurant Services Segment). The Bakery segment’s
end product is BBP. The Company regularly monitors Jacobsen index reports on PM, MBM, BFT, PG, YG and
BBP because they provide a daily indication of the Company’s revenue performance against business plan
benchmarks. Although the Jacobsen index provides one useful metric of performance, the Company’s finished
products are commodities that compete with other commodities such as corn, soybean oil, palm oil complex, soybean
meal and heating oil on nutritional and functional values and therefore actual pricing for the Company’s finished
products, as well as competing products, can be quite volatile. In addition, the Jacobsen index does not provide
forward or future period pricing. The Jacobsen prices quoted below are for delivery of the finished product at a
specified location. Although the Company’s prices generally move in concert with reported Jacobsen prices, the
Company’s actual sales prices for its finished products may vary significantly from the Jacobsen index because of
delivery timing differences and because the Company’s finished products are delivered to multiple locations in
different geographic regions which utilize different price indexes. In addition, certain of the Company’s premium
branded finished products may also sell at prices that may be higher than the closest related Jacobsen index. During
Fiscal 2010, the Company’s actual sales prices by product trended with the disclosed Jacobsen prices. Average
Jacobsen prices (at the specified delivery point) for Fiscal 2010, compared to average Jacobsen prices for Fiscal
2009 follow:
Rendering Segment:
MBM (Illinois)
Feed Grade PM (Carolina)
Pet Food PM (Southeast)
BFT (Chicago)
PG (Southeast)
Restaurant Services Segment:
YG (Illinois)
Bakery Segment:
BBP (Chicago)
Avg. Price
Fiscal 2010
Avg. Price
Fiscal 2009
Increase/
(Decrease)
$297.35/ton
$366.89/ton
$606.55/ton
$ 33.43/cwt
$ 29.01/cwt
$338.09/ton
$390.04/ton
$626.39/ton
$ 25.21 /cwt
$ 23.44 /cwt
$ (40.74)/ton
$ (23.15)/ton
$ (19.84)/ton
$ 8.22/cwt
$ 5.57/cwt
%
Increase/
(Decrease)
(12.1)%
(5.9)%
(3.2)%
32.6%
23.8%
$ 26.89/cwt
$ 20.73 /cwt
$ 6.16/cwt
29.7%
$143.57/ton
$135.70/ton
$ 7.87/ton
5.8%
The overall increase in average BFT and YG prices of the finished products the Company sells had a
favorable impact on revenue that was partially offset by lower MBM prices and by a negative impact to the
Company’s raw material cost resulting from formula pricing arrangements, which compute raw material cost based
upon the price of finished product.
Page 38
Raw Material Volume. Raw material volume represents the quantity (pounds) of raw material collected
from Rendering Segment suppliers, such as butcher shops, grocery stores and independent beef, pork and poultry
processors, and from Restaurant Services Segment suppliers, such as food service establishments, or in the case of
the Bakery segment, commercial bakeries. Raw material volumes from the Company’s Rendering Segment suppliers
provide an indication of the future production of feed grade and pet food PM, MBM, BFT and PG finished products,
raw material volumes from the Company’s Restaurant Services Segment suppliers provide an indication of the future
production of YG finished products, and raw material volumes from the Company’s Bakery segment suppliers
provide an indication of the future production of BBP finished products.
Production Volume and Related Yield of Finished Product. Finished product production volumes are the
end result of the Company’s production processes, and directly impact goods available for sale, and thus become an
important component of sales revenue. In addition, physical inventory turn-over is impacted by both the availability
of credit to the Company’s customers and suppliers and reduced market demand which can lower finished product
inventory values. Yield on production is a ratio of production volume (pounds), divided by raw material volume
(pounds) and provides an indication of effectiveness of the Company’s production process. Factors impacting yield
on production include quality of raw material and warm weather during summer months, which rapidly degrades raw
material. The quantities of finished products produced varies depending on the mix of raw materials used in
production. For example, raw material from cattle yields more fat and protein than raw material from pork or
poultry. Accordingly, the mix of finished products produced by the Company can vary from quarter to quarter
depending on the type of raw material being received by the Company. The Company cannot increase the
production of protein or fat based on demand since the type of raw material available will dictate the yield of each
finished product.
Energy Prices for Natural Gas quoted on the NYMEX Index and Diesel Fuel. Natural gas and heating oil
commodity prices are quoted each day on the NYMEX exchange for future months of delivery of natural gas and
delivery of diesel fuel. The prices are important to the Company because natural gas and diesel fuel are major
components of factory operating and collection costs and natural gas and diesel fuel prices are an indicator of
achievement of the Company’s business plan.
Collection Fees and Collection Operating Expense. The Company charges collection fees which are
included in net sales. Each month the Company monitors both the collection fee charged to suppliers, which is
included in net sales, and collection expense, which is included in cost of sales. The importance of monitoring
collection fees and collection expense is that they provide an indication of achievement of the Company’s business
plan. Furthermore, management monitors collection fees and collection expense so that the Company can consider
implementing measures to mitigate against unforeseen increases in these expenses.
Factory Operating Expenses. The Company incurs factory operating expenses which are included in cost
of sales. Each month the Company monitors factory operating expense. The importance of monitoring factory
operating expense is that it provides an indication of achievement of the Company’s business plan. Furthermore,
when unforeseen expense increases occur, the Company can consider implementing measures to mitigate such
increases.
Net Sales. The Company collects and processes animal by-products (fat, bones and offal), including hides,
commercial bakery waste and used restaurant cooking oil to principally produce finished products of feed grade and
pet food PM, MBM, BFT, PG, YG, BBP and hides as well as a range of branded and value-added products. Sales
are significantly affected by finished goods prices, quality and mix of raw material, and volume of raw material. Net
sales include the sales of produced finished goods, collection fees, fees for grease trap services, and finished goods
purchased for resale.
During Fiscal 2010, net sales were $724.9 million as compared to $597.8 million during Fiscal 2009. The
Rendering Segments’ finished products are primarily feed grade and pet food PM and MBM, which collectively are
approximately $243.5 million and $244.7 million of net sales for the year ended January 1, 2011 and January 2,
2010, respectively and BFT and PG, which collectively are approximately $262.9 million and $187.8 million of net
sales for the year ended January 1, 2011 and January 2, 2010, respectively. The Restaurant Services Segment’s
finished product is YG, which is approximately $136.2 million and $95.9 million of net sales for the year ended
January 1, 2011 and January 2, 2010, respectively. The increase in Rendering Segment sales of $78.3 million, the
increase in Restaurant Services Segment sales of $38.6 million and Bakery Segment sales of $10.2 million accounted
for the $127.1 million increase in sales. The increase in net sales was primarily due to the following (in millions of
dollars):
Page 39
Increase in finished product prices
Increase in net sales due to acquisition
of Griffin
Increase in raw material volume
Increase/(decrease) in yield
Purchases of finished product for resale
Increase/(decrease) in other sales
Product transfers
Rendering
$ 39.7
Restaurant
Services
$ 33.6
Bakery
$ –
Corporate
$ –
Total
$ 73.3
17.5
20.8
3.2
(1.6)
(2.1)
0.8
$ 78.3
–
3.6
(0.5)
2.6
0.1
(0.8)
$ 38.6
10.2
–
–
–
–
–
$ 10.2
–
–
–
–
–
–
$ –
27.7
24.4
2.7
1.0
(2.0)
–
$ 127.1
Further detail regarding the $78.3 million increase in sales in the Rendering Segment, the $38.6 million increase in
sales in the Restaurant Services Segment and the $10.2 million increase in sales in the Bakery Segment is as follows:
Rendering
Finished Product Prices: Higher prices in the overall commodity market for corn and soybean oil, which are
competing fats to BFT, positively impacted the Company’s finished product prices while MBM prices were
lower as soybean meal prices were lower. $39.7 million of the increase in Rendering Segment sales is due
primarily to a market-wide increase in BFT prices (fat), but this increase was impacted by extreme summer
temperatures in the third quarter of fiscal 2010 as compared to the third quarter of fiscal 2009 that also extended
for a longer period of time which affected product quality resulting in lower grades of rendered tallow and
grease for sale. The market increases were due to changes in supply/demand in both the domestic and export
markets for commodity fats, including BFT.
Net Sales from Acquisition of Griffin: The Company’s net sales have increased by $17.5 million in the
Rendering Segment as a result of two weeks of contribution from the acquisition of Griffin.
Raw Material Volume: The positive effect of the integration of current and prior year acquisition activity other
than Griffin has resulted in higher raw material volumes available to process. The higher raw material volumes
from Rendering Segment suppliers, which are processed into MBM and BFT finished products, increased sales
by $20.8 million. As noted elsewhere, MBM and BFT are derived principally from bones, fat and offal from the
Rendering Segment’s suppliers. The proportions of bones, fat and offal are relatively stable, but will vary from
production run to production run based on the source and whether the material is principally beef, pork or
poultry material. The Company has no ability to alter the proportion of bones, fat and offal offered to the
Company by the Company’s suppliers and therefore the Company cannot meaningfully alter the mix of MBM
and BFT resulting from the Company’s rendering process.
Yield: The raw material processed in Fiscal 2010 compared to the same period of Fiscal 2009 yielded more
finished product for sale and increased sales by $3.2 million. The increase in the relative portion of cattle offal
in the raw material collected during Fiscal 2010 impacted yields since cattle offal is a higher yielding material
than pork and poultry offal.
Purchases of Finished Product for Resale: The Company purchased less finished product for resale from third
party suppliers in Fiscal 2010 compared to the same period in Fiscal 2009 by $1.6 million. Higher volumes and
higher yields reduced the need to source third party product.
Other Sales: The $2.1 million decrease in other Rendering Segment sales was primarily due to lower collection
and processing fees.
Product Transfers: Depending on the Company’s customers’ finished product quality specifications and the
quality of raw material the Company receives from meat processors and other sources, from time to time BFT
material must be downgraded and sold as YG. Generally, product transfers occur when BFT is downgraded
and the product is reclassified as YG, which is a Restaurant Services Segment product. Product transfers from
the Rendering Segment to the Restaurant Services Segment were less in Fiscal 2010 compared to the same
period in Fiscal 2009. When less product is transferred from the Rendering Segment to the Restaurant Services
Page 40
Segment, more BFT is available for sale by the Rendering Segment and YG sales will decrease correspondingly.
The increased BFT available in Fiscal 2010 compared to Fiscal 2009 resulted in an increase in Rendering
Segment sales of $0.8 million.
Restaurant Services
Finished Product Prices: Higher prices in competing commodities due to an increase in global demand for use
of YG in bio-fuels positively impacted the Company’s YG finished product prices. The $33.6 million increase
in Restaurant Services Segment sales was due to a significant increase in prices for YG and competing
commodity products during Fiscal 2010 as compared to the same period in Fiscal 2009.
Raw Material Volume: The positive effect of the integration of prior year acquisition activity and improving
conditions in the food service industry impacted the volume of raw material available for collection. Higher raw
material volume from used cooking oil suppliers increased YG sales by $3.6 million. As noted elsewhere, YG is
produced by the Company’s Restaurant Services Segment as a result of refining used cooking oil collected from
the Company’s food service establishment suppliers.
Yield: Although the volume of cooking oil has improved, the Company believes that YG yields have declined
because the cooking oil received is being used longer by the foodservice industry, which decreases the quality of
oil picked up from suppliers. This lowers yield and lowers the amount of finished product available for sale
resulting in reduced sales of $0.5 million.
Purchases of Finished Product for Resale: The $2.6 million increase in purchase of finished product resulted
from the Company purchasing more finished product for resale from third party suppliers in Fiscal 2010 as
compared to the same period in Fiscal 2009.
Other Sales: The $0.1 million increase in other sales was primarily from prior year acquisitions in the
Restaurant Services Segment.
Product Transfers: Product transfers from the Rendering Segment to the Restaurant Services Segment were less
in Fiscal 2010 as compared to the same period in Fiscal 2009. The decrease in product transfers was a result of
less BFT (a Rendering Segment product) being downgraded and transferred to the Restaurant Services Segment
to be sold as YG in Fiscal 2010 compared to Fiscal 2009. As a result, Restaurant Services Segment sales were
decreased by $0.8 million in Fiscal 2010.
Bakery
Net Sales from Acquisition of Griffin: The Bakery segment was acquired with Griffin and contributed $10.2
million of net sales during the period subsequent to the Merger.
Cost of Sales and Operating Expenses. Cost of sales and operating expenses include the cost of raw
material, the cost of product purchased for resale and the cost to collect raw material, which includes diesel fuel and
processing costs including natural gas. The Company utilizes both fixed and formula pricing methods for the
purchase of raw materials. Fixed prices are adjusted where possible for changes in competition. Significant changes
in finished goods market conditions impact finished product inventory values, while raw materials purchased under
formula prices are correlated with specific finished goods prices. Energy costs, particularly diesel fuel and natural
gas, are significant components of the Company’s cost structure. The Company has the ability to burn alternative
fuels at a majority of its plants to help manage the Company’s price exposure to volatile energy markets.
During Fiscal 2010, cost of sales and operating expenses were $531.6 million as compared to $440.1
million during Fiscal 2009. The increase in Rendering Segment cost of sales and operating expenses of $62.6
million, the increase in Restaurant Services Segment cost of sales and operating expenses of $20.8 million and
Bakery Segment cost of sales and operating expenses of $8.0 million accounted for substantially all of the $91.5
million increase in cost of sales and operating expenses. The increase in cost of sales and operating expenses was
primarily due to the following (in millions of dollars):
Page 41
Increase in raw material costs
Increase in cost of sales and operating
expense due to acquisition of Griffin
Increase/(decrease) in other
Increase in raw material volume
Increase/(decrease) in energy costs
primarily diesel fuel
Purchases of finished product for resale
Product transfers
Rendering
$ 35.6
Restaurant
Services
$ 15.7
Bakery
$ –
Corporate
$ –
Total
$ 51.3
11.8
10.0
4.4
2.1
(2.1)
0.8
$ 62.6
–
3.1
0.9
1.0
0.9
(0.8)
$ 20.8
8.0
–
–
–
–
$ 8.0
–
–
–
0.1
–
–
$ 0.1
19.8
13.1
5.3
3.2
(1.2)
–
$ 91.5
Further detail regarding the $62.6 million increase in cost of sales and operating expenses in the Rendering Segment,
the $20.8 million increase in the Restaurant Services Segment and the $8.0 million increase in Bakery Segment is as
follows:
Rendering
Raw Material Costs: A portion of the Company’s volume of raw material is acquired on a formula basis. Under
a formula arrangement, the cost of raw material is tied to the finished product market for MBM and BFT. The
Company’s formula pricing was impacted by extreme summer temperatures in Fiscal 2010 as compared to
Fiscal 2009 due primarily to raw material being priced based on higher quality rendered tallow and grease than
the Company’s actual sales, which increased the overall impact of higher raw material costs from overall higher
BFT prices in Fiscal 2010 resulting in an increase of $35.6 million in raw material costs in Fiscal 2010 as
compared to Fiscal 2009.
Cost of Sales and Operating Expenses from Acquisition of Griffin: The Company’s cost of sales and operating
expenses increased by $11.8 million in the Rendering Segment as a result of two weeks of contribution from the
acquisition of Griffin.
Other Expense: The $10.0 million increase in other expense which includes increases in payroll and related
benefits, increases in repairs and maintenance and increases in hauling costs is primarily due to the integration of
additional locations resulting from current and prior year acquisitions in the Rendering Segment other than the
acquisition of Griffin.
Raw Material Volume: The integration of current and prior year acquisition activity and signs of an improved
U.S. economy have resulted in higher raw material volume available to process. The higher raw material
volume from Rendering Segment suppliers increased cost of sales by $4.4 million.
Energy Costs: Both natural gas and diesel fuel are major components of collection and factory operating costs
to the Rendering Segment. During Fiscal 2010, energy costs were higher and are reflected in the $2.1 million
increase due primarily to increased diesel fuel costs as compared to the same period in Fiscal 2009.
Purchases of Finished Product for Resale: The Company purchased less finished product for resale from third
party suppliers in Fiscal 2010 compared to the same period in Fiscal 2009 by $2.1 million.
Product Transfers: In Fiscal 2010, less BFT failed to meet customer finished product quality specifications than
in Fiscal 2009, and therefore less BFT was downgraded to YG value and transferred from the Rendering
Segment to the Restaurant Services Segment. Since the Rendering Segment had relatively more BFT available
for sale in Fiscal 2010, cost of sales related to product transfers increased by $0.8 million.
Page 42
Restaurant Services
Raw Material Costs: YG finished product prices were higher in Fiscal 2010 as compared to Fiscal 2009, which
caused the raw material costs to increase by $15.7 million.
Other Expense: The $3.1 million increase in other expense was primarily due to the integration of additional
locations resulting from prior year acquisitions in the Restaurant Services Segment.
Raw Material Volume: Signs of improving conditions in the food service industry impacted the volume of raw
material available for collection. Higher raw material volume from used cooking oil suppliers increased cost of
sales by $0.9 million.
Energy Costs: Both natural gas and diesel fuel are major components of collection and factory operating costs
to the Restaurant Services Segment. During Fiscal 2010, energy costs were higher and are reflected in the $1.0
million increase due primarily to diesel fuel costs as compared to the same period in Fiscal 2009.
Purchases of Finished Product for Resale: The Company purchased more finished product for resale from third
party suppliers in Fiscal 2010 compared to the same period in Fiscal 2009 by $0.9 million.
Product Transfers: Because less BFT was downgraded for failure to meet customer specifications and
subsequently sold by the Restaurant Services Segment as YG in Fiscal 2010 compared to Fiscal 2009 cost of
sales was decreased by $0.8 million.
Bakery
Cost of Sales and Operating Expenses from Acquisition of Griffin: The Company’s cost of sales and operating
expenses related to the Bakery segment acquired with Griffin were $8.0 million for the period subsequent to the
Merger.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $68.0
million during Fiscal 2010, a $6.9 million increase (11.3%) from $61.1 million during Fiscal 2009. Payroll and
related expense increased selling, general and administrative costs primarily due to current and prior year acquisition
activity other than Griffin and more favorable operations in Fiscal 2010 as compared to Fiscal 2009. Additionally,
selling, general and administrative expenses increased from the two weeks of contributions for the acquisition of
Griffin. The increase in selling, general and administrative expenses is primarily due to the following (in millions of
dollars):
Payroll and related benefits expense
Increases in selling, general and
administrative expense from two weeks
of contribution related to Griffin
Increase/(decrease) in other
Rendering
$ 0.8
Restaurant
Services
$ 0.5
Bakery
$ –
Corporate
$ 2.7
Total
$ 4.0
1.0
0.1
$ 1.9
–
0.8
$ 1.3
0.4
–
$ 0.4
0.9
(0.3)
$ 3.3
2.3
0.6
$ 6.9
Depreciation and Amortization. Depreciation and amortization charges increased $6.7 million (26.6%) to
$31.9 million during Fiscal 2010 as compared to $25.2 million during Fiscal 2009. The increase in depreciation and
amortization is primarily due to an overall increase in depreciable capital assets and intangibles due to capital
expenditures and current and prior year acquisition activity.
Acquisition Costs. Acquisition costs were $10.8 million during Fiscal 2010, a $10.3 million increase from
$0.5 million during Fiscal 2009. The increase is primarily due to the acquisition of Griffin.
Page 43
Interest Expense. Interest expense was $8.7 million during Fiscal 2010 compared to $3.1 million during
Fiscal 2009, an increase of $5.6 million, primarily due to bank fees paid in association with an unutilized and expired
bridge finance facility of $3.1 million and an increase in interest of approximately $2.0 million due to an increase in
debt outstanding as a result of the acquisition of Griffin.
Other Income/Expense. Other expense was $3.4 million in Fiscal 2010, a $2.4 million increase from $1.0
million in Fiscal 2009. The increase in other expense is primarily due to losses reported as a result of fires at two
plant locations of approximately $1.0 million, write-off of deferred loan costs of approximately $0.9 million due to
the termination of the previous credit agreement and an increase in loss on sale of fixed assets of approximately $0.3
million.
Income Taxes. The Company recorded income tax expense of $26.1 million for Fiscal 2010, compared to
income tax expense of $25.1 million recorded in Fiscal 2009, an increase of $1.0 million, primarily due to an
increase in pre-tax earnings of the Company in Fiscal 2010. The effective tax rate for Fiscal 2010 and Fiscal 2009 is
37.1 % and 37.5%, respectively. The difference from the federal statutory rate of 35% in Fiscal 2010 and Fiscal
2009 is primarily due to state taxes.
Results of Operations
Fifty-two Week Fiscal Year Ended January 2, 2010 (“Fiscal 2009”) Compared to Fifty-three Week Fiscal Year
Ended January 3, 2009 (“Fiscal 2008”)
Fiscal 2008 includes an additional week of operations which occurs every five to six years. In Fiscal 2008 the
additional week increased both net sales and costs by approximately $10 million with an immaterial effect on
operating income and net income.
Summary of Key Factors Impacting Fiscal 2009 Results:
Principal factors that contributed to a $21.8 million decrease in operating income, which are discussed in
greater detail in the following section, were:
Lower raw material volumes, and
Lower finished product prices.
These decreases to operating income were partially offset by:
Lower raw material costs,
Lower energy costs, primarily related to natural gas and diesel fuel, and
Prior year goodwill impairment.
Summary of Key Indicators of Fiscal 2009 Performance:
Principal indicators that management routinely monitors and compares to previous periods as an indicator
of problems or improvements in operating results include:
Finished product commodity prices,
Raw material volume,
Production volume and related yield of finished product,
Energy prices for natural gas quoted on the NYMEX index and diesel fuel,
Collection fees and collection operating expense, and
Factory operating expenses.
These indicators and their importance are discussed below in greater detail.
Page 44
Finished Product Commodity Prices. Prices for finished product commodities that the Company produces
are reported each business day on the Jacobsen index, an established trading exchange price publisher. The
Jacobsen index reports industry sales from the prior day’s activity by product. The Jacobsen index includes reported
prices for MBM and BFT (which are end products of the Company’s Rendering Segment) and YG (which is an end
product of the Company’s Restaurant Services Segment). The Company regularly monitors Jacobsen index reports
on MBM, BFT and YG because they provide a daily indication of the Company’s revenue performance against
business plan benchmarks. Although the Jacobsen index provides one useful metric of performance, the Company’s
finished products are commodities that compete with other commodities such as corn, soybean oil, palm oil complex,
soybean meal and heating oil on nutritional and functional values and therefore actual pricing for the Company’s
finished products, as well as competing products, can be quite volatile. In addition, the Jacobsen index does not
provide forward or future period pricing. The Jacobsen prices quoted below are for delivery of the finished product
at a specified location. Although the Company’s prices generally move in concert with reported Jacobsen prices, the
Company’s actual sales prices for its finished products may vary significantly from the Jacobsen index because of
delivery timing differences and because the Company’s finished products are delivered to multiple locations in
different geographic regions which utilize different price indexes. Average Jacobsen prices (at the specified delivery
point) for Fiscal 2009, compared to average Jacobsen prices for Fiscal 2008 follow:
Avg. Price
Fiscal 2009
Avg. Price
Fiscal 2008
Increase/
(Decrease)
%
Increase/
(Decrease)
$338.09/ton
$ 25.21/cwt
$333.17 /ton
$ 34.21 /cwt
$4.92/ton
$ (9.00)/cwt
1.5%
(26.3)%
Rendering Segment:
MBM (Illinois)
BFT (Chicago)
Restaurant Services Segment:
YG (Illinois)
$ 20.73/cwt
$ 27.75 /cwt
$ (7.02)/cwt
(25.3)%
The overall decrease in average prices for BFT and YG of the finished products the Company sells had an
unfavorable impact on revenue that was partially offset by a positive impact to the Company’s raw material cost
resulting from formula pricing arrangements, which compute raw material cost based upon the price of finished
product.
Raw Material Volume. Raw material volume represents the quantity (pounds) of raw material collected
from Rendering Segment suppliers, such as butcher shops, grocery stores and independent beef, pork and poultry
processors, and from Restaurant Services Segment suppliers, such as food service establishments. Raw material
volumes from the Company’s Rendering Segment suppliers provide an indication of the future production of MBM
and BFT finished products, and raw material volumes from the Company’s Restaurant Services Segment suppliers
provide an indication of the future production of YG finished products.
Production Volume and Related Yield of Finished Product. Finished product production volumes are the
end result of the Company’s production processes, and directly impact goods available for sale, and thus become an
important component of sales revenue. In addition, physical inventory turn-over is impacted by both the availability
of credit to the Company’s customers and suppliers and reduced market demand which can lower finished product
inventory values. Yield on production is a ratio of production volume (pounds), divided by raw material volume
(pounds) and provides an indication of effectiveness of the Company’s production process. Factors impacting yield
on production include quality of raw material and warm weather during summer months, which rapidly degrades raw
material. The quantities of finished products produced varies depending on the mix of raw materials used in
production. For example, raw material from cattle yields more fat and protein than raw material from pork or
poultry. Accordingly, the mix of finished products produced by the Company can vary from quarter to quarter
depending on the type of raw material being received by the Company. The Company cannot increase the
production of protein or fat based on demand since the type of raw material will dictate the yield of each finished
product.
Page 45
Energy Prices for Natural Gas quoted on the NYMEX Index and Diesel Fuel. Natural gas and heating oil
commodity prices are quoted each day on the NYMEX exchange for future months of delivery of natural gas and
diesel fuel. The prices are important to the Company because natural gas and diesel fuel are major components of
factory operating and collection costs and natural gas and diesel fuel prices are an indicator of achievement of the
Company’s business plan.
Collection Fees and Collection Operating Expense. The Company charges collection fees which are
included in net sales. Each month the Company monitors both the collection fee charged to suppliers, which is
included in net sales, and collection expense, which is included in cost of sales. The importance of monitoring
collection fees and collection expense is that they provide an indication of achievement of the Company’s business
plan. Furthermore, management monitors collection fees and collection expense so that the Company can consider
implementing measures to mitigate against unforeseen increases in these expenses.
Factory Operating Expenses. The Company incurs factory operating expenses which are included in cost
of sales. Each month the Company monitors factory operating expense. The importance of monitoring factory
operating expense is that it provides an indication of achievement of the Company’s business plan. Furthermore,
when unforeseen expense increases occur, the Company can consider implementing measures to mitigate such
increases.
Net Sales. The Company collects and processes animal by-products (fat, bones and offal), including hides,
and used restaurant cooking oil to principally produce finished products of MBM, BFT, YG and hides. Sales are
significantly affected by finished goods prices, quality and mix of raw material, and volume of raw material. Net
sales include the sales of produced finished goods, collection fees, fees for grease trap services, and finished goods
purchased for resale.
During Fiscal 2009, net sales were $597.8 million as compared to $807.5 million during Fiscal 2008. The
Rendering Segments’ finished products are primarily MBM, which is approximately $244.7 million and $259.9
million of net sales for the year ended January 2, 2010 and January 3, 2009, respectively and BFT, which is
approximately $187.8 million and $276.6 million of net sales for the year ended January 2, 2010 and January 3,
2009, respectively. The Restaurant Services Segment’s finished product is YG, which is approximately $95.9
million and $186.3 million of net sales for the year ended January 2, 2010 and January 3, 2009, respectively. The
decrease in Rendering Segment sales of $126.5 million, the decrease in Restaurant Services Segment sales of $83.2
million accounted for the $209.7 million decrease in sales. The decrease in net sales was primarily due to the
following (in millions of dollars):
Decrease in finished product prices
Decrease in raw material volume
Other sales (decreases)/increases
Purchases of finished product for resale
Decrease in yield
Product transfers
Rendering
$ (59.0 )
(64.3 )
(24.6 )
(8.7 )
(4.5 )
34.6
$ (126.5 )
Restaurant
Services
$ (40.5 )
(9.8 )
4.7
(2.1 )
(0.9 )
(34.6 )
$ (83.2 )
Corporate
$ –
–
–
–
–
–
$ –
Total
$ (99.5 )
(74.1 )
(19.9 )
(10.8 )
(5.4 )
–
$ (209.7 )
Further detail regarding the $126.5 million decrease in sales in the Rendering Segment and the $83.2 million
decrease in sales in the Restaurant Services Segment is as follows:
Rendering
Finished Product Prices: Lower prices in the overall commodity market for corn and soybean oil, which are
competing fats to BFT, negatively impacted the Company’s finished product prices. $59.0 million of the
decrease in Rendering Segment sales is due to a market-wide decrease in BFT prices (fat) offset slightly by a
market-wide increase in MBM prices (protein). The market declines were due to changes in supply/demand in
both the domestic and export markets for commodity fats, including BFT.
Page 46
Raw Material Volume: Production cutbacks from integrated processors and closures of mid-sized processor
operations as a result of difficult economic conditions for consumers generally and in the food service industry
resulted in lower raw material available to process. The lower raw material from Rendering Segment suppliers,
which is processed into MBM and BFT finished products, decreased sales by $64.3 million. As noted
elsewhere, MBM and BFT are derived principally from bones, fat and offal from the Rendering Segment’s
suppliers. The proportions of bones, fat and offal are relatively stable, but will vary from production run to
production run based on the source and whether the material is principally beef, pork or poultry material. The
Company has no ability to alter the proportion of bones, fat and offal offered to the Company by the Company’s
suppliers and therefore the Company cannot meaningfully alter the mix of MBM and BFT resulting from the
Company’s rendering process. During Fiscal 2009, the Company’s suppliers in the Rendering Segment were
negatively impacted by the continued weak economy and decline in consumer confidence, resulting in a
reduction in meat consumption and a corresponding reduction in the supply of raw materials available to the
Company.
Other Sales: The $24.6 million decrease in other Rendering Segment sales was primarily due to lower prices
and volumes on hides. Hide volumes were down due to lower dead stock volume and lower slaughter rates at
beef processors, as well as the Company’s decision not to skin as many hides since the cost to process the hides
was more than the value of the finished product. Prices were impacted by difficult economic conditions and
decreased demand for leather goods. The lower dead stock volume was due primarily to unseasonably good
weather in Fiscal 2009.
Purchases of Finished Product for Resale: The Company purchased less finished product for resale from third
party suppliers in Fiscal 2009 compared to the same period in Fiscal 2008 by $8.7 million. Lower domestic and
export demand for finished products reduced the need to source third party product.
Yield: The raw material processed in Fiscal 2009 compared to the same period of Fiscal 2008 yielded less
finished product for sale and reduced sales by $4.5 million. The reduction in cattle kills by the packing industry
during the year impacted yields since cattle offal is a higher yielding material than pork and poultry offal.
Product Transfers: Depending on the Company’s customers’ finished product quality specifications and the
quality of raw material the Company receives from meat processors and other sources, from time to time BFT
material must be downgraded and sold as YG. Generally, product transfers occur when BFT is downgraded
and the product is reclassified as YG, which is a Restaurant Services Segment product. Product transfers from
the Rendering Segment to the Restaurant Services Segment were less in Fiscal 2009 compared to the same
period in Fiscal 2008. When less product is transferred from the Rendering Segment to the Restaurant Services
Segment, more BFT is available for sale by the Rendering Segment and YG sales will decrease correspondingly.
The increased BFT available in Fiscal 2009 compared to Fiscal 2008 resulted in an increase in Rendering
Segment sales of $34.6 million.
Restaurant Services
Finished Product Prices: Lower prices in the commodity markets for competing fats and corn negatively
impacted the Company’s YG finished product prices. The $40.5 million decrease in Restaurant Services
Segment sales was due to a significant decrease in prices for YG and competing commodity products. The
market declines were due to weaker demand in both the domestic and export markets for YG.
Raw Material Volume: Difficult economic conditions in the food service industry impacted the volume of raw
material available for collection. Lower raw material volume from used cooking oil suppliers decreased YG
sales by $9.8 million. As noted elsewhere, YG is produced by the Company’s Restaurant Services Segment as a
result of refining used cooking oil collected from the Company’s food service establishment suppliers. During
Fiscal 2009, the Company’s suppliers in the Restaurant Services Segment were negatively impacted by the
continued weak economy and decline in consumer confidence, resulting in reduced patronage of restaurants,
longer usage by restaurants of cooking oil and a corresponding reduction in the supply of used cooking oil
available to the Company.
Other Sales: The $4.7 million increase in other sales was primarily from the current year acquisitions in the
Restaurant Services Segment.
Page 47
Purchases of Finished Product for Resale: The $2.1 million decrease in sales resulted from the Company
purchasing less finished product for resale from third party suppliers in Fiscal 2009 as compared to the same
period in Fiscal 2008. With less demand for finished products, the Company’s need to source additional third
party product for sales decreased.
Yield: The Company believes that YG yields have declined because of the current economic environment in the
U.S. that has caused the food service industry to use their current oil longer, which decreases the volumes and
quality of cooking oil picked up from suppliers. This lowers yields and lowers the amount of finished product
available for sale resulting in reduced sales of $0.9 million.
Product Transfers: Product transfers from the Rendering Segment to the Restaurant Services Segment were less
in Fiscal 2009 as compared to the same period in Fiscal 2008. The reduction in product transfers was a result of
less BFT (a Rendering Segment product) being downgraded and transferred to the Restaurant Services Segment
to be sold as YG in Fiscal 2009 compared to Fiscal 2008. As a result, Restaurant Services Segment sales were
reduced by $34.6 million in Fiscal 2009.
Cost of Sales and Operating Expenses. Cost of sales and operating expenses include the cost of raw
material, the cost of product purchased for resale and the cost to collect raw material, which includes diesel fuel and
processing costs including natural gas. The Company utilizes both fixed and formula pricing methods for the
purchase of raw materials. Fixed prices are adjusted where possible for changes in competition. Significant changes
in finished goods market conditions impact finished product inventory values, while raw materials purchased under
formula prices are correlated with specific finished goods prices. Energy costs, particularly diesel fuel and natural
gas, are significant components of the Company’s cost structure. The Company has the ability to burn alternative
fuels at a majority of its plants to help manage the Company’s price exposure to volatile energy markets.
During Fiscal 2009, cost of sales and operating expenses were $440.1 million as compared to $614.7
million during Fiscal 2008. Decreases in Rendering Segment cost of sales and operating expenses of $108.5 million
and the decrease in Restaurant Services Segment cost of sales and operating expenses of $67.0 million accounted for
a majority of the $174.6 million decrease in cost of sales and operating expenses. The decrease in cost of sales and
operating expenses was primarily due to the following (in millions of dollars):
Decrease in raw material costs
Decreases in energy costs, primarily natural gas
and diesel fuel
Other expense (decreases)/increases
Decrease in raw material volume
Purchases of finished product for resale
Multi-employer pension plans mass withdrawal
termination
Product transfers
Rendering
Restaurant
Services
$ (56.4 )
$ (25.6 )
Corporate
$ –
Total
$ (82.0 )
(24.4
)
(28.8 )
(19.7 )
(10.6 )
(3.1
)
0.9
(2.8 )
(1.8 )
(3.2
)
34.6
$ (108.5 )
–
(34.6 )
$ (67.0 )
(0.3 )
1.2
–
–
–
–
$ 0.9
(27.8
)
(26.7 )
(22.5 )
(12.4 )
(3.2
)
–
$ (174.6 )
Further detail regarding the $108.5 million decrease in cost of sales and operating expenses in the Rendering
Segment and the $67.0 million decrease in the Restaurant Services Segment is as follows:
Rendering
Raw Material Costs: In Fiscal 2009 approximately 53% of the Company’s annual volume of raw material was
acquired on a “formula” basis. Under a formula arrangement, the cost of raw material is tied to the finished
product market for MBM and BFT. Since finished product prices were lower in Fiscal 2009 as compared to
Fiscal 2008, the raw material costs decreased by $56.4 million.
Page 48
Energy Costs: Both natural gas and diesel fuel are major components of collection and factory operating costs
to the Rendering Segment. The lower energy costs of $24.4 million reflect the lower cost of natural gas and
diesel fuel during Fiscal 2009 as compared to Fiscal 2008.
Other Expense: Other expense decreased $28.8 million in cost of sales and operating expenses principally due
to lower hide prices and volumes. Hide volumes were down due to lower dead stock volumes and lower
slaughter rates at beef processors, as well as the Company’s decision not to skin as many hides since the cost to
process the hides was more than the value of the finished product. Prices were impacted by difficult economic
conditions and decreased demand for leather goods. The lower dead stock volume was due primarily to
unseasonably good weather in Fiscal 2009.
Raw Material Volume: Production cutbacks from integrated processors and closures of mid-sized processor
operations resulted in lower raw material available to be processed. The lower raw material reduced the cost of
sales by $19.7 million.
Purchases of Finished Product for Resale: The Company purchased less finished product for resale from third
party suppliers in Fiscal 2009 compared to the same period in Fiscal 2008 by $10.6 million.
Product Transfers: In Fiscal 2009, less BFT failed to meet customer finished product quality specifications than
in Fiscal 2008, and therefore less BFT was downgraded to YG value and transferred from the Rendering
Segment to the Restaurant Services Segment. Since the Rendering Segment had relatively more BFT available
for sale in Fiscal 2009, cost of sales related to product transfers increased $34.6 million.
Restaurant Services
Raw Material Costs: YG finished product prices were lower in the Fiscal 2009 as compared to Fiscal 2008,
which caused the raw material costs to decrease by $25.6 million.
Raw Material Volume: Difficult economic conditions in the food service industry impacted the volume of raw
material available to collect. Lower raw material volume from used cooking oil suppliers decreased cost of
sales by $2.8 million.
Energy Costs: Diesel fuel and natural gas are major components of collection and operating costs to the
Restaurant Services Segment. The lower energy costs of $3.1 million reflect the lower cost of diesel fuel and
natural gas during Fiscal 2009 as compared to the same period in Fiscal 2008.
Other Expense: The $0.9 million increase in other expense was primarily due to current year acquisitions in the
Restaurant Services Segment that more than offset efforts by the operations groups to reduce collection expense.
Purchases of Finished Product for Resale: The $1.8 million decrease in cost of sales is from purchasing less
finished product for resale from third party suppliers.
Product Transfers: Because less BFT was downgraded for failure to meet customer specifications and
subsequently sold by the Restaurant Services Segment as YG in Fiscal 2009 compared to Fiscal 2008, the cost
of sales was reduced by $34.6 million year over year.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $61.1
million during Fiscal 2009, a $1.3 million increase (2.2%) from $59.8 million during Fiscal 2008. The increase in
selling, general and administrative expenses is primarily due to the following (in millions of dollars):
Other expense (decreases)/increases
Consulting fees
Payroll and related benefits expense
Bad debt expense (decreases)/ increases
Rendering
Restaurant
Services
$ (0.2 )
–
0.8
(0.8 )
$ (0.2 )
$ (0.2 )
–
0.8
(0.5 )
$ 0.1
Corporate
$ 1.7
0.6
(1.1 )
0.2
$ 1.4
Total
$ 1.3
0.6
0.5
(1.1 )
$ 1.3
Page 49
Depreciation and Amortization. Depreciation and amortization charges increased $0.8 million (3.3%) to
$25.2 million during Fiscal 2009 as compared to $24.4 million during Fiscal 2008. The increase in depreciation and
amortization is primarily due to an overall increase in depreciable capital assets on the balance sheet.
Acquisition Costs. Acquisition costs were $0.5 million during Fiscal 2010 and represent acquisition costs
primarily related to the acquisition of certain rendering, grease and collection and trap servicing business assets from
Sanimax USA, Inc.
Interest Expense. Interest expense was $3.1 million during Fiscal 2009 compared to $3.0 million during
Fiscal 2008, an increase of $0.1 million, primarily due to an increase in fees from the amended credit agreement that
was partially offset by a decrease in outstanding balance related to the Company’s debt.
Other Income/Expense. Other expense was $1.0 million in Fiscal 2009, a $1.3 million increase from other
income of $0.3 million in Fiscal 2008. The increase in other expense is primarily due to a decrease in interest
income on the Company’s interest bearing accounts due to lower rates and increases in other non-operating expenses,
which includes approximately $0.5 million of costs associated with the expected renewable diesel joint venture
project.
Income Taxes. The Company recorded income tax expense of $25.1 million for Fiscal 2009, compared to
income tax expense of $35.4 million recorded in Fiscal 2008, a decrease of $10.3 million, primarily due to a
decrease in pre-tax earnings of the Company in Fiscal 2009. The effective tax rate for Fiscal 2009 and Fiscal 2008 is
37.5 % and 39.3%, respectively. The difference from the federal statutory rate of 35% in Fiscal 2009 and Fiscal
2008 is primarily due to state taxes.
FINANCING, LIQUIDITY, AND CAPITAL RESOURCES
On December 17, 2010, the Company entered into a $625 million credit agreement (the “Credit
Agreement”). The Company used the proceeds of the term loan facility and a portion of the revolving loan facility to
pay a portion of the consideration of its acquisition of Griffin, to pay related fees and expenses and to provide for
working capital needs and general corporate purposes. The principal components of the Credit Agreement consist of
the following:
The Credit Agreement provides for senior secured credit facilities (the “Senior Secured Facilities”) in
the aggregate principal amount of $625.0 million comprised of a five-year revolving loan facility of
$325.0 million (approximately $75.0 million of which will be available for a letter of credit sub-facility
and $15.0 million of which will be available for a swingline sub-facility) and a six-year term loan
facility of $300.0 million.
The $325.0 million revolving credit facility has a term that matures on December 17, 2015. As of
January 1, 2011, the Company had an aggregate of $160.0 million outstanding under the revolving loan
facility. On February 4, 2011, the Company repaid all $160.0 million of the revolving loan facility that
was outstanding with the proceeds from its $307 million common stock public offering which was
consummated on February 2, 2011.
As of January 1, 2011, the Company has borrowed all $300.0 million under the term loan facility,
which provides for scheduled quarterly amortization payments of $0.75 million over a six-year term
ending with a final installment in the amount of all term loans then outstanding due and payable on
December 17, 2016. The Company has the right to prepay the term loan without penalty, but any
amounts that have been repaid may not be reborrowed. As of January 1, 2011, the Company had an
aggregate of $300.0 million principal outstanding under the term loan facility. On February 8, 2011,
the Company repaid $140.0 million of the term loan facility that was outstanding with the proceeds
from its $307 million common stock public offering which was consummated on February 2, 2011.
With respect to any revolving facility loan, i) an alternate base rate means a rate per annum equal to the
greatest of (a) the prime rate (b) the federal funds effective rate (as defined in the Credit Agreement)
plus ½ of 1% and (c) the adjusted London Inter-Bank Offer Rate (“LIBOR”) for a month interest
Page 50
period plus 1%, plus in each case, a margin determined by reference to a pricing grid under the Credit
Agreement and adjusted according to the Company’s adjusted leverage ratio, and, ii) Eurodollar rate
loans bear interest at a rate per annum based on the then applicable LIBOR multiplied by the statutory
reserve rate plus a margin determined by reference to a pricing grid and adjusted according to the
Company’s adjusted leverage ratio. With respect to an alternate base rate loan that is a term loan, at no
time shall the alternate base rate be less than 2.50% per annum, plus the term loan alternate base rate
margin of 2.50%. With respect to a LIBOR loan that is a term loan, at no time shall the LIBOR rate
applicable to the term loans (before giving effect to any adjustment for reserve requirements) be less
than 1.50% per annum, plus the term loan LIBOR margin of 3.50%.
The Credit Agreement contains various customary representations and warranties by the Company,
which include customary use of materiality, material adverse effect and knowledge qualifiers. The
Credit Agreement also contains (a) certain affirmative covenants that impose certain reporting and/or
performance obligations on the Company, (b) certain negative covenants that generally prohibit,
subject to various exceptions, the Company from taking certain actions, including, without limitation,
incurring indebtedness, making investments, incurring liens, paying dividends, and engaging in mergers
and consolidations, sale leasebacks and sales of assets, (c) financial covenants such as maximum total
leverage ratio and a minimum fixed charge coverage ratio and (d) customary events of default
(including a change of control). Obligations under the Credit Agreement may be declared due and
payable upon the occurrence of such customary events of default.
On December 17, 2010, Darling issued $250.0 million aggregate principal amount of its 8.5% Senior Notes
due 2018 (the “Notes”) under an indenture, dated as of December 17, 2010 (the “Original Indenture”), among
Darling, Darling National, and U.S. Bank National Association, as trustee (the “Trustee”). After the Merger, Griffin
and its subsidiary, Craig Protein Division, Inc. (“Craig Protein”, and collectively with Griffin and Darling National,
the “Guarantors”), entered into a supplemental indenture with the Trustee (the “Supplemental Indenture,” and
together with the Original Indenture, the “Indenture”), to provide for the guarantee of the Notes by Griffin and its
subsidiary. The Notes were sold pursuant to a purchase agreement dated December 3, 2010 among the Company,
the guarantors named therein and the initial purchasers named therein (the “Initial Purchasers”), at an issue price of
100.0%. Darling used the net proceeds from the sale of the Notes to finance in part the cash portion of the purchase
price to be paid in connection with Darling’s acquisition of Griffin. The principal components of the Notes consist
of the following:
The Notes will mature on December 15, 2018. The Company will pay interest on June 15 and
December 15 of each year, commencing on June 15, 2011. Interest on the Notes will accrue at a rate of
8.5% per annum and be payable in cash.
The Company is not required to make any mandatory redemption or sinking fund payments with
respect to the Notes. If a Change of Control (as defined in the Indenture) occurs, unless the Company
has exercised its right to redeem all the Notes as described below, each holder will have the right to
require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of
such holder’s Notes at a purchase price in cash equal to 101% of the principal amount of the Notes,
plus accrued and unpaid interest, if any, to the date of purchase, subject to the right of holders of record
on the relevant record date to receive interest due on the relevant interest payment date. If the
Company or its subsidiaries engage in certain Asset Dispositions (as defined in the Indenture), the
Company generally must, within specific periods of time, either prepay, repay or repurchase certain of
its or its restricted subsidiaries’ indebtedness or make an offer to purchase a principal amount of the
Notes and certain other debt equal to the excess net cash proceeds, or invest the net cash proceeds from
such sales in additional assets. The purchase price of the Notes will be 100% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of purchase. The Company may at any
time and from time to time purchase Notes in the open market or otherwise.
The Company may redeem some or all of the Notes at any time prior to December 15, 2014, at a
redemption price equal to 100% of the principal amount of the Notes redeemed, plus accrued and
unpaid interest to the redemption date and an Applicable Premium (as defined below) as of the date of
redemption subject to the rights of holders on the relevant record date to receive interest due on the
relevant interest payment date. The “Applicable Premium” means, with respect to any Note on any
redemption date, the greater of: (a) 1.0% of the principal amount of such Note; and (b) the excess, if
Page 51
any, of (i) the present value at such redemption date of (A) the redemption price of such Note at
December 15, 2014 (such redemption price being set forth in the table below), plus (B) all required
interest payments due on such Note through December 15, 2014 (excluding accrued but unpaid interest
to the redemption date), computed using a discount rate equal to the applicable treasury rate as of such
redemption date plus 50 basis points; over (ii) the principal amount of such Note.
On and after December 15, 2014, the Company may redeem all or, from time to time, a part of the
Notes (including any additional 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 Notes, if any, to 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 December 15 of the years indicated below:
Year
2014
2015
2016 and thereafter
Percentage
104.250%
102.125%
100.000%
In addition, until December 15, 2013, the Company may, at its option, redeem up to 35% of the
original principal amount of the Notes and any issuance of additional Notes with the net cash proceeds
of one or more equity offerings at a redemption price equal to 108.5% of the principal amount thereof,
plus accrued and unpaid interest, if any, to 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 65% of the original principal amount of the Notes and any issuance of additional Notes remains
outstanding immediately after each such redemption; provided further that the redemption occurs
within 90 days after the closing of such equity offering.
The Indenture contains covenants limiting Darling’s ability and the ability of its restricted subsidiaries
to, among other things incur additional indebtedness or issue preferred stock; pay dividends on or make
other distributions or repurchase of Darling’s capital stock or make other restricted payments; create
restrictions on the payment of dividends or other 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.
Holders of the Notes have the benefit of registration rights. In connection with the issuance of the
Notes, Darling and the Guarantors entered into a registration rights agreement (the “Notes Registration
Rights Agreement”) with the representative of the Initial Purchasers. Darling and the Guarantors have
agreed to consummate a registered exchange offer for the Notes within 270 days after the date of the
Merger. Darling and the Guarantors have agreed to file and keep effective for a certain time period a
shelf registration statement for the resale of the Notes if an exchange offer cannot be effected and under
certain other circumstances. Darling will be required to pay additional interest on the Notes if it fails to
timely comply with its obligations under the Notes Registration Rights Agreement until such time as it
complies.
The Indenture also provides for customary events of default, including, without limitation, payment
defaults, covenant defaults, cross acceleration defaults to certain other indebtedness in excess of
specified amounts, certain events of bankruptcy and insolvency and judgment defaults in excess of
specified amounts. If any such event of default occurs and is continuing under the Indenture, the
Trustee or the holders of at least 25% in principal amount of the total outstanding Notes may declare
the principal, premium, if any, interest and any other monetary obligations on all the then outstanding
Notes issued under the Indenture to be due and payable immediately.
Page 52
The Company’s Notes and Credit Agreement consist of the following elements at January 1, 2011 (in
thousands):
Notes:
8.5% Senior Notes due 2018
$ 250,000
Credit Agreement:
Term Loan
Revolving Credit Facility:
Maximum availability
Borrowings outstanding
Letters of credit issued
Availability
$ 300,000
$ 325,000
160,000
23,383
$ 141,617
The obligations under the Credit Agreement are guaranteed by Darling National, Griffin, and its subsidiary,
Craig Protein and are secured by substantially all of the property of the Company, including a pledge of 100% of the
stock of all material domestic subsidiaries and 65% of the capital stock of certain foreign subsidiaries. The Notes
are guaranteed on an unsecured basis by Darling’s existing restricted subsidiaries, including Griffin and all of its
subsidiaries, other than Darling’s foreign subsidiaries, its captive insurance subsidiary and any inactive subsidiary
with nominal assets. The Notes rank equally in right of payment to any existing and future senior debt of Darling.
The Notes will be effectively junior to existing and future secured debt of Darling and the guarantors, including debt
under the Credit Agreement, to the extent of the value of the assets securing such debt. The Notes will be
structurally subordinated to all of the existing and future liabilities (including trade payables) of each of the
subsidiaries of Darling that do not guarantee the Notes. The guarantees by the Guarantors (the “Guarantees”) rank
equally in right of payment to any existing and future senior indebtedness of the guarantors. The Guarantees will be
effectively junior to existing and future secured debt of the Guarantors including debt under the Credit Agreement, to
the extent the value of the assets securing such debt. The Guarantees will be structurally subordinated to all of the
existing and future liabilities (including trade payables) of each of the subsidiaries of each Guarantor that do not
guarantee the Notes.
As of January 1, 2011, the Company believes it is in compliance with all of the financial covenants, as well
as all of the other covenants contained in the Credit Agreement and Indenture.
The classification of long-term debt in the Company’s January 1, 2011 consolidated balance sheet is based
on the contractual repayment terms of the Notes and debt issued under the Credit Agreement.
On January 1, 2011, the Company had working capital of $30.8 million and its working capital ratio was
1.20 to 1 compared to working capital of $75.1 million and a working capital ratio of 2.05 to 1 on January 2, 2010.
The decrease in working capital is primarily due to the decrease in cash and cash equivalents and working capital
from the Griffin acquisition. At January 1, 2011, the Company had unrestricted cash of $19.2 million and funds
available under the revolving credit facility of $141.6 million, compared to unrestricted cash of $68.2 million and
funds available under the revolving credit facility of $109.1 million at January 2, 2010. The Company diversifies its
cash investments by limiting the amounts located at any one financial institution and invests primarily in
government-backed securities.
Net cash provided by operating activities was $81.5 million and $79.2 million for the fiscal years ended
January 1, 2011 and January 2, 2010, respectively, an increase of $2.3 million due primarily to an increase in net
income of approximately $2.5 million. Cash used by investing activities was $783.6 million during Fiscal 2010,
compared to $55.7 million in Fiscal 2009, an increase of $727.9 million, primarily due to the acquisition of Griffin in
December 2010. Net cash provided by financing activities was $653.2 million during Fiscal 2010 compared to net
cash used by financing activities of $6.1 million in Fiscal 2009, an increase of $659.3 million due primarily to
borrowings made to complete the acquisition of Griffin in December 2010.
Page 53
Capital expenditures of $24.7 million were made during Fiscal 2010 as compared to $23.6 million in Fiscal
2009, an increase of $1.1 million (4.7%). The increase is due to a slight overall increase in spending. Capital
expenditures related to compliance with environmental regulations were $3.5 million in Fiscal 2010, $3.1 million in
Fiscal 2009 and $1.1 million in Fiscal 2008. Fiscal 2009 compliance spending included capital expenditures related
to the Final BSE Rule of approximately $1.5 million.
Based upon the underlying terms of the Credit Agreement, approximately $3.0 million in current debt,
which is included in current liabilities on the Company’s balance sheet at January 1, 2011, will be due during the
next twelve months, which includes scheduled quarterly installment payments of $0.75 million.
Based upon the annual actuarial estimate, current accruals, and claims paid during Fiscal 2010, the
Company has accrued approximately $8.6 million it expects will become due during the next twelve months in order
to meet obligations related to the Company’s self insurance reserves and accrued insurance obligations, which are
included in current accrued expenses at January 1, 2011. The self insurance reserve is composed of estimated
liability for claims arising for workers’ compensation and for auto liability and general liability claims. The self
insurance reserve liability is determined annually, based upon a third party actuarial estimate. The actuarial estimate
may vary from year to year, due to changes in costs of health care, the pending number of claims and other factors
beyond the control of management of the Company. No assurance can be given that the Company’s funding
obligations under its self insurance reserve will not increase in the future.
Based upon current actuarial estimates, the Company expects to make payments of approximately $2.0
million in order to meet minimum pension funding requirements during fiscal 2011. The minimum pension funding
requirements are determined annually, based upon a third party actuarial estimate. The actuarial estimate may vary
from year to year, due to fluctuations in return on investments or other factors beyond the control of management of
the Company or the administrator of the Company’s pension funds. No assurance can be given that the minimum
pension funding requirements will not increase in the future. Additionally, the Company has made required and tax
deductible discretionary contributions to its pension plans in Fiscal 2010 and Fiscal 2009 of approximately $1.0
million and $14.9 million, respectively.
The Pension Protection Act of 2006 (“PPA”) was signed into law in August 2006 and went into effect in
January 2008. The stated goal of the PPA is to improve the funding of pension plans. Plans in an under-funded
status will be required to increase employer contributions to improve the funding level within PPA timelines. The
impact of recent declines in the world equity and other financial markets have had and could continue to have a
material negative impact on pension plan assets and the status of required funding under the PPA. The Company
participates in several multi-employer pension plans that 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. Current information with respect to the Company’s proportionate
share of the over- and under-funded status of all actuarially computed value of vested benefits over these pension
plans’ net assets is not available as the Company relies on third parties outside its control to provide such
information. The Company knows that three of these multi-employer plans were under-funded as of the latest
available information, some of which is over a year old. The Company has no ability to compel the plan trustees to
provide more current information. In June 2009, the Company received a notice of a mass withdrawal termination
and a notice of initial withdrawal liability from one of these underfunded plans. 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 the second quarter of fiscal 2010, the Company received further third party information
confirming the future payout related to this multi-employer plan. As a result, the Company reduced its liability to
approximately $1.2 million. In April 2010, another underfunded multi-employer plan in which the Company
participates gave notification of partial withdrawal liability. As of January 1, 2011, the Company has an accrued
liability of approximately $1.1 million representing the present value of scheduled withdrawal liability payments
under this multi-employer plan. While the Company has no ability to calculate a possible current liability for under-
funded multi-employer plans that could terminate or could require additional funding under the PPA, the amounts
could be material.
Page 54
The Company has the ability to burn alternative fuels, including its fats and greases, at a majority of its
plants as a way to help manage the Company’s exposure to high natural gas prices. Beginning October 1, 2006, the
federal government effected a program which provides federal tax credits under certain circumstances for
commercial use of alternative fuels in lieu of fossil-based fuels. Beginning in the fourth quarter of 2006, the
Company filed documentation with the IRS to recover these Alternative Fuel Mixture Credits as a result of its use of
fats and greases to fuel boilers at its plants. The Company has received approval from the IRS to apply for these
credits. However, the federal regulations relating to the Alternative Fuel Mixture Credits are complex and further
clarification is needed by the Company prior to recognition of certain tax credits received. As of January 1, 2011,
the Company has $0.7 million of received credits included in current liabilities on the balance sheet as deferred
income while the Company pursues further clarification. This and other federal bio-fuel tax incentive programs
expired on December 31, 2009. On December 17, 2010, however, the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 was signed into public law which extended through 2011 and made
retroactive to January 1, 2010 the Alternative Fuel Mixture Credits. The Company will continue to evaluate the
option of burning alternative fuels at its plants in future periods depending on the price relationship between
alternative fuels and natural gas.
The Company announced on January 21, 2011 that a wholly-owned subsidiary of Darling entered into the
JV Agreement with a wholly-owned subsidiary of Valero to form the Joint Venture. The Joint Venture will be
owned 50% / 50% with Valero and was formed to design, engineer, construct and operate the Facility, which will be
capable of producing approximately 9,300 barrels per day of renewable diesel fuel and certain other co-products, to
be located adjacent to Valero’s refinery in Norco, Louisiana. The Joint Venture intends to construct the Facility
under an engineering, procurement and construction contract (“EPC Contract”) that will fix the Company’s
maximum economic exposure for the cost of the Facility. On January 20, 2011, the U.S. Department of Energy
(“DOE”) offered to the Joint Venture a conditional commitment to issue an approximately $241 million loan
guarantee (the “DOE Guarantee”) under the Energy Policy Act of 2005 to support the construction of the Facility.
Each of Darling and Valero will be required, as a condition to the DOE Guarantee, to guarantee the completion of
the Facility on a several (but not joint and several) basis; however, the Company’s obligations under the completion
guarantee will be terminated if Congress repeals the biomass-based diesel mandate under RSF2 in its entirety.
Through equity investments into the Joint Venture, each of Darling and Valero are committed to contributing
approximately $93.2 million (the “Equity Commitment”) of the estimated aggregate costs of approximately $427.0
million for completion of the Facility. The ultimate cost of the Joint Venture to the Company cannot be determined
until, among other things, further detailed engineering reports and studies have been completed. As part of the terms
and conditions of the DOE Guarantee, until the Company’s Equity Commitment has been paid in full or repayment
of the DOE Guarantee, the Company has to commit to, among other things, a sponsor completion guarantee covering
certain costs of the construction of the Facility and the Company must maintain a cash balance of approximately $27
million (less the pro rata portion of the Company’s Equity Commitment made prior to such date) in a segregated
financial account, the proceeds of which will be used solely to fund the Company’s Equity Commitment required
under the DOE Guarantee and its related documentation. The Company’s funds on deposit in such segregated
financial account cannot at any time be lower than the initial funding less one third of the portion of the Equity
Commitment that the Company has made. The Company will not have access to those funds for any other part of the
Company’s business. In addition to the segregated financial account requirement, the Company will be required to
maintain, on each business day, average availability under a debt facility and in cash and/or cash equivalents
(including any amounts in the segregated financial account) sufficient to fund the full amount of the Company’s
remaining Equity Commitment required under the DOE Guarantee and its related documentation. As a result of the
requirements that the Company maintains a minimum cash balance in a segregated financial account and certain
availability under a debt facility to cover the Company’s Equity Commitment, such committed funds will not be
available to the Company for other purposes, including other business opportunities, development costs for other
projects, working capital and general corporate needs. The Company is also required to pay for 50% of any cost
overruns incurred in connection with the construction of the Facility. Further, the Company will have to grant a
security interest in substantially all of the assets of the Joint Venture, including providing a pledge of all of the
Company’s equity interests in the Joint Venture, for the benefit of the DOE until the loan guaranteed by the DOE
Guarantee has been paid in full and the DOE Guarantee has terminated in accordance with its terms.
Page 55
On January 27, 2011, the Company entered into an underwritten public offering for 24,193,548 shares of its
common stock, at a price to the public of $12.70 per share, pursuant to an effective shelf registration statement. The
offering closed on February 2, 2011. In addition, certain former stockholders of Griffin Industries, Inc. (pursuant to
such stockholders’ contractual registration rights) granted the underwriters a 30-day option, which the underwriters
subsequently exercised in full, to purchase from them up to an additional 3,629,032 shares of Darling common stock
to cover over-allotments. The Company used the net proceeds of approximately $292.7 million from the offering to
repay all of its outstanding revolver balance and a portion of its term loan facility under the Company’s Credit
Agreement. The repayment of such indebtedness will, among other things, provide Darling with additional debt
capacity and cash from operations to use in connection with the Joint Venture. Darling did not receive any proceeds
from the sale of shares by the former stockholders of Griffin.
The Company’s management believes that cash flows from operating activities consistent with the level
generated in Fiscal 2010, unrestricted cash and funds available under the Credit Agreement will be sufficient to meet
the Company’s working capital needs and maintenance and compliance-related capital expenditures, scheduled debt
and interest payments, income tax obligations, continued funding of the Joint Venture and other contemplated needs
through the next twelve months. Numerous factors could have adverse consequences to the Company that cannot be
estimated at this time, such as: reductions in raw material volumes available to the Company due to weak margins in
the meat production industry as a result of higher feed costs or other factors, reduced volume from food service
establishments, reduced demand for animal feed, or otherwise; a further reduction in finished product prices;
changes to worldwide government policies relating to renewable fuels and greenhouse gas emissions that adversely
affect programs like RFS2 and tax credits for bio-fuels both in the U.S. and abroad; possible product recall resulting
from developments relating to the discovery of unauthorized adulterations to food additives; the occurrence of Bird
Flu in the U.S.; any additional occurrence of BSE in the U.S. or elsewhere; unanticipated costs and/or reductions in
raw material volumes related to the Company’s implementation of and compliance with the Final BSE Rule,
including capital expenditures to comply with the Final BSE Rule; unforeseen new U.S. or foreign regulations
affecting the rendering industry (including new or modified animal feed, 2009 H1N1 flu, Bird Flu or BSE
regulations); increased contributions to the Company’s multi-employer and employer-sponsored defined benefit
pension plans as required by the PPA; bad debt write-offs; loss of or failure to obtain necessary permits and
registrations; unexpected cost overruns related to the Joint Venture; continued or escalated conflict in the Middle
East; and/or unfavorable export markets. These factors, coupled with volatile prices for natural gas and diesel fuel,
general performance of the U.S. economy and declining consumer confidence including the inability of consumers
and companies to obtain credit due to the current lack of liquidity in the financial markets, among others, could
negatively impact the Company’s results of operations in fiscal 2011 and thereafter. The Company cannot provide
assurance that the cash flows from operating activities generated in Fiscal 2010 are indicative of the future cash
flows from operating activities that will be generated by the Company’s operations. The Company reviews the
appropriate use of unrestricted cash periodically. Except for the potential contributions to the Joint Venture, no
decision has been made as to non-ordinary course cash usages at this time; however, potential usages could include:
opportunistic capital expenditures and/or acquisitions; investments relating to the Company’s developing a
comprehensive renewable energy strategy, including, without limitation, potential investments in additional
renewable diesel and/or biodiesel projects; investments in response to governmental regulations relating to BSE or
other regulations; unexpected funding required by the PPA requirements; and paying dividends or repurchasing
stock, subject to limitations under the Credit Agreement, as well as suitable cash conservation to withstand adverse
commodity cycles.
The current economic environment in the Company’s markets has the potential to adversely impact its
liquidity in a variety of ways, including through reduced raw materials availability, reduced finished product prices,
reduced sales, potential inventory buildup, increased bad debt reserves, potential impairment charges and/or higher
operating costs.
The principal products that the Company sells are commodities, the prices of which are based on
established commodity markets and are subject to volatile changes. Any decline in these prices has the potential to
adversely impact the Company’s liquidity. Any of a continued decline in raw material availability, a further decline
in commodities prices, increases in energy prices and the impact of the PPA has the potential to adversely impact the
Company’s liquidity. A decline in commodities prices, a rise in energy prices, a slowdown in the U.S. or
international economy, continued or escalated conflict in the Middle East, or other factors, could cause the Company
to fail to meet management’s expectations or could cause liquidity concerns.
Page 56
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The following table summarizes the Company’s expected material contractual payment obligations,
including both on- and off-balance sheet arrangements at January 1, 2011 (in thousands):
Contractual obligations(a):
Long-term debt obligations (b)
Operating lease obligations (c)
Estimated interest payable (d)
Purchase commitments (e)
Pension funding obligation (f)
Other obligations
Total
Total
Less than
1 Year
1 – 3
Years
3 – 5
Years
More than
5 Years
$ 710,000
58,806
284,016
21,003
2,049
39
$ 1,075,913
$ 3,000
14,355
42,669
21,003
2,049
9
$ 83,085
$ 5,250
18,696
84,902
–
–
20
$ 108,868
$ 166,750
8,910
79,979
–
–
10
$ 255,649
$ 535,000
16,845
76,466
–
–
–
$ 628,311
(a) The above table does not reflect uncertain tax positions of approximately $0.1 million because the timing of
the cash settlement cannot be reasonably estimated.
(b) See Note 9 to the consolidated financial statements. In February 2011, approximately $300.0 million of the
outstanding debt was repaid from the proceeds of a public stock offering of 24,193,548 shares of the
Company’s common stock.
(c) See Note 8 to the consolidated financial statements.
(d) Interest payable was calculated using the current rate for term, revolver, senior notes and current rates on other
liabilities that existed as of January 1, 2011.
(e) Purchase commitments were determined based on specified contracts for natural gas, diesel fuel and finish
product purchases.
(f) Pension funding requirements are determined annually based upon a third party actuarial estimate. The
Company expects to make approximately $2.0 million in required contributions to its pension plan in fiscal
2011. The Company is not able to estimate pension funding requirements beyond the next twelve months. The
accrued pension benefit liability was approximately $18.1 million at the end of Fiscal 2010. The Company
knows that one of the multi-employer pension plans that has not terminated to which it contributes and which
is not administered by the Company was under-funded as of the latest available information, and while the
Company has no ability to calculate a possible current liability for the under-funded multi-employer plan to
which the Company contributes, the amounts could be material.
The Company’s off-balance sheet contractual obligations and commercial commitments as of January 1,
2011 relate to operating lease obligations, letters of credit, forward purchase agreements, and employment
agreements. The Company has excluded these items from the balance sheet in accordance with accounting
principles generally accepted in the U.S.
The following table summarizes the Company’s other commercial commitments, including both on- and off-
balance sheet arrangements at January 1, 2011 (in thousands):
Other commercial commitments:
Standby letters of credit
Total other commercial commitments:
OFF BALANCE SHEET OBLIGATIONS
$ 23,383
$ 23,383
Based upon the underlying purchase agreements, the Company has commitments to purchase $21.0 million
of commodity products, consisting of approximately $14.2 million of finished products and approximately $6.8
million of natural gas and diesel fuel, during the next twelve months, which are not included in liabilities on the
Company’s balance sheet at January 1, 2011. These purchase agreements are entered into in the normal course of the
Company’s business and are not subject to derivative accounting. The commitments will be recorded on the balance
sheet of the Company when delivery of these commodities occurs and ownership passes to the Company during
fiscal 2011, in accordance with accounting principles generally accepted in the U.S.
Page 57
Based upon underlying lease agreements, the Company is obligated to pay approximately $14.4 million for
operating leases during fiscal 2011 which are not included in liabilities on the Company’s balance sheet at January 1,
2011. These lease obligations are included in cost of sales or selling, general and administrative expense on the
Company’s Statement of Operations as the underlying lease obligation comes due, in accordance with accounting
principles generally accepted in the U.S.
CRITICAL ACCOUNTING POLICIES
The Company follows certain significant accounting policies when preparing its consolidated financial
statements. A complete summary of these policies is included in Note 1 to the Consolidated Financial Statements.
Certain of the policies require management to make significant and subjective estimates or assumptions that
may deviate from actual results. In particular, management makes estimates regarding valuation of inventories,
estimates of useful life of long-lived assets related to depreciation and amortization expense, estimates regarding fair
value of the Company’s reporting units and future cash flows with respect to assessing potential impairment of both
long-lived assets and goodwill, self-insurance, environmental and litigation reserves, pension liability, estimates of
income tax expense, and estimates of expense related to stock options granted. Each of these estimates is discussed in
greater detail in the following discussion.
Inventories
The Company’s inventories are valued at the lower of cost or market. Finished product manufacturing cost
is calculated using the first-in, first-out (FIFO) method, based upon the Company’s raw material costs, collection and
factory production operating expenses, and depreciation expense on collection and factory assets. Market values of
inventory are estimated at each plant location, based upon either: 1) the backlog of unfilled sales orders at the
balance sheet date; or 2) unsold inventory, calculated using regional finished product prices quoted in the Jacobsen
index at the balance sheet date. Estimates of market value, based upon the backlog of unfilled sales orders or upon
the Jacobsen index, assume that the inventory held by the Company at the balance sheet date will be sold at the
estimated market finished product sales price, subsequent to the balance sheet date. Actual sales prices received on
future sales of inventory held at the end of a period may vary from either the backlog unfilled sales order price or the
Jacobsen index quotation at the balance sheet date. These variances could cause actual sales prices realized on
future sales of inventory to be different than the estimate of market value of inventory at the end of the period.
Inventories were approximately $45.6 million and $19.1 million at January 1, 2011 and January 2, 2010,
respectively. The increase in inventory is primarily due to the acquisition of Griffin.
Long-Lived Assets, Depreciation and Amortization Expense and Valuation
The Company’s property, plant and equipment are recorded at cost when acquired. Depreciation expense is
computed on property, plant and equipment based upon a straight line method over the estimated useful life of the
assets, which is based upon a standard classification of the asset group. Buildings and improvements are depreciated
over a useful life of 15 to 30 years, machinery and equipment are depreciated over a useful life of 3 to 10 years and
vehicles are depreciated over a life of 2 to 6 years. These useful life estimates have been developed based upon the
Company’s historical experience of asset life utility, and whether the asset is new or used when placed in service.
The actual life and utility of the asset may vary from this estimated life. Useful lives of the assets may be modified
from time to time when the future utility or life of the asset is deemed to change from that originally estimated when
the asset was placed in service. Depreciation expense was approximately $26.3 million, $21.4 million and $19.3
million in fiscal years ending January 1, 2011, January 2, 2010 and January 3, 2009, respectively.
The Company’s intangible assets, including permits, routes, non-compete agreements, trade names and
royalty, consulting and leasehold agreements are recorded at fair value when acquired. Amortization expense is
computed on these intangible assets based upon a straight line method over the estimated useful life of the assets,
which is based upon a standard classification of the asset group. Collection routes are amortized over a useful life of
5 to 20 years; non-compete agreements are amortized over a useful life of 3 to 7 years; trade names with a finite life
are amortized over a useful life of 15 years; royalty, consulting and leasehold agreements are amortized over the term
of the agreement; and permits are amortized over a useful life of 11 to 20 years. The actual economic life and utility
of the asset may vary from this estimated life. Useful lives of the assets may be modified from time to time when the
Page 58
future utility or life of the asset is deemed to change from that originally estimated when the asset was placed in
service. Intangible asset amortization expense was approximately $5.6 million, $3.8 million and $5.2 million in
fiscal years ending January 1, 2011, January 2, 2010 and January 3, 2009, respectively.
The Company reviews the carrying value of long-lived assets for impairment when events or changes in
circumstances indicate that the carrying amount of an asset, or related asset group, may not be recoverable from
estimated future undiscounted cash flows. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be
generated by the asset or asset group. If the carrying amount of the asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of
the asset. During the fourth quarter of Fiscal 2008, due to lower commodity markets and the loss of certain large raw
material suppliers, the Company performed testing of all its long-lived assets for impairment based on future
undiscounted cash flows and has determined during this testing process that no impairment exists for its long-lived
assets. In Fiscal 2009 and Fiscal 2010, no triggering event occurred requiring that the Company perform testing of
all of its long-lived assets for impairment.
The net book value of property, plant and equipment was approximately $393.4 million and $152.0 million
at January 1, 2011 and January 2, 2010, respectively. The net book value of intangible assets was approximately
$391.0 million and $40.3 million at January 1, 2011 and January 2, 2010, respectively. The increase in property,
plant and equipment, and intangible assets is primarily due to the acquisition of Griffin.
Goodwill Valuation
The Company reviews the carrying value of goodwill on a regular basis, including at the end of each fiscal
year, for indications of impairment at each reporting unit that has recorded goodwill as an asset. Impairment is
indicated whenever the carrying value of a reporting unit exceeds the estimated fair value of a reporting unit. For
purposes of evaluating impairment of goodwill, the Company estimates fair value of a reporting unit, based upon
future discounted net cash flows. In calculating these estimates, actual historical operating results and anticipated
future economic factors, such as future business volume, future finished product prices, and future operating costs
and expenses are evaluated and estimated as a component of the calculation of future discounted cash flows for each
reporting unit with recorded goodwill. The estimates of fair value of these reporting units and of future discounted
net cash flows from operation of these reporting units could change if actual volumes, prices, costs or expenses vary
from these estimates.
Based on the Company’s annual impairment testing at the end of the fourth quarter of Fiscal 2008, it was
determined that goodwill was impaired due to lower commodity markets and the loss of certain large raw material
suppliers in the fourth quarter of Fiscal 2008, which resulted in the Company recording an impairment charge of
approximately $15.9 million based on future discounted net cash flows. In addition, a future reduction of earnings in
the reporting units with recorded goodwill could result in future impairment charges because the estimate of fair
value would be negatively impacted by a reduction of earnings at those reporting units. Based on the Company’s
annual impairment testing at the end of the fourth quarter of Fiscal 2009 and Fiscal 2010, the fair values of the
Company’s reporting units containing goodwill exceeded the related carrying value. Goodwill was approximately
$376.3 million and $79.1 million at January 1, 2011 and January 2, 2010, respectively. The increase in goodwill is
primarily due to the acquisition of Griffin.
Self Insurance, Environmental and Legal Reserves
The Company’s workers compensation, auto and general liability policies contain significant deductibles or
self insured retentions. The Company estimates and accrues for 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. In
developing estimates for self insured losses, the Company utilizes its staff, a third party actuary and outside counsel
as sources of information and judgment as to the expected undiscounted future costs of the claims. The Company
accrues reserves related to environmental and litigation matters based on estimated undiscounted future costs. With
respect to the Company’s self insurance, environmental and litigation reserves, estimates of reserve liability could
change if future events are different than those included in the estimates of the actuary, consultants and management
of the Company. The reserve for self insurance, environmental and litigation contingencies included in accrued
expenses and other non-current liabilities for which there are no potential insurance recoveries was approximately
$28.2 million and $15.6 million at January 1, 2011 and January 2, 2010, respectively.
Page 59
Pension Liability
The Company provides retirement benefits to employees under separate final-pay noncontributory pension
plans for salaried and hourly employees (excluding those employees covered by a union-sponsored plan), who meet
service and age requirements. Benefits are based principally on length of service and earnings patterns during the
five years preceding retirement. Pension expense and pension liability recorded by the Company is based upon an
annual actuarial estimate provided by a third party administrator. Factors included in estimates of current year
pension expense and pension liability at the balance sheet date include estimated future service period of employees,
estimated future pay of employees, estimated future retirement ages of employees, and the projected time period of
pension benefit payments. Two of the most significant assumptions used to calculate future pension obligations are
the discount rate applied to pension liability and the expected rate of return on pension plan assets. These
assumptions and estimates are subject to the risk of change over time, and each factor has inherent uncertainties
which neither the actuary nor the Company is able to control or to predict with certainty. See Note 13 of Notes to
Consolidated Financial Statements for summaries of pension plans.
The discount rate applied to the Company’s pension liability is the interest rate used to calculate the present
value of the pension benefit obligation. The weighted average discount rate was 5.55% and 5.90% at January 1,
2011 and January 2, 2010, respectively. The net periodic benefit cost for fiscal 2011 would increase by
approximately $0.9 million if the discount rate was 0.5% lower at 5.05%. The net periodic benefit cost for fiscal
2011 would decrease by approximately $0.8 million if the discount rate was 0.5% higher at 6.05%.
The expected rate of return on the Company’s pension plan assets is the interest rate used to calculate future
returns on investment of the plan assets. The expected return on plan assets is a long-term assumption whose
accuracy can only be assessed over a long period of time. The weighted average expected return on pension plan
assets was 7.85% for Fiscal 2010 and Fiscal 2009, respectively. During Fiscal 2010, the Company’s actual return on
pension plan assets was a gain of $12.0 million or approximately 14% of pension plan assets as compared to Fiscal
2009 where the Company’s actual return on pension plan assets was a gain of $12.8 million or approximately 21% of
pension plan assets.
The Company has recorded a pension liability of approximately $18.1 million and $19.1 million at January
1, 2011 and January 2, 2010, respectively. The Company’s net pension cost was approximately $3.9 million, $6.3
million and $0.4 million for the fiscal years ending January 1, 2011, January 2, 2010 and January 3, 2009,
respectively. The projected net periodic pension expense for fiscal 2011 is expected to decrease by approximately
$0.7 million as compared to Fiscal 2010.
Income Taxes
In calculating net income, the Company includes estimates in the calculation of income tax expense, the
resulting tax liability and in future realization of deferred tax assets that arise from temporary differences between
financial statement presentation and tax recognition of revenue and expense. The Company’s deferred tax assets
include a net operating loss carry-forward which is limited to approximately $0.7 million per year in future
utilization due to the change in control resulting from the May 2002 recapitalization of the Company. Valuation
allowances for deferred tax assets are recorded when it is more likely than not that deferred tax assets will not be
realized. Based upon the Company’s evaluation of these matters, a portion of the Company’s net operating loss
carry-forwards will expire unused. The valuation allowance established to provide a reserve against these deferred
tax assets was less than $0.1 million and approximately $0.2 million at January 1, 2011 and January 2, 2010,
respectively.
Stock Option Expense
The calculation of expense of stock options issued utilizes the Black-Scholes mathematical model which
estimates the fair value of the option award to the holder and the compensation expense to the Company, based upon
estimates of volatility, risk-free rates of return at the date of issue and projected vesting of the option grants. The
Company recorded compensation expense related to stock options expense for the year ended January 1, 2011,
January 2, 2010 and January 3, 2009 of approximately $0.1 million, $0.1 million and $0.2 million, respectively.
Page 60
NEW ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value
Measurements. The ASU amends ASC Topic 820, Fair Value Measurements and Disclosures. The new standard
provides for additional disclosures requiring the Company to disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements, describe the reasons for the transfers and present
separately information about purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value
measurements. The update also provides clarification of existing disclosures requiring the Company to determine
each class of assets and liabilities based on the nature and risks of the investments rather than by major security type
and for each class of assets and liabilities, and to disclose the valuation techniques and inputs used to measure fair
value for both Level 2 and Level 3 fair value measurements. The Company adopted ASU 2010-06 as of January 3,
2010, except for the presentation of purchases, sales, issuances and settlement in the reconciliation of Level 3 fair
value measurements, which is effective for the Company on January 2, 2011. This update will not change the
techniques the Company uses to measure fair values and is not expected to have a material impact on the Company’s
consolidated financial statements.
In December 2010, the FASB issued ASU No. 2010-28, When to Perform Step 2 of the Goodwill
Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The ASU amends Topic 350,
Intangibles-Goodwill and Other. The new standard requires an entity to perform all steps in the test for a reporting
unit whose carrying value is zero or negative if it is more likely than not (more than 50%) that a goodwill impairment
exists based on qualitative factors, resulting in the elimination of an entity’s ability to assert that such a reporting
unit’s goodwill is not impaired and additional testing is not necessary despite the existence of qualitative factors that
indicate otherwise. The Company is required to adopt ASU 2010-28 on January 2, 2011 and it is not expected to
have a material impact on the Company’s consolidated financial statements.
In December 2010, the FASB issued ASU No. 2010-29 Disclosure of Supplementary Pro Forma
Information for Business Combinations. The ASU amends Topic 805, Business Combinations. The new standard
provides for changes to the disclosure of pro forma information for business combinations. These changes clarify
that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of
the combined entity as though the business combination that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. Also, the existing supplemental pro forma
disclosures were expanded to include a description of the nature and amount of material, nonrecurring pro forma
adjustments directly attributable to the business combination included in the reported pro forma revenue and
earnings. The Company is required to adopt ASU 2010-29 on January 2, 2011 and it is not expected to have a
material impact on the Company’s consolidated financial statements.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes “forward-looking” statements that involve risks and
uncertainties. The words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “could” and similar expressions
identify forward-looking statements. All statements other than statements of historical facts included in the Annual
Report on Form 10-K, including, without limitation, the statements under the sections entitled “Business,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Legal Proceedings”
and located elsewhere herein regarding industry prospects and the Company’s financial position are forward-looking
statements. Actual results could differ materially from those discussed in the forward-looking statements as a result
of certain factors, including many that are beyond the control of the Company. Although the Company believes that
the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these
expectations will prove to be correct.
In addition to those factors discussed under the heading “Risk Factors” in Item 1A of this report and
elsewhere in this report, and in the Company’s other public filings with the SEC, important factors that could cause
actual results to differ materially from the Company’s expectations include: the Company’s continued ability to
obtain sources of supply for its rendering operations; general economic conditions in the American, European and
Asian markets; a decline in consumer confidence; prices in the competing commodity markets which are volatile
and are beyond the Company’s control; energy prices; changes to worldwide government policies relating to
renewable fuels and greenhouse gas emissions; the implementation of the Enhanced BSE Rule; BSE and its impact
on finished product prices, export markets and government regulations, which are still evolving and are beyond the
Page 61
Company’s control; the occurrence of Bird Flu in the U.S.; possible product recall resulting from developments
relating to the discovery of unauthorized adulterations (such as melamine or salmonella) to food additives; increased
contributions to the Company’s multi-employer defined benefit pension plans as required by the PPA; the
Company’s ability to bring its planned Joint Venture to construct a renewable diesel plant with Valero to fruition
including the Joint Venture’s ability to enter into a credit agreement providing adequate construction funding on
acceptable terms; and the Company’s ability to combine Darling’s business and Griffin’s business and to realize the
anticipated growth opportunities and cost synergies and to integrate the two businesses efficiently. Among other
things, future profitability may be affected by the Company’s ability to grow its business, which faces competition
from companies that may have substantially greater resources than the Company. The Company cautions readers
that all forward-looking statements speak only as of the date made, and the Company undertakes no obligation to
update any forward-looking statements, whether as a result of changes in circumstances, new events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks affecting the Company are exposures to changes in prices of the finished products the
Company sells, interest rates on debt, availability of raw material supply and the price of natural gas and diesel fuel
used in the Company’s plants. Raw materials available to the Company are impacted by seasonal factors, including
holidays, when raw material volume declines; warm weather, which can adversely affect the quality of raw material
processed and finished products produced; and cold weather, which can impact the collection of raw material.
Predominantly all of the Company’s finished products are commodities that are generally sold at prices prevailing at
the time of sale.
The Company makes limited use of derivative instruments to manage cash flow risks related to interest
expense, natural gas usage, diesel fuel usage and inventory. The Company does not use derivative instruments for
trading purposes. Interest rate swaps are entered into with the intent of managing overall borrowing costs by
reducing the potential impact of increases in interest rates on floating-rate long-term debt. Natural gas swaps and
options are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential
impact of seasonal weather demands on natural gas that increases natural gas prices. Heating oil swaps 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. Inventory swaps and options are entered into with
the intent of managing seasonally high concentrations of feed grade and pet food PM, MBM, BFT, PG, YG and BBP
inventories by reducing the potential impact of decreasing prices. The interest rate swaps and the natural gas swaps
are subject to the requirements of FASB authoritative guidance. Some of the Company’s natural gas and diesel fuel
instruments are not subject to the requirements of FASB authoritative guidance because some of the natural gas and
diesel fuel instruments qualify as normal purchases as defined in FASB authoritative guidance. At January 1, 2011,
the Company had natural gas swaps outstanding that qualified and were designated for hedge accounting as well as
heating oil swaps and natural gas swaps and options that did not qualify and were not designated for hedge
accounting.
In fiscal 2010, the Company has entered into natural gas contracts that are considered cash flow hedges
according to FASB authoritative guidance. Under the terms of the natural gas swap contracts the Company fixed the
expected purchase cost of a portion of its plants expected natural gas usage through a portion of fiscal 2011. As of
January 1, 2011, the aggregate fair value of these natural gas swaps was approximately $0.1 million and are included
in current assets and accrued expenses on the balance sheet, with an offset recorded in accumulated other
comprehensive income for the effective portion.
Additionally, the Company had heating oil swaps and natural gas swaps and options that are marked to
market because they did not qualify for hedge accounting at January 1, 2011. The heating oil swaps and natural gas
swaps and options had an aggregate fair value of $0.3 million and are included in current other assets at January 1,
2011.
As of January 1, 2011, the Company had forward purchase agreements in place for purchases of approximately
$6.8 million of natural gas and diesel fuel in fiscal 2011. As of January 1, 2011, the Company had forward purchase
agreements in place for purchases of approximately $14.2 million of finished product in fiscal 2011.
Page 62
Interest Rate Sensitivity
The Company’s obligations subject to fixed or variable interest rates include (in thousands, except interest
rates):
Long-term debt:
Fixed rate
Average interest rate
Variable rate
Average interest rate
Total
Total
$ 250,039
8.50%
460,000
4.50%
$ 710,039
Less than
1 Year
1 – 3
Years
3 – 5
Years
More than
5 Years
$ 9
5.75%
3,000
5.00%
$ 3,009
$ 20
5.75%
5,250
5.00%
$ 5,270
$ 10
5.75%
166,750
3.62%
$ 166,760
$ 250,000
8.50%
285,000
5.00%
$ 535,000
The Company’s fixed rate debt obligations consist of the Notes and other immaterial debt that accrue
interest at an annual weighted average fixed rate of approximately 8.5%. These obligations are not affected by
changes in interest rates.
The Company has $460.0 million in variable rate debt that represents the balance outstanding at January 1,
2011 under the Company’s Credit Agreement. This portion of the Company’s debt is sensitive to fluctuations in
interest rates. The Company estimates that a 1% increase in interest rates will increase the Company’s interest
expense by approximately $4.6 million in fiscal 2011.
Page 63
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm on Consolidated Financial
Statements
Report of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting
Consolidated Balance Sheets -
January 1, 2011 and January 2, 2010
Consolidated Statements of Operations -
Three years ended January 1, 2011
Consolidated Statements of Stockholders’ Equity
and Comprehensive Income(Loss) -
Three years ended January 1, 2011
Consolidated Statements of Cash Flows -
Three years ended January 1, 2011
Notes to Consolidated Financial Statements
Page
65
66
67
68
69
71
72
All other schedules are omitted since the required information is not present or is not present in
amounts sufficient to require submission of the schedule, or because the information required is
included in the consolidated financial statements and notes thereto.
Page 64
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Darling International Inc.:
We have audited the consolidated financial statements of Darling International Inc. and subsidiaries as listed in the
accompanying index. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Darling International Inc. and subsidiaries as of January 1, 2011 and January 2, 2010, and the
results of their operations and their cash flows for each of the years in the three-year period ended January 1, 2011, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Darling International Inc.’s internal control over financial reporting as of January 1, 2011, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 2, 2011 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Dallas, Texas
March 2, 2011
KPMG LLP
Page 65
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Darling International Inc.:
We have audited Darling International Inc.’s internal control over financial reporting as of January 1, 2011, based on
criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Darling International Inc.’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Darling International Inc. maintained, in all material respects, effective internal control over financial
reporting as of January 1, 2011, based on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In December 2010, Darling International Inc. acquired Griffin Industries, Inc. (Griffin) and management excluded from
its assessment of the effectiveness of Darling International Inc.’s internal control over financial reporting as of
January 1, 2011, Griffin’s internal control over financial reporting associated with total assets of $924.8 million and total
revenues of $27.7 million included in the consolidated financial statements of Darling International Inc. and subsidiaries
as of and for the year ended January 1, 2011. Our audit of internal control over financial reporting of Darling
International Inc. also excluded an evaluation of the internal control over financial reporting of Griffin.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements of Darling International Inc. and subsidiaries as listed in the accompanying
index, and our report dated March 2, 2011 expressed an unqualified opinion on those consolidated financial statements.
Dallas, Texas
March 2, 2011
KPMG LLP
Page 66
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 1, 2011 and January 2, 2010
(in thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, less allowance for bad debts of $2,134
at January 1, 2011 and $2,148 at January 2, 2010
Escrow receivable
Inventories
Income taxes refundable
Other current assets
Deferred income taxes
Total current assets
Property, plant and equipment, net
Intangible assets, less accumulated amortization of $56,689
at January 1, 2011 and $51,109 at January 2, 2010
Goodwill
Other assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
Accounts payable, principally trade
Accrued expenses
Total current liabilities
Long-term debt, net of current portion
Other noncurrent liabilities
Deferred income taxes
Total liabilities
Commitments and contingencies
January 1,
2011
$ 19,202
373
87,455
16,267
45,606
1,474
8,833
6,376
185,586
January 2,
2010
$ 68,182
397
45,572
–
19,057
605
5,348
7,216
146,377
393,420
151,982
390,954
376,263
36,035
$1,382,258
$ 3,009
70,123
81,698
154,830
707,030
50,760
5,342
917,962
40,298
79,085
8,429
$426,171
$ 5,009
18,746
47,522
71,277
27,539
36,143
6,335
141,294
Stockholders’ equity:
Common stock, $.01 par value; 150,000,000 and 100,000,000
shares authorized, 93,014,691 and 82,629,970 shares issued
at January 1, 2011 and January 2, 2010, respectively
Additional paid-in capital
Treasury stock, at cost; 455,020 and 403,280 shares at
January 1, 2011 and January 2, 2010, respectively
Accumulated other comprehensive loss
Retained earnings
Total stockholders’ equity
930
290,106
( 4,340 )
( 20,988 )
198,588
464,296
$1,382,258
826
157,343
( 3,855 )
( 23,782 )
154,345
284,877
$426,171
The accompanying notes are an integral part of these
consolidated financial statements.
Page 67
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three years ended January 1, 2011
(in thousands, except per share data)
Net sales
Costs and expenses:
Cost of sales and operating expenses
Selling, general and administrative expenses
Depreciation and amortization
Acquisition costs
Goodwill impairment
Total costs and expenses
Operating income
Other income/(expense):
Interest expense
Other, net
Total other income/(expense)
Income from operations before
income taxes
Income taxes
Net income
Net income per share:
Basic
Diluted
January 1,
2011
January 2,
2010
January 3,
2009
$724,909
$597,806
$807,492
531,648
68,042
31,908
10,798
–
642,396
82,513
440,111
61,062
25,226
468
–
526,867
70,939
614,708
59,761
24,433
–
15,914
714,816
92,676
( 8,737 )
(3,433 )
( 12,170 )
( 3,105 )
(955 )
( 4,060 )
( 3,018 )
258
( 2,760 )
70,343
26,100
66,879
25,089
89,916
35,354
$ 44,243
$ 41,790
$ 54,562
$ 0.53
$ 0.53
$ 0.51
$ 0.51
$ 0.67
$ 0.66
The accompanying notes are an integral part
of these consolidated financial statements.
Page 68
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income(Loss)
Three years ended January 1, 2011
(in thousands, except share data)
Common Stock
Number of
Outstanding
Shares
$.01 par
Value
Additional
Paid-In
Capital
Treasury
Stock
Accumulated
Other
Compre-
hensive Loss
Retained
Earnings
Total
Stockholders’
Equity
Balances at December 29, 2007
81,362,100
$ 815
$152,264
$ (1,547)
$ (8,598)
$ 58,050
$200,984
Net income
Unrecognized net actuarial
loss of defined benefit plans:
Pension liability
adjustments, net of tax
Interest rate swap derivative
adjustment, net of tax
Total comprehensive income
Adjustment effect of actuarially
determined pension liabilities
measurement adoption,
net of tax
–
–
–
–
–
Issuance of non-vested stock
50,558
Stock-based compensation
Tax benefits associated with
stock-based compensation
–
–
Treasury stock
(218,728)
–
–
–
–
–
1
–
–
–
–
–
–
–
–
702
(127)
2,308
–
–
–
–
–
–
–
–
–
(2,301)
–
54,562
54,562
(20,386)
(937)
–
–
–
–
(20,386)
(937)
33,239
71
(57)
–
–
–
–
–
–
–
–
14
703
(127)
2,308
(2,301)
Issuance of common stock
574,052
6
1,752
–
–
–
1,758
Balances at January 3, 2009
81,767,982
$ 822
$156,899
$ (3,848)
$(29,850)
$ 112,555
$236,578
Net income
Unrecognized net actuarial
loss of defined benefit plans:
Pension liability
adjustments, net of tax
Interest rate swap derivative
adjustment, net of tax
Natural gas swap derivative
adjustment, net of tax
Total comprehensive income
–
–
–
–
–
Issuance of non-vested stock
307,558
Stock-based compensation
Tax benefits associated with
stock-based compensation
–
–
Treasury stock
(2,186)
–
–
–
–
–
3
–
–
–
–
–
–
–
–
901
(720)
(39)
–
–
–
–
–
–
–
–
–
(7)
–
41,790
41,790
5,229
702
137
–
–
–
–
–
–
–
–
–
–
–
–
–
5,229
702
137
47,858
904
(720)
(39)
(7)
Issuance of common stock
153,336
1
302
–
–
–
303
Balances at January 2, 2010
82,226,690
$ 826
$157,343
$ (3,855)
$(23,782)
$ 154,345
$284,877
Page 69
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income(Loss) (Continued)
Three years ended January 1, 2011
(in thousands, except share data)
Common Stock
Number of
Outstanding
Shares
$.01 par
Value
Additional
Paid-In
Capital
Treasury
Stock
Net income
Unrecognized net actuarial
loss of defined benefit plans:
Pension liability
adjustments, net of tax
Interest rate swap derivative
adjustment, net of tax
Natural gas swap derivative
adjustment, net of tax
Total comprehensive income
–
–
–
–
–
Issuance of non-vested stock
254,220
Stock-based compensation
Tax benefits associated with
stock-based compensation
–
–
Treasury stock
(51,740)
–
–
–
–
–
3
–
–
–
–
–
–
–
–
2,401
94
234
–
–
–
–
–
–
–
–
–
(485)
Accumulated
Other
Compre-
hensive Loss
Retained
Earnings
Total
Stockholders’
Equity
–
44,243
44,243
2,346
507
(59)
–
–
–
–
–
–
–
–
–
–
–
–
–
2,346
507
(59)
47,037
2,404
94
234
(485)
Issuance of common stock
10,130,501
101
130,034
–
–
–
130,135
Balances at January 1, 2011
92,559,671
$ 930
$290,106
$ (4,340)
$(20,988)
$ 198,588
$464,296
The accompanying notes are an integral part
of these consolidated financial statements.
Page 70
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three years ended January 1, 2011
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Deferred income taxes
Loss/(gain) on sale of assets
Increase/(decrease) in long-term pension liability
Stock-based compensation expense
Write-off deferred loan costs
Goodwill impairment
Changes in operating assets and liabilities, net
of effects from acquisitions:
Restricted cash
Accounts receivable
Escrow receivable
Income taxes refundable
Inventories and prepaid expenses
Accounts payable and accrued expenses
Other
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Acquisitions, net of cash acquired
Gross proceeds from sale of property, plant and equipment
and other assets
Payments related to routes and other intangibles
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from long-term debt
Payments on long-term debt
Net proceeds from revolver borrowings
Contract payments
Deferred loan costs
Issuance of common stock
Minimum withholding taxes paid on stock awards
Excess tax benefits from stock-based compensation
Net cash provided/(used) in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
Income taxes, net of refunds
January 1,
2011
January 2,
2010
January 3,
2009
$ 44,243
$ 41,790
$ 54,562
31,908
2,402
51
1,353
2,146
851
–
24
(6,276 )
(16,267 )
( 869 )
( 4,661 )
23,727
2,878
81,510
( 24,720 )
( 758,182 )
624
( 1,367 )
( 783,645 )
550,000
( 32,509 )
160,000
–
( 24,020 )
35
( 585 )
234
653,155
(48,980 )
68,182
$ 19,202
25,226
14,652
( 294 )
( 11,974 )
768
–
–
52
( 5,148 )
–
10,643
4,286
( 369 )
(446 )
79,186
( 23,638 )
( 33,987 )
1,913
–
( 55,712 )
48
( 5,000 )
–
( 72 )
( 946 )
11
( 108 )
(39 )
( 6,106 )
24,433
( 12,428 )
( 141 )
6,784
800
–
15,914
( 16 )
18,977
–
( 11,248 )
( 398 )
( 6,884 )
1,595
91,950
( 31,006 )
( 15,876 )
1,101
( 6,609 )
( 52,390 )
–
( 6,250 )
–
( 176 )
( 67 )
303
( 1,199 )
2,308
( 5,081 )
17,368
50,814
$ 68,182
34,479
16,335
$ 50,814
$ 7,743
$ 28,114
$ 2,687
$ 2,244
$ 3,016
$ 44,246
The accompanying notes are an integral part
of these consolidated financial statements.
Page 71
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1. GENERAL
(a)
NATURE OF OPERATIONS
Darling International Inc., a Delaware corporation (“Darling”, and together with its subsidiaries, the “Company”), is
a leading provider of rendering, cooking oil and bakery waste recycling and recovery solutions to the nation’s food
industry. The Company collects and recycles animal by-products, bakery waste and used cooking oil from poultry
and meat processors, commercial bakeries, grocery stores, butcher shops, and food service establishments and
provides grease trap cleaning services to many of the same establishments. On December 17, 2010, Darling
completed its acquisition of Griffin Industries Inc. and its subsidiaries (“Griffin”) pursuant to the Agreement and
Plan of Merger, dated as of November 9, 2010 (the “Merger Agreement”), by and among Darling, DG
Acquisition Corp., a wholly-owned subsidiary of Darling (“Merger Sub”), Griffin and Robert A. Griffin, as the
Griffin shareholders’ representative. Merger Sub was merged with and into Griffin (the “Merger”), and Griffin
survived the Merger as a wholly-owned subsidiary of Darling. The Company operates over 125 processing and
transfer facilities located throughout the United States to process raw materials into finished products such as protein
(primarily meat and bone meal, (“MBM”) and poultry meal (“PM”)), tallow (primarily bleachable fancy tallow,
(“BFT”)), poultry grease (“PG”), yellow grease (“YG”), bakery by-products (“BBP”) and hides as well as a range of
branded and value-added products. The Company sells these products nationally and internationally, primarily to
producers of animal feed, pet food, fertilizer, bio-fuels and other consumer and industrial ingredients including oleo-
chemicals, soaps and leather goods for use as ingredients in their products or for further processing. The
Company’s operations are organized into three segments: Rendering, Restaurant Services and Bakery. For
additional information on the Company’s segments, see Note 18.
(b)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in consolidation.
(2) Fiscal Year
The Company has a 52/53 week fiscal year ending on the Saturday nearest December 31. Fiscal years for
the consolidated financial statements included herein are for the 52 weeks ended January 1, 2011, the 52
weeks ended January 2, 2010, and the 53 weeks ended January 3, 2009.
(3) Cash and Cash Equivalents
The Company considers all short-term highly liquid instruments, with an original maturity of three months
or less, to be cash equivalents.
(4) Accounts Receivable and Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from customers’
non-payment of trade accounts receivable owed to the Company. These trade receivables arise in the
ordinary course of business from sales of raw material, finished product or services to the Company’s
customers. The estimate of allowance for doubtful accounts is based upon the Company’s bad debt
experience, prevailing market conditions, and aging of trade accounts receivable, among other factors. If
the financial condition of the Company’s customers deteriorates, resulting in the customers’ inability to pay
the Company’s receivables as they come due, additional allowances for doubtful accounts may be required.
Page 72
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
(5)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO)
method.
(6) Long Lived Assets
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is computed by the straight-line method
1) Buildings and improvements, 15 to 30 years;
over the estimated useful lives of assets:
2) Machinery and equipment, 3 to 10 years; and 3) Vehicles, 2 to 6 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. 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 and
leasehold agreements. Amortization expense is calculated using the straight-line method over the estimated
useful lives of the assets ranging from: 5-20 years for collection routes; 11-20 years for permits; 3-7 years
for non-compete covenants; and 15 years for trade names. Royalty, consulting and leasehold agreements
are amortized over the term of the agreement.
(7)
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of
The Company reviews the carrying value of long-lived assets for impairment when events or changes in
circumstances indicate that the carrying amount of an asset, or related asset group, may not be recoverable
from estimated future undiscounted cash flows. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows
expected to be generated by the asset or asset group. If the carrying amount of the asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. During the fourth quarter of fiscal 2008, due to
lower commodity markets and the loss of certain large raw material suppliers, the Company performed
testing of all its long-lived assets for impairment based on future undiscounted cash flows and concluded
that its long-lived assets were not impaired. In fiscal 2009 and fiscal 2010 no triggering event occurred
requiring that the Company perform testing of all of its long-lived assets for impairment.
(8) Goodwill
Goodwill and indefinite lived assets are tested for impairment annually or more frequently if events or
changes in circumstances indicate that the asset might be impaired. The Company follows a two-step
process for testing impairment. First, the fair value of each reporting unit is compared to its carrying value
to determine whether an indication of impairment exists. If impairment is indicated, then the fair value of
the reporting unit’s goodwill is determined by allocating the unit’s fair value of its assets and liabilities
(including any unrecognized intangible assets) as if the reporting unit had been acquired in a business
combination. The amount of impairment for goodwill is measured as the excess of its carrying value over its
implied fair value.
Page 73
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
In fiscal 2008, the fair value of the Company’s reporting units containing goodwill did not exceed the
related carrying values; consequently, the Company recorded an impairment of approximately $15.9 million
for the year ended January 3, 2009. In fiscal 2009 and fiscal 2010, the fair values of the Company’s
reporting units containing goodwill exceeded the related carrying value. Goodwill was approximately
$376.3 million and $79.1 million at January 1, 2011 and January 2, 2010, respectively. See Note 6 for
further information on the Company’s goodwill.
(9) Environmental Expenditures
Environmental expenditures incurred to mitigate or prevent environmental impacts that have yet to occur
and that otherwise may result from future operations are capitalized. Expenditures that relate to an existing
condition caused by past operations and that do not contribute to current or future revenues are expensed or
charged against established environmental reserves. Reserves are established when environmental impacts
have been identified which are probable to require mitigation and/or remediation and the costs are
reasonably estimable.
(10) Income Taxes
The Company accounts for income taxes using the asset and liability method. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable
income to realize its deferred income tax assets. In making this determination, the Company considers all
available positive and negative evidence and makes certain assumptions. The Company considers, among
other things, its deferred tax liabilities, the overall business environment, its historical earnings and losses,
current industry trends and its outlook for future years. Although the Company is unable to carryback any of
its net operating losses, based upon recent favorable operating results and future projections, certain net
operating losses can be carried forward and utilized and other deferred tax assets will be realized.
(11) Earnings per Share
On January 4, 2009, the Company adopted the provisions of Financial Accounting Standards Board
(“FASB”) authoritative guidance, which addresses determinations as to whether instruments granted in
share-based payment transactions are participating securities prior to vesting and, therefore, need to be
included in the earnings allocation in computing earnings per share under the two-class method. Non-vested
and restricted share awards granted to the Company’s employees and non-employee directors contain non-
forfeitable dividend rights and, therefore, are considered participating securities.
Basic income per common share is computed by dividing net income by the weighted average number of
common shares including non-vested and restricted shares outstanding during the period. Diluted income
per common share is computed by dividing net income by the weighted average number of common shares
outstanding during the period increased by dilutive common equivalent shares determined using the treasury
stock method.
Page 74
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
Basic:
Net income
Diluted:
Effect of dilutive securities
Add: Option shares in the money and
dilutive effect of nonvested stock
Less: Pro-forma treasury shares
Diluted:
Net income
Net Income per Common Share (in thousands)
January 1,
2011
January 2,
2010
January 3,
2009
Income
Shares
Per-
Share
Income
Shares
Per-
Share
Income
Shares
Per-
Share
$44,243
82,854
$0.53
$41,790
82,142
$0.51
$54,562
81,685
$0.67
–
–
778
(389)
–
–
–
–
778
(445)
–
–
–
–
969
(408)
–
–
$44,243
83,243
$0.53
$41,790
82,475
$0.51
$54,562
82,246
$0.66
For fiscal 2010, 2009 and 2008, respectively, 87,843, 32,000 and 24,000 outstanding stock options were
excluded from diluted income per common share as the effect was antidilutive. For fiscal 2010 non-vested
stock of 75,714 shares were excluded from diluted income per common share as the effect was antidilutive.
(12) Stock Based Compensation
The Company recognizes compensation expense in an amount equal to the fair value of the share-based
payments (e.g., stock options and non-vested and restricted stock) granted to employees or by incurring
liabilities to an employee or other supplier (a) in amounts based, at least in part, on the price of the entity’s
shares or other equity instruments, or (b) that require or may require settlement by issuing the entity’s equity
shares or other equity instruments.
Total stock-based compensation recognized in the statements of operations for the years ended January 1,
2011, January 2, 2010 and January 3, 2009 was approximately $2.8 million, $1.2 million and $1.1 million,
respectively, which is included in selling, general and administrative costs, and the related income tax
benefit recognized was approximately $1.1 million, $0.5 million and $0.3 million, respectively. See Note
12 for further information on the Company’s stock-based compensation plans.
The benefits of tax deductions in excess of recognized compensation cost are reported as a financing cash
flow. For the year ended January 1, 2011 the Company recognized $0.2 million as an increase in financing
cash flows and for the year ended January 2, 2010 the Company recognized less than $0.1 million of such
tax expenses, which were recorded as a decrease in financing cash flows. For the year ended January 3,
2009, the Company recognized $2.3 million in such tax deductions, which were recorded as an increase in
financing cash flows and a reduction in operating cash flows.
(13) Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
If it is at least reasonably possible that the estimate of the effect on the financial statements of a condition,
situation, or set of circumstances that exist at the date of the financial statements will change in the near
term due to one or more future confirming events and the effect of the change would be material to the
financial statements, the Company will disclose the nature of the uncertainty and include an indication that
Page 75
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
it is at least reasonably possible that a change in the estimate will occur in the near term. If the estimate
involves certain loss contingencies the disclosure will also include an estimate of the probable loss or range
of loss or state that an estimate cannot be made.
(14) Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses approximates fair value due to the short maturity of these instruments. Based upon quoted market
price the Company’s senior notes described in Note 9 has a fair value of approximately $260.6 million
compared to a carrying amount of $250.0 million at January 1, 2011. The Company’s term loans and
revolver as described in Note 9 have a fair value based on rates the Company believes it would pay for debt
of the same remaining maturity. The Company’s term loan had a fair value of approximately $30.2 million
compared to a carrying amount of $32.5 million at January 2, 2010. The carrying amount of the Company’s
term loan and revolver approximates the fair value at January 1, 2011. The carrying amount for the
Company’s other debt is not deemed to be significantly different than the amount recorded and all other
financial instruments have been recorded at fair value as disclosed in Note 15.
(15) Derivative Instruments
The Company makes limited use of derivative instruments to manage cash flow risks related to interest
expense, natural gas usage, diesel fuel usage and inventory. The Company does not use derivative
instruments for trading purposes. Interest rate swaps are entered into with the intent of managing overall
borrowing costs by reducing the potential impact of increases in interest rates on floating-rate long-term
debt. Natural gas swaps and options are entered into with the intent of managing the overall cost of natural
gas usage by reducing the potential impact of seasonal weather demands on natural gas that increases natural
gas prices. Heating oil swaps 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. Inventory swaps and options are entered into with the intent of managing seasonally high
concentrations of MBM, PM, BFT, PG, YG and BBP inventories by reducing the potential impact of
decreasing prices. At January 1, 2011, the Company had natural gas swaps outstanding that qualified and
were designated for hedge accounting as well as natural gas swaps, options and heating oil swaps 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 is reported in earnings
immediately. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in
earnings in the period of change.
(16) 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 against certain foreign and domestic sales. These amounts are recorded as unearned
revenue and recognized when the products have shipped and the customer takes ownership and assumes risk
of loss. The Company has formula arrangements with certain suppliers whereby the charge or credit for raw
materials is tied to published finished product commodity prices after deducting a fixed processing fee
Page 76
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
incorporated into the formula and is recorded as a cost of sale by line of business. The Company recognizes
revenue related to grease trap servicing in the month the trap service occurs.
(17) Related Party Transactions
Darling through its wholly-owned subsidiary Griffin Industries, Inc., leases two real properties located in
Butler, Kentucky and real properties located in each of Jackson, Mississippi and Henderson, Kentucky from
Martom Properties, LLC, an entity owned in part by Martin W. Griffin, the Company’s Executive Vice
President – Chief Operations Officer – Griffin Industries. See Note 8 for further information on the
Company’s leases.
(18) Reclassification
Certain prior year amounts have been reclassified to conform to the current year presentation.
(19) Subsequent Events
The Company has evaluated subsequent events from the end of the most recent fiscal year through the date
the consolidated financial statements were issued.
NOTE 2. ACQUISITIONS AND DISPOSITIONS
On December 17, 2010, Darling completed its acquisition of all of the shares of Griffin pursuant to the Merger
Agreement, by and among Darling, Merger Sub, Griffin and Robert A. Griffin, as the Griffin shareholders’
representative. Griffin survived the Merger as a wholly-owned subsidiary of Darling (the “Griffin Transaction”).
The Griffin Transaction will increase Darling’s capabilities by growing revenues, diversifying the raw material
supplies, increase the ability to better serve the Company’s customers and suppliers and provide new opportunities
for business growth on a national platform.
The amount of Griffins revenue and earnings including in the Company’s consolidated statement of operations for
the year ended January 1, 2011 were $27.7 million and $1.9 million, respectively.
As a result of the Griffin Transaction, effective December 17, 2010, the Company began including the operations of
Griffin into the Company’s consolidated financial statements. The following table presents selected pro forma
information, for comparative purposes, assuming the Griffin Transaction had occurred on January 4, 2009 for the
periods presented (unaudited) (in thousands, except per share data):
Net sales
Income from continuing operations
Net income
Earnings per share
Basic
Diluted
January 1,
2011
$1,339,589
133,184
85,344
January 2,
2010
$1,123,108
91,299
57,062
$ 0.92
$ 0.91
$ 0.62
$ 0.61
The selected unaudited pro forma information is not necessarily indicative of the consolidated results of
operations for future periods or the results of operations that would have been realized had the Griffin
Transaction actually occurred on January 4, 2009.
Total consideration paid in the Griffin Transaction totaled approximately $872.0 million and comprises $740.3
million in cash (including $33.6 million in escrow), the issuance of approximately 10.0 million shares of Darling
common stock (valued at the fair market at the closing of $13.06 or approximately $130.6 million), a $16.3 million
Page 77
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
escrow receivable for certain over funding of working capital, a $13.6 million accrued expense for the Company’s
election to step up the tax basis of the assets acquired in the Griffin Transaction and a long-term liability of
approximately $3.8 million of contingent consideration for the true-up adjustment as further described below. The
purchase price is subject to a potential working capital and other adjustments. The cash consideration was funded
primarily through borrowings under the Company’s credit agreement and the sale of senior notes as further
discussed in Note 9. The shares issued under the Griffin Transaction were issued on terms set forth in the rollover
agreement, dated as of November 9, 2010, by and among Darling, certain of Griffin’s shareholders who qualify as
“accredited investors” (the “Rollover Shareholders”) pursuant to Rule 501(a) of Regulation D promulgated under
the Securities Act, and Robert A. Griffin, as such shareholders’ representative (the “Rollover Agreement”), to the
Rollover Shareholders.
The Rollover Agreement provides for a true-up adjustment in which additional cash of up to $15 million could be
paid by Darling if on the True-Up Date (the last day of the 13th full consecutive month following the closing of the
Merger), the True-up Market Price (as defined in the Rollover Agreement) is less than $10.002. If the True-Up
Market Price exceeds $10.002, no additional consideration will be paid. The Company has initially valued this
contingent consideration at fair value of approximately $3.8 million based on the probability of the Company’s
stock will be less than the True-up Market Price as defined above. The Company is required to revalue the
contingent consideration on a quarterly basis until the True-up Market Price is determined.
The Company also incurred costs as part of the Griffin Transaction for consulting, legal and financing in the amount
of approximately $37.7 million of which $10.6 million was expensed as acquisition costs and approximately $3.1
million was recorded as interest expense. Additionally, approximately $24.0 million was capitalized as deferred
loan costs, which are included in other assets on the Company’s consolidated balance sheets.
The following table summarizes the fair value of the assets acquired and liabilities assumed in the Griffin
Transaction as of December 17, 2010 (in thousands):
Cash
Accounts receivable
Inventory
Other current assets
Other assets
Deferred tax asset
Identifiable intangibles
Property and equipment
Goodwill
Accounts payable
Accrued expenses
Other liabilities
Purchase price
$ 350
35,607
22,623
2,558
3,103
2,555
349,775
234,115
291,153
(46,583)
(12,219)
(11,004)
$ 872,033
The $291.2 million of goodwill was assigned to the rendering and bakery segments in the amounts of $239.7
million and $51.5 million, respectively. Of the total amount, $291.2 million is expected to be deductible for tax
purposes. Identifiable intangibles include trade names with indefinite lives of approximately $92.0 million and
definite lived intangible assets including trade names of approximately $0.5 million with a weighted average
useful life of 15 years, $228.4 million in permits with a weighted average useful life of 13 years, $25.1 million in
routes with a weighted average useful life of 5 years, and $3.8 million in non-compete and leasehold agreements
with a useful life of 5 years.
The Company notes the acquisitions discussed below are not considered related businesses, therefore are not
required to be treated as a single business combination. Pro forma results of operations for these acquisitions
have not been presented because the effect of each acquisition individually is not deemed material to revenues
and net income of the Company for any fiscal period presented.
Page 78
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
On May 28, 2010, the Company acquired certain rendering business assets from Nebraska By-Products, Inc. for
approximately $15.3 million. The purchase was accounted for as an asset purchase pursuant to the terms of the
asset purchase agreement between the Company and Nebraska By-Products, Inc. and affiliated companies (the
“Nebraska Transaction”). The assets acquired in the Nebraska Transaction will increase the Company’s rendering
portfolio and better serve the Company’s customers within the rendering segment.
Effective May 28, 2010, the Company began including the operations of the Nebraska Transaction into the
Company’s consolidated financial statements. The Company paid approximately $15.3 million in cash for assets
and assumed liabilities consisting of property, plant and equipment of $9.6 million, intangible assets of $2.8 million,
goodwill of $2.8 million and other of $0.1 million on the closing date. The goodwill from the Nebraska Transaction
was assigned to the rendering segment and is expected to be deductible for tax purposes. The identifiable
intangibles have a weighted average life of eleven years.
On December 31, 2009, the Company acquired certain rendering, grease collection and trap servicing business
assets from Sanimax USA Inc. for approximately $19 million. The purchase was accounted for as an asset
purchase pursuant to the terms of the asset purchase agreement between the Company and Sanimax USA Inc.
and affiliated companies (the “Sanimax Transaction”). The assets acquired in the Sanimax Transaction will
increase the Company’s national footprint and better serve the Company’s customers within the rendering segment.
Effective December 31, 2009, the Company began including the operations of the Sanimax Transaction into the
Company’s consolidated financial statements. The Company paid approximately $19.0 million in cash for assets
and assumed liabilities consisting of property, plant and equipment of $4.7 million, intangible assets of $4.8 million,
goodwill of $9.9 million and accrued liabilities of $0.4 million on the closing date. The goodwill from the Sanimax
Transaction was assigned to the rendering segment and is expected to be deductible for tax purposes and the
identifiable intangibles have a weighted average life of eight years.
On February 23, 2009, the Company acquired substantially all of the assets of Boca Industries, Inc., a grease trap
services business headquartered in Smyrna, Georgia (the “Boca Transaction”) for approximately $12.5 million.
The purchase was accounted for as an asset purchase pursuant to the terms of the asset purchase agreement
between the Company and Boca Transport, Inc. and Donald E. Lenci. The assets acquired in the Boca
Transaction will increase the Company’s capabilities to grow revenues and continue the Company’s strategy of
broadening its restaurant services segment.
Effective February 23, 2009, the Company began including the operations of the Boca Transaction into the
Company’s consolidated financial statements. The Company paid approximately $12.5 million in cash for assets
consisting of property, plant and equipment of $3.3 million, intangible assets of $3.3 million, goodwill of $5.8
million and other of $0.1 million on the closing date. The goodwill from the Boca Transaction was assigned to the
restaurant services segment and is expected to be deductible for tax purposes and the identifiable intangibles have a
weighted average life of nine years.
On August 25, 2008, Darling completed the acquisition of substantially all of the assets of API Recycling’s used
cooking oil collection business (the “API Transaction”). The API Transaction included additional consideration
that could be required to be paid each anniversary by the Company, if certain average market prices are achieved
over the three years following the anniversary of the closing of the API Transaction, less on a prorate basis a long
term receivable recorded at closing. During fiscal 2010, the Company paid approximately $2.3 million representing
additional consideration of $2.9 million recorded as goodwill less approximately $0.6 million representing a
reduction of the long term receivable.
Page 79
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
On September 11, 2009, the Company sold its Little Rock, Arkansas grease/trap plant to a third party for cash
and other consideration of approximately $1.6 million. Effective September 11, 2009, the consolidated financial
statements do not include the operations of the Little Rock plant. The disclosure of the Little Rock plant as
discontinued operations and the pro forma presentation of the Little Rock plant have not been made because the
Company has determined that the historical revenues and net income are not material to the Company for fiscal
2009 and 2008.
NOTE 3.
INVENTORIES
A summary of inventories follows (in thousands):
Finished product
Supplies and other
January 1,
2011
$ 40,927
4,679
$ 45,606
January 2,
2010
$ 16,211
2,846
$ 19,057
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
Land
Buildings and improvements
Machinery and equipment
Vehicles
Aircraft
Construction in process
Accumulated depreciation
January 1,
2011
$ 44,864
110,988
336,856
91,015
11,650
36,312
631,685
(238,265)
$ 393,420
January 2,
2010
$ 18,386
52,059
244,962
56,221
–
3,919
375,547
(223,565)
$ 151,982
NOTE 5.
INTANGIBLE ASSETS
The gross carrying amount of intangible assets not subject to amortization and intangible assets subject to
amortization is as follows (in thousands):
Indefinite Lived Intangible Assets
Trade Names
Finite Lived Intangible Assets:
Routes
Permits
Non-compete agreements
Trade Names
Royalty, consulting and leasehold
January 1, 2011
January 2, 2010
$ –
–
$ 68,028
20,500
2,491
–
388
91,407
$ 92,002
92,002
$ 96,938
251,413
6,012
539
739
355,641
Page 80
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
Accumulated Amortization:
Routes
Permits
Non-compete agreements
Trade Names
Royalty, consulting and leasehold
Total Intangible assets, less
accumulated amortization
(48,361)
(5,563)
(2,417)
(2)
(346)
(56,689)
(44,731)
(3,725)
(2,329)
–
(324)
(51,109)
$ 390,954
$ 40,298
Gross intangible routes, permits, trade names, non-compete agreements and royalty, consulting and leasehold
increased in fiscal 2010 by approximately $352.6 million consisting of approximately $349.8 million from the
Griffin Transaction and $2.8 million from the Nebraska Transaction as discussed in Note 2. Amortization
expense for the three years ended January 1, 2011, January 2, 2010 and January 3, 2009, was approximately $5.6
million, $3.8 million and $5.2 million, respectively. Amortization expense for the next five fiscal years is
estimated to be $28.0 million, $27.9 million, $27.8 million, $27.8 million and $27.1 million.
NOTE 6. GOODWILL
Changes in the carrying amount of goodwill (in thousands):
Balance at January 2, 2010
Goodwill
Accumulated impairment losses
Goodwill acquired during year
Impairment losses
Balance at January 1, 2011
Goodwill
Accumulated impairment losses
Rendering
$ 65,557
(13,864)
51,693
242,806
–
Restaurant
Services
$ 29,442
(2,050)
27,392
2,910
–
Bakery
Total
$ –
–
–
51,462
–
$ 94,999
(15,914)
79,085
297,178
–
308,363
(13,864)
$294,499
32,352
(2,050)
$ 30,302
51,462
–
$ 51,462
392,177
(15,914)
$376,263
Certain of the Company’s rendering facilities are highly dependent on one or few suppliers. It is reasonably
possible that certain of those suppliers could cease their operations or choose a competitor’s services which
could have a significant impact on these facilities.
Based on the Company’s annual impairment testing at the end of the fourth quarter of fiscal 2008 it was
determined that goodwill was impaired due to lower commodity markets and the loss of certain large raw
material suppliers in the fourth quarter of fiscal 2008, which resulted in the Company recording an impairment
charge of approximately $15.9 million based on future discounted net cash flows.
The process of evaluating goodwill for impairment involves the determination of the fair value of the Company’s
reporting units. In step one, the Company determined based on the discounted cash flows that one of the
Company’s reporting unit’s carrying value exceeded its fair value in fiscal 2008. In step two the Company is
required to compute the implied fair value of the reporting unit’s goodwill and compare it against the actual
carrying amount of goodwill for that reporting unit. This was determined in the same manner that goodwill
recognized in a business combination is determined. That is the fair value of the reporting unit was allocated to
all of the individual assets and liabilities of the reporting unit including any intangible assets, as if the reporting
unit had been acquired in a business combination and the fair value of the reporting unit determined in the first
step was the price paid to acquire the reporting unit.
Page 81
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
In fiscal 2009 and fiscal 2010, the fair values of the Company’s reporting units containing goodwill exceeded the
related carrying value.
NOTE 7. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
Compensation and benefits
Utilities and sewage
Accrued income, ad valorem, and franchise taxes
Reserve for self insurance, litigation, environmental
and tax matters (Note 17)
Medical claims liability
Griffin Transaction step up in basis (Note 2)
Other accrued expense
January 1,
2011
$ 24,920
5,106
2,374
9,042
4,193
13,639
22,424
$ 81,698
January 2,
2010
$ 17,159
3,781
3,233
5,087
4,230
–
14,032
$47,522
NOTE 8. LEASES
The Company leases ten processing plants and storage locations, land surrounding certain processing plants, four
office locations and a portion of its transportation equipment under operating leases. Leases are noncancellable
and expire at various times through the year 2040. Minimum rental commitments under noncancellable leases as
of January 1, 2011, are as follows (in thousands):
Period Ending Fiscal
2011
2012
2013
2014
2015
Thereafter
Total
Operating Leases
$ 14,355
10,745
7,951
5,377
3,533
16,845
$ 58,806
Darling through its wholly-owned subsidiary Griffin Industries, Inc., leases two real properties located in Butler,
Kentucky and real properties located in each of Jackson, Mississippi and Henderson, Kentucky from Martom
Properties, LLC, an entity owned in part by Martin W. Griffin, the Company’s Executive Vice President – Chief
Operations Officer – Griffin Industries. The lease term for each of the Butler properties and the Jackson
property is thirty years, and the Company has the right to renew such leases for two additional terms of ten years
each. The annual rental payment for each of the Butler properties is $30,000 for the first five years of the lease
term and is increased by the increase in the consumer price index every five years thereafter. The annual rental
payment for the Jackson property is $221,715 for the first five years of the lease term and is increased by the
increase in the consumer price index every five years thereafter. The lease term for the Henderson property is
ten years, and the Company has the right to renew such lease for four additional terms of five years each. The
annual rental payment for the Henderson property is $60,000 for the first five years of the lease term and is
increased by the increase in the consumer price index every five years thereafter. Under the terms of each lease,
the Company has a right of first offer and right of first refusal for each of the properties.
Rent expense for the fiscal years ended January 1, 2011, January 2, 2010 and January 3, 2009 was $9.7 million,
$9.4 million and $8.6 million, respectively.
Page 82
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
NOTE 9. DEBT
Credit Agreement
On December 17, 2010, the Company entered into a $625 million credit agreement (the “Credit Agreement”).
The Credit Agreement provides for senior secured credit facilities (the “Senior Secured Facilities”) in the
aggregate principal amount of $625.0 million comprised of a five-year revolving loan facility of $325.0 million
(approximately $75.0 million of which will be available for letter of credit sub-facility and $15.0 million of
which will be available for a swingline sub-facility) and a six-year term loan facility of $300.0 million. As of
January 1, 2011, the Company has borrowed all $300.0 million under the term loan facility, which provides for
scheduled quarterly amortization payments of $0.75 million over a six-year term ending with a final installment
in the amount of all term loans then outstanding due and payable on December 17, 2016. The Company has the
right to prepay the term loan without penalty, but any amounts that have been repaid may not be reborrowed.
The revolving credit facility has a five-year term ending December 17, 2015. The Company used the proceeds
of the term loan facility and a portion of the revolving loan facility to pay a portion of the consideration of its
acquisition of Griffin, to pay related fees and expenses and to provide for working capital needs and general
corporate purposes.
The Credit Agreement allows for borrowings at per annum rates based on the following loan types. With respect
to any revolving facility loan, i) an alternate base rate means a rate per annum equal to the greatest of (a) the
prime rate (b) the federal funds effective rate (as defined in the Credit Agreement) plus ½ to 1% and (c) the
adjusted London Inter-Bank Offer Rate (“LIBOR”) for a month interest period plus 1%, plus in each case, a
margin determined by reference to a pricing grid under the Credit Agreement and adjusted according to the
Company’s adjusted leverage ratio, and, ii) Eurodollar rate loans bear interest at a rate per annum based on the
then applicable LIBOR multiplied by the statutory reserve rate plus a margin determined by reference to a
pricing grid and adjusted according to the Company’s adjusted leverage ratio. With respect to an alternate base
rate loan that is a term loan, at no time shall the alternate base rate be less than 2.50% per annum, plus the term
loan alternate base rate margin of 2.50%. With respect to a LIBOR loan that is a term loan, at no time shall the
LIBOR rate applicable to the term loans (before giving effect to any adjustment for reserve requirements) be less
than 1.50% per annum, plus the term loan LIBOR margin of 3.50%. At January 1, 2011 under the Credit
Agreement, the interest rate for the $300.0 million of the term loan that was outstanding was based on LIBOR
plus a margin of 3.5% per annum for a total of 5.0% per annum. The interest rate for $160.0 million of the
revolver loan amount outstanding was based on LIBOR plus a margin of 3.25% per annum for a total of
3.5625% per annum.
The Credit Agreement contains various customary representations and warranties by the Company, which
include customary use of materiality, material adverse effect and knowledge qualifiers. The Credit Agreement
also contains (a) certain affirmative covenants that impose certain reporting and/or performance obligations on
the Company, (b) certain negative covenants that generally prohibit, subject to various exceptions, the Company
from taking certain actions, including, without limitation, incurring indebtedness, making investments, incurring
liens, paying dividends, and engaging in mergers and consolidations, sale leasebacks and sales of assets, (c)
financial covenants such as maximum total leverage ratio and a minimum fixed charge coverage ratio and (d)
customary events of default (including a change of control). Obligations under the Credit Agreement may be
declared due and payable upon the occurrence of such customary events of default.
On December 17, 2010, the Company repaid the balance plus accrued interest on the term facility under the
former credit agreement and incurred a write-off of deferred loan costs of approximately $0.9 million.
Page 83
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
Senior Notes
On December 17, 2010, Darling issued $250.0 million aggregate principal amount of its 8.5% Senior Notes due
2018 (the “Notes”) under an indenture, dated as of December 17, 2010 (the “Original Indenture”), among
Darling, Darling National LLC (“Darling National”), and U.S. Bank National Association, as trustee
(the “Trustee”). The Notes were sold pursuant to a purchase agreement dated December 3, 2010 among the
Company, the guarantors named therein and the initial purchasers named therein (the “Initial Purchasers”), at an
issue price of 100.0%. Darling used the net proceeds from the sale of the Notes to finance in part the cash
portion of the purchase price to be paid in connection with Darling’s acquisition of Griffin.
The Notes will mature on December 15, 2018. The Company will pay interest on June 15 and December 15 of
each year, commencing on June 15, 2011. Interest on the Notes will accrue at a rate of 8.5% per annum and be
payable in cash.
The Company is not required to make any mandatory redemption or sinking fund payments with respect to the
Notes. If a Change of Control (as defined in the Indenture) occurs, unless the Company has exercised its right to
redeem all the Notes as described below, each holder will have the right to require the Company to repurchase
all or any part (equal to $1,000 or an integral multiple thereof) of such holder’s Notes at a purchase price in cash
equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to the date of
purchase, subject to the right of holders of record on the relevant record date to receive interest due on the
relevant interest payment date. If the Company or its subsidiaries engage in certain Asset Dispositions (as
defined in the Indenture), the Company generally must, within specific periods of time, either prepay, repay or
repurchase certain of its or its restricted subsidiaries’ indebtedness or make an offer to purchase a principal
amount of the Notes and certain other debt equal to the excess net cash proceeds, or invest the net cash proceeds
from such sales in additional assets. The purchase price of the Notes will be 100% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of purchase. The Company may at any time and
from time to time purchase Notes in the open market or otherwise.
The Company may redeem some or all of the Notes at any time prior to December 15, 2014, at a redemption
price equal to 100% of the principal amount of the Notes redeemed, plus accrued and unpaid interest to the
redemption date and an Applicable Premium (as defined below) as of the date of redemption subject to the rights
of holders on the relevant record date to receive interest due on the relevant interest payment date. The
“Applicable Premium” means, with respect to any Note on any redemption date, the greater of: (a) 1.0% of the
principal amount of such Note; and (b) the excess, if any, of (i) the present value at such redemption date of (A)
the redemption price of such Note at December 15, 2014 (such redemption price being set forth in the table
below), plus (B) all required interest payments due on such Note through December 15, 2014 (excluding accrued
but unpaid interest to the redemption date), computed using a discount rate equal to the applicable treasury rate
as of such redemption date plus 50 basis points; over (ii) the principal amount of such Note.
On and after December 15, 2014, the Company may redeem all or, from time to time, a part of the Notes
(including any additional 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
Notes, if any, to 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 December 15 of the years indicated below:
Year
2014
2015
2016 and thereafter
Percentage
104.250%
102.125%
100.000%
Page 84
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
In addition, until December 15, 2013, the Company may, at its option, redeem up to 35% of the original
principal amount of the Notes and any issuance of additional Notes with the net cash proceeds of one or more
equity offerings at a redemption price equal to 108.5% of the principal amount thereof, plus accrued and unpaid
interest, if any, to 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 65% of the original principal
amount of the Notes and any issuance of additional Notes remains outstanding immediately after each such
redemption; provided further that the redemption occurs within 90 days after the closing of such equity offering.
The Indenture contains covenants limiting Darling’s ability and the ability of its restricted subsidiaries to, among
other things; incur additional indebtedness or issue preferred stock; pay dividends on or make other distributions
or repurchase of Darling’s capital stock or make other restricted payments; create restrictions on the payment of
dividends or other 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.
Holders of the Notes have the benefit of registration rights. In connection with the issuance of the Notes,
Darling and the Guarantors entered into a registration rights agreement (the “Notes Registration Rights
Agreement”) with the representative of the Initial Purchasers. Darling and the Guarantors have agreed to
consummate a registered exchange offer for the Notes within 270 days after the date of the Merger. Darling and
the Guarantors have agreed to file and keep effective for a certain time period a shelf registration statement for
the resale of the Notes if an exchange offer cannot be effected and under certain other circumstances. Darling
will be required to pay additional interest on the Notes if it fails to timely comply with its obligations under the
Notes Registration Rights Agreement until such time as it complies.
The Indenture also provides for customary events of default, including, without limitation, payment defaults,
covenant defaults, cross acceleration defaults to certain other indebtedness in excess of specified amounts,
certain events of bankruptcy and insolvency and judgment defaults in excess of specified amounts. If any such
event of default occurs and is continuing under the Indenture, the Trustee or the holders of at least 25% in
principal amount of the total outstanding Notes may declare the principal, premium, if any, interest and any other
monetary obligations on all the then outstanding Notes issued under the Indenture to be due and payable
immediately.
The Credit Agreement and the Notes consisted of the following elements at January 1, 2011 and January 2,
2010, respectively (in thousands):
Senior Notes
8.5% Senior Notes due 2018
$ 250,000
$ –
January 1,
2011
January 2,
2010
Credit Agreement and Former Credit Agreement:
Term Loan
Revolving Credit Facility:
Maximum availability
Borrowings outstanding
Letters of credit issued
Availability
$ 300,000
$ 32,500
$ 325,000
160,000
23,383
$ 141,617
$ 125,000
–
15,852
$ 109,148
In connection with the Credit Agreement and the Notes the Company incurred approximately $24.0 million of
deferred loan costs.
Page 85
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
The obligations under the Credit Agreement are guaranteed by Darling National, Griffin, and its subsidiary,
Craig Protein Division, Inc (“Craig Protein”) and are secured by substantially all of the property of the
Company, including a pledge of 100% of the stock of all material domestic subsidiaries and 65% of the capital
stock of certain foreign subsidiaries. The Notes are guaranteed on an unsecured basis by Darling’s existing
restricted subsidiaries, including Griffin and all of its subsidiaries, other than Darling’s foreign subsidiaries, its
captive insurance subsidiary and any inactive subsidiary with nominal assets. The Notes rank equally in right of
payment to any existing and future senior debt of Darling. The Notes will be effectively junior to existing and
future secured debt of Darling and the guarantors, including debt under the Credit Agreement, to the extent of
the value of assets securing such debt. The Notes will be structurally subordinated to all of the existing and
future liabilities (including trade payables) of each of the subsidiaries of Darling that do not guarantee the Notes.
The guarantees by the Guarantors (the “Guarantees”) rank equally in right of payment to any existing and future
senior indebtedness of the guarantors. The Guarantees will be effectively junior to existing and future secured
debt of the Guarantors including debt under the Credit Agreement, to the extent the value of the assets securing
such debt. The Guarantees will be structurally subordinated to all of the existing and future liabilities (including
trade payables) of each of the subsidiaries of each Guarantor that do not guarantee the Notes.
As of January 1, 2011, the Company believes it is in compliance with all of the financial covenants, as well as all
of the other covenants contained in the Credit Agreement and Indenture.
Debt consists of the following (in thousands):
Credit Agreement:
Revolving Credit Facility
Term Loan
8.5% Senior Notes due 2018
Other Notes
Less Current Maturities
January 1,
2011
January 2,
2010
$ 160,000
300,000
250,000
39
710,039
3,009
$ 707,030
$ –
32,500
–
48
32,548
5,009
$27,539
Maturities of long-term debt at January 1, 2011 follow (in thousands):
2011
2012
2013
2014
2015
thereafter
Contractual
Debt Payment
$ 3,009
2,260
3,010
3,760
163,000
535,000
$ 710,039
As of January 1, 2011, current maturities of debt of $3.0 million will be due during fiscal 2011, which include
scheduled term loan principal payments of $0.75 million due each calendar quarter.
The Company entered into a Bridge Facility (the “Bridge Facility”) commitment with the parties to the Senior
Secured Facilities in the aggregate principal amount not to exceed $250.0 million. The proceeds of the Bridge
Facility if drawn were to be used to finance in part the Griffin Transaction. The Bridge Facility was available to
ensure that the Griffin Transaction would close if certain unsecured financing related to the Company’s
acquisition did not get issued prior to the closing of the Merger. The Company incurred a commitment fee of
approximately $3.1 million for the Bridge Facility. The Company recorded the commitment fee as interest
expense when the Bridge Facility expired.
Page 86
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
NOTE 10. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist of the following (in thousands):
Accrued pension liability (Note 13)
Reserve for self insurance, litigation, environmental and tax
matters (Note 17)
Other
January 1,
2011
January 2,
2010
$18,068
$19,060
26,756
5,936
$50,760
14,610
2,473
$36,143
NOTE 11. INCOME TAXES
FASB authoritative guidance prescribes accounting for and disclosure of uncertain tax positions (“UTP”) and
requires application of a more likely than not threshold to the recognition and de-recognition of UTP. FASB
authoritative guidance permits recognition of the amount of tax benefit that has a greater than 50 percent
likelihood of being realized upon settlement. A change in judgment related to the expected ultimate resolution
of UTP is recognized in earnings in the quarter of change. At January 1, 2011 and January 2, 2010, the
Company had $0.1 million, respectively of gross unrecognized tax benefits; if recognized, the net impact on the
Company’s effective tax rate would be less than $0.1 million, respectively. The Company recognizes accrued
interest and penalties, as appropriate, related to unrecognized tax benefits as a component of income tax expense.
In fiscal 2010, the Company’s major taxing jurisdictions include the U.S. (federal and state). The Company is
no longer subject to federal examinations on years prior to fiscal 2006. The number of years open for state tax
audits varies, depending on the tax jurisdiction, but is generally from three to five years. Currently, several state
examinations are in progress. The Company does not anticipate that any state or federal audits will have a
significant impact on the Company’s results of operations or financial position. In addition, the Company does
not reasonably expect any significant changes to the estimated amount of liability associated with the Company’s
unrecognized tax positions in fiscal 2011.
Income tax expense/(benefit) attributable to income from continuing operations before income taxes consists of
the following (in thousands):
Current:
Federal
State
Deferred:
Federal and State
January 1,
2011
January 2,
2010
January 3,
2009
$ 21,491
4,356
253
$ 26,100
$ 11,741
2,702
10,646
$ 25,089
$ 29,193
5,152
1,009
$ 35,354
Income tax expense for the years ended January 1, 2011, January 2, 2010 and January 3, 2009, differed from the
amount computed by applying the statutory U.S. federal income tax rate to income from continuing operations
before income taxes as a result of the following (in thousands):
Page 87
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
Computed “expected” tax expense
State income taxes
Section 199 deduction
Non-deductible employee compensation
Tax credits
Reversal of reserve for taxes
Other, net
January 1,
2011
$ 24,620
2,679
(2,079 )
363
(80 )
(52 )
649
$ 26,100
January 2,
2010
$ 23,408
2,491
(744 )
201
(441 )
(212 )
386
$ 25,089
January 3,
2009
$ 31,471
3,436
(1,257 )
993
(128 )
(19 )
858
$ 35,354
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
deferred tax liabilities at January 1, 2011 and January 2, 2010 are presented below (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Loss contingency reserves
Employee benefits
Pension liability
Intangible assets amortization, including taxable goodwill
Other
Total gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Intangible assets amortization, including taxable goodwill
Property, plant and equipment depreciation
Other
Total gross deferred tax liabilities
January 1,
2011
January 2,
2010
$ 1,754
9,941
3,453
12,623
233
6,705
34,709
(45 )
34,664
–
(23,192 )
(10,438 )
(33,630 )
$ 1,034
$ 2,196
7,330
3,070
14,088
552
4,290
31,526
(175 )
31,351
–
(21,788 )
(8,682 )
(30,470 )
$ 881
At January 1, 2011, the Company had net operating loss carryforwards for federal income tax purposes of
approximately $4.7 million expiring through 2020. The availability of the net operating loss carryforwards to
reduce future taxable income is subject to various limitations. As a result of the change in ownership which
occurred pursuant to the May 2002 recapitalization, utilization of the net operating loss carryforwards is limited
to approximately $0.7 million per year for the remaining life of the net operating losses.
The net change in the total valuation allowance was a decrease of approximately $0.1 million for the year ended
January 1, 2011 due to the expiration of net operating loss carryforwards. The Company has assessed that it is
more likely than not that it will generate sufficient taxable income in future periods to realize its deferred income
tax assets.
Page 88
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
NOTE 12. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
On December 21, 2010 a special meeting of the stockholders was held and a proposal to approve an amendment
to Darling’s restated certificate of incorporation, as amended, to increase the total number of authorized shares
of common stock, par value $0.01, from 100,000,000 to 150,000,000 was approved.
On May 11, 2005, the shareholders approved the Company’s 2004 Omnibus Incentive Plan (the “2004 Plan”).
The 2004 Plan replaced both the 1994 Employee Flexible Stock Option Plan and the Non-Employee Directors
Stock Option Plan and thus broadens the array of equity alternatives available to the Company. On May 11,
2010, the shareholders reapproved the performance measures under the 2004 Plan. Under the 2004 Plan, the
Company is allowed to grant stock options, stock appreciation rights, non-vested and restricted stock (including
performance stock), restricted stock units (including performance units), other stock-based awards, non-employee
director awards, dividend equivalents and cash-based awards. There are up to 6,074,969 common shares
available under the 2004 Plan which may be granted to any participant in any plan year as defined in the 2004
Plan. Some of those shares are subject to outstanding awards as detailed in the tables below. To the extent these
outstanding awards are forfeited or expire without exercise, the shares will be returned to and available for future
grants under the 2004 Plan. The 2004 Plan’s purpose is to attract, retain and motivate employees, directors and
third party service providers of the Company and to encourage them to have a financial interest in the Company.
The 2004 Plan is administered by the Compensation Committee (the “Committee”) of the Board of Directors.
The Committee has the authority to select plan participants, grant awards, and determine the terms and conditions
of such awards as defined in the 2004 Plan. The Company’s stock options granted under the 2004 Plan generally
terminate 10 years after date of grant. At January 1, 2011, the number of common shares available for issuance
under the 2004 Plan was 1,933,217.
The following is a summary of stock-based compensation granted during the years ended January 1, 2011,
January 2, 2010 and January 3, 2009.
Nonqualified Stock Options. On February 27, 2008, the Company granted 20,000 nonqualified stock options in
the aggregate to the non-employee directors. The exercise price for February 27, 2008 stock options was $13.55
per share (fair market value at grant date). On May 6, 2008 following a new director’s initial election to the
board by the stockholders, the Company granted 4,000 nonqualified stock options to the most recent non-
employee director. The exercise price for the May 6, 2008 stock options was $16.20 per share (fair market value
at the grant date). On March 10, 2009, the Company granted 24,000 nonqualified stock options in the aggregate
to the non-employee directors. The exercise price for the March 10, 2009 stock options was $2.94 per share
(fair market value at the close of the trading day immediately preceding the grant date). On March 9, 2010, the
Company granted 24,000 nonqualified stock options in the aggregate to the non-employee directors. The
exercise price for March 9, 2010 stock options was $8.21 per share (fair market value at the close of the trading
day immediately preceding the grant date). All of the non-employee director stock options vest 25 percent six
months after the grant date and 25 percent on each of the first three anniversary dates thereafter.
On March 9, 2010, the Company’s board of directors granted 53,722 nonqualified stock options in the aggregate
under the Company’s long term incentive program to certain of the Company’s employees. The exercise price
for March 9, 2010 stock options was $8.21 per share (fair market value at the close of the trading day
immediately preceding the grant date). All of these awards vest 25 percent upon grant and 25 percent on each of
the first three anniversary dates of the grant thereafter.
Incentive Stock Options. For fiscal 2010, 2009 and 2008 the Company did not issue any incentive stock options.
A summary of stock option activity as of January 1, 2011 and changes during the year ended is presented below.
Page 89
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
Options outstanding at January 2, 2010
Granted
Exercised
Forfeited
Expired
Options outstanding at January 1, 2011
Options exercisable at January 1, 2011
Number of
shares
810,205
77,722
(20,905)
–
–
867,022
790,727
Weighted-avg.
exercise price
per share
Weighted-avg.
remaining
contractual life
$ 3.75
8.21
1.68
N/A
N/A
$ 4.20
$ 3.85
4.5 years
4.0 years
The fair value of each stock option grant under the Company’s stock option plan was estimated on the date of
grant using the Black Scholes option-pricing model with the following weighted average assumptions and results
for fiscal 2010, 2009 and 2008.
Weighted Average
Expected dividend yield
Risk-free interest rate
Expected term
Expected volatility
Fair value of options granted
2010
2009
2008
0.0%
2.73%
5.77 years
60.2%
$4.80
0.0%
2.31%
5.80 years
58.4%
$1.76
0.0%
3.24%
5.80 years
42.0%
$6.23
The expected lives for options granted during fiscal 2010, 2009 and 2008 were computed using the simplified
method.
At January 1, 2011, $7.8 million of total future equity-based compensation expense (determined using the Black-
Scholes option pricing model and Monte Carlo model for non-vested stock grants) related to outstanding non-
vested options and stock awards is expected to be recognized over a weighted average period of 1.9 years.
For the years ended January 1, 2011 and January 2, 2010, the amount of cash received from the exercise of
options was insignificant and the related tax benefits were approximately $0.2 million and less than $0.1 million,
respectively. For the year ended January 3, 2009 the amount of cash received from the exercise of options was
approximately $0.3 million and the related tax benefits were approximately $2.3 million. The total intrinsic
value of options exercised for the years ended January 1, 2011, January 2, 2010 and January 3, 2009 was
approximately $0.1 million, $0.1 million and $6.4 million, respectively. The fair value of shares vested for the
years ended January 1, 2011, January 2, 2010 and January 3, 2009 was approximately $2.0 million, $0.7 million
and $0.6 million, respectively. At January 1, 2011, the aggregate intrinsic value of options outstanding was
approximately $7.9 million and the aggregate intrinsic value of options exercisable was approximately $7.5
million.
Non-Vested Stock Awards. On March 3, 2008, the Company’s board of directors granted 67,411 shares of stock
under the Company’s long term incentive program. At the grant date 16,853 shares vested immediately and the
remaining stock awards vest over the next three anniversary dates of the grant in equal installments. On March
10, 2009, the Company’s board of directors granted 410,076 shares of stock, 366,326 shares were under the
Company’s long term incentive program and 43,750 shares were granted as a one-time issuance to other
employees not part of the Company’s long term incentive award program. At the March 10, 2009 grant date
102,518 shares vested immediately and the remaining stock awards vest over the next three anniversary dates of
the grants in equal installments. On March 9, 2010, the Company’s board of directors granted 241,183 shares of
stock, 161,183 shares were under the Company’s long term incentive program and 80,000 shares were granted as
a one-time issuance to other employees not part of the Company’s long term incentive award program. On
November 11, 2010, the Company’s board of directors approved award opportunities for 640,000 non-vested
Page 90
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
restricted shares at $12.53 (fair market value at grant date) under the Company’s 2010 Special Incentive
Program (as more fully described below). These restricted shares vest upon the closing of the Merger and
achievement of certain varying market conditions over vesting periods spanning 4 years.
A summary of the Company’s non-vested stock awards as of January 1, 2011, and changes during the year ended
is as follows:
Stock awards outstanding January 2, 2010
Shares granted
Shares vested
Shares forfeited
Stock awards outstanding January 1, 2011
Non-Vested
Shares
341,261
881,183
(216,336 )
–
1,006,108
Weighted Average
Grant Date
Fair Value
$ 4.02
8.98
6.89
–
$ 7.75
Restricted Stock Awards. On March 9, 2006, the Company's Board of Directors approved a Non-Employee
Director Restricted Stock Award Plan (as subsequently amended, the "Director Restricted Stock Plan") pursuant
to and in accordance with the 2004 Plan in order to attract and retain highly qualified persons to serve as non-
employee directors and to more closely align such directors' interests with the interests of the stockholders of the
Company by providing a portion of their compensation in the form of Company common stock.
Under the Director Restricted Stock Plan, $20,000 in restricted Company common stock (the "Restricted Stock")
will be awarded to each non-employee director on the fourth business day after the Company releases its
earnings for its prior completed fiscal year (the "Date of Award"). The amount of restricted stock to be issued
will be calculated using the closing price of the Company’s common stock on the third business day after the
Company releases its earnings. The Restricted Stock will be subject to a right of repurchase at $0.01 per share
upon termination of the holder as a member of the Company's board of directors for cause and will not be
transferable. These restrictions will lapse with respect to 100% of the Restricted Stock upon the earliest to occur
of (i) ten years after the Date of Award, (ii) a Change of Control (as defined in the 2004 Plan), and (iii)
termination of the non-employee director's service with the Company, other than for "cause" (as defined in the
Director Restricted Stock Plan). On March 9, 2010, the Company issued 14,616 share of restricted stock in the
aggregate to its non-employee directors under the Director Restricted Stock Plan. On March 10, 2009, the
Company issued 40,818 shares of restricted stock in the aggregate to its non-employee directors under the
Director Restricted Stock Plan. On March 3, 2008 and March 11, 2008, the Company issued 7,190 and 1,509
shares of restricted stock in the aggregate to its non-employee directors under the Director Restricted Stock Plan.
A summary of the Company’s directors’ restricted stock awards as of January 1, 2011, and changes during the
year ended is as follows:
Stock awards outstanding January 2, 2010
Restricted shares granted
Restricted shares where the restriction lapsed
Restricted shares forfeited
Stock awards outstanding January 1, 2011
Restricted
Shares
79,532
14,616
–
–
94,148
Weighted Average
Grant Date
Fair Value
$ 5.03
8.21
N/A
N/A
$ 5.52
Long-Term Incentive Opportunity Awards. The Committee has adopted a Long-Term Incentive Plan (the
“LTIP”) for the Company’s key employees, as a subplan under the terms of the 2004 Plan. The principal
purpose of the LTIP is to encourage the Company’s executives to enhance the value of the Company and, hence,
Page 91
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
the price of the Company’s stock and the stockholders’ return. In addition, the LTIP is designed to create
retention incentives for the individual and to provide an opportunity for increased equity ownership by
executives. The Committee awarded dollar value performance based restricted stock and stock option
opportunities under the LTIP for fiscal 2010 to certain of the Company’s officers, including the Chief Executive
Officer and the Executive Vice Presidents of Finance and Administration, Operations, Commodities, Legal, and
Sales and Services (the “2010 Restricted Stock and Option Awards”). The restricted stock and stock options
underlying the 2010 Restricted Stock and Option Awards are issued only if a predetermined financial objective
is met by the Company. The Company met the financial objective for fiscal 2010. Accordingly, in accordance
with the terms of the 2010 Restricted Stock and Option Awards, it is anticipated that the restricted stock
representing 75% of the potential award and stock options representing 25% of the potential award will be
granted and issued to the executives on the fourth business day after the Company releases its annual financial
results for fiscal 2010. The amount of restricted stock and stock options to be issued was predetermined using
the closing market price of the Company’s common stock on January 8, 2010, the date of adoption of the LTIP
program for fiscal 2010. The stock options will have an exercise price equal to the fair market value of the
Company’s common stock on the third business day after the Company releases its annual financial results.
The Committee awarded dollar value performance based restricted stock and stock option opportunities under
the LTIP for fiscal 2009 to certain of the Company’s officers, including the Chief Executive Officer and the
Executive Vice Presidents of Finance and Administration, Operations, Commodities, Legal, and Sales and
Services (the “2009 Restricted Stock and Option Awards”). The restricted stock and stock options underlying
the 2009 Restricted Stock and Option Awards are issued only if a predetermined financial objective is met by the
Company. The Company met the financial objective for fiscal 2009. Accordingly, in accordance with the terms
of the 2009 Restricted Stock and Option Awards, the restricted stock representing 75% of the award and stock
options representing 25% of the award were granted and issued to the executives on the fourth business day after
the Company released its annual financial results for fiscal 2009. The amount of restricted stock and stock
options granted and issued was calculated using the closing price of the Company’s common stock on the third
business day after the Company released its annual financial results for fiscal 2009. The stock options have an
exercise price equal to the fair market value of the Company’s common stock on the third business day after the
Company released its annual financial results.
The above 2010 Restricted Stock and Option Awards and 2009 Restricted Stock and Option Awards are treated
as a liability until the grant date when the number of shares and options to be issued is known, and then it
becomes equity-classified. At January 1, 2011 and January 2, 2010 the Company recorded a liability of
approximately $2.6 million and $1.8 million on the balance sheet for the long-term incentive opportunities.
2010 Special Incentive Program Awards. On November 11, 2010, the Committee approved a 2010 Special
Incentive Program (the “2010 Special Incentive Program”) for certain key employees of the Company pursuant
to the Company’s 2004 Omnibus Incentive Plan, conditioned upon the closing of the Merger. Under the 2010
Special Incentive Program, certain key employees (the “Participating Employees”) upon successful completion
of the Merger became eligible to receive a total of 640,000 shares of restricted stock. The stock vests upon the
closing of the Merger and achievement of certain varying market conditions over vesting periods spanning 4
years. A Participating Employee will not be entitled to receive any grant under the Restricted Stock Award if
such Participating Employee’s employment with the Company has terminated, voluntarily or involuntarily, prior
to the determination that the conditions to receive the Restricted Stock Award have been fulfilled.
NOTE 13. EMPLOYEE BENEFIT PLANS
The Company has retirement and pension plans covering substantially all of its employees. Most retirement
benefits are provided by the Company under separate final-pay noncontributory and contributory defined benefit
and defined contribution plans for all salaried and hourly employees (excluding those covered by union-
sponsored plans) who meet service and age requirements. Defined benefits are based principally on length of
service and earnings patterns during the five years preceding retirement.
Page 92
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
Effective January 1, 2008, the Darling National LLC Pension Retirement Plan was merged into the Darling
International Inc. Hourly Employees’ Retirement Plan, which plan was then amended and restated. Employees
from both plans are entitled to their accrued benefit as of December 31, 2007 under their prior plan design, plus
benefit accruals after January 1, 2008 using the new benefit of $20 for each year of service with no cap on
service years with no effect on accumulated benefits. Previously, these hourly employees had been accruing
$20-$30 per year of service, depending on location of employment.
Also effective January 1, 2008, the Darling International Inc. Salaried Employees’ Retirement Plan, a defined
benefit plan, was amended. Effective January 1, 2008, all of the Company’s eligible salaried employees
participate in this plan, including all former Darling National salaried employees who did not have a defined
benefit plan prior to January 1, 2008. All eligible salaried employees are entitled to their accrued benefit as of
December 31, 2007, which accrued benefit is an amount equal to 1.8% times years of service (up to 25 years)
times final average pay plus 0.5% for each additional service year beyond 25 years, with a total service year cap
of 40 years with no effect on accumulated benefits. Effective January 1, 2008, for service years earned going
forward, the benefit accrual will be 0.25% times years of service times final average pay.
Also effective January 1, 2008, the Darling National LLC Retirement Savings Plan was amended and restated to,
among other things, update the plan for the Economic Growth and Tax Relief Reconciliation Act and change the
name of the plan to the Darling International Inc. Hourly 401(k) Savings Plan. Effective January 1, 2008, all of
the Company’s hourly employees are eligible to participate in this plan, which allows for elective deferrals, an
employer match equal to 100% of the first $10 per pay period deferred by a participant, with a maximum of
$520 per year, and an employer contribution equal to $520 per year. Previously, certain of the Company’s
hourly employees were only given the opportunity to make deferrals. The $520 employer contribution will be a
new contribution for all participating hourly employees. This plan accepted the transfer of assets and liabilities
of the hourly employees that had account balances in the Darling International Inc. 401(k) Savings Plan which
existed prior to January 1, 2008. The Company’s matching portion to the Darling International Inc. Hourly
401(k) Savings plan for fiscal 2010, fiscal 2009 and 2008 was approximately $0.7 million, $0.7 million and $0.6
million, respectively.
Effective January 1, 2008, the Darling International Inc. 401(k) Savings Plan, a defined contribution plan, was
amended and restated and became the Darling International Inc. Salaried 401(k) Savings Plan and now includes
all eligible salaried employees. This plan received the assets and liabilities of participating salaried employees
under the Darling National LLC Retirement Savings Plan. Effective January 1, 2008, the Darling International
Inc. Salaried 401(k) Savings Plan includes an employer contribution based on age (ranging from 2-5% of
compensation per year), and will continue to allow for employee deferrals. Previously, only the Darling National
employees received an employer match, which was equal to 100% of the first $10 per pay period deferred by a
participant, with a maximum of $520 per year. The Company’s matching portion to the Darling International
Inc. Salaried 401(k) Savings Plan for fiscal 2010, fiscal 2009 and 2008 was approximately $1.5 million, $1.5
million and $1.4 million, respectively.
Griffin employees are covered under separate qualified profit-sharing plans that cover substantially all salaried
and office employees who qualify as to age and length of service and substantially all hourly employees other
than office employees. Each of these plans has an added 401(k) option, which includes a Griffin matching
contribution. For fiscal 2010 the amount of the Company’s profit-sharing and matching 401(k) match was
immaterial.
The Company recognizes the over-funded or under-funded status of the Company’s defined benefit post-
retirement plans as an asset or liability in the Company’s balance sheet, with changes in the funded status
recognized through comprehensive income in the year in which they occur.
The following table sets forth the plans’ funded status and amounts recognized in the Company’s consolidated
balance sheets based on the measurement date (January 1, 2011 and January 2, 2010) (in thousands):
Page 93
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
Change in projected benefit obligation:
Projected benefit obligation at beginning of period
Service cost
Interest cost
Actuarial loss
Benefits paid
Other
Projected benefit obligation at end of period
Change in plan assets:
Fair value of plan assets at beginning of period
Actual return on plan assets
Employer contribution
Benefits paid
Fair value of plan assets at end of period
Funded status
Net amount recognized
Amounts recognized in the consolidated balance
sheets consist of:
Non-current liability
Net amount recognized
Amounts recognized in accumulated other
comprehensive loss consist of:
Net actuarial loss
Prior service cost
Net amount recognized (a)
January 1,
2011
January 2,
2010
$ 103,159
1,056
5,959
4,996
(3,794 )
–
111,376
84,099
11,974
1,029
(3,794 )
93,308
(18,068 )
$ (18,068 )
$ 96,539
984
5,767
3,768
(3,914 )
15
103,159
60,276
12,812
14,925
(3,914 )
84,099
(19,060 )
$ (19,060 )
$ (18,068 )
$ (18,068 )
$ (19,060 )
$ (19,060 )
$ 32,146
264
$ 32,410
$ 35,866
375
$ 36,241
(a) Amounts do not include deferred taxes of $12.2 million and $13.7 million at January
1, 2011 and January 2, 2010, respectively.
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
January 1,
2011
$ 111,376
103,946
93,308
January 2,
2010
$ 103,159
96,082
84,099
Net pension cost includes the following components (in thousands):
Service cost
Interest cost
Expected return on plan assets
Net amortization and deferral
Net pension cost
January 1,
2011
$ 1,056
5,959
(6,389 )
3,242
$ 3,868
January 2,
2010
$ 984
5,767
(4,811 )
4,321
$ 6,261
January 3,
2009
$ 1,067
5,442
(6,603 )
472
$ 378
Page 94
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
Amounts recognized in accumulated other comprehensive income (loss) for the year ended (in thousands):
Actuarial gains recognized:
Reclassification adjustments
Actuarial (loss)/gain recognized during
the period
Prior service (cost) credit recognized:
Reclassification adjustments
Prior service cost arising during the period
2010
2009
$ 1,917
$ 2,558
361
2,592
68
–
$ 2,346
88
(9 )
$ 5,229
The estimated amount that will be amortized from accumulated other comprehensive loss into net periodic
pension cost in fiscal 2011 is as follows (in thousands):
Net actuarial loss
Prior service cost
2011
$ 2,724
90
$ 2,814
Weighted average assumptions used to determine benefit obligations were:
Discount rate
Rate of compensation increase
January 1,
2011
5.55%
4.16%
January 2,
2010
5.90%
4.08%
January 3,
2009
6.10%
4.08%
Weighted average assumptions used to determine net periodic benefit cost for the employee benefit pension
plans were:
Discount rate
Rate of increase in future compensation levels
Expected long-term rate of return on assets
January 1,
2011
5.90%
4.08%
7.85%
January 2,
2010
6.10%
4.08%
8.10%
January 3,
2009
6.00%
4.10%
8.10%
Consideration was made to the long-term time horizon for the plans’ benefit obligations as well as the related
asset class mix in determining the expected long-term rate of return. Historical returns are also considered, over
the long-term time horizon, in determining the expected return. Considering the overall asset mix of
approximately 60% equity and 40% fixed income, several years in the last ten years (except for 2008) having
strong double digit returns as well as several years of single digit losses, the Company believes it is reasonable to
expect a long-term rate of return of 7.85% for the plans’ investments as a whole.
Plan Assets
The Company’s pension plan weighted-average asset allocations at January 1, 2011 and January 2, 2010, by
asset category, are as follows:
Page 95
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
Asset Category
Equity Securities
Debt Securities
Other
Total
Plan Assets at
January 1,
2011
59.8%
40.2%
–%
100.0%
January 2,
2010
61.1%
38.9%
–%
100.0%
The investment objectives have been established in conjunction with a comprehensive review of the current and
projected financial requirements. The primary investment objectives are: 1) to have the ability to pay all benefit
and expense obligations when due; 2) to maximize investment returns within reasonable and prudent levels of
risk in order to minimize contributions; and 3) to maintain flexibility in determining the future level of
contributions.
Investment results are the most critical element in achieving funding objectives, while reliance on contributions
is a secondary element.
The investment guidelines are based upon an investment horizon of greater than ten years; therefore, interim
fluctuations are viewed with this perspective. The strategic asset allocation is based on this long-term
perspective. However, because the participants’ average age is somewhat older than the typical average plan
age, consideration is given to retaining some short-term liquidity. Analysis of the cash flow projections of the
plans indicates that benefit payments will continue to exceed contributions. The results of a thorough asset-
liability study completed during 2008 reinforced the appropriateness of the Company’s target asset allocation
ranges described herein.
Based upon the plans’ time horizon, risk tolerances, performance expectations, asset class constraints and asset-
liability study results, target asset allocation ranges are as follows:
Fixed Income
Domestic Equities
International Equities
35% - 45%
45% - 55%
7% - 13%
The fixed income allocation is invested in corporate and government bonds primarily denominated in U.S.
dollar, private and publicly traded mortgages, private placement debt and cash equivalents. The average
maturity of these issues does not exceed ten years. The portfolio is expected to be well-diversified.
The domestic equity allocation is invested in stocks traded on one of the U.S. stock exchanges. Securities
convertible into such stocks, convertible bonds and preferred stock, may also be purchased. The majority of the
domestic equities are invested in mutual funds that are well-diversified among growth and value stocks
categorized in large, mid and small cap asset classes. By definition, small cap investments carry greater risk than
large and mid cap, but also are expected to create greater returns over time than large and mid cap. By definition
large cap investments carry less risk than small and mid cap, and are expected to return less than small and mid
cap over time. By definition mid cap investments fall between small and large cap stocks concerning riskiness
and expected return. Small company definitions fluctuate with market levels but generally will be considered
companies with market capitalizations between $300 million and $2 billion. The portfolio will be diversified in
terms of individual company securities and industries. No individual equity or individual fixed income
investment comprised more than 1.5% of the defined benefit plans’ total assets (excluding U.S. government
issues).
Page 96
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
The international equity allocation is invested in companies whose stock is traded outside the U.S. and/or
companies that conduct the major portion of their business outside of the U.S. The portfolio may invest in
ADR’s. The emerging market portion of the international equity investment is held below 10% due to greater
volatility in the asset class. The portfolio is well-diversified in terms of companies, industries and countries.
All investment objectives are expected to be achieved over a market cycle anticipated to be a period of five to
seven years. Reallocations are performed on a monthly basis to retain target allocation ranges.
The following table presents fair value measurements for the Company’s defined benefit plans’ assets as
categorized using the fair value hierarchy under FASB authoritative guidance (in thousands):
Quoted Prices in
Active Markets for
Total
Fair Value
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(In thousands of dollars)
Balances as January 2, 2010
Fixed Maturities:
Long-term bonds
U.S. Government bonds
$ 29,879
2,193
Equity Securities:
Common stocks
Other equity interests
Totals
50,527
1,500
$ 84,099
Balances as January 1, 2011
$ —
—
—
—
—
$ 29,879
2,193
50,527
1,500
$ 84,099
$ —
—
—
—
$ —
Fixed Income:
Long Term
Short Term
Equity Securities:
Domestic equities
International equities
Totals
$ 32,734
4,741
$ 32,734
4,298
$ —
443
$ —
—
45,465
10,368
$ 93,308
45,465
10,368
$ 92,865
—
—
$ 443
—
—
$ —
In fiscal 2009 the defined benefit plans’ assets were 100% comprised of purchased units of pooled separate
accounts (“PSA”). The net assets values of the PSA’s are not publicly-quoted in an active market. The net
assets value of each PSA is based on the market value of the underlying investments. During fiscal 2010 the
Company increased its pension investment options allowing for investing directly into mutual funds whereby the
Company believes it gives the pension plan assets more options and a greater long term return potential. As a
result the Company has transferred its pension assets in fiscal 2010 from PSA accounts to assets nearly 100%
comprised of mutual funds, which are publicly traded in an active market. The particular shares used in the
defined benefit plans are either retirement plan shares or A-shares with no loads. The fair value of each mutual
fund is based on the market value of the underlying investments.
Contributions
The Company's funding policy for employee benefit pension plans is to contribute annually not less than the
minimum amount required nor more than the maximum amount that can be deducted for federal income tax
purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for
those expected to be earned in the future.
Page 97
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
Based on current actuarial estimates, the Company expects to make payments of approximately $2.0 million to
meet funding requirements for its pension plans in fiscal 2011.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in
thousands):
Year Ending
2011
2012
2013
2014
2015
Years 2016 – 2020
Pension Benefits
$4,670
4,760
4,890
5,380
5,720
33,340
The Company participates in several multi-employer 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. Current information with respect to the
Company's proportionate share of the over-and under-funded status of all actuarially computed value of vested
benefits over these pension plans’ net assets is not available. The Company’s portion of contributions to these
plans amounted to $2.9 million, $2.8 million and $2.8 million for the years ended January 1, 2011, January 2,
2010 and January 3, 2009, respectively.
The Company participates in several multi-employer pension plans which provide defined benefits to certain
employees covered by labor contracts. One multi-employer plan in which the Company participates gave
notification of a mass withdrawal termination for the plan year ended June 30, 2007. In April 2008 the Company
made a lump sum settlement payment to this multi-employer plan for approximately $1.4 million, which included
a release for any future liability. In June 2009, the Company received a notice of a mass withdrawal termination
and a notice of initial withdrawal liability from a multi-employer plan in which it participates. 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 multi-employer plan. As a result, the Company reduced
its liability to approximately $1.2 million. In fiscal 2010, another underfunded multi-employer plan in which the
Company participates gave notification of partial withdrawal liability. As of January 1, 2011, the Company has
an accrued liability of approximately $1.1 million representing the present value of scheduled withdrawal
liability payments under this multi-employer plan. While the Company has no ability to calculate a possible
current liability for under-funded multi-employer plans that could terminate or could require additional funding
under the Pension Protection Act of 2006, the amounts could be material.
NOTE 14. 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.
The Company makes limited use of derivative instruments to manage cash flow risks related to interest expense,
natural gas usage, diesel fuel usage and inventory. The Company does not use derivative instruments for trading
purposes. Interest rate swaps are entered into with the intent of managing overall borrowing costs by reducing
the potential impact of increases in interest rates on floating-rate long-term debt. Natural gas swaps and options
are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential impact
of seasonal weather demands on natural gas that increases natural gas prices. Heating oil swaps are entered into
with the intent of managing the overall cost of diesel fuel usage by reducing the potential impact of seasonal
Page 98
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
weather demands on diesel fuel that increases diesel fuel prices. Inventory swaps and options are entered into
with the intent of managing seasonally high concentrations of MBM, PM, BFT, PG, YG and BBP inventories by
reducing the potential impact of decreasing prices. At January 1, 2011, the Company had natural gas swaps
outstanding that qualified and were designated for hedge accounting as well as heating oil swaps and natural gas
swaps and options 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
On May 19, 2006, the Company entered into two interest rate swap agreements that are considered cash flow
hedges according to FASB authoritative guidance. Under the terms of these swap agreements, beginning June
30, 2006, the cash flows from the Company’s $50.0 million floating-rate term loan facility under the former
credit agreement had been exchanged for fixed-rate contracts that bear interest, payable quarterly. The first swap
agreement for $25.0 million matured April 7, 2012 bearing interest at 5.42%, which does not include the
borrowing spread per the former credit agreement, with amortizing payments that mirror the old term loan
facility. The second swap agreement for $25.0 million matured April 7, 2012 bearing interest at 5.415%, which
does not include the borrowing spread per the former credit agreement, with amortizing payments that mirror the
old term loan facility. The Company’s receive rate on each swap agreement was based on three-month LIBOR.
As a result of the Merger and entry into a new Credit Agreement the term loan that specifically related to these
interest swap transactions was repaid. As such, the Company discontinued and paid approximately $2.0 million
representing the fair value of these two interest swap transactions at the discontinuance date with the effective
portion in accumulated other comprehensive loss to be reclassified to income over the remaining original term of
the interest swaps.
In the fourth quarter of fiscal 2009, the Company entered into natural gas swap contracts that are considered cash
flow hedges. Under the terms of the natural gas swap contracts the Company fixed the expected purchase cost of
a portion of its plants expected natural gas usage through the first quarter of fiscal 2010. As of January 1, 2011
these cash flow hedges have expired and settled according to the contracts.
In fiscal 2010, the Company has entered into natural gas contracts that are considered cash flow hedges. Under
the terms of the natural gas swap contracts the Company fixed the expected purchase cost of a portion of its
plants expected natural gas usage through the second quarter of fiscal 2011. As of January 1, 2011, some of the
contracts have expired and settled according to the contracts while the remaining contract positions and activity
are disclosed below.
The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at
January 1, 2011 into earnings over the next 12 months will be approximately $1.0 million. As of January 1,
2011, approximately $0.3 million of losses have been reclassified into earnings as a result of the discontinuance
of cash flow hedges.
The following table presents the fair value of the Company’s derivative instruments as of January 1, 2011 and
January 2, 2010 (in thousands):
Page 99
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
Derivatives Designated
as Hedges
Natural gas swaps
Balance Sheet
Location
Other current assets
Asset Derivatives Fair Value
January 1, 2011
$
135
January 2, 2010
228
$
Total derivatives designated as hedges
$
135
$
228
Derivatives not
Designated as
Hedges
Natural gas swaps
Heating oil swaps
Other current assets
Other current assets
Total derivatives not designated as hedges
Total asset derivatives
$
$
$
212
81
293
428
$
$
$
–
84
84
312
Derivatives Designated
as Hedges
Balance Sheet
Location
Interest rate swaps
Natural gas swaps
Other noncurrent liabilities
Accrued expenses
Liability Derivatives Fair Value
January 1, 2011
$
–
16
January 2, 2010
2,473
$
–
Total derivatives designated as hedges
Derivatives not
Designated as
Hedges
Inventory swaps
Accrued Expenses
Total derivates not designated as hedges
Total liability derivatives
$
$
$
$
16
$
2,473
–
–
16
$
$
$
3
3
2,476
The effect of the Company’s derivative instruments on the consolidated financial statements for the fiscal years
ended January 1, 2011 and January 2, 2010 are as follows (in thousands):
Derivatives
Designated as
Cash Flow Hedges
Gain or (Loss)
Recognized in OCI
on Derivatives
(Effective Portion) (a)
2009
2010
Gain or (Loss)
Reclassified From
Accumulated OCI
into Income
(Effective Portion) (b)
2009
2010
Gain or (Loss)
Recognized in Income
On Derivatives
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing) (c)
2010
2009
Interest rate swaps
Natural gas swaps
$ (723)
(257)
$ (482)
(186)
$ (1,551)
(161)
$ (1,629)
(409)
$ 41
(13)
$ (27)
5
Total
$ (980)
$ (668)
$ (1,712)
$ (2,038)
$ 28
$ (22)
Page 100
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
(a) Amount recognized in accumulated OCI (effective portion) is reported as accumulated other
comprehensive loss of approximately $1.0 million and approximately $0.7 million recorded net of
taxes of approximately $0.4 million and approximately $0.3 million for the year ended January 1,
2011 and January 2, 2010, respectively.
(b) Gains and (losses) reclassified from accumulated OCI into income (effective portion) for interest
rate swaps and natural gas swaps is included in interest expense and cost of sales, respectively, in the
Company’s consolidated statements of operations.
(c) Gains and (losses) recognized in income on derivatives (ineffective portion) for interest rate swaps
and natural gas swaps is included in other, net in the Company’s consolidated statements of
operations.
At January 1, 2011, the Company had forward purchase agreements in place for purchases of approximately
$6.8 million of natural gas and diesel fuel. These forward purchase agreements have no net settlement
provisions and the Company intends to take physical delivery. Accordingly, the forward purchase agreements
are not subject to the requirements of fair value accounting because they qualify as normal purchases as defined.
NOTE 15. FAIR VALUE MEASUREMENT
FASB authoritative guidance which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements including guidance related to nonrecurring measurements of
nonfinancial assets and liabilities.
The following table presents the Company’s financial instruments that are measured at fair value on a recurring
basis as of January 1, 2011 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.
(In thousands of dollars)
Total
Derivative assets
Derivative liabilities
Total
$
428
(16)
$
412
Fair Value Measurements at January 1, 2011 Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
$ —
—
$ —
$
$
428
(16)
412
Significant
Unobservable
Inputs
(Level 3)
$ —
—
$ —
Derivative assets consist of the Company’s natural gas swap, natural gas option and heating oil swap contracts,
which represents the difference between the observable market rates of commonly quoted intervals for similar
assets and liabilities in active markets and the fixed swap and option rate considering the instruments term,
notional amount and credit risk. See Note 14 Derivatives for breakdown by instrument type.
Derivative liabilities consist of the Company’s natural gas swap contracts, which represent the difference
between the observable market rates of commonly quoted intervals for similar assets and liabilities in active
markets and the fixed swap rate considering the instrument’s term, notional amount and credit risk. See Note 14
Derivatives for breakdown by instrument type.
Page 101
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
NOTE 16. CONCENTRATION OF CREDIT RISK
Concentration of credit risk is limited due to the Company’s diversified customer base and the fact that the
Company sells commodities. No single customer accounted for more than 10% of the Company’s net sales in
fiscal years 2010, 2009 and 2008.
NOTE 17. CONTINGENCIES
The Company is a party to several lawsuits, claims and loss contingencies arising in the ordinary course of its
business, including assertions by certain regulatory and governmental agencies related to permitting requirements
and air, wastewater and storm water discharges from the Company’s processing facilities.
The Company’s workers compensation, auto and general liability policies contain significant deductibles or self-
insured retentions. The Company estimates and accrues its expected ultimate claim costs related to accidents
occurring during each fiscal year and carries this accrual as a reserve until these claims are paid by the Company.
As a result of the matters discussed above, the Company has established loss reserves for insurance, environmental
and litigation matters. At January 1, 2011 and January 2, 2010, the reserves for insurance, environmental and
litigation contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities for which
there are no potential insurance recoveries were approximately $28.2 million and $15.6 million, respectively. 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 financial statements.
Lower Passaic River Area. The Company has been named as a third party defendant in a lawsuit pending in the
Superior Court of New Jersey, Essex County, styled New Jersey Department of Environmental Protection, The
Commissioner of the New Jersey Department of Environmental Protection Agency and the Administrator of the
New Jersey Spill Compensation Fund, as Plaintiffs, vs. Occidental Chemical Corporation, Tierra Solutions,
Inc., Maxus Energy Corporation, Repsol YPF, S.A., YPF, S.A., YPF Holdings, Inc., and CLH Holdings, as
Defendants (Docket No. L-009868-05) (the “Tierra/Maxus Litigation”). In the Tierra/Maxus Litigation, which
was filed on December 13, 2005, the plaintiffs seek to recover from the defendants past and future cleanup and
removal costs, as well as unspecified economic damages, punitive damages, penalties and a variety of other
forms of relief, purportedly arising from the alleged discharges into the Passaic River of a particular type of
dioxin and other unspecified hazardous substances. The damages being sought by the plaintiffs from the
defendants are likely to be substantial. On February 4, 2009, two of the defendants, Tierra Solutions, Inc.
(“Tierra”) and Maxus Energy Corporation (“Maxus”), filed a third party complaint against over 300 entities,
including the Company, seeking to recover all or a proportionate share of cleanup and removal costs, damages or
other loss or harm, if any, for which Tierra or Maxus may be held liable in the Tierra/Maxus Litigation. Tierra
and Maxus allege that Standard Tallow Company, an entity that the Company acquired in 1996, contributed to
the discharge of the hazardous substances that are the subject of this case while operating a former plant site
located in Newark, New Jersey. The Company is investigating these allegations, has entered into a joint defense
agreement with many of the other third-party defendants and intends to defend itself vigorously. Additionally, in
December 2009, the Company, along with numerous other entities, received notice from the United States
Environmental Protection Agency (EPA) that the Company (as successor-in-interest to Standard Tallow
Company) is considered a potentially responsible party with respect to alleged contamination in the lower
Passaic River area which is part of the Diamond Alkali Superfund Site located in Newark, New Jersey. In the
letter, EPA requested that the Company join a group of other parties in funding a remedial investigation and
feasibility study at the site. As of the date of this report, the Company has not agreed to participate in the
funding group. The Company’s ultimate liability for investigatory costs, remedial costs and/or natural resource
damages in connection with the lower Passaic River area cannot be determined at this time; however, as of the
Page 102
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
date of this report, there is nothing that leads the Company to believe that these matters will have a material
effect on the Company’s financial position or results of operation.
NOTE 18. BUSINESS SEGMENTS
As of January 1, 2011, the Company sells its products domestically and internationally and operates within three
industry segments: Rendering, Restaurant Services and Bakery. The measure of segment profit (loss) includes all
revenues, operating expenses (excluding certain amortization of intangibles), and selling, general and
administrative expenses incurred at all operating locations and excludes general corporate expenses.
Included in corporate activities are general corporate expenses and the amortization of intangibles. Assets of
corporate activities include cash, unallocated prepaid expenses, deferred tax assets, prepaid pension, and
miscellaneous other assets.
Rendering
Rendering operations process poultry and animal by-products into protein (primarily MBM and PM (feed grade
and pet food), BFT and PG), which MBM and PM collectively are approximately $243.5 million, $244.7 million
and $259.9 million of net Rendering sales for the year ended January 1, 2011, January 2, 2010 and January 3,
2009, respectively and BFT and PG, which collectively are approximately $262.9 million, $187.8 million and
$276.6 million of net sale for the year ended January 1, 2011, January 2, 2010 and January 3, 2009, respectively.
Restaurant Services
Restaurant Services consists of collecting used cooking oil from restaurants and processes it into finished
products, such as YG used as high-energy animal feed ingredients and industrial oils. This finished product of
YG was approximately $136.2 million, $95.9 million and $186.3 million of net Restaurant Services sales for the
year ended January 1, 2011, January 2, 2010 and January 3, 2009, respectively. Restaurant Services also
provides grease trap servicing. Included in restaurant services is the National Service Center (“NSC”). The
NSC schedules services such as fat and bone and used cooking oil collection as well as trap cleaning for
contracted customers using the Company’s resources or third party providers.
Bakery
Bakery products are collected from large commercial bakeries that produce a variety of products, including
cookies, crackers, cereal, bread, dough, potato chips, pretzels, sweet goods and biscuits, among others. The
Company processes the raw materials into Cookie Meal® or BBP.
Business Segment Net Revenues (in thousands):
Rendering:
Trade
Intersegment
Restaurant Services:
Trade
Intersegment
Bakery:
Trade
Intersegment
Eliminations
Total
January 1,
2011
Year Ended
January 2,
2010
January 3,
2009
$536,935
15,333
552,268
177,750
28,774
206,524
10,224
–
10,224
$458,573
16,216
474,789
139,233
13,126
152,359
–
–
–
$585,108
50,832
635,940
222,384
10,118
232,502
–
–
–
(44,107 )
$724,909
(29,342 )
$597,806
(60,950 )
$807,492
Page 103
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
Included in Corporate Activities are general corporate expenses and the amortization of intangibles related to
“Fresh Start Reporting.”
Business Segment Profit/(Loss) (in thousands):
Rendering
Restaurant Services
Bakery
Corporate Activities
Interest expense
Net income
January 1,
2011
$100,940
31,562
1,425
(80,947)
(8,737)
$ 44,243
Year Ended
January 2,
2010
$94,446
15,251
–
(64,802)
(3,105)
$ 41,790
January 3,
2009
$101,439
29,896
–
(73,755)
(3,018)
$ 54,562
Certain assets are not attributable to a single operating segment but instead relate to multiple operating segments
operating out of individual locations. These assets are utilized by both the Rendering and Restaurant Services
business segments and are identified in the category Combined Rendering/Restaurant Services. Depreciation of
Combined Rendering/Restaurant Services assets is allocated based upon an estimate of the percentage of
corresponding activity attributed to each segment. Additionally, although intangible assets are allocated to
operating segments, the amortization related to the adoption of “Fresh Start Reporting” in 1993 is not considered in
the measure of operating segment profit/(loss) and is included in Corporate Activities.
Business Segment Assets (in thousands):
Rendering
Restaurant Services
Combined Rendering/Restaurant Services
Bakery
Corporate Activities
Total
January 1,
2011
$ 925,249
76,945
100,525
166,658
112,881
$1,382,258
January 2,
2010
$ 171,005
65,184
100,173
–
89,809
$ 426,171
Business Segment Property, Plant and Equipment (in thousands):
Depreciation and amortization:
Rendering
Restaurant Services
Bakery
Corporate Activities
Total
Capital expenditures:
Rendering
Restaurant Services
Combined Rendering/Restaurant Services
Bakery
Corporate Activities
Total
(a)
January 1,
2011
January 2,
2010
January 3,
2009
$ 22,173
5,786
426
3,523
$ 31,908
$ 5,739
1,791
13,901
165
3,124
$ 24,720
$ 16,648
5,284
–
3,294
$ 25,226
$ 5,071
1,211
13,384
–
3,972
$ 23,638
$ 14,270
4,310
–
5,853
$ 24,433
$ 11,723
610
15,776
–
2,897
$ 31,006
Page 104
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
(a) Excludes the capital assets acquired as part of the acquisition of assets related to the Griffin
Transaction and Nebraska Transaction in fiscal 2010 of approximately$243.7 million, the Sanimax
Transaction and Boca Transaction in fiscal 2009 of approximately $8.0 million and the API
Transaction in fiscal 2008 of approximately $3.4 million.
The Company has no material foreign operations, but exports a portion of its products to customers in various
foreign countries.
Geographic Area Net Trade Revenues (in thousands):
Domestic
Foreign
Total
January 1,
2011
$ 653,909
71,000
$ 724,909
January 2,
2010
$ 526,975
70,831
$ 597,806
January 3,
2009
$ 675,257
132,235
$ 807,492
The Company attributes revenues from external customers to individual foreign countries based on the destination
of the Company’s shipments. For fiscal 2010, 2009 and 2008, no individual foreign country comprised more than
5% of the Company’s consolidated revenue.
NOTE 19. QUARTERLY FINANCIAL DATA (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE
AMOUNTS):
Net sales
Operating income
Income from operations
before income taxes
Net income
Basic earnings per share
Diluted earnings per share
Net sales
Operating income
Income from operations
before income taxes
Net income
Basic earnings per share
Diluted earnings per share
First
Quarter
$ 162,782
19,583
18,139
11,478
0.14
0.14
First
Quarter
$ 133,000
8,763
7,868
4,810
0.06
0.06
Year Ended January 1, 2011
Second
Quarter
$ 166,210
18,914
Third
Quarter
$ 168,685
19,318
Fourth
Quarter (a)
$ 227,232
24,698
17,577
11,371
0.14
0.14
17,704
11,382
0.14
0.14
Year Ended January 2, 2010
Second
Quarter
$ 155,298
20,276
Third
Quarter
$ 159,936
25,396
19,274
11,699
0.14
0.14
24,819
16,073
0.20
0.19
16,923
10,012
0.12
0.12
Fourth
Quarter
$ 149,572
16,504
14,918
9,208
0.11
0.11
(a) Included in net income in the fourth quarter of fiscal 2010 are costs incurred as part of the Griffin
Transaction for consulting, legal and financing in the amount of approximately $13.7 million.
Page 105
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
NOTE 20. NEW ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements.
The ASU amends ASC Topic 820, Fair Value Measurements and Disclosures. The new standard provides for
additional disclosures requiring the Company to disclose separately the amounts of significant transfers in and
out of Level 1 and Level 2 fair value measurements, describe the reasons for the transfers and present separately
information about purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value
measurements. The update also provides clarification of existing disclosures requiring the Company to
determine each class of assets and liabilities based on the nature and risks of the investments rather than by
major security type and for each class of assets and liabilities, and to disclose the valuation techniques and inputs
used to measure fair value for both Level 2 and Level 3 fair value measurements. The Company adopted ASU
2010-06 as of January 3, 2010, except for the presentation of purchases, sales, issuances and settlement in the
reconciliation of Level 3 fair value measurements, which is effective for the Company on January 2, 2011. This
update will not change the techniques the Company uses to measure fair values and is not expected to have a
material impact on the Company’s consolidated financial statements.
In December 2010, the FASB issued ASU No. 2010-28, When to Perform Step 2 of the Goodwill Impairment
Test for Reporting Units with Zero or Negative Carrying Amounts. The ASU amends Topic 350, Intangibles-
Goodwill and Other. The new standard requires an entity to perform all steps in the test for a reporting unit
whose carrying value is zero or negative if it is more likely than not (more than 50%) that a goodwill impairment
exists based on qualitative factors, resulting in the elimination of an entity’s ability to assert that such a reporting
unit’s goodwill is not impaired and additional testing is not necessary despite the existence of qualitative factors
that indicate otherwise. The Company is required to adopt ASU 2010-28 on January 2, 2011 and it is not
expected to have a material impact on the Company’s consolidated financial statements.
In December 2010, the FASB issued ASU No. 2010-29 Disclosure of Supplementary Pro Forma Information
for Business Combinations. The ASU amends Topic 805, Business Combinations. The new standard provides
for changes to the disclosure of pro forma information for business combinations. These changes clarify that if a
public entity presents comparative financial statements, the entity should disclose revenue and earnings of the
combined entity as though the business combination that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. Also, the existing supplemental pro forma
disclosures were expanded to include a description of the nature and amount of material, nonrecurring pro forma
adjustments directly attributable to the business combination included in the reported pro forma revenue and
earnings. The Company is required to adopt ASU 2010-29 on January 2, 2011 and it is not expected to have a
material impact on the Company’s consolidated financial statements.
NOTE 21. SUBSEQUENT EVENTS
The Company announced on January 21, 2011, a wholly-owned subsidiary of the Company entered into a limited
liability company agreement (the “JV Agreement”) with a wholly-owned subsidiary of Valero Energy
Corporation (“Valero”) to form Diamond Green Diesel Holdings LLC (the “Joint Venture”). The Joint Venture
will be owned 50% / 50% with Valero and was formed to design, engineer, construct and operate a site adjacent
to Valero’s St. Charles refinery near Norco, Louisiana (the “Facility”). On January 20, 2011, the U.S.
Department of Energy (“DOE”) offered to the Joint Venture a conditional commitment to issue an approximately
$241 million loan guarantee (the “DOE Guarantee”) under the Energy Policy Act of 2005 to support the
construction of the Facility. Through equity investments into the Joint Venture, each of Darling and Valero are
committed to contributing approximately $93.2 million (the “Equity Commitment”) of the estimated aggregate
costs of approximately $427.0 million for completion of the Facility. As part of the terms and conditions of the
DOE Guarantee, until the Company’s Equity Commitment has been paid in full or repayment of the DOE
Guarantee, the Company has to commit to, among other things, a sponsor completion guarantee covering certain
costs of the construction of the Facility and the Company must maintain a cash balance of approximately $27
million (less the pro rata portion of the Company’s Equity Commitment made prior to such date) in a segregated
Page 106
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements (continued)
financial account, the proceeds of which will be used solely to fund the Company’s Equity Commitment required
under the DOE Guarantee and its related documentation. The Company’s funds on deposit in such segregated
financial account cannot at any time be lower than the initial funding less one third of the portion of the Equity
Commitment that the Company has made. The Company will not have access to those funds for any other part
of the Company’s business. The Company is also required to pay for 50% of any cost overruns incurred in
connection with the construction of the Facility. Further, the Company will have to grant a security interest in
substantially all of the assets of the Joint Venture, including providing a pledge of all of the Company’s equity
interests in the Joint Venture, for the benefit of the DOE until the loan guaranteed by the DOE Guarantee has
been paid in full and the DOE Guarantee has terminated in accordance with its terms.
On January 27, 2011, the Company entered into an underwritten public offering for 24,193,548 shares of its
common stock, at a price to the public of $12.70 per share, pursuant to an effective shelf registration statement.
The offering closed on February 2, 2011. In addition, certain former stockholders of Griffin Industries, Inc.
(pursuant to such stockholders’ contractual registration rights) granted the underwriters a 30-day option, which
the underwriters subsequently exercised in full, to purchase from them up to an additional 3,629,032 shares of
Darling common stock to cover over-allotments. The Company used the net proceeds of approximately $292.7
million from the offering to repay all of its outstanding revolver balance and a portion of its term loan facility
under the Company’s Credit Agreement. Darling did not receive any proceeds from the sale of shares by the
former stockholders of Griffin.
Page 107
PART II
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
As required by Exchange Act Rule 13a-15(b), the Company’s management, including the Chief Executive
Officer and Chief Financial Officer, conducted an evaluation, as of the end of the period covered by this report, of the
effectiveness of the design and operation of the Company’s disclosure controls and procedures. As defined in Exchange
Act Rules 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls and procedures are controls and other
procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or
submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Based on management’s evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Internal Control over Financial Reporting.
(a) Management’s Annual Report on Internal Control over Financial Reporting. Management of the Company
is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-
15(f) and 15d-15(f) promulgated under the Exchange Act. Those rules define internal control over financial reporting as a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles and includes those
policies and procedures that:
• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the Company;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management and directors of the
Company; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial
reporting as of January 1, 2011. In making this assessment, the Company’s management used the criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
Page 108
Based on their assessment, management has concluded that the Company’s internal control over financial
reporting was effective at the reasonable assurance level as of January 1, 2011.
In December 2010, the Company acquired Griffin Industries, Inc. (Griffin). The Company is currently in the
process of integrating Griffin pursuant to the Sarbanes-Oxley Act of 2002. The Company is evaluating changes to
processes, information technology systems and other components of internal controls over financial reporting as part of its
ongoing integration activities, and as a result, controls will be periodically changed. The Company believes, however, it
will be able to maintain sufficient controls over the substantive results of its financial reporting throughout this integration
process. Because of the size and complexity of Griffin and the timing of the acquisition, the internal controls over
financial reporting of Griffin were excluded from management’s assessment of the Company’s internal control over
financial reporting as of January 1, 2011. Griffin attributed approximately $27.7 million of the Company’s consolidated
net operating revenues for the year ended January 1, 2011, and represented approximately $924.8 million of the
Company’s consolidated total assets as of January 1, 2011.
KPMG LLP, the registered public accounting firm that audited the Company’s financial statements, has issued an
audit report on management’s assessment of the Company’s internal control over financial reporting, which report is
included herein.
(b) Attestation Report of the Registered Public Accounting Firm. The attestation report called for by Item
308(b) of Regulation S-K is incorporated herein by reference to Report of Independent Registered Public Accounting
Firm on Internal Control Over Financial Reporting, included in Part II, Item 8, “Financial Statements and Supplementary
Data” of this report.
(c) Changes in Internal Control over Financial Reporting. As required by Exchange Act Rule 13a-15(d), the
Company’s management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation
of the Company’s internal control over financial reporting to determine whether any change occurred during the last fiscal
quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting. Based on that evaluation, except for the acquisition of Griffin
discussed above, there has been no change in the Company’s internal control over financial reporting during the last fiscal
quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
Page 109
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item with respect to Items 401, 405 and 407 of Regulation S-K will appear in the
sections entitled “Election of Directors,” “Our Management - Executive Officers and Directors,” “Section 16(a) Beneficial
Ownership Reporting Compliance” and “Corporate Governance-Committees of the Board - Audit Committee” included in the
Company’s definitive Proxy Statement relating to the 2011 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
The Company has adopted the Darling International Inc. Code of Business Conduct (“Code of Business Conduct”),
which is applicable to all of the Company’s employees, including its senior financial officers, the Chief Executive Officer,
Chief Financial Officer, Controller, Treasurer and General Counsel. The Company has not granted any waivers to the Code
of Business Conduct to date. A copy of the Company’s Code of Business Conduct has been posted on the “Investor” portion
of our web site, at www.darlingii.com. Shareholders may request a free copy of our Code of Business Conduct from:
Brad Phillips
Darling International Inc.
251 O’Connor Ridge Blvd, Suite 300
Irving, Texas 75038
Phone: 972-717-0300
Fax: 972-717-1588
Email: bphillips@darlingii.com
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will appear in the sections entitled “Executive Compensation,” “Compensation
Committee Report” and “Corporate Governance - Compensation Committee Interlocks and Insider Participation” included in
the Company’s definitive Proxy Statement relating to the 2011 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item with respect to Item 201(d) of Regulation S-K appears in Item 5 of this report.
The information required by this Item with respect to Item 403 of Regulation S-K will appear in the section entitled
“Security Ownership of Certain Beneficial Owners and Management” included in the Company’s definitive Proxy Statement
relating to the 2011 Annual Meeting of Stockholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item will appear in the sections entitled “Transactions with Related Persons,
Promoters and Certain Control Persons’” “Corporate Governance – Code of Business Conduct” and “Corporate
Governance - Independent Directors” included in the Company’s definitive Proxy Statement relating to the 2011 Annual
Meeting of Stockholders, which information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will appear in the section entitled “Ratification of Selection of Independent
Registered Public Accountant” included in the Company’s definitive Proxy Statement relating to the 2011 Annual
Meeting of Stockholders, which information is incorporated herein by reference.
Page 110
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
(1) The following consolidated financial statements are included in Item 8.
Report of Independent Registered Public Accounting Firm on Consolidated Financial
Statements
Report of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting
Consolidated Balance Sheets
January 1, 2011 and January 2, 2010
Consolidated Statements of Operations-
Three years ended January 1, 2011
Consolidated Statements of Stockholders’ Equity
and Comprehensive Income(Loss) -
Three years ended January 1, 2011
Consolidated Statements of Cash Flows -
Three years ended January 1, 2011
Notes to Consolidated Financial Statements
Page
65
66
67
68
69
71
72
All other schedules are omitted since the required information is not present or is not present in
amounts sufficient to require submission of the schedule, or because the information required is
included in the consolidated financial statements and notes thereto.
Page 111
(3) Exhibits.
Exhibit No.
Document
2.1
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
10.1 *
10.2
10.3
Agreement and Plan of Merger, dated as of November 9, 2010, by and among Darling International
Inc., DG Acquisition Corp., Griffin Industries, Inc. and Robert A. Griffin, in his capacity as the
Shareholders’ Representative (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K
filed November 9, 2010 and incorporated herein by reference).
Restated Certificate of Incorporation of the Company, as amended (filed as Exhibit 3.1 to the
Company’s Registration Statement on Form S-1 filed May 23, 2002 and incorporated herein by
reference).
Certificate of Amendment of Restated Certificate of Incorporation of the Company (filed herewith).
Amended and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company’s Current Report
on Form 8-K filed December 12, 2008 and incorporated herein by reference).
Specimen Common Stock Certificate (filed as Exhibit 4.1 to the Company’s Registration Statement on
Form S-1 filed May 27, 1994 and incorporated herein by reference).
Certificate of Designation, Preference and Rights of Series A Preferred Stock (filed as Exhibit 4.2 to
the Company’s Registration Statement on Form S-1 filed May 23, 2002 and incorporated herein by
reference).
Indenture, dated as of December 17, 2010, by and among Darling International Inc., Darling
National LLC, and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed December 20, 2010 and incorporated herein by
reference).
Supplemental Indenture, dated as of December 17, 2010, by and among Griffin Industries, Inc.,
Craig Protein Division, Inc. and U.S. Bank National Association, as trustee (filed as Exhibit 4.2 to
the Company’s Current Report on Form 8-K filed December 20, 2010 and incorporated herein by
reference).
Form of Senior Indenture for Debt Securities of Darling International Inc. (filed as Exhibit 4.3 to
the Company’s Registration Statement on Form S-3 filed November 17, 2010 and incorporated herein
by reference).
Form of Subordinated Indenture for Debt Securities of Darling International Inc. (filed as Exhibit
4.4 to the Company’s Registration Statement on Form S-3 filed November 17, 2010 and incorporated
herein by reference).
Form of Indemnification Agreement (filed as Exhibit 10.7 to the Company’s Registration Statement
on Form S-1 filed on May 27, 1994, and incorporated herein by reference).
Registration Rights Agreement, dated as of December 17, 2010, by and among Darling
International Inc., the guarantors listed in Schedule 1 thereto, and J.P. Morgan Securities LLC,, as
representative of the several initial purchasers named therein (filed as Exhibit 10.4 to the Company’s
Current Report on Form 8-K filed December 20, 2010 and incorporated herein by reference).
Registration Rights Agreement, dated as of December 17, 2010, by and among Darling
International Inc. and each of the stockholders named therein (filed as Exhibit 10.5 to the
Company’s Current Report on Form 8-K filed December 20, 2010 and incorporated herein by
reference).
Page 112
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13 *
10.14 *
10.15 *
10.16*
10.17 *
Rollover Agreement, dated as of November 9, 2010, by and among Darling International Inc.,
certain investors named therein and Robert A. Griffin, in his capacity as the Investors’
Representative (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November
9, 2010 and incorporated herein by reference).
Credit Agreement, dated as of December 17, 2010, by and among, Darling International Inc., the
lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of Montreal, as
Syndication Agent, and PNC Bank, N.A. and Goldman Sachs Bank USA, as Documentation
Agents (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 20, 2010
and incorporated herein by reference).
Security Agreement, dated as of December 17, 2010, by and among Darling International Inc., its
subsidiaries signatory thereto and any other subsidiary who may become a party thereto and
JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed December 20, 2010 and incorporated herein by reference).
Guaranty Agreement, dated as of December 17, 2010, by Griffin Industries, Inc., Darling National
LLC and Craig Protein Division, Inc (filed as Exhibit 10.3 to the Company’s Current Report on
Form 8-K filed December 20, 2010 and incorporated herein by reference).
Limited Liability Company Agreement, dated as of January 21, 2011, by and among Diamond
Green Diesel Holdings LLC, Darling Green Energy LLC and Diamond Alternative Energy, LLC.
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 21, 2011 and
incorporated herein by reference).
Leases, dated July 1, 1996, between the Company and the City and County of San Francisco (filed
pursuant to temporary hardship exemption under cover of Form SE).
Lease, dated November 24, 2003, between Darling International Inc. and the Port of Tacoma (filed as
Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed March 29, 2004, and
incorporated herein by reference).
Ground Lease, dated as of December 17, 2010, by and between Martom Properties, LLC and
Griffin Industries, Inc. (Butler, Kentucky) (filed as Exhibit 10.6 to the Company’s Current Report on
Form 8-K filed December 20, 2010 and incorporated herein by reference).
Ground Lease, dated as of December 17, 2010, by and between Martom Properties, LLC and
Griffin Industries, Inc. (Henderson, Kentucky) (filed as Exhibit 10.7 to the Company’s Current
Report on Form 8-K filed December 20, 2010 and incorporated herein by reference).
1994 Employee Flexible Stock Option Plan (filed as Exhibit 2 to the Company’s Revised Definitive
Proxy Statement filed on April 20, 2001, and incorporated herein by reference).
Non-Employee Directors Stock Option Plan (filed as Exhibit 10.13 to the Company’s Registration
Statement on Form S-1/A filed on June 5, 2002, and incorporated herein by reference).
Darling International Inc. 2004 Omnibus Incentive Plan (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed May 11, 2005, and incorporated herein by reference).
Amendment to Darling International Inc. 2004 Omnibus Incentive Plan (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed January 22, 2007 and incorporated herein by
reference).
Darling International Inc. Compensation Committee Long-Term Incentive Program Policy
Statement (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 22,
2005, and incorporated herein by reference).
Page 113
10.18 *
10.19 *
10.20 *
10.21 *
10.22 *
10.23 *
10.24 *
10.25 *
10.26 *
10.27 *
10.28 *
10.29 *
10.30 *
10.31 *
10.32 *
Darling International Inc. Compensation Committee Executive Compensation Program Policy
Statement adopted January 15, 2009 (filed as Exhibit 10.3 to the Company’s Current Report on
Form 8-K filed January 21, 2009 and incorporated herein by reference).
Darling International Inc. Compensation Committee Amended and Restated Executive Compensation
Program Policy Statement adopted January 8, 2010 (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed January 14, 2010 and incorporated herein by reference).
Darling International Inc. Compensation Committee 2011 Amended and Restated Executive
Compensation Program Policy Statement adopted February 3, 2011 (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed February 9, 2011 and incorporated herein by
reference).
Integration Success Incentive Award Plan (filed as Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed March 15, 2006 and incorporated herein by reference).
2010 Special Incentive Program (filed as Exhibit 10.1 to the Company’s Current Report on Form
8-K filed November 17, 2010 and incorporated herein by reference).
Non-Employee Director Restricted Stock Award Plan (filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed March 15, 2006 and incorporated herein by reference).
Amendment No. 1 to Non-Employee Director Restricted Stock Award Plan, effective as of January
15, 2009 (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed January 21,
2009 and incorporated herein by reference).
Amended and Restated Non-Employee Director Restricted Stock Award Plan (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed February 28, 2011 and incorporated herein by
reference).
Notice of Amendment to Grants and Awards, dated as of October 10, 2006 (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed October 10, 2006 and incorporated herein by
reference).
Amended and Restated Employment Agreement, dated as of January 1, 2009, between Darling
International Inc. and Randall C. Stuewe (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed January 21, 2009, and incorporated herein by reference).
Employment Agreement, dated as of December 17, 2010, by and among Darling International Inc.,
Griffin Industries, Inc. and Robert A. Griffin (filed as Exhibit 10.9 to the Company’s Current Report
on Form 8-K filed December 20, 2010 and incorporated herein by reference).
Employment Agreement, dated as of December 17, 2010, by and among Darling International Inc.,
Griffin Industries, Inc. and Martin W. Griffin (filed as Exhibit 10.10 to the Company’s Current
Report on Form 8-K filed December 20, 2010 and incorporated herein by reference).
Form of Senior Executive Termination Benefits Agreement (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed November 29, 2007 and incorporated herein by reference).
Form of Addendum to Senior Executive Termination Benefits Agreement (filed as Exhibit 10.2 to
the Company’s Current Report on Form 8-K filed December 12, 2008 and incorporated herein by
reference).
Amended and Restated Senior Executive Termination Benefits Agreement dated, as of January 15,
2009, between Darling International Inc. and John O. Muse (filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed January 21, 2009 and incorporated herein by reference).
Page 114
10.33 *
10.34 *
10.35 *
10.36 *
10.37 *
10.38
14
21
23
31.1
31.2
32
101
First Addendum to Amended and Restated Senior Executive Termination Benefits Agreement dated
as of December 8, 2009 by and between Darling International Inc. and John O. Muse (filed as Exhibit
10.4 to the Company’s Current Report on Form 8-K filed December 14, 2009 and incorporated herein
by reference).
Second Addendum to Amended and Restated Senior Executive Termination Benefits Agreement
dated as of December 8, 2010 by and between Darling International Inc. and John O. Muse (filed
as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed December 13, 2010 and
incorporated herein by reference).
Form of Addendum to Senior Executive Termination Benefits Agreement (filed as Exhibit 10.4 to
the Company’s Current Report on Form 8-K filed December 13, 2010 and incorporated herein by
reference).
Separation and Consulting Agreement dated October 26, 2009, between Darling International Inc. and
Mark A. Myers (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October
29, 2009 and incorporated herein by reference).
Form of Indemnification Agreement between Darling International Inc. and its directors and
executive officers (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
February 25, 2008, and incorporated herein by reference).
Underwriting Agreement, dated as of January 27, 2011, by and among Darling International Inc.,
the selling stockholders signatory thereto and Goldman, Sachs & Co., as representative of the
several underwriters named in Schedule 1 thereto (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed January 28, 2011 and incorporated herein by reference).
Darling International Inc. Code of Business Conduct applicable to all employees, including senior
executive officers (filed as Exhibit 14 to the Company’s Current Report on Form 8-K filed February
25, 2008, and incorporated herein by reference).
Subsidiaries of the Registrant (filed herewith).
Consent of KPMG LLP (filed herewith).
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, of
Randall C. Stuewe, the Chief Executive Officer of the Company (filed herewith).
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, of
John O. Muse, the Chief Financial Officer of the Company (filed herewith).
Written Statement of Chief Executive Officer and Chief Financial Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith).
Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as
of January 1, 2011 and January 2, 2010; (ii) Consolidated Statements of Operations for the years
ended January 1, 2011, January 2, 2010 and January 3, 2009; (iii) Consolidated Statements of
Stockholders’ Equity and Comprehensive Income(Loss) for the years ended January 1, 2011,
January 2, 2010 and January 3, 2009; (iv) Consolidated Statements of Cash Flows for the years
ended January 1, 2011, January 2, 2010 and January 3, 2009; (v) Notes to the Consolidated
Financial Statements.
The Exhibits are available upon request from the Company.
*
Management contract or compensatory plan or arrangement.
Page 115
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
DARLING INTERNATIONAL INC.
By: /s/ Randall C. Stuewe
Randall C. Stuewe
Chairman of the Board and
Chief Executive Officer
Date: March 2, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Randall C. Stuewe
Randall C. Stuewe
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/
John O. Muse
John O. Muse
Executive Vice President –
Finance and Administration
(Principal Financial and Accounting Officer)
/s/ O. Thomas Albrecht
Director
O. Thomas Albrecht
/s/
C. Dean Carlson
C. Dean Carlson
/s/ Marlyn Jorgensen
Marlyn Jorgensen
/s/ Charles Macaluso
Charles Macaluso
/s/
John D. March
John D. March
Director
Director
Director
Director
/s/ Michael Urbut
Director
Michael Urbut
Date
March 2, 2011
March 2, 2011
March 2, 2011
March 2, 2011
March 2, 2011
March 2, 2011
March 2, 2011
March 2, 2011
Page 116
INDEX TO EXHIBITS
2.1
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
10.1 *
10.2
10.3
Agreement and Plan of Merger, dated as of November 9, 2010, by and among Darling International
Inc., DG Acquisition Corp., Griffin Industries, Inc. and Robert A. Griffin, in his capacity as the
Shareholders’ Representative (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K
filed November 9, 2010 and incorporated herein by reference).
Restated Certificate of Incorporation of the Company, as amended (filed as Exhibit 3.1 to the
Company’s Registration Statement on Form S-1 filed May 23, 2002 and incorporated herein by
reference).
Certificate of Amendment of Restated Certificate of Incorporation of the Company (filed herewith).
Amended and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company’s Current Report
on Form 8-K filed December 12, 2008 and incorporated herein by reference).
Specimen Common Stock Certificate (filed as Exhibit 4.1 to the Company’s Registration Statement on
Form S-1 filed May 27, 1994 and incorporated herein by reference).
Certificate of Designation, Preference and Rights of Series A Preferred Stock (filed as Exhibit 4.2 to
the Company’s Registration Statement on Form S-1 filed May 23, 2002 and incorporated herein by
reference).
Indenture, dated as of December 17, 2010, by and among Darling International Inc., Darling
National LLC, and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed December 20, 2010 and incorporated herein by
reference).
Supplemental Indenture, dated as of December 17, 2010, by and among Griffin Industries, Inc.,
Craig Protein Division, Inc. and U.S. Bank National Association, as trustee (filed as Exhibit 4.2 to
the Company’s Current Report on Form 8-K filed December 20, 2010 and incorporated herein by
reference).
Form of Senior Indenture for Debt Securities of Darling International Inc. (filed as Exhibit 4.3 to
the Company’s Registration Statement on Form S-3 filed November 17, 2010 and incorporated herein
by reference).
Form of Subordinated Indenture for Debt Securities of Darling International Inc. (filed as Exhibit
4.4 to the Company’s Registration Statement on Form S-3 filed November 17, 2010 and incorporated
herein by reference).
Form of Indemnification Agreement (filed as Exhibit 10.7 to the Company’s Registration Statement
on Form S-1 filed on May 27, 1994, and incorporated herein by reference).
Registration Rights Agreement, dated as of December 17, 2010, by and among Darling
International Inc., the guarantors listed in Schedule 1 thereto, and J.P. Morgan Securities LLC,, as
representative of the several initial purchasers named therein (filed as Exhibit 10.4 to the Company’s
Current Report on Form 8-K filed December 20, 2010 and incorporated herein by reference).
Registration Rights Agreement, dated as of December 17, 2010, by and among Darling
International Inc. and each of the stockholders named therein (filed as Exhibit 10.5 to the
Company’s Current Report on Form 8-K filed December 20, 2010 and incorporated herein by
reference).
Page 117
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13 *
10.14 *
10.15 *
10.16*
10.17 *
Rollover Agreement, dated as of November 9, 2010, by and among Darling International Inc.,
certain investors named therein and Robert A. Griffin, in his capacity as the Investors’
Representative (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November
9, 2010 and incorporated herein by reference).
Credit Agreement, dated as of December 17, 2010, by and among, Darling International Inc., the
lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of Montreal, as
Syndication Agent, and PNC Bank, N.A. and Goldman Sachs Bank USA, as Documentation
Agents (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 20, 2010
and incorporated herein by reference).
Security Agreement, dated as of December 17, 2010, by and among Darling International Inc., its
subsidiaries signatory thereto and any other subsidiary who may become a party thereto and
JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed December 20, 2010 and incorporated herein by reference).
Guaranty Agreement, dated as of December 17, 2010, by Griffin Industries, Inc., Darling National
LLC and Craig Protein Division, Inc (filed as Exhibit 10.3 to the Company’s Current Report on
Form 8-K filed December 20, 2010 and incorporated herein by reference).
Limited Liability Company Agreement, dated as of January 21, 2011, by and among Diamond
Green Diesel Holdings LLC, Darling Green Energy LLC and Diamond Alternative Energy, LLC.
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 21, 2011 and
incorporated herein by reference).
Leases, dated July 1, 1996, between the Company and the City and County of San Francisco (filed
pursuant to temporary hardship exemption under cover of Form SE).
Lease, dated November 24, 2003, between Darling International Inc. and the Port of Tacoma (filed as
Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed March 29, 2004, and
incorporated herein by reference).
Ground Lease, dated as of December 17, 2010, by and between Martom Properties, LLC and
Griffin Industries, Inc. (Butler, Kentucky) (filed as Exhibit 10.6 to the Company’s Current Report on
Form 8-K filed December 20, 2010 and incorporated herein by reference).
Ground Lease, dated as of December 17, 2010, by and between Martom Properties, LLC and
Griffin Industries, Inc. (Henderson, Kentucky) (filed as Exhibit 10.7 to the Company’s Current
Report on Form 8-K filed December 20, 2010 and incorporated herein by reference).
1994 Employee Flexible Stock Option Plan (filed as Exhibit 2 to the Company’s Revised Definitive
Proxy Statement filed on April 20, 2001, and incorporated herein by reference).
Non-Employee Directors Stock Option Plan (filed as Exhibit 10.13 to the Company’s Registration
Statement on Form S-1/A filed on June 5, 2002, and incorporated herein by reference).
Darling International Inc. 2004 Omnibus Incentive Plan (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed May 11, 2005, and incorporated herein by reference).
Amendment to Darling International Inc. 2004 Omnibus Incentive Plan (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed January 22, 2007 and incorporated herein by
reference).
Darling International Inc. Compensation Committee Long-Term Incentive Program Policy
Statement (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 22,
2005, and incorporated herein by reference).
Page 118
10.18 *
10.19 *
10.20 *
10.21 *
10.22 *
10.23 *
10.24 *
10.25 *
10.26 *
10.27 *
10.28 *
10.29 *
10.30 *
10.31 *
10.32 *
Darling International Inc. Compensation Committee Executive Compensation Program Policy
Statement adopted January 15, 2009 (filed as Exhibit 10.3 to the Company’s Current Report on
Form 8-K filed January 21, 2009 and incorporated herein by reference).
Darling International Inc. Compensation Committee Amended and Restated Executive Compensation
Program Policy Statement adopted January 8, 2010 (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed January 14, 2010 and incorporated herein by reference).
Darling International Inc. Compensation Committee 2011 Amended and Restated Executive
Compensation Program Policy Statement adopted February 3, 2011 (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed February 9, 2011 and incorporated herein by
reference).
Integration Success Incentive Award Plan (filed as Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed March 15, 2006 and incorporated herein by reference).
2010 Special Incentive Program (filed as Exhibit 10.1 to the Company’s Current Report on Form
8-K filed November 17, 2010 and incorporated herein by reference).
Non-Employee Director Restricted Stock Award Plan (filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed March 15, 2006 and incorporated herein by reference).
Amendment No. 1 to Non-Employee Director Restricted Stock Award Plan, effective as of January
15, 2009 (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed January 21,
2009 and incorporated herein by reference).
Amended and Restated Non-Employee Director Restricted Stock Award Plan (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed February 28, 2011 and incorporated herein by
reference).
Notice of Amendment to Grants and Awards, dated as of October 10, 2006 (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed October 10, 2006 and incorporated herein by
reference).
Amended and Restated Employment Agreement, dated as of January 1, 2009, between Darling
International Inc. and Randall C. Stuewe (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed January 21, 2009, and incorporated herein by reference).
Employment Agreement, dated as of December 17, 2010, by and among Darling International Inc.,
Griffin Industries, Inc. and Robert A. Griffin (filed as Exhibit 10.9 to the Company’s Current Report
on Form 8-K filed December 20, 2010 and incorporated herein by reference).
Employment Agreement, dated as of December 17, 2010, by and among Darling International Inc.,
Griffin Industries, Inc. and Martin W. Griffin (filed as Exhibit 10.10 to the Company’s Current
Report on Form 8-K filed December 20, 2010 and incorporated herein by reference).
Form of Senior Executive Termination Benefits Agreement (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed November 29, 2007 and incorporated herein by reference).
Form of Addendum to Senior Executive Termination Benefits Agreement (filed as Exhibit 10.2 to
the Company’s Current Report on Form 8-K filed December 12, 2008 and incorporated herein by
reference).
Amended and Restated Senior Executive Termination Benefits Agreement dated, as of January 15,
2009, between Darling International Inc. and John O. Muse (filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed January 21, 2009 and incorporated herein by reference).
Page 119
10.33 *
10.34 *
10.35 *
10.36 *
10.37 *
10.38
14
21
23
31.1
31.2
32
101
First Addendum to Amended and Restated Senior Executive Termination Benefits Agreement dated
as of December 8, 2009 by and between Darling International Inc. and John O. Muse (filed as Exhibit
10.4 to the Company’s Current Report on Form 8-K filed December 14, 2009 and incorporated herein
by reference).
Second Addendum to Amended and Restated Senior Executive Termination Benefits Agreement
dated as of December 8, 2010 by and between Darling International Inc. and John O. Muse (filed
as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed December 13, 2010 and
incorporated herein by reference).
Form of Addendum to Senior Executive Termination Benefits Agreement (filed as Exhibit 10.4 to
the Company’s Current Report on Form 8-K filed December 13, 2010 and incorporated herein by
reference).
Separation and Consulting Agreement dated October 26, 2009, between Darling International Inc. and
Mark A. Myers (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October
29, 2009 and incorporated herein by reference).
Form of Indemnification Agreement between Darling International Inc. and its directors and
executive officers (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
February 25, 2008, and incorporated herein by reference).
Underwriting Agreement, dated as of January 27, 2011, by and among Darling International Inc.,
the selling stockholders signatory thereto and Goldman, Sachs & Co., as representative of the
several underwriters named in Schedule 1 thereto (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed January 28, 2011 and incorporated herein by reference).
Darling International Inc. Code of Business Conduct applicable to all employees, including senior
executive officers (filed as Exhibit 14 to the Company’s Current Report on Form 8-K filed February
25, 2008, and incorporated herein by reference).
Subsidiaries of the Registrant (filed herewith).
Consent of KPMG LLP (filed herewith).
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, of
Randall C. Stuewe, the Chief Executive Officer of the Company (filed herewith).
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, of
John O. Muse, the Chief Financial Officer of the Company (filed herewith).
Written Statement of Chief Executive Officer and Chief Financial Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith).
Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as
of January 1, 2011 and January 2, 2010; (ii) Consolidated Statements of Operations for the years
ended January 1, 2011, January 2, 2010 and January 3, 2009; (iii) Consolidated Statements of
Stockholders’ Equity and Comprehensive Income(Loss) for the years ended January 1, 2011,
January 2, 2010 and January 3, 2009; (iv) Consolidated Statements of Cash Flows for the years
ended January 1, 2011, January 2, 2010 and January 3, 2009; (v) Notes to the Consolidated
Financial Statements.
The Exhibits are available upon request from the Company.
*
Management contract or compensatory plan or arrangement.
Page 120
Corporate
Information
Principal Office
Directors
Officers
Randall C. Stuewe
Chairman and Director
since February 2003
O. Thomas Albrecht
Director since 2002
C. Dean Carlson
Director since 2006
Marlyn Jorgensen
Director since 2006
Charles Macaluso
Director since 2002
John D. March
Director since 2008
Michael Urbut
Director since 2005
Darling International Inc.
251 O’Connor Ridge Blvd., Suite 300
Irving, Texas 75038
972.717.0300
www.darlingii.com
Transfer Agent and Registrar
Computershare Investor Services
P.O. Box 43078
Providence, Rhode Island 02940-3078
Shareholder Inquiries 781.575.2879
www.computershare.com
Legal Counsel
Weil, Gotshal & Manges LLP
200 Crescent Court, Suite 300
Dallas, Texas 75201
Independent Auditors
KPMG LLP
717 N. Harwood St., Suite 3100
Dallas, Texas 75201-6585
Annual Meeting
May 10, 2011
10:00 a.m.
Omni Mandalay Hotel at Las Colinas
221 E. Las Colinas Blvd.
Irving, Texas 75039
Form 10-K
Darling International Inc.’s Annual Report on Form
10-K is available upon request without charge:
c/o Investor Relations
Darling International Inc.
251 O’Connor Ridge Blvd., Suite 300
Irving, Texas 75038
www.darlingii.com
The common stock of Darling International Inc. is
traded on the New York Stock Exchange (NYSE)
under the symbol “DAR.”
Randall C. Stuewe
Chief Executive Officer
Robert A. Griffin
President – Griffin Industries
John O. Muse
Executive Vice President
Finance and Administration
Neil Katchen
Executive Vice President and
Chief Operations Officer
Darling International
Martin W. Griffin
Executive Vice President and
Chief Operations Officer
Griffin Industries
Robert H. Seemann
Executive Vice President
Sales and Services
Michael L. Rath
Executive Vice President
Commodities and Risk Management
John F. Sterling
Executive Vice President
General Counsel and Secretary
John Bohannon
Vice President
Grease Trap Services
Mitchell C. Kilanowski
Vice President
Commodities
Robert A. Hinerman
Vice President
Chief Information Officer
William R. McMurtry
Vice President
Environmental Affairs
C. Ross Hamilton, PhD
Vice President
Government Affairs and Technology
Brad Phillips
Treasurer
Brenda Snell
Controller
Darling International Inc.
251 O’Connor Ridge Blvd.
Suite 300
Irving, Texas 75038
sustaining
innovating
renewing
2010 Annual Report