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DAR Darling Ingredients

Filed: 8 Nov 21, 7:00pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
 (Mark One)      
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended
October 2, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
  For the transition period from _______ to _______
 
Commission File Number   001-13323

DARLING INGREDIENTS INC.
(Exact name of registrant as specified in its charter) 
Delaware36-2495346
 (State or other jurisdiction     (I.R.S. Employer
of incorporation or organization)   Identification Number)
 5601 N MacArthur Blvd., Irving, Texas     75038
(Address of principal executive offices)     (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 classTrading Symbol(s)Name of each exchange on which registered
Common stock $0.01 par value per shareDARNew York Stock Exchange(“NYSE”)
 
    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      No
 
    Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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      No 

 Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer    
Non-accelerated filer  Smaller reporting company       
Emerging growth company
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of Exchange Act.
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No 
 
There were 161,808,213 shares of common stock, $0.01 par value, outstanding at November 4, 2021.



DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 2021
 
 
TABLE OF CONTENTS   

 
 
2





DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
October 2, 2021 and January 2, 2021
(in thousands, except share data)
October 2,
2021
January 2,
2021
ASSETS(unaudited)
Current assets:
Cash and cash equivalents$67,188 $81,617 
Restricted cash172 103 
Accounts receivable, less allowance for bad debts of $10,107 at
   October 2, 2021 and $10,815 at January 2, 2021
479,575 405,387 
Inventories476,295 405,922 
Prepaid expenses63,633 47,793 
Income taxes refundable3,060 3,883 
Other current assets13,721 42,289 
Total current assets1,103,644 986,994 
Property, plant and equipment, less accumulated depreciation of $1,821,115 at
   October 2, 2021 and $1,702,123 at January 2, 2021
1,834,670 1,863,814 
Intangible assets, less accumulated amortization of $552,288 at
   October 2, 2021 and $568,086 at January 2, 2021
417,409 473,680 
Goodwill1,232,179 1,260,240 
Investment in unconsolidated subsidiaries1,107,834 804,682 
Operating lease right-of-use assets160,660 146,563 
Other assets53,887 60,682 
Deferred income taxes15,437 16,676 
 $5,925,720 $5,613,331 
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities:  
Current portion of long-term debt$55,138 $27,538 
Accounts payable, principally trade272,844 255,340 
Income taxes payable34,623 17,497 
Current operating lease liabilities40,182 39,459 
Accrued expenses353,410 335,471 
Total current liabilities756,197 675,305 
Long-term debt, net of current portion1,325,736 1,480,531 
Long-term operating lease liabilities123,169 109,707 
Other non-current liabilities115,815 117,371 
Deferred income taxes335,566 276,208 
Total liabilities2,656,483 2,659,122 
Commitments and contingencies00
Stockholders’ equity:  
     Common stock, $0.01 par value; 250,000,000 shares authorized; 171,665,336 and
        169,880,238 shares issued at October 2, 2021 and January 2, 2021,
        respectively
1,717 1,699 
Additional paid-in capital1,623,264 1,597,429 
     Treasury stock, at cost; 9,886,705 and 7,679,849 shares at
       October 2, 2021 and January 2, 2021, respectively
(302,188)(151,710)
Accumulated other comprehensive loss(309,353)(252,433)
Retained earnings2,192,084 1,696,924 
Total Darling's stockholders’ equity3,205,524 2,891,909 
Noncontrolling interests63,713 62,300 
 Total stockholders' equity3,269,237 2,954,209 
 $5,925,720 $5,613,331 
 The accompanying notes are an integral part of these consolidated financial statements.
3


DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
Three and nine months ended October 2, 2021 and September 26, 2020
(in thousands, except per share data)
(unaudited)


 
Three Months EndedNine Months Ended
 October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Net sales$1,185,916 $850,569 $3,431,301 $2,552,084 
Costs and expenses:  
Cost of sales and operating expenses859,604 638,368 2,510,461 1,917,623 
Loss/(gain) on sale of assets(501)122 (793)210 
Selling, general and administrative expenses97,275 89,993 293,805 276,379 
Restructuring and asset impairment charges— — 778 — 
Depreciation and amortization77,826 85,730 235,582 253,711 
Total costs and expenses1,034,204 814,213 3,039,833 2,447,923 
 Equity in net income of Diamond Green Diesel53,951 91,099 281,964 252,411 
Operating income205,663 127,455 673,432 356,572 
Other expense:  
Interest expense(15,409)(18,793)(47,105)(55,803)
Foreign currency loss(205)(1,239)(1,299)(709)
Other expense, net(853)(1,912)(3,210)(5,278)
Total other expense(16,467)(21,944)(51,614)(61,790)
Equity in net income of other unconsolidated subsidiaries1,647 906 4,199 2,467 
Income before income taxes190,843 106,417 626,017 297,249 
Income tax expense42,637 4,812 126,324 43,058 
Net income148,206 101,605 499,693 254,191 
Net income attributable to noncontrolling interests(1,394)(480)(4,533)(2,117)
Net income attributable to Darling$146,812 $101,125 $495,160 $252,074 
Basic income per share$0.91 $0.62 $3.04 $1.55 
Diluted income per share$0.88 $0.61 $2.96 $1.51 

 



The accompanying notes are an integral part of these consolidated financial statements.
4


DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
Three and nine months ended October 2, 2021 and September 26, 2020
(in thousands)
(unaudited)

Three Months EndedNine Months Ended
 October 2, 2021September 26, 2020October 2, 2021September 26, 2020
Net income$148,206 $101,605 $499,693 $254,191 
Other comprehensive income/(loss), net of tax:  
Foreign currency translation(32,903)37,854 (48,741)(7,243)
Pension adjustments791 648 2,375 1,943 
Soybean meal derivative adjustments(23)— (297)— 
Corn option derivative adjustments3,628 (2,518)2,472 (578)
Heating oil derivative adjustments(6,490)1,494 (5,334)3,424 
Foreign exchange derivative adjustments(4,664)1,412 (4,519)(2,060)
Total other comprehensive income/(loss), net of tax(39,661)38,890 (54,044)(4,514)
Total comprehensive income$108,545 $140,495 $445,649 $249,677 
Comprehensive income attributable to noncontrolling interests2,332 456 7,409 1,364 
Comprehensive income attributable to Darling$106,213 $140,039 $438,240 $248,313 





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

5



DARLING INGREDIENTS INC. AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Nine months ended October 2, 2021 and September 26, 2020
(in thousands, except share data)
(unaudited)
Common Stock
Number of Outstanding Shares$0.01 par ValueAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive LossRetained EarningsStockholders' equity attributable to DarlingNon-controlling InterestsTotal Stockholders' Equity
Balances at January 2, 2021162,200,389 $1,699 $1,597,429 $(151,710)$(252,433)$1,696,924 $2,891,909 $62,300 $2,954,209 
Net income— — — — — 151,766 151,766 1,652 153,418 
Distribution of noncontrolling interest earnings— — — — — — — (2,143)(2,143)
Pension liability adjustments, net of tax— — — — 792 — 792 — 792 
Heating oil derivative adjustments, net of tax— — — — 3,464 — 3,464 — 3,464 
Corn option derivative adjustments, net of tax— — — — (800)— (800)— (800)
Soybean meal derivative adjustments, net of tax— — — — (257)— (257)— (257)
Foreign exchange derivative adjustments, net of tax— — — — (6,806)— (6,806)— (6,806)
Foreign currency translation adjustments— — — — (39,756)— (39,756)1,534 (38,222)
Issuance of non-vested stock— — 58 — — — 58 — 58 
Stock-based compensation— — 8,357 — — — 8,357 — 8,357 
Treasury stock(684,674)— — (48,141)— — (48,141)— (48,141)
Issuance of common stock1,639,151 16 6,001 — — — 6,017 — 6,017 
Balances at April 3, 2021163,154,866 $1,715 $1,611,845 $(199,851)$(295,796)$1,848,690 $2,966,603 $63,343 $3,029,946 
Net income— — — — — 196,582 196,582 1,487 198,069 
Pension liability adjustments, net of tax— — — — 792 — 792 — 792 
Heating oil derivative adjustments, net of tax— — — — (2,308)— (2,308)— (2,308)
Corn option derivative adjustments, net of tax— — — — (356)— (356)— (356)
Soybean meal derivative adjustments, net of tax— — — — (17)— (17)— (17)
Foreign exchange derivative adjustments, net of tax— — — — 6,951 — 6,951 — 6,951 
Foreign currency translation adjustments— — — — 21,980 — 21,980 404 22,384 
Issuance of non-vested stock— — 41 — — — 41 — 41 
Stock-based compensation— — 5,555 — — — 5,555 — 5,555 
Treasury stock(1,171,630)— — (77,760)— — (77,760)— (77,760)
Issuance of common stock67,634 512 — — — 513 — 513 
Balances at July 3, 2021162,050,870 $1,716 $1,617,953 $(277,611)$(268,754)$2,045,272 $3,118,576 $65,234 $3,183,810 
Net income— — — — — 146,812 146,812 1,394 148,206 
Distribution of noncontrolling interest earnings— — — — — — — (3,853)(3,853)
Pension liability adjustments, net of tax— — — — 791 — 791 — 791 
Heating oil derivative adjustments, net of tax— — — — (6,490)— (6,490)— (6,490)
Corn option derivative adjustments, net of tax— — — — 3,628 — 3,628 — 3,628 
Soybean meal derivative adjustments, net of tax— — — — (23)— (23)— (23)
Foreign exchange derivative adjustments, net of tax— — — — (4,664)— (4,664)— (4,664)
Foreign currency translation adjustments— — — — (33,841)— (33,841)938 (32,903)
Issuance of non-vested stock— — 41 — — — 41 — 41 
Stock-based compensation— — 4,361 — — — 4,361 — 4,361 
Treasury stock(350,552)— — (24,577)— — (24,577)— (24,577)
Issuance of common stock78,313 909 — — — 910 — 910 
Balances at October 2, 2021161,778,631 $1,717 $1,623,264 $(302,188)$(309,353)$2,192,084 $3,205,524 $63,713 $3,269,237 
The accompanying notes are an integral part of these consolidated financial statements.
6



DARLING INGREDIENTS INC. AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
Nine months ended October 2, 2021 and September 26, 2020
(in thousands, except share data)
(unaudited)
Common Stock
Number of Outstanding Shares$0.01 par ValueAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive LossRetained EarningsStockholders' equity attributable to DarlingNon-controlling InterestsTotal Stockholders' Equity
Balances at December 28, 2019163,775,111 $1,686 $1,560,897 $(75,022)$(321,847)$1,400,105 $2,565,819 $77,531 $2,643,350 
Net income— — — — — 85,510 85,510 581 86,091 
Deductions to noncontrolling interests— — 3,271 — — — 3,271 (13,146)(9,875)
Pension liability adjustments, net of tax— — — — 648 — 648 — 648 
Heating oil derivative adjustments, net of tax— — — — 10,870 — 10,870 10,870 
Corn option derivative adjustments, net of tax— — — — 136 — 136 — 136 
Foreign exchange derivative adjustments, net of tax— — — — (9,151)— (9,151)— (9,151)
Foreign currency translation adjustments— — — — (65,147)— (65,147)(89)(65,236)
Issuance of non-vested stock8,000 — 40 — — — 40 — 40 
Stock-based compensation— — 10,778 — — — 10,778 — 10,778 
Treasury stock(2,372,876)— — (60,082)— — (60,082)— (60,082)
Issuance of common stock447,729 868 — — — 873 — 873 
Balances at March 28, 2020161,857,964 $1,691 $1,575,854 $(135,104)$(384,491)$1,485,615 $2,543,565 $64,877 $2,608,442 
Net income— — — — — 65,439 65,439 1,056 66,495 
Deductions to noncontrolling interests— — — — — — — (299)(299)
Pension liability adjustments, net of tax— — — — 647 — 647 — 647 
Heating oil derivative adjustments, net of tax— — — — (8,940)— (8,940)— (8,940)
Corn option derivative adjustments, net of tax— — — — 1,804 — 1,804 — 1,804 
Foreign exchange derivative adjustments, net of tax— — — — 5,679 — 5,679 — 5,679 
Foreign currency translation adjustments— — — — 20,779 — 20,779 (640)20,139 
Issuance of non-vested stock— — 55 — — — 55 — 55 
Stock-based compensation— — 4,693 — — — 4,693 — 4,693 
Treasury stock(72,540)— — (1,572)— — (1,572)— (1,572)
Issuance of common stock172,852 1,210 — — — 1,211 — 1,211 
Balances at June 27, 2020161,958,276 $1,692 $1,581,812 $(136,676)$(364,522)$1,551,054 $2,633,360 $64,994 $2,698,354 
Net income— — — — — 101,125 101,125 480 101,605 
Deductions to noncontrolling interests— — — — — — — (4,181)(4,181)
Pension liability adjustments, net of tax— — — — 648 — 648 — 648 
Heating oil derivative adjustments, net of tax— — — — 1,494 — 1,494 — 1,494 
Corn option derivative adjustment, net of tax— — — — (2,518)— (2,518)— (2,518)
Foreign exchange derivative adjustment, net of tax— — — — 1,412 — 1,412 — 1,412 
Foreign currency translation adjustments— — — — 37,878 — 37,878 (24)37,854 
Issuance of non-vested stock— — 56 — — — 56 — 56 
Stock-based compensation— — 3,580 — — — 3,580 — 3,580 
Treasury stock(220,652)— — (7,150)— — (7,150)— (7,150)
Issuance of common stock329,475 4,031 — — — 4,035 — 4,035 
Balances at September 26, 2020162,067,099 $1,696 $1,589,479 $(143,826)$(325,608)$1,652,179 $2,773,920 $61,269 $2,835,189 

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

7


DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended October 2, 2021 and September 26, 2020
(in thousands)
(unaudited)
 October 2,
2021
September 26,
2020
Cash flows from operating activities:  
Net Income$499,693 $254,191 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization235,582 253,711 
Loss (gain) on disposal of property, plant, equipment and other assets(793)210 
Asset impairment138 — 
Deferred taxes67,272 13,362 
Decrease in long-term pension liability(1,118)(7,960)
Stock-based compensation expense18,413 19,202 
Write-off deferred loan costs1,130 2,419 
Deferred loan cost amortization3,044 4,242 
Equity in net income of Diamond Green Diesel and other unconsolidated subsidiaries(286,163)(254,878)
Distributions of earnings from Diamond Green Diesel and other unconsolidated subsidiaries3,322 207,165 
Changes in operating assets and liabilities, net of effects from acquisitions:  
Accounts receivable(85,822)36,083 
Income taxes refundable/payable18,688 8,282 
Inventories and prepaid expenses(97,531)(43,980)
Accounts payable and accrued expenses46,912 (10,832)
Other29,282 (10,804)
Net cash provided by operating activities452,049 470,413 
Cash flows from investing activities:  
Capital expenditures(191,738)(184,919)
       Acquisitions, net of cash acquired(2,059)— 
  Investment in Diamond Green Diesel(25,000)— 
       Investment in other unconsolidated subsidiaries(4,449)— 
Gross proceeds from disposal of property, plant and equipment and other assets3,805 1,291 
Payments related to routes and other intangibles(274)(3,712)
Net cash used by investing activities(219,715)(187,340)
Cash flows from financing activities:  
Proceeds from long-term debt31,088 24,085 
Payments on long-term debt(131,224)(171,640)
Borrowings from revolving credit facility287,000 390,971 
Payments on revolving credit facility(309,000)(415,800)
Net cash overdraft financing29,034 (33,385)
Deferred loan costs— (3,688)
Issuance of common stock50 67 
Repurchase of common stock(97,924)(55,044)
Minimum withholding taxes paid on stock awards(45,260)(7,980)
Acquisition of noncontrolling interest— (8,784)
Distributions to noncontrolling interests(3,853)(6,253)
Net cash used by financing activities(240,089)(287,451)
Effect of exchange rate changes on cash(6,605)(2,712)
Net decrease in cash, cash equivalents and restricted cash(14,360)(7,090)
Cash, cash equivalents and restricted cash at beginning of period81,720 73,045 
Cash, cash equivalents and restricted cash at end of period$67,360 $65,955 
Supplemental disclosure of cash flow information:  
Accrued capital expenditures$3,008 $(2,202)
Cash paid during the period for:  
Interest, net of capitalized interest$32,430 $39,481 
Income taxes, net of refunds$36,709 $24,868 
Non-cash operating activities
 Operating lease right of use asset obtained in exchange for new lease liabilities$50,883 $44,479 
Non-cash financing activities
Debt issued for assets$66 $21 

The accompanying notes are an integral part of these consolidated financial statements.
8


DARLING INGREDIENTS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
October 2, 2021
(unaudited)

(1)General

The accompanying consolidated financial statements for the three and nine month periods ended October 2, 2021 and September 26, 2020, have been prepared by Darling Ingredients Inc., a Delaware corporation (“Darling”, and together with its subsidiaries, the “Company” or “we”, “us” or “our”) in accordance with generally accepted accounting principles in the United States (“GAAP”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The information furnished herein reflects all adjustments (consisting only of normal recurring accruals) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations.  However, management of the Company believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading.  The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Form 10-K for the fiscal year ended January 2, 2021. 

(2)Summary of Significant Accounting Policies

(a)Basis of Presentation

The consolidated financial statements include the accounts of Darling and its consolidated subsidiaries. Noncontrolling interests represent the outstanding ownership interest in the Company's consolidated subsidiaries that are not owned by the Company. In the accompanying Consolidated Statements of Operations, the noncontrolling interest in net income of the consolidated subsidiaries is shown as an allocation of the Company's net income and is presented separately as “Net income attributable to noncontrolling interests.” In the Company's Consolidated Balance Sheets, noncontrolling interests represent the ownership interests in the Company consolidated subsidiaries' net assets held by parties other than the Company. These ownership interests are presented separately as “Noncontrolling interests” within “Stockholders' Equity.” All intercompany balances and transactions have been eliminated in consolidation.

(b)Fiscal Periods

The Company has a 52/53 week fiscal year ending on the Saturday nearest December 31.  Fiscal periods for the consolidated financial statements included herein are as of October 2, 2021, and include the 13 and 39 weeks ended October 2, 2021, and the 13 and 39 weeks ended September 26, 2020.

(c)    Accounts Receivable Factoring

The Company has entered into agreements with third party banks to factor certain of the Company's trade receivables in order to enhance working capital by turning trade receivables into cash faster. Under these agreements, the Company sells certain selected customers’ trade receivables to third party banks without recourse for cash less a nominal fee. For the three months ended October 2, 2021 and September 26, 2020, the Company sold approximately $106.6 million and $76.2 million of its trade receivables and incurred approximately $0.3 million and $0.2 million in fees, which are recorded as interest expense, respectively. For the nine months ended October 2, 2021 and September 26, 2020, the Company sold approximately $319.8 million and $247.0 million of its trade receivables and incurred approximately $0.8 million and $0.9 million in fees, which are recorded as interest expense, respectively.

(d)    Revenue Recognition

The Company recognizes revenue on sales when control of the promised finished product is transferred to the Company's customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for the finished product. Service revenues are recognized when the service occurs.  Certain
9


customers may be required to prepay prior to shipment in order to maintain payment protection related to certain foreign and domestic sales.  These amounts are recorded as unearned revenue and recognized when control of the promised finished product is transferred to the Company's customer.  See Note 18 (Revenue) to the Company's Consolidated Financial Statements included herein.

(e)    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 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.

As a result of the current global COVID-19 pandemic, and related government imposed movement restrictions and initiatives implemented to reduce the global transmission of COVID-19, we have evaluated the potential impact to the Company's operations and for any indicators of potential triggering events that could indicate certain of the Company's assets may be impaired. Through the nine months ended October 2, 2021, the Company has not observed any impairments of the Company's assets or a significant change in their fair value due to the COVID-19 pandemic.

(f)    Earnings Per Share

Basic income per common share is computed by dividing net income attributable to Darling by the weighted average number of common shares including non-vested and restricted shares outstanding during the period.  Diluted income per common share is computed by dividing net income attributable to Darling by the weighted average number of common shares outstanding during the period increased by dilutive common equivalent shares determined using the treasury stock method.
Net Income per Common Share (in thousands, except per share data)
 Three Months Ended
October 2, 2021September 26, 2020
 IncomeSharesPer ShareIncomeSharesPer Share
Basic:      
Net Income attributable to Darling$146,812 162,166 $0.91 $101,125 162,264 $0.62 
Diluted:      
Effect of dilutive securities:      
Add: Option shares in the money and dilutive effect of non-vested stock awards 5,403   6,543  
Less: Pro forma treasury shares (799)  (1,810) 
Diluted:      
Net income attributable to Darling$146,812 166,770 $0.88 $101,125 166,997 $0.61 

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Net Income per Common Share (in thousands, except per share data)
 Nine Months Ended
October 2, 2021September 26, 2020
 IncomeSharesPer ShareIncomeSharesPer Share
Basic:      
Net Income attributable to Darling$495,160 162,707 $3.04 $252,074 162,631 $1.55 
Diluted:      
Effect of dilutive securities:      
Add: Option shares in the money and dilutive effect of non-vested stock awards 5,512   6,391  
Less: Pro forma treasury shares (845)  (2,048) 
Diluted:      
Net income attributable to Darling$495,160 167,374 $2.96 $252,074 166,974 $1.51 

For the three months ended October 2, 2021 and September 26, 2020, respectively, zero and 550,934 outstanding stock options were excluded from diluted income per common share as the effect was antidilutive. For the three months ended October 2, 2021 and September 26, 2020, respectively, 187,484 and 342,003 shares of non-vested stock and stock equivalents were excluded from diluted income per common share as the effect was antidilutive.

For the nine months ended October 2, 2021 and September 26, 2020, respectively, zero and 550,934 outstanding stock options were excluded from diluted income per common share as the effect was antidilutive. For the nine months ended October 2, 2021 and September 26, 2020, respectively, 216,622 and 474,520 shares of non-vested stock and stock equivalents were excluded from diluted income per common share as the effect was antidilutive.

(3)    Investment in Unconsolidated Subsidiaries

On January 21, 2011, a wholly-owned subsidiary of Darling entered into a limited liability company agreement with a wholly-owned subsidiary of Valero Energy Corporation (“Valero”) to form Diamond Green Diesel Holdings LLC (“DGD” or the “DGD Joint Venture”). The DGD Joint Venture is owned 50% / 50% with Valero and was formed to design, engineer, construct and operate a renewable diesel plant located adjacent to Valero's refinery in Norco, Louisiana. The DGD Joint Venture reached mechanical completion and began the production of renewable diesel in late June 2013. Effective May 1, 2019, the limited liability company agreement was amended and restated for the purpose of updating the agreement in certain respects, including to remove certain provisions that were no longer relevant and to add new provisions relating to the expansion of the existing facility.

Selected financial information for the Company's DGD Joint Venture is as follows (in thousands):

(in thousands)September 30, 2021December 31, 2020
Assets:
Total current assets$365,354 $383,557 
Property, plant and equipment, net2,192,808 1,238,726 
Other assets44,657 36,082 
Total assets$2,602,819 $1,658,365 
Liabilities and members' equity:
Total current portion of long term debt$106,423 $517 
Total other current liabilities228,657 99,787 
Total long term debt108,952 8,705 
Total other long term liabilities17,048 3,758 
Total members' equity2,141,739 1,545,598 
Total liabilities and members' equity$2,602,819 $1,658,365 

11


Three Months EndedNine Months Ended
(in thousands)September 30, 2021September 30, 2020September 30, 2021September 30, 2020
Revenues:
Operating revenues$401,900 $346,276 $1,405,392 $1,000,717 
Expenses:
Total costs and expenses less depreciation, amortization and accretion expense281,848 153,406 804,939 462,364 
Depreciation, amortization and accretion expense10,991 10,772 34,673 33,660 
Total costs and expenses292,839 164,178 839,612 496,024 
Operating income109,061 182,098 565,780 504,693 
Other income113 415 524 1,076 
Interest and debt expense, net(1,272)(315)(2,376)(947)
Net income$107,902 $182,198 $563,928 $504,822 

As of October 2, 2021, under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $1,072.6 million on the consolidated balance sheet. The Company has recorded equity in net income from the DGD Joint Venture of approximately $54.0 million and $91.1 million for the three months ended October 2, 2021 and September 26, 2020, respectively. The Company has recorded equity in net income from the DGD Joint Venture of approximately $282.0 million and $252.4 million for the nine months ended October 2, 2021 and September 26, 2020, respectively. In December 2019, the blender tax credits for calendar year 2018 and 2019 were retroactively reinstated by the U.S. Congress. In addition, blenders tax credits were extended for calendar years 2020, 2021 and 2022. For the three months ended September 30, 2021 and September 30, 2020, the DGD Joint Venture recorded approximately $61.7 million and $79.9 million of blenders tax credits, respectively. For the nine months ended September 30, 2021 and September 30, 2020, the DGD Joint Venture recorded approximately $224.6 million and $232.1 million of blenders tax credits, respectively. The blenders tax credits are recorded as a reduction of cost of sales by the DGD Joint Venture. In the three months ended October 2, 2021, the Company made a $25.0 million capital contribution to the DGD Joint Venture. In the three and nine months ended October 2, 2021, the Company did not receive any dividend distributions from the DGD Joint Venture. Subsequent to October 2, 2021, each partner made a capital contribution of approximately $37.75 million.

In addition to the DGD Joint Venture, the Company has investments in other unconsolidated subsidiaries that are insignificant to the Company.

(4)    Inventories

A summary of inventories follows (in thousands):
        
 October 2, 2021January 2, 2021
Finished product$294,220 $233,044 
Work in process83,940 87,223 
Raw material45,917 36,746 
Supplies and other52,218 48,909 
 $476,295 $405,922 

(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):    
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 October 2, 2021January 2, 2021
Indefinite Lived Intangible Assets  
Trade names$53,778 $55,349 
 53,778 55,349 
Finite Lived Intangible Assets:  
Routes342,822 397,342 
Permits480,976 494,191 
Non-compete agreements645 3,300 
Trade names65,675 65,675 
Royalty, consulting, land use rights and leasehold25,801 25,909 
 915,919 986,417 
Accumulated Amortization:
Routes(168,227)(203,392)
Permits(331,509)(315,246)
Non-compete agreements(412)(2,981)
Trade names(44,394)(39,491)
Royalty, consulting, land use rights and leasehold(7,746)(6,976)
(552,288)(568,086)
Total Intangible assets, less accumulated amortization$417,409 $473,680 

Gross intangible routes, permits, trade names, non-compete agreements and other intangibles decreased in fiscal 2021 as a result of approximately $54.5 million of fully amortized asset retirements and a decrease from foreign currency translation. Amortization expense for the three months ended October 2, 2021 and September 26, 2020, was approximately $16.8 million and $18.4 million, respectively, and for the nine months ended October 2, 2021 and September 26, 2020 was $50.8 million and $54.5 million, respectively.

(6)    Goodwill

Changes in the carrying amount of goodwill (in thousands):
 Feed IngredientsFood IngredientsFuel IngredientsTotal
Balance at January 2, 2021   
Goodwill$830,321 $351,296 $126,578 $1,308,195 
Accumulated impairment losses(15,914)(461)(31,580)(47,955)
 814,407 350,835 94,998 1,260,240 
Goodwill acquired during year40 — 161 201 
Foreign currency translation(9,959)(13,061)(5,242)(28,262)
Balance at October 2, 2021   
Goodwill820,402 338,235 121,497 1,280,134 
Accumulated impairment losses(15,914)(461)(31,580)(47,955)
 $804,488 $337,774 $89,917 $1,232,179 

(7)    Accrued Expenses
 
Accrued expenses consist of the following (in thousands):
 October 2, 2021January 2, 2021
Compensation and benefits$112,841 $121,497 
Accrued ad valorem, and franchise taxes21,175 39,167 
Accrued operating expenses83,343 62,601 
Other accrued expense136,051 112,206 
 $353,410 $335,471 


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(8)    Debt

Debt consists of the following (in thousands):
October 2, 2021January 2, 2021
Amended Credit Agreement:  
Revolving Credit Facility$33,000 $55,000 
Term Loan B200,000 300,000 
Less unamortized deferred loan costs(2,081)(3,798)
Carrying value Term Loan B197,919 296,202 
5.25% Senior Notes due 2027 with effective interest of 5.47%500,000 500,000 
Less unamortized deferred loan costs(5,159)(5,747)
Carrying value 5.25% Senior Notes due 2027494,841 494,253 
3.625% Senior Notes due 2026 - Denominated in euro with effective interest of 3.83%597,297 632,163 
Less unamortized deferred loan costs - Denominated in euro(5,423)(6,586)
Carrying value 3.625% Senior Notes due 2026591,874 625,577 
Other Notes and Obligations63,240 37,037 
1,380,874 1,508,069 
Less Current Maturities55,138 27,538 
$1,325,736 $1,480,531 

As of October 2, 2021, the Company had outstanding debt under the Company's 3.625% Senior Notes due 2026 denominated in euros of €515.0 million. In addition, at October 2, 2021, the Company had finance lease obligations denominated in euros of approximately €2.5 million.

As of October 2, 2021, the Company had other notes and obligations of $63.2 million that consist of various overdraft facilities of approximately $32.9 million, a China working capital line of credit of approximately $19.2 million and other debt of approximately $11.1 million.

The interest rate applicable to any borrowings under the revolving credit facility is equal to either LIBOR/euro interbank offered rate/CDOR plus 1.50% per annum or base rate/Canadian prime rate plus 0.50% per annum, subject to certain step-ups or step-downs based on the Company's total leverage ratio. The interest rate applicable to any borrowings under the term loan B facility is equal to the base rate plus 1.00% or LIBOR plus 2.00%.

As of October 2, 2021, the Company had $33.0 million outstanding under the revolver at base rate plus a margin of 0.50% per annum for a total of 3.75% per annum. The Company had $200.0 million outstanding under the term loan B facility at LIBOR plus a margin of 2.00% per annum for a total of 2.09% per annum. As of October 2, 2021, the Company had availability of $912.6 million under the Amended Credit Agreement taking into account amounts borrowed, ancillary facilities and letters of credit issued of $4.1 million. The Company also has foreign bank guarantees that are not part of the Company's Amended Credit Agreement in the amount of approximately $11.8 million at October 2, 2021.

As of October 2, 2021, the Company believes it is in compliance with all of the financial covenants under the Amended Credit Agreement, as well as all of the other covenants contained in the Amended Credit Agreement, the 5.25% Senior Notes due 2027 and the 3.625% Senior Notes due 2026.

(9)    Income Taxes
 
The Company has provided income taxes for the three and nine month periods ended October 2, 2021 and September 26, 2020, based on its estimate of the effective tax rate for the entire 2021 and 2020 fiscal years. The Company’s estimated annual effective tax rate is based on forecasts of income by jurisdiction, permanent differences between book and tax income, the relative proportion of income and losses by jurisdiction, and statutory income tax rates. Discrete events such as the assessment of the ultimate outcome of tax audits, audit settlements, recognizing previously unrecognized tax benefits due to the lapsing of statutes of limitation, recognizing or derecognizing deferred
14


tax assets due to projections of income or loss and changes in tax laws are recognized in the period in which they occur.
 
Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. As of October 2, 2021, the Company had $6.6 million of gross unrecognized tax benefits and $0.6 million of related accrued interest and penalties. The Company's gross unrecognized tax benefits are not expected to decrease within the next twelve months.

The Company’s major taxing jurisdictions include the United States (federal and state), Canada, the Netherlands, Belgium, Brazil, Germany, France and China. The Company is subject to regular examination by various tax authorities and although the final outcome of these examinations is not yet determinable, the Company does not anticipate that any of the examinations will have a significant impact on the Company's results of operations or financial position. The statute of limitations for the Company’s major tax jurisdictions is open for varying periods, but is generally closed through the 2013 tax year.

(10)      Other Comprehensive Income/(Loss)

The components of other comprehensive income/(loss) and the related tax impacts for the three and nine months ended October 2, 2021 and September 26, 2020 are as follows (in thousands):

Three Months Ended
Before-TaxTax (Expense)Net-of-Tax
Amountor BenefitAmount
October 2, 2021September 26, 2020October 2, 2021September 26, 2020October 2, 2021September 26, 2020
Defined benefit pension plans
Amortization of prior service (cost)/benefit$$$(1)$(2)$$
Amortization of actuarial loss1,052 854 (265)(213)787 641 
Total defined benefit pension plans1,057 863 (266)(215)791 648 
Soybean meal option derivatives
Reclassified to earnings(19)— — (14)— 
Activity recognized in other comprehensive income/(loss)(12)— — (9)— 
Total soybean meal option derivatives(31)— — (23)— 
Corn option derivatives
Reclassified to earnings4,217 229 (1,072)(57)3,145 172 
Activity recognized in other comprehensive income/(loss)647 (3,588)(164)898 483 (2,690)
Total corn option derivatives4,864 (3,359)(1,236)841 3,628 (2,518)
Heating oil derivatives
Activity recognized in other comprehensive income/(loss)(8,699)1,992 2,209 (498)(6,490)1,494 
Total heating oil derivatives(8,699)1,992 2,209 (498)(6,490)1,494 
Foreign exchange derivatives
Reclassified to earnings(1,889)(5,317)565 385 (1,324)(4,932)
Activity recognized in other comprehensive income/(loss)(5,397)7,486 2,057 (1,142)(3,340)6,344 
Total foreign exchange derivatives(7,286)2,169 2,622 (757)(4,664)1,412 
Foreign currency translation(33,689)39,237 786 (1,383)(32,903)37,854 
Other comprehensive income/(loss)$(43,784)$40,902 $4,123 $(2,012)$(39,661)$38,890 


15


Nine Months Ended
Before-TaxTax (Expense)Net-of-Tax
Amountor BenefitAmount
October 2, 2021September 26, 2020October 2, 2021September 26, 2020October 2, 2021September 26, 2020
Defined benefit pension plans
Amortization of prior service (cost)/benefit$16 $25 $(4)$(6)$12 $19 
Amortization of actuarial loss3,157 2,562 (794)(638)2,363 1,924 
Total defined benefit pension plans3,173 2,587 (798)(644)2,375 1,943 
Soybean meal option derivatives
Reclassified to earnings(267)— 68 — (199)— 
Activity recognized in other comprehensive income/(loss)(131)— 33 — (98)— 
Total soybean meal option derivatives(398)— 101 — (297)— 
Corn option derivatives
Reclassified to earnings14,880 1,168 (3,780)(292)11,100 876 
Activity recognized in other comprehensive income/(loss)(11,566)(1,939)2,938 485 (8,628)(1,454)
Total corn option derivatives3,314 (771)(842)193 2,472 (578)
Heating oil derivatives
Activity recognized in other comprehensive income/(loss)(7,149)4,565 1,815 (1,141)(5,334)3,424 
Total heating oil derivatives(7,149)4,565 1,815 (1,141)(5,334)3,424 
Foreign exchange derivatives
Reclassified to earnings(2,503)(10,564)884 1,690 (1,619)(8,874)
Activity recognized in other comprehensive income/(loss)(4,482)8,112 1,582 (1,298)(2,900)6,814 
Total foreign exchange derivatives(6,985)(2,452)2,466 392 (4,519)(2,060)
Foreign currency translation(50,866)(5,798)2,125 (1,445)(48,741)(7,243)
Other comprehensive income/(loss)$(58,911)$(1,869)$4,867 $(2,645)$(54,044)$(4,514)

The following table presents the amounts reclassified out of each component of other comprehensive income/(loss), net of tax for the three and nine months ended October 2, 2021 and September 26, 2020 as follows (in thousands):

Three Months EndedNine Months Ended
October 2, 2021September 26, 2020October 2, 2021September 26, 2020Statement of Operations Classification
Derivative instruments
Soybean meal derivatives$19 $— $267 $— Net sales
Foreign exchange contracts1,889 5,317 2,503 10,564 Net sales
Corn option derivatives(4,217)(229)(14,880)(1,168)Cost of sales and operating expenses
(2,309)5,088 (12,110)9,396 Total before tax
502 (328)2,828 (1,398)Income taxes
(1,807)4,760 (9,282)7,998 Net of tax
Defined benefit pension plans
Amortization of prior service cost$(5)$(9)$(16)$(25)(a)
Amortization of actuarial loss(1,052)(854)(3,157)(2,562)(a)
(1,057)(863)(3,173)(2,587)Total before tax
266 215 798 644 Income taxes
(791)(648)(2,375)(1,943)Net of tax
Total reclassifications$(2,598)$4,112 $(11,657)$6,055 Net of tax

(a)These items are included in the computation of net periodic pension cost. See Note 12 (Employee Benefit Plans) to the Company's Consolidated Financial Statement included herein for additional information.

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The following table presents changes in each component of accumulated other comprehensive income/(loss) as of October 2, 2021 as follows (in thousands):
Nine Months Ended October 2, 2021
Foreign CurrencyDerivativeDefined Benefit
TranslationInstrumentsPension PlansTotal
Accumulated Other Comprehensive loss January 2, 2021, attributable to Darling, net of tax$(210,902)$(3,214)$(38,317)$(252,433)
Other comprehensive loss before reclassifications(48,741)(16,960)— (65,701)
Amounts reclassified from accumulated other comprehensive loss— 9,282 2,375 11,657 
Net current-period other comprehensive income/(loss)(48,741)(7,678)2,375 (54,044)
Noncontrolling interest2,876 — — 2,876 
Accumulated Other Comprehensive loss October 2, 2021, attributable to Darling, net of tax$(262,519)$(10,892)$(35,942)$(309,353)

(11)    Stockholders' Equity

Fiscal 2021 Long-Term Incentive Opportunity Awards (2021 LTIP). On January 4, 2021, the Compensation Committee (the “Committee”) of the Company's Board of Directors adopted the 2021 LTIP pursuant to which they awarded certain of the Company's key employees, 90,689 restricted stock units and 126,711 performance share units (the “PSUs”) under the Company's 2017 Omnibus Incentive Plan. The restricted stock units vest 33.33% on the first, second and third anniversaries of the grant date. The PSUs are tied to a three-year forward-looking performance period and will be earned based on the Company's average return on gross investment (“ROGI”), as calculated in accordance with the terms of the award agreement, relative to the average ROGI of the Company's performance peer group companies, with the earned award to be determined in the first quarter of fiscal 2024, after the final results for the relevant performance period are determined. The PSUs were granted at a target of 100%, but each PSU will reduce or increase (up to 225%) depending on the Company's ROGI relative to that of the performance peer group companies and is also subject to the application of a total shareholder return (“TSR”) cap/collar modifier depending on the Company's TSR during the performance period relative to that of the performance peer group companies.

On August 3, 2020, the Company’s Board of Directors approved the extension for an additional two years of its previously announced share repurchase program and refreshed the amount of the program back up to its original amount of an aggregate of $200.0 million of the Company's Common Stock depending on market conditions. During the first nine months of fiscal 2021, $97.9 million of common stock was repurchased under the repurchase program. As of October 2, 2021, the Company had approximately $102.1 million remaining under the share repurchase program initially approved in August 2017 and subsequently extended to August 13, 2022.

(12)    Employee Benefit Plans

Net pension cost for the three and nine months ended October 2, 2021 and September 26, 2020 includes the following components (in thousands):
Pension BenefitsPension Benefits
 Three Months EndedNine Months Ended
 October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Service cost$778 $764 $2,359 $2,268 
Interest cost1,203 1,425 3,616 4,283 
Expected return on plan assets(2,320)(2,042)(6,969)(6,113)
Amortization of prior service cost16 25 
Amortization of actuarial loss1,052 854 3,157 2,562 
Net pension cost$718 $1,010 $2,179 $3,025 

Based on actuarial estimates at October 2, 2021, the Company expects to contribute approximately $3.7 million to its pension plans to meet funding requirements during the next twelve months. Additionally, the Company has made tax deductible discretionary and required contributions to its pension plans for the nine months ended October 2, 2021 and September 26, 2020 of approximately $2.8 million and $10.3 million, respectively.  

17


The Company participates in various multiemployer pension plans which provide defined benefits to certain employees covered by labor contracts.  These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts to meet their pension benefit obligations to their participants. The Company's contributions to each multiemployer plan represent less than 5% of the total contributions to each plan. Based on the most currently available information, the Company has determined that, if a withdrawal were to occur, withdrawal liabilities on 2 of the plans in which the Company currently participates could be material to the Company, with 1 of these material plans certified as critical or red zone. With respect to the other multiemployer pension plans in which the Company participates and which are not individually significant, 5 plans have certified as critical or red zone and 2 plans have certified as endangered or yellow zone as defined by the Pension Protection Act of 2006.

The Company currently has withdrawal liabilities recorded on 4 U.S. multiemployer plans in which it participated. During the first nine months of fiscal 2021, the Company was notified by one of these multiemployer plans that the Company's withdrawal liability has increased and as a result the Company recorded an additional liability of approximately $1.3 million. As of October 2, 2021, the Company has an aggregate accrued liability of approximately $3.9 million representing the present value of scheduled withdrawal liability payments on the multiemployer plans that have given notice of withdrawal. While the Company has no ability to calculate a possible current liability for under-funded multiemployer plans that could terminate or could require additional funding under the Pension Protection Act of 2006, the amounts could be material.

(13)    Derivatives

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

The Company makes limited use of derivative instruments to manage cash flow risks related to natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes.  Natural gas swaps and options are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential impact of seasonal weather demands on natural gas that increases natural gas prices.  Heating oil swaps and options are entered into with the intent of managing the overall cost of diesel fuel usage by reducing the potential impact of seasonal weather demands on diesel fuel that increases diesel fuel prices.  Soybean meal options are entered into with the intent of managing the impact of changing prices for poultry meal sales. Corn options and future contracts are entered into with the intent of managing U.S. forecasted sales of bakery by-products (“BBP”) by reducing the impact of changing prices.  Foreign currency forward and option contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency. At October 2, 2021, the Company had corn option contracts and foreign exchange forward and option contracts outstanding that qualified and were designated for hedge accounting as well as corn forward contracts and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.

Cash Flow Hedges

In fiscal 2020 and fiscal 2021, the Company entered into corn option contracts on the Chicago Board of Trade that are designated as cash flow hedges. Under the terms of the corn option contracts, the Company hedged a portion of its U.S. forecasted sales of BBP into the fourth quarter of fiscal 2022. At October 2, 2021 and January 2, 2021, the aggregate fair value of these corn option contracts was approximately $2.2 million and $6.8 million, respectively. These amounts are included in other current assets, accrued expenses and noncurrent liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss. The Company may enter into corn option contracts in the future from time to time.

In fiscal 2020 and fiscal 2021, the Company entered into foreign exchange forward and option contracts that are designated as cash flow hedges. Under the terms of the foreign exchange contracts, the Company hedged a portion of its forecasted collagen sales in currencies other than the functional currency through the fourth quarter of fiscal 2022. At October 2, 2021 and January 2, 2021, the aggregate fair value of these foreign exchange contracts was approximately $2.5 million and $11.6 million, respectively. These amounts are included in other current assets, accrued expense and noncurrent assets on the balance sheet, with an offset recorded in accumulated other comprehensive loss.

18


In fiscal 2020 and fiscal 2021, the Company entered into soybean meal forward contracts to hedge a portion of its forecasted poultry meal sales into the third quarter of fiscal 2021. At October 2, 2021 and January 2, 2021, the aggregate fair value of the soybean meal contracts was zero and $0.4 million, respectively. These amounts are included in other current assets on the balance sheet, with an offset recorded in accumulated other comprehensive loss.

As of October 2, 2021, the Company had the following designated and non-designated outstanding forward and option contract amounts that were entered into to hedge foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency (in thousands):

Functional CurrencyContract Currency
TypeAmountTypeAmount
Brazilian real22,978 Euro3,536 
Brazilian real1,116,635 U.S. dollar237,950 
Euro33,298 U.S. dollar39,070 
Euro24,960 Polish zloty114,000 
Euro7,160 Japanese yen929,960 
Euro20,692 Chinese renminbi157,474 
Euro13,670 Australian dollar21,850 
Euro2,810 British pound2,400 
Euro34 Canadian dollar50 
Polish zloty2,057 U.S. dollar524 
Polish zloty20,589 Euro4,483 
British pound179 Euro210 
Japanese yen228,482 U.S. dollar2,070 
U.S. dollar514 Japanese yen57,000 
U.S. dollar293,089 Euro250,000 

The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at October 2, 2021 into earnings over the next 12 months will be approximately $14.3 million. As of October 2, 2021, no amounts have been reclassified into earnings as a result of the discontinuance of cash flow hedges.

The table below summarizes the effect of derivatives not designated as hedges on the Company's consolidated statements of operations for the three and nine months ended October 2, 2021 and September 26, 2020 (in thousands):

Loss or (Gain) Recognized in Income on Derivatives Not Designated as Hedges
Three Months EndedNine Months Ended
Derivatives not designated as hedging instrumentsLocationOctober 2, 2021September 26, 2020October 2, 2021September 26, 2020
Foreign exchangeForeign currency loss$5,656 $(1,957)$13,626 $(1,995)
Foreign exchangeNet sales323 (566)895 57 
Foreign exchangeCost of sales and operating expenses(98)111 (524)(946)
Foreign exchangeSelling, general and administrative expenses2,732 1,187 2,001 8,091 
Corn options and futuresNet sales753 (914)(2,724)876 
Corn options and futuresCost of sales and operating expenses(1,871)754 3,683 (2,332)
Heating oil swaps and optionsNet sales— — — (38)
Total$7,495 $(1,385)$16,957 $3,713 

At October 2, 2021, the Company had forward purchase agreements in place for purchases of approximately $118.8 million of natural gas and diesel fuel.  The Company intends to take physical delivery of the commodities under the forward purchase agreements and accordingly, these contracts are not subject to the requirements of fair value accounting because they qualify as normal purchases.

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(14)    Fair Value Measurements

FASB authoritative guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The following table presents the Company’s financial instruments that are measured at fair value on a recurring and nonrecurring basis as of October 2, 2021 and are categorized using the fair value hierarchy under FASB authoritative guidance.  The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value. 

  Fair Value Measurements at October 2, 2021 Using
Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable
Inputs
Significant
Unobservable
Inputs
(In thousands of dollars)Total(Level 1)(Level 2)(Level 3)
Assets:
Derivative instruments$5,645 $— $5,645 $— 
Total Assets$5,645 $— $5,645 $— 
Liabilities:
Derivative instruments$8,516 $— $8,516 $— 
5.25% Senior notes520,000 — 520,000 — 
3.625% Senior notes606,854 — 606,854 — 
Term loan B200,000 — 200,000 — 
Revolver debt32,505 — 32,505 — 
Total Liabilities$1,367,875 $— $1,367,875 $— 
  Fair Value Measurements at January 2, 2021 Using
Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable
Inputs
Significant
Unobservable
Inputs
(In thousands of dollars)Total(Level 1)(Level 2)(Level 3)
Assets:
Derivative instruments$17,358 $— $17,358 $— 
Total Assets$17,358 $— $17,358 $— 
Liabilities:
Derivative instruments$9,778 $— $9,778 $— 
5.25% Senior notes531,300 — 531,300 — 
3.625% Senior notes646,323 — 646,323 — 
Term loan B298,500 — 298,500 — 
Revolver debt54,175 — 54,175 — 
Total Liabilities$1,540,076 $— $1,540,076 $— 

Derivative assets and liabilities consist of the Company’s corn option and future contracts, foreign currency forward and option contracts and soybean meal forward contracts which represent the difference between observable market rates of commonly quoted intervals for similar assets and liabilities in active markets and the fixed swap rate considering the instruments term, notional amount and credit risk.  See Note 13 (Derivatives) to the Company's Consolidated Financial Statements included herein for discussion on the Company's derivatives.

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

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


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(15)    Restructuring and Asset Impairment Charges 

In December 2020, due to unfavorable economics in the biodiesel industry, the Company made the decision to shut down processing operations at its biodiesel facilities located in the United States and Canada, and there are no current plans to resume biodiesel production at these facilities in the future. In addition to charges incurred in fiscal 2020, the Company has incurred additional restructuring and asset impairment charges in fiscal 2021 related to the biodiesel facilities of approximately $0.8 million, with approximately $0.4 million of this amount being employee termination costs in Canada and the remainder representing charges to long-lived assets and other charges.

(16)    Contingencies 

The Company is a party to various lawsuits, claims and loss contingencies arising in the ordinary course of its business, including insured worker's compensation, auto, and general liability claims, assertions by certain regulatory and governmental agencies related to permitting requirements and environmental matters, including air, wastewater and storm water discharges from the Company’s processing facilities, litigation involving tort, contract, statutory, labor, employment, and other claims, and tax matters.

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

As a result of the matters discussed above, the Company has established loss reserves for insurance, environmental, litigation and tax contingencies. At October 2, 2021 and January 2, 2021, the reserves for insurance, environmental, litigation and tax contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities were approximately $70.8 million and $66.2 million, respectively.  The Company has insurance recovery receivables of approximately $27.0 million as of October 2, 2021 and January 2, 2021, related to the insurance contingencies. The Company's management believes these reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management; however, there can be no assurance that final costs related to these contingencies will not exceed current estimates. The Company believes that the likelihood is remote that any additional liability from the lawsuits and claims that may not be covered by insurance would have a material effect on the Company's financial position, results of operations or cash flows.

Lower Passaic River Area. In December 2009, the Company, along with numerous other entities, received notice from the United States Environmental Protection Agency (“EPA”) that the Company (as alleged successor-in-interest to The Standard Tallow Corporation) is considered a potentially responsible party (a “PRP”) with respect to alleged contamination in the lower 17-mile area of the Passaic River which is part of the Diamond Alkali Superfund Site located in Newark, New Jersey. The Company’s designation as a PRP is based upon the operation of former plant sites located in Newark and Kearny, New Jersey by The Standard Tallow Corporation, an entity that the Company acquired in 1996. In March 2016, the Company received another letter from EPA notifying the Company that it had issued a Record of Decision (the “ROD”) selecting a remedy for the lower 8.3 miles of the lower Passaic River area at an estimated cost of $1.38 billion. The EPA letter made no demand on the Company and laid out a framework for remedial design/remedial action implementation in which the EPA will first seek funding from major PRPs. The letter indicates that the EPA has sent the letter to over 100 parties, which include large chemical and refining companies, manufacturing companies, foundries, plastic companies, pharmaceutical companies and food and consumer product companies. The Company asserts that it is not responsible for any liabilities of its former subsidiary The Standard Tallow Corporation, which was legally dissolved in 2000, and that, in any event, The Standard Tallow Corporation did not discharge any of the eight contaminants of concern identified in the ROD (the “COCs”). Subsequently, the EPA conducted a settlement analysis using a third-party allocator and offered early cash out settlements to those PRPs for whom the third-party allocator determined did not discharge any of the COCs. The Company participated in this allocation process, and in November 2019, received a cash out settlement offer from the EPA in the amount of $0.6 million ($0.3 million for each of the former plant sites in question) for liabilities relating to the lower 8.3 miles of the lower Passaic River area. The Company accepted this settlement offer, and the settlement became effective on April 16, 2021 following the completion of the EPA's administrative approval process. On September 30, 2016, Occidental Chemical Corporation (“OCC”) entered into an agreement with the EPA to perform the remedial design for the cleanup plan for the lower 8.3 miles of the Passaic River. On June 30, 2018, OCC filed a complaint in the United States District Court for the District of New Jersey against over 100 companies, including the Company, seeking cost recovery or contribution for costs under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) relating to various investigations and cleanups OCC has conducted or is conducting in connection with the Passaic River. According to the complaint, OCC has incurred or is incurring costs which include the estimated cost to complete the remedial design for the cleanup plan for the lower 8.3 miles of the Passaic River. OCC is also seeking
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a declaratory judgment to hold the defendants liable for their proper shares of future response costs, including the remedial action for the lower 8.3 miles of the Passaic River. The Company, along with 40 of the other defendants, had previously received a release from OCC of its CERCLA contribution claim of $165 million associated with the costs to design the remedy for the lower 8.3 miles of the Passaic River. Furthermore, the Company's settlement with the EPA described above could preclude certain of the claims alleged by OCC against the Company. The Company's ultimate liability, if any, for investigatory costs, remedial costs and/or natural resource damages in connection with the lower Passaic River area cannot be determined at this time; however, as of the date of this report, the Company has found no definitive evidence that the former Standard Tallow Corporation plant sites contributed any of the COCs to the Passaic River and, therefore, there is nothing that leads the Company to believe that this matter will have a material effect on the Company's financial position, results of operations or cash flows.

(17)    Business Segments

The Company sells its products domestically and internationally, operating within 3 industry segments: Feed Ingredients, Food Ingredients and Fuel Ingredients. The measure of segment income (loss) includes all revenues, operating expenses (excluding certain amortization of intangibles), and selling, general and administrative expenses incurred at all operating locations and excludes corporate activities.

Included in corporate activities are general corporate expenses and the amortization of certain intangibles. Assets of corporate activities include cash, unallocated prepaid expenses, deferred tax assets, prepaid pension, and miscellaneous other assets.

Feed Ingredients
Feed Ingredients consists principally of (i) the Company's U.S. ingredients business, including the Company's fats and proteins, used cooking oil, trap grease, the Rothsay ingredients business, and the ingredients and specialty products businesses conducted by Darling Ingredients International under the Sonac name (proteins, fats, and blood products) and (ii) the Company's bakery residuals business. Feed Ingredients operations process animal by-products and used cooking oil into fats, proteins and hides.

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

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

Business Segments (in thousands):

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Feed IngredientsFood IngredientsFuel IngredientsCorporateTotal
Three Months Ended October 2, 2021
Net Sales$769,626 $311,856 $104,434 $— $1,185,916 
Cost of sales and operating expenses553,662 241,308 64,634 — 859,604 
Gross Margin215,964 70,548 39,800 — 326,312 
Gain on sale of assets(229)(8)(264)— (501)
Selling, general and administrative expenses54,997 24,417 4,481 13,380 97,275 
Depreciation and amortization53,824 14,933 6,361 2,708 77,826 
Equity in net income of Diamond Green Diesel— — 53,951 — 53,951 
Segment operating income/(loss)107,372 31,206 83,173 (16,088)205,663 
Equity in net income of other unconsolidated subsidiaries1,647 — — — 1,647 
Segment income/(loss)109,019 31,206 83,173 (16,088)207,310 
Total other expense(16,467)
Income before income taxes$190,843 

Feed IngredientsFood IngredientsFuel IngredientsCorporateTotal
Three Months Ended September 26, 2020
Net Sales$483,025 $291,842 $75,702 $— $850,569 
Cost of sales and operating expenses361,576 226,745 50,047 — 638,368 
Gross Margin121,449 65,097 25,655 — 212,201 
Loss/(gain) on sale of assets167 16 (61)— 122 
Selling, general and administrative expenses49,028 23,366 5,038 12,561 89,993 
Depreciation and amortization53,764 20,648 8,633 2,685 85,730 
Equity in net income of Diamond Green Diesel— — 91,099 — 91,099 
Segment operating income/(loss)18,490 21,067 103,144 (15,246)127,455 
Equity in net income of other unconsolidated subsidiaries906 — — — 906 
Segment income/(loss)19,396 21,067 103,144 (15,246)128,361 
Total other expense(21,944)
Income before income taxes$106,417 

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Feed IngredientsFood IngredientsFuel IngredientsCorporateTotal
Nine Months Ended October 2, 2021
Net Sales$2,193,002 $926,952 $311,347 $— $3,431,301 
Cost of sales and operating expenses1,584,667 706,260 219,534 — 2,510,461 
Gross Margin608,335 220,692 91,813 — 920,840 
Gain on sale of assets(490)(1)(302)— (793)
Selling, general and administrative expenses162,594 75,150 13,822 42,239 293,805 
Restructuring and asset impairment charges— — 778 — 778 
Depreciation and amortization162,404 45,666 19,214 8,298 235,582 
Equity in net income of Diamond Green Diesel— — 281,964 — 281,964 
Segment operating income/(loss)283,827 99,877 340,265 (50,537)673,432 
Equity in net income of other unconsolidated subsidiaries4,199 — — — 4,199 
Segment income/(loss)288,026 99,877 340,265 (50,537)677,631 
Total other expense(51,614)
Income before income taxes$626,017 
Segment assets at October 2, 2021$2,787,376 $1,213,831 $1,413,049 $511,464 $5,925,720 

Feed IngredientsFood IngredientsFuel IngredientsCorporateTotal
Nine Months Ended September 26, 2020
Net Sales$1,499,340 $841,070 $211,674 $— $2,552,084 
Cost of sales and operating expenses1,117,931 652,334 147,358 — 1,917,623 
Gross Margin381,409 188,736 64,316 — 634,461 
Loss/(gain) on sale of assets293 (30)(53)— 210 
Selling, general and administrative expenses153,459 71,406 10,645 40,869 276,379 
Depreciation and amortization159,968 60,925 24,705 8,113 253,711 
Equity in net income of Diamond Green Diesel— — 252,411 — 252,411 
Segment operating income/(loss)67,689 56,435 281,430 (48,982)356,572 
Equity in net income of other unconsolidated subsidiaries2,467 — — — 2,467 
Segment income/(loss)70,156 56,435 281,430 (48,982)359,039 
Total other expense(61,790)
Income before income taxes$297,249 
Segment assets at January 2, 2021$2,708,922 $1,335,769 $1,160,132 $408,508 $5,613,331 

(18)    Revenue

The Company extends payment terms to its customers based on commercially acceptable practices. The term between invoicing and payment due date is not significant. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring finished products or performing services, which is generally based on an executed agreement or purchase order.

Most of the Company's products are shipped based on the customer specifications. Customer returns are infrequent and not material to the Company. Adjustments to net sales for sales deductions are generally recognized in the same period as the sale or when known. Customers in certain industries or countries may be required to prepay prior to shipment in order to maintain payment protection. These represent short-term prepayment from customers and are not material to the Company. The Company elected to treat shipping and handling as fulfilment costs, which will result in billed freight recorded in cost of sales and netted against freight costs. Sales, value-add, and other taxes collected concurrently with revenue-producing activities are excluded from revenue and booked on a net basis.

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The following tables present the Company revenues disaggregated by geographic area and major product types by reportable segment for the three and nine months ended October 2, 2021 and September 26, 2020 (in thousands):

Three Months Ended October 2, 2021
Feed IngredientsFood IngredientsFuel IngredientsTotal
Geographic Area
North America$647,114 $66,995 $$714,111 
Europe114,762 166,039 104,432 385,233 
China4,910 55,856 — 60,766 
South America— 8,943 — 8,943 
Other2,840 14,023 — 16,863 
Net sales$769,626 $311,856 $104,434 $1,185,916 
Major product types
Fats$307,929 $48,579 $— $356,508 
Used cooking oil69,859 — — 69,859 
Proteins257,991 — — 257,991 
Bakery80,543 — — 80,543 
Other rendering43,741 — — 43,741 
Food ingredients— 231,645 — 231,645 
Bioenergy— — 104,432 104,432 
Biofuels— — 
Other9,563 31,632 — 41,195 
Net sales$769,626 $311,856 $104,434 $1,185,916 


Nine Months Ended October 2, 2021
Feed IngredientsFood IngredientsFuel IngredientsTotal
Geographic Area
North America$1,856,642 $207,100 $3,376 $2,067,118 
Europe316,804 487,056 307,971 1,111,831 
China10,594 165,880 — 176,474 
South America— 24,987 — 24,987 
Other8,962 41,929 — 50,891 
Net sales$2,193,002 $926,952 $311,347 $3,431,301 
Major product types
Fats$829,494 $131,123 $— $960,617 
Used cooking oil207,325 — — 207,325 
Proteins771,889 — — 771,889 
Bakery222,850 — — 222,850 
Other rendering132,150 — — 132,150 
Food ingredients— 700,809 — 700,809 
Bioenergy— — 307,971 307,971 
Biofuels— — 3,376 3,376 
Other29,294 95,020 — 124,314 
Net sales$2,193,002 $926,952 $311,347 $3,431,301 

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Three Months Ended September 26, 2020
Feed IngredientsFood IngredientsFuel IngredientsTotal
Geographic Area
North America$390,182 $66,554 $5,678 $462,414 
Europe85,803 152,372 70,024 308,199 
China4,310 43,491 — 47,801 
South America— 11,711 — 11,711 
Other2,730 17,714 — 20,444 
Net sales$483,025 $291,842 $75,702 $850,569 
Major product types
Fats$153,496 $35,108 $— $188,604 
Used cooking oil45,659 — — 45,659 
Proteins190,663 — — 190,663 
Bakery44,402 — — 44,402 
Other rendering39,041 — — 39,041 
Food ingredients— 238,651 — 238,651 
Bioenergy— — 70,024 70,024 
Biofuels— — 5,678 5,678 
Other9,764 18,083 — 27,847 
Net sales$483,025 $291,842 $75,702 $850,569 


Nine Months Ended September 26, 2020
Feed IngredientsFood IngredientsFuel IngredientsTotal
Geographic Area
North America$1,236,963 $171,517 $12,069 $1,420,549 
Europe244,712 468,285 199,605 912,602 
China10,087 128,490 — 138,577 
South America— 24,377 — 24,377 
Other7,578 48,401 — 55,979 
Net sales$1,499,340 $841,070 $211,674 $2,552,084 
Major product types
Fats$484,287 $100,423 $— $584,710 
Used cooking oil132,274 — — 132,274 
Proteins596,784 — — 596,784 
Bakery129,467 — — 129,467 
Other rendering125,669 — — 125,669 
Food ingredients— 676,970 — 676,970 
Bioenergy— — 199,605 199,605 
Biofuels— — 12,069 12,069 
Other30,859 63,677 — 94,536 
Net sales$1,499,340 $841,070 $211,674 $2,552,084 

Long-Term Performance Obligations. The Company from time to time enters into long-term contracts to supply certain volumes of finished products to certain customers. Revenue recognized to date in 2021 under these long-term supply contracts was approximately $62.4 million, with the remaining performance obligations to be recognized in future periods (generally 2 years) of approximately $143.4 million.

(19)    Related Party Transactions

Raw Material Agreement

The Company entered into a Raw Material Agreement with the DGD Joint Venture in May 2011 pursuant to which the Company will offer to supply certain animal fats and used cooking oil at market prices, but the DGD Joint Venture is not obligated to purchase the raw material offered by the Company. Additionally, the Company may offer other feedstocks to the DGD Joint Venture, such as inedible corn oil, purchased on a resale basis. For the three months
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ended October 2, 2021 and September 26, 2020, the Company has recorded sales to the DGD Joint Venture of approximately $102.9 million and $69.0 million, respectively. For the nine months ended October 2, 2021 and September 26, 2020, the Company has recorded sales to the DGD Joint Venture of approximately $301.7 million and $203.4 million, respectively. At October 2, 2021 and January 2, 2021, the Company has $18.7 million and $14.2 million in outstanding receivables due from the DGD Joint Venture, respectively. In addition, the Company has eliminated approximately $21.6 million and $4.2 million of additional sales for the three months ended October 2, 2021 and September 26, 2020, respectively to defer the Company's portion of profit of approximately $5.5 million and $0.8 million on those sales relating to inventory assets remaining on the DGD Joint Venture's balance sheet at October 2, 2021 and September 26, 2020, respectively.

Revolving Loan Agreement

On May 1, 2019, Darling through its wholly owned subsidiary Darling Green Energy LLC, (“Darling Green”), and Diamond Alternative Energy, LLC, a wholly owned subsidiary of Valero (“Diamond Alternative” and together with Darling Green, the “DGD Lenders”), entered into a revolving loan agreement (the “DGD Loan Agreement”) with the DGD Joint Venture. The DGD Lenders have committed to making loans available to the DGD Joint Venture in the total amount of $50.0 million with each lender committed to $25.0 million of the total commitment. Any borrowings by the DGD Joint Venture under the DGD Loan Agreement are at the applicable annum rate equal to the sum of (a) the LIBO Rate (meaning Reuters BBA Libor Rates Page 3750) on such day plus (b) 2.50%. The DGD Loan Agreement matures on April 29, 2022, unless extended by agreement of the parties. As of October 2, 2021, no amounts were owed to Darling Green under the DGD Loan Agreement. Subsequent to October 2, 2021, the DGD Joint Venture borrowed all $50.0 million available under the DGD Loan Agreement, including the Company's full $25.0 million commitment.

Guarantee Agreements

In February 2020, in connection with the DGD Joint Venture’s expansion project at its Norco, LA facility, it entered into 2 agreements (the “IMTT Terminaling Agreements”) with International-Matex Tank Terminals (“IMTT”), pursuant to which the DGD Joint Venture will move raw material and finished product to and from the IMTT terminal facility by pipeline, thereby providing better logistical capabilities.  As a condition to entering into the IMTT Terminaling Agreements, IMTT required that the Company and Valero guarantee their proportionate share, up to a maximum of approximately $50 million each, of the DGD Joint Venture’s obligations under the IMTT Terminaling Agreements (the “IMTT Guarantee”), subject to the conditions provided for in the IMTT Terminaling Agreements. The Company has not recorded any liability as a result of the IMTT Guarantee, as the Company believes the likelihood of having to make any payments under the IMTT Guarantee is remote.

In April 2021, in connection with the DGD Joint Venture’s expansion project at its Port Arthur, TX facility, it entered into 2 agreements (the “GTL Terminaling Agreements”) with GT Logistics, LLC (“GTL”), pursuant to which the DGD Joint Venture will move raw material and finished product to and from the GTL terminal facility by pipeline, thereby providing better logistical capabilities. As a condition to entering into the GTL Terminaling Agreements, GLT required that the Company and Valero guarantee their proportionate share, up to a maximum of approximately $160 million each, of the DGD Joint Venture’s obligations under the GTL Terminaling Agreements (the “GTL Guarantee”), subject to the conditions provided for in the GTL Terminaling Agreements. The maximum amount of the GTL Guarantee is reduced over the 20-year initial term of the GTL Terminaling Agreements as the termination fee under such agreements declines. The Company has not recorded any liability as a result of the GTL Guarantee, as the Company believes the likelihood of having to make any payments under the GTL Guarantee is remote.

(20)    New Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. This ASU amends Topic 740 Income Taxes, which eliminates certain exceptions in accounting for income taxes, improves consistency in application and clarifies existing guidance. The standard is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The adoption of this ASU in the first quarter of fiscal 2021 did not have a material impact on the Company's consolidated financial statements.
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Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 below under the heading “Forward Looking Statements” and elsewhere in this report, and under the heading “Risk Factors” in Part I, Item 1A in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2021, filed with the SEC on March 2, 2021 and in the Company's other public filings with the SEC.

The following discussion should be read in conjunction with the unaudited consolidated financial statements and related notes thereto contained in this report.

Overview

Darling Ingredients Inc. (“Darling”, and together with its subsidiaries, the “Company” or “we,” “us” or “our”) is a global developer and producer of sustainable natural ingredients from edible and inedible bio-nutrients, creating a wide range of ingredients and customized specialty solutions for customers in the pharmaceutical, food, pet food, feed, industrial, fuel, bioenergy and fertilizer industries. With operations on five continents, the Company collects and transforms all aspects of animal by-product streams into useable and specialty ingredients, such as collagen, edible fats, feed-grade fats, animal proteins and meals, plasma, pet food ingredients, organic fertilizers, yellow grease, fuel feedstocks, green energy, natural casings and hides. The Company also recovers and converts recycled oils (used cooking oil and animal fats) into valuable feed and collects and processes residual bakery products into feed ingredients. In addition, the Company provides environmental services, such as grease trap collection and disposal services to food service establishments. The Company sells its products domestically and internationally and operates within three industry segments: Feed Ingredients, Food Ingredients and Fuel Ingredients.

The Feed Ingredients operating segment includes the Company's global activities related to (i) the collection and processing of beef, poultry and pork animal by-products in North America and Europe into non-food grade oils and protein meals, (ii) the collection and processing of bakery residuals in North America into Cookie Meal®, which is predominantly used in poultry and swine rations, (iii) the collection and processing of used cooking oil in North America into non-food grade fats, (iv) the collection and processing of porcine and bovine blood in China, Europe, North America and Australia into blood plasma powder and hemoglobin, (v) the processing of selected portions of slaughtered animals into a variety of meat products for use in pet food in Europe and North America, (vi) the processing of cattle hides and hog skins in North America, (vii) the production of organic fertilizers using protein produced from the Company’s animal by-products processing activities in North America and Europe, (viii) the rearing and processing of black soldier fly larvae into specialty proteins for use in animal feed and pet food in North America, and (ix) the provision of grease trap services to food service establishments in North America. Non-food grade oils and fats produced and marketed by the Company are principally sold to third parties to be used as ingredients in animal feed and pet food, as an ingredient for the production of renewable diesel and biodiesel, or to the oleo-chemical industry to be used as an ingredient in a wide variety of industrial applications. Protein meals, blood plasma powder and hemoglobin produced and marketed by the Company are sold to third parties to be used as ingredients in animal feed, pet food and aquaculture.

The Food Ingredients operating segment includes the Company's global activities related to (i) the purchase and processing of beef and pork bone chips, beef hides, pig skins, and fish skins into collagen in Europe, China, South America and North America, (ii) the collection and processing of porcine and bovine intestines into natural casings in Europe, China and North America, (iii) the extraction and processing of porcine mucosa into crude heparin in Europe, (iv) the collection and refining of animal fat into food grade fat in Europe, and (v) the processing of bones to bone chips for the collagen industry and bone ash in Europe. Collagens produced and marketed by the Company are sold to third parties to be used as ingredients in the pharmaceutical, nutraceutical, food, pet food and technical (e.g., photographic) industries. Natural casings produced and marketed by the Company are sold to third parties to be used as an ingredient in the production of sausages and other similar food products.

The Fuel Ingredients operating segment includes the Company's global activities related to (i) the Company’s share of the results of its equity investment in Diamond Green Diesel Holdings LLC, a joint venture with Valero Energy Corporation (“Valero”) to convert animal fats, recycled greases, used cooking oil, inedible corn oil, soybean oil, or other feedstocks that become economically and commercially viable into renewable diesel (“DGD” or the “DGD Joint Venture”) as described in Note 3 (Investment in Unconsolidated Subsidiaries) to the Company's Consolidated Financial Statements for the period ended October 2, 2021 included herein, (ii) the conversion of organic sludge and food waste into biogas in
28


Europe, (iii) the collection and conversion of fallen stock and certain animal by-products pursuant to applicable E.U. regulations into low-grade energy sources to be used in industrial applications, and (iv) the processing of manure into natural bio-phosphate in Europe.

Corporate Activities principally include unallocated corporate overhead expenses, acquisition-related expenses, interest expense net of interest income, and other non-operating income and expenses.

Observations on the Effects of COVID-19

In January 2020, the World Health Organization (“WHO”) declared the coronavirus disease (“COVID-19”) a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. Since then, various federal, state and local government-imposed movement restrictions and initiatives have been implemented worldwide to reduce the global transmission of COVID-19, including reduced or eliminated food services, the promotion of social distancing and the adoption of remote working policies.

To date, these restrictions have not had a material impact on the Company’s operations, as the Company operates in industries that are deemed “critical” and “essential” under the rules imposing these restrictions; however, the Company did incur approximately $7.5 million of COVID-19 related charges globally in fiscal year 2020 and has incurred approximately $2.4 million in the first nine months of fiscal 2021. The Company has implemented operational guidelines throughout the Company's organization consistent with the applicable governmental and regulatory policies in the geographies the Company operates intended to protect the Company's employees and prevent the spread of the virus in the Company's workplace, and to date, all of the Company's facilities are operational. In December 2020, several vaccines were first authorized for use against COVID-19 in the United States and internationally. As a result of the distribution of these vaccines, various of the government imposed movement restrictions and initiatives have begun to be relaxed in certain areas of the United States and abroad. Notwithstanding, the Company believes the severity and duration of the COVID-19 pandemic is uncertain and such uncertainty will likely continue. Among the items that could have a significant impact on the Company's future results is a reduction in the Company's raw material supply due to disruptions in the operations of the Company's third-party suppliers. Accordingly, while to date the Company has experienced no material negative effects on the Company's business and results of operations as a result of the current COVID-19 outbreak, the situation remains dynamic and subject to rapid and possibly material change, including but not limited to changes that may materially affect the operations of the Company's supply chain partners and finished product customers, which ultimately could result in material negative effects on the Company's business and results of operations.

DGD has also implemented operational guidelines in its organization, and to date, COVID-19 has not had a material impact on DGD’s operations. We expect that biofuel regulations and mandates will continue supporting renewable diesel demand; however, a prolonged or significant decline in overall fuel demand could negatively impact the sales and profitability of DGD’s business.

The extent to which COVID-19 impacts the Company’s and DGD's results will depend on future developments, which are highly uncertain, cannot be predicted and may vary by jurisdiction and market, including the duration and scope of the pandemic, the emergence of new variants of the virus, the likelihood of a resurgence of positive cases, the development and availability of effective treatments and vaccines, the speed at which such vaccines are administered, global economic conditions during and after the pandemic and governmental actions that have been taken or may be taken in the future in response to the pandemic, among others. For additional information regarding the risks associated with COVID-19, see the important information in Item 1A. Risk Factors, under the caption “Pandemics, epidemics or disease outbreaks, such as the novel coronavirus (“COVID-19”), may disrupt our business, including, among other things, our supply chain and production processes, each of which could materially affect our operations, liquidity, financial condition and results of operations” in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2021, as filed with the SEC on March 2, 2021.

Operating Performance Indicators

    The Company monitors the performance of its business segments using key financial metrics such as results of operations, non-GAAP measurements (Adjusted EBITDA), segment operating income, raw material processed, gross margin percentage, foreign currency translation, and corporate activities. The Company’s operating results can vary significantly due to changes in factors such as the fluctuation in energy prices, weather conditions, crop harvests, government policies and programs, changes in global demand, changes in standards of living, protein consumption, and global production of competing ingredients. Due to these unpredictable factors that are beyond the control of the
29


Company, forward-looking financial or operational estimates are not provided. The Company is exposed to certain risks associated with a business that is influenced by agricultural-based commodities. These risks are further described in Item 1A of Part I, “Risk Factors” included in the Company’s Form 10-K for the fiscal year ended January 2, 2021.

    The Company’s Feed Ingredients segment animal by-products, bakery residuals, used cooking oil recovery, and blood operations are each influenced by prices for agricultural-based alternative ingredients such as corn oil, soybean oil, soybean meal, and palm oil. In these operations, the costs of the Company's raw materials change with, or in certain cases are indexed to, the selling price or the anticipated selling price of the finished goods produced from the acquired raw materials and/or in some cases, the price spread between various types of finished products. The Company believes that this methodology of procuring raw materials generally establishes a relatively stable gross margin upon the acquisition of the raw material. Although the costs of raw materials for the Feed Ingredients segment are generally based upon actual or anticipated finished goods selling prices, rapid and material changes in finished goods prices, including competing agricultural-based alternative ingredients, generally have an immediate, and often times, material impact on the Company’s gross margin and profitability resulting from the brief lapse of time between the procurement of the raw materials and the sale of the finished goods. In addition, the volume of raw material acquired, which has a direct impact on the amount of finished goods produced, can also have a material effect on the gross margin reported, as the Company has a substantial amount of fixed operating costs.

    The Company’s Food Ingredients segment collagen and natural casings products are influenced by other competing ingredients including plant-based and synthetic hydrocolloids and artificial casings. In the collagen operation, the cost of the Company's animal-based raw material moves in relationship to the selling price of the finished goods. The processing time for the Food Ingredients segment collagen and casings is generally 30 to 60 days, which is substantially longer than the Company's Feed Ingredients segment animal by-products operations. Consequently, the Company’s gross margin and profitability in this segment can be influenced by the movement of finished goods prices from the time the raw materials were procured until the finished goods are sold.

The Company’s Fuel Ingredients segment converts fats into renewable diesel, organic sludge and food waste into biogas, and fallen stock into low-grade energy sources. The Company's gross margin and profitability in this segment are impacted by world energy prices for oil, electricity, natural gas and governmental subsidies.

The reporting currency for the Company's financial statements is the U.S. dollar. The Company operates in over 15 countries and therefore, certain of the Company's assets, liabilities, revenues and expenses are denominated in functional currencies other than the U.S. dollar, primarily in the Euro, Brazilian real, Chinese renminbi, Canadian dollar and Polish zloty. To prepare the Company's consolidated financial statements, assets, liabilities, revenues, and expenses must be translated into U.S. dollars at the applicable exchange rate. As a result, increases or decreases in the value of the U.S. dollar against these other currencies will affect the amount of these items recorded in the Company's consolidated financial statements, even if their value has not changed in the functional currency. This could have a significant impact on the Company's results, if such increase or decrease in the value of the U.S. dollar relative to these other currencies is substantial.

Results of Operations

Three Months Ended October 2, 2021 Compared to Three Months Ended September 26, 2020

Operating Performance Metrics

Operating performance metrics which management routinely monitors as an indicator of operating performance include:

Finished product commodity prices
Segment results
Foreign currency exchange
Corporate activities
Non-U.S. GAAP measures

These indicators and their importance are discussed below.


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Finished Product Commodity Prices  

Prices for finished product commodities that the Company produces in the Feed Ingredients segment are reported each business day on the Jacobsen Index (the “Jacobsen”), an established North American trading exchange price publisher. The Jacobsen reports industry sales from the prior day's activity by product. Included on the Jacobsen are reported prices for finished products such as protein (primarily meat and bone meal (“MBM”), poultry meal (“PM”) and feather meal (“FM”)), hides, fats (primarily bleachable fancy tallow (“BFT”) and yellow grease (“YG”)) and corn, which is a substitute commodity for the Company's bakery by-product (“BBP”) as well as a range of other branded and value-added products, which are products of the Company's Feed Ingredients segment. In the United States, the Company regularly monitors the Jacobsen for MBM, PM, FM, BFT, YG and corn because it provides a daily indication of the Company's U.S. revenue performance against business plan benchmarks. In Europe, the Company regularly monitors Thomson Reuters (“Reuters”) to track the competing commodities palm oil and soy meal.

Although the Jacobsen and Reuters provide useful metrics 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. Therefore, actual pricing for the Company's finished products, as well as competing products, can be quite volatile. In addition, neither the Jacobsen nor Reuters provides forward or future period pricing for the Company's commodities. The Jacobsen and Reuters 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 and Reuters prices, the Company's actual sales prices for its finished products may vary significantly from the Jacobsen and Reuters because of production and delivery timing differences and because the Company's finished products are delivered to multiple locations in different geographic regions which utilize alternative price indexes. In addition, certain of the Company's premium branded finished products may sell at prices that may be higher than the closest product on the related Jacobsen or Reuters index. During the third quarter of fiscal 2021, the Company's actual sales prices by product trended with the disclosed Jacobsen and Reuters prices.

Average Jacobsen and Reuters prices (at the specified delivery point) for the third quarter of fiscal 2021, compared to average Jacobsen and Reuters prices for the third quarter of fiscal 2020 are as follows:

 Avg. Price
3rd Quarter
2021
Avg. Price
3rd Quarter
2020
 
Increase/(Decrease)
%
Increase/(Decrease)
Jacobsen:
MBM (Illinois)$ 385.53/ton$ 212.91/ton$ 172.62/ton81.1 %
Feed Grade PM (Mid-South)$ 337.15/ton$ 226.07/ton$ 111.08/ton49.1 %
Pet Food PM (Mid-South)$ 680.77/ton$ 581.80/ton$ 98.97/ton17.0 %
Feather meal (Mid-South)$ 482.79/ton$ 267.91/ton$ 214.88/ton80.2 %
BFT (Chicago)$ 66.75/cwt$    29.04/cwt$ 37.71/cwt129.9 %
YG (Illinois)$ 44.70/cwt$   19.48/cwt$ 25.22/cwt129.5 %
Corn (Illinois)$ 6.20/bushel$ 3.55/bushel$ 2.65/bushel74.6 %
Reuters:
Palm Oil (CIF Rotterdam)$ 1,213.00/MT$ 690.00/MT$ 523.00/MT75.8 %
Soy meal (CIF Rotterdam)$ 469.00/MT$ 379.00/MT$ 90.00/MT23.7 %

The following table shows the average Jacobsen and Reuters prices for the third quarter of fiscal 2021, compared to average Jacobsen and Reuters prices for the second quarter of fiscal 2021.
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 Avg. Price
3rd Quarter
2021
Avg. Price
2nd Quarter
2021
 
Increase/(Decrease)
%
Increase/(Decrease)
Jacobsen:
MBM (Illinois)$ 385.53/ton$ 408.63/ton$ (23.10)/ton(5.7)%
Feed Grade PM (Mid-South)$ 337.15/ton$ 339.31/ton$ (2.16)/ton(0.6)%
Pet Food PM (Mid-South)$ 680.77/ton$ 823.18/ton$ (142.41)/ton(17.3)%
Feather meal (Mid-South)$ 482.79/ton$ 465.50/ton$ 17.29/ton3.7 %
BFT (Chicago)$ 66.75/cwt$    56.60/cwt$     10.15/cwt17.9 %
YG (Illinois)$ 44.70/cwt$   42.47/cwt$   2.23/cwt5.3 %
Corn (Illinois)$ 6.20/bushel$ 6.84/bushel$ (0.64)/bushel(9.4)%
Reuters:
Palm Oil (CIF Rotterdam)$ 1,213.00/MT$ 1,168.00/MT$ 45.00/MT3.9 %
Soy meal (CIF Rotterdam)$ 469.00/MT$ 473.00/MT$ (4.00)/MT(0.8)%

Segment Results

Segment operating income for the three months ended October 2, 2021 was $205.7 million, which reflects an increase of $78.2 million or 61.3% as compared to the three months ended September 26, 2020.

(in thousands, except percentages)Feed IngredientsFood IngredientsFuel IngredientsCorporateTotal
Three Months Ended October 2, 2021
Net Sales$769,626 $311,856 $104,434 $— $1,185,916 
Cost of sales and operating expenses553,662 241,308 64,634 — 859,604 
Gross Margin215,964 70,548 39,800 — 326,312 
Gross Margin %28.1 %22.6 %38.1 %— %27.5 %
Gain on sale of assets(229)(8)(264)— (501)
Selling, general and administrative expenses54,997 24,417 4,481 13,380 97,275 
Depreciation and amortization53,824 14,933 6,361 2,708 77,826 
Equity in net income of Diamond Green Diesel— — 53,951 — 53,951 
Segment operating income/(loss)107,372 31,206 83,173 (16,088)205,663 
Equity in net income of other unconsolidated subsidiaries1,647 — — — 1,647 
Segment income/(loss)109,019 31,206 83,173 (16,088)207,310 

(in thousands, except percentages)Feed IngredientsFood IngredientsFuel IngredientsCorporateTotal
Three Months Ended September 26, 2020
Net Sales$483,025 $291,842 $75,702 $— $850,569 
Cost of sales and operating expenses361,576 226,745 50,047 — 638,368 
Gross Margin121,449 65,097 25,655 — 212,201 
Gross Margin %25.1 %22.3 %33.9 %— %24.9 %
Loss/(gain) on sale of assets167 16 (61)— 122 
Selling, general and administrative expenses49,028 23,366 5,038 12,561 89,993 
Depreciation and amortization53,764 20,648 8,633 2,685 85,730 
Equity in net income of Diamond Green Diesel— — 91,099 — 91,099 
Segment operating income/(loss)18,490 21,067 103,144 (15,246)127,455 
Equity in net income of other unconsolidated subsidiaries906 — — — 906 
Segment income/(loss)19,396 21,067 103,144 (15,246)128,361 
 

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Feed Ingredients Segment

Raw material volume. In the three months ended October 2, 2021, the raw material processed by the Company's Feed Ingredients segment totaled approximately 2.22 million metric tons. Compared to the three months ended September 26, 2020, overall raw material volume processed in the Feed Ingredients segment increased approximately 1.9%.

Sales. During the three months ended October 2, 2021, net sales for the Feed Ingredients segment were $769.6 million as compared to $483.0 million during the three months ended September 26, 2020, an increase of approximately $286.6 million or 59.3%. Net sales for fats were approximately $307.9 million and $153.5 million for the three months ended October 2, 2021 and September 26, 2020, respectively. Protein net sales were approximately $258.0 million and $190.7 million for the three months ended October 2, 2021 and September 26, 2020, respectively. Other rendering net sales, which include hides, pet food and service charges, were approximately $43.7 million and $39.0 million for the three months ended October 2, 2021 and September 26, 2020, respectively. Total rendering net sales were approximately $609.6 million and $383.2 million for the three months ended October 2, 2021 and September 26, 2020, respectively. Used cooking oil net sales were approximately $69.9 million and $45.7 million for the three months ended October 2, 2021 and September 26, 2020, respectively. Bakery net sales were approximately $80.6 million and $44.4 million for the three months ended October 2, 2021 and September 26, 2020, respectively, and other net sales, which includes trap services, were approximately $9.5 million and $9.7 million for the three months ended October 2, 2021 and September 26, 2020, respectively.

The increase in net sales for the Feed Ingredients segment was primarily due to the following (in millions of dollars):
FatsProteinsOther RenderingTotal RenderingUsed Cooking OilBakeryOtherTotal
Net sales three months ended September 26, 2020153.5 190.7 39.0 $383.2 45.7 44.4 9.7 $483.0 
Increase/(decrease) in sales volumes(7.5)5.0 — (2.5)(0.7)(0.2)— (3.4)
Increase in finished product prices159.7 60.3 — 220.0 24.4 36.4 — 280.8 
Increase due to currency exchange rates2.2 2.0 0.2 4.4 0.5 — — 4.9 
Other change— — 4.5 4.5 — — (0.2)4.3 
Total change154.4 67.3 4.7 226.4 24.2 36.2 (0.2)286.6 
Net sales three months ended October 2, 2021$307.9 $258.0 $43.7 $609.6 $69.9 $80.6 $9.5 $769.6 

Margins. In the Feed Ingredients segment for the three months ended October 2, 2021, the gross margin percentage increased to 28.1% as compared to 25.1% for the comparable period of fiscal 2020. The increase is primarily due to higher overall finished product prices as compared to fiscal 2020.

Segment operating income. Feed Ingredients operating income for the three months ended October 2, 2021 was $107.4 million, an increase of $88.9 million or 480.5% as compared to the three months ended September 26, 2020. The increase is due to higher overall finished product prices as compared to fiscal 2020.

Food Ingredients Segment

Raw material volume. In the three months ended October 2, 2021, the raw material processed by the Company's Food Ingredients segment totaled approximately 275,000 metric tons. Compared to the three months ended September 26, 2020, overall raw material volume processed in the Food Ingredients segment increased approximately 4.0%.

Sales. Overall sales increased in the Food Ingredients segment primarily due to higher collagen sales prices and higher edible fat prices that more than offset overall lower sales volumes.

Margins. In the Food Ingredients segment for the three months ended October 2, 2021, the gross margin percentage increased to 22.6% as compared to 22.3% for the comparable period of fiscal 2021. The increase is primarily due to higher overall finished product prices as compared to fiscal 2020.

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Segment operating income. Food Ingredients operating income was $31.2 million for the three months ended October 2, 2021, an increase of $10.1 million or 47.9% as compared to the three months ended September 26, 2020. The increase is primarily due to higher sales prices in Europe, North America and China collagen markets and higher fat prices in the edible fat market. This was partially offset by a weaker Brazilian real and lower volumes in Brazil as a result of the continuing COVID-19 pandemic in South America. In addition, segment operating income increased as a result of lower depreciation expense.

Fuel Ingredients Segment

Raw material volume. In the three months ended October 2, 2021, the raw material processed by the Company's Fuel Ingredients segment totaled approximately 304,000 metric tons. Compared to the three months ended September 26, 2020, overall raw material volume processed in the Fuel Ingredients segment decreased approximately 6.1%.

Sales. Overall sales increased in the Fuel Ingredients segment primarily due to higher sales prices in Europe.

Margins. In the Fuel Ingredients segment (exclusive of the equity contribution from the DGD Joint Venture) for the three months ended October 2, 2021, the gross margin percentage increased to 38.1% as compared to 33.9% for the comparable period of fiscal 2020. The increase is primarily due to alternative fuel mixture credits recorded in the current period as a reduction to other operating expenses that more than offset considerably higher raw material prices in Europe in fiscal 2021 as compared to fiscal 2020.

Segment operating income. The Company's Fuel Ingredients segment operating income (inclusive of the equity contribution from the DGD Joint Venture) for the three months ended October 2, 2021 was $83.2 million, a decrease of $19.9 million or (19.3)% as compared to the same period in fiscal 2020. The decrease is primarily attributed to downtime at the DGD Joint Venture facility due to Hurricane Ida in fiscal 2021 as compared to the same period in fiscal 2020.

Foreign Currency Exchange

    During the third quarter of fiscal 2021, the euro and Canadian dollar strengthened against the U.S. dollar as compared to the same period in fiscal 2020. Using actual results for the three months ended October 2, 2021 and using the prior year's average currency rate for the three months ended September 26, 2020, foreign currency translation would result in a decrease in operating income of approximately $2.2 million. The average rate assumptions used in this calculation were the actual fiscal average rates for the three months ended October 2, 2021 of €1.00:USD$1.18 and CAD$1.00:USD$0.79 as compared to the average rates for the three months ended September 26, 2020 of €1.00:USD$1.17 and CAD$1.00:USD$0.75, respectively.

Corporate Activities

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $13.4 million during the three months ended October 2, 2021, compared to $12.6 million during the three months ended September 26, 2020, an increase of $0.8 million.  The increase is primarily due to an increase in corporate related benefits.

Depreciation and Amortization.  Depreciation and amortization charges remained at $2.7 million during the three months ended October 2, 2021, as compared to the same period in fiscal 2020.

Interest Expense. Interest expense was $15.4 million during the three months ended October 2, 2021, compared to $18.8 million during the three months ended September 26, 2020, a decrease of $3.4 million. The decrease is primarily due to lower amortization of deferred loan costs and lower interest on the Term loan B as a result of partial note pay-downs.

Foreign Currency Loss.  Foreign currency losses were $0.2 million for the three months ended October 2, 2021 as compared to foreign currency losses of $1.2 million for the three months ended September 26, 2020. The decrease in foreign currency losses is due primarily to a decrease in losses on the revaluation of non-functional currency assets and liabilities as compared to the same period in fiscal 2020.

Other Expense, net. Other expense was $0.9 million in the three months ended October 2, 2021, compared to other expense of $1.9 million for the three months ended September 26, 2020. The decrease in other expense was primarily due to a decrease in the non-service component of pension expense and casualty loss as compared to the same period in fiscal 2020.

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Equity in Net Income in Investment of Other Unconsolidated Subsidiaries. The change in this line item is not significant and primarily represents the Company's pro rata share of the net income from foreign unconsolidated subsidiaries.
Income Taxes. The Company recorded income tax expense of $42.6 million for the three months ended October 2, 2021, compared to $4.8 million recorded in the three months ended September 26, 2020, an increase of $37.8 million, which is primarily due to increased pre-tax earnings of the Company for the three months ended October 2, 2021 and certain discrete items recognized during the three months ended September 26, 2020 including an adjustment to an unrecognized tax position and the favorable impact of federal income tax regulations allowing taxpayers to exclude certain high-taxed income from their Global Intangible Low-Tax Income (“GILTI") computations. The effective tax rate for the three months ended October 2, 2021 is 22.3%. The effective tax rate for the three months ended October 2, 2021 differs from the federal statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes), biofuel tax incentives, and certain taxable income inclusion items in the U.S. based on foreign earnings. The effective tax rate for the three months ended September 26, 2020 was 4.5%. The effective tax rate for the three months ended September 26, 2020 differed from the statutory rate of 21% due to the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes), biofuel tax incentives, compensation related expenses not deductible for tax purposes, and discrete items, including the recognition of a previously unrecognized tax benefit and the favorable impact of the final U.S. GILTI regulations related to the High-Tax Exclusion. The Company's effective tax rate excluding discrete items is 22.2% for the three months ended October 2, 2021, compared to 13.2% for the three months ended September 26, 2020.

Non-U.S. GAAP Measures

Adjusted EBITDA is not a recognized accounting measurement under GAAP; it should not be considered as an alternative to net income, as a measure of operating results, or as an alternative to cash flow as a measure of liquidity. It is presented here not as an alternative to net income, but rather as a measure of the Company's operating performance. Since EBITDA (generally, net income plus interest expense, taxes, depreciation and amortization) is not calculated identically by all companies, the presentation in this report may not be comparable to EBITDA or Adjusted EBITDA presentations disclosed by other companies. Adjusted EBITDA is calculated below and represents for any relevant period, net income/(loss) plus depreciation and amortization, restructuring, goodwill and long-lived asset impairment, interest expense, (income)/loss from discontinued operations, net of tax, income tax provision, other income/(expense) and equity in net (income)/loss of unconsolidated subsidiary. 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.  

The Company’s management uses Adjusted EBITDA as a measure to evaluate performance and for other discretionary purposes.  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, 5.25% Notes and 3.625% Notes that were outstanding at October 2, 2021.  However, the amounts shown below for Adjusted EBITDA differ from the amounts calculated under similarly titled definitions in the Company’s Senior Secured Credit Facilities, 5.25% Notes and 3.625% Notes, as those definitions permit further adjustments to reflect certain other non-recurring costs, non-cash charges and cash dividends from the DGD Joint Venture. Additionally, the Company evaluates the impact of foreign exchange on operating cash flow, which is defined as segment operating income (loss) plus depreciation and amortization.


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Reconciliation of Net Income to (Non-GAAP) Adjusted EBITDA and (Non-GAAP) Pro Forma Adjusted EBITDA
Third Quarter 2021 As Compared to third Quarter 2020
Three Months Ended
(dollars in thousands)October 2,
2021
September 26,
2020
Net income attributable to Darling$146,812 $101,125 
Depreciation and amortization77,826 85,730 
Interest expense15,409 18,793 
Income tax expense42,637 4,812 
Foreign currency loss205 1,239 
Other expense, net853 1,912 
Equity in net income of Diamond Green Diesel(53,951)(91,099)
Equity in net income of other unconsolidated subsidiaries(1,647)(906)
Net income attributable to non-controlling interests1,394 480 
Darling's Adjusted EBITDA$229,538 $122,086 
Foreign currency exchange impact (1)(2,249)— 
Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP)$227,289 $122,086 
DGD Joint Venture Adjusted EBITDA (Darling's Share)$60,026 $96,435 
Darling plus Darling's share of DGD Joint Venture Adjusted EBITDA$289,564 $218,521 

(1) The average rates assumption used in this calculation was the actual fiscal average rate for the three months ended October 2, 2021 of €1.00:USD$1.18 and CAD$1.00:USD$0.79 as compared to the average rate for the three months ended September 26, 2020 of €1.00:USD$1.17 and CAD$1.00:USD$0.75, respectively.

Nine Months Ended October 2, 2021 Compared to Nine Months Ended September 26, 2020

Operating Performance Metrics

Operating performance metrics which management routinely monitors as an indicator of operating performance include:

Finished product commodity prices
Segment results
Foreign currency exchange
Corporate activities
Non-U.S. GAAP measures

These indicators and their importance are discussed below.

Finished Product Commodity Prices  

During the first nine months of fiscal 2021, the Company's actual sales prices by product trended with the disclosed Jacobsen and Reuters prices.

Average Jacobsen and Reuters prices (at the specified delivery point) for the first nine months of fiscal 2021, compared to average Jacobsen and Reuters prices for the first nine months of fiscal 2020 are as follows:

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 Avg. Price
First Nine Months
2021
Avg. Price
First Nine Months
2020
 
Increase/(Decrease)
%
Increase/(Decrease)
Jacobsen:
MBM (Illinois)$ 393.71/ton$ 246.81/ton$ 146.90/ton59.5 %
Feed Grade PM (Mid-South)$ 344.75/ton$ 240.29/ton$ 104.46/ton43.5 %
Pet Food PM (Mid-South)$ 783.01/ton$ 600.44/ton$ 182.57/ton30.4 %
Feather meal (Mid-South)$ 495.77/ton$ 283.77/ton$ 212.00/ton74.7 %
BFT (Chicago)$ 56.59/cwt$    30.56/cwt$ 26.03/cwt85.2 %
YG (Illinois)$ 40.54/cwt$   20.86/cwt$ 19.68/cwt94.3 %
Corn (Illinois)$ 6.20/bushel$ 3.57/bushel$ 2.63/bushel73.7 %
Reuters:
Palm Oil (CIF Rotterdam)$ 1,155.00/MT$ 659.00/MT$ 496.00/MT75.3 %
Soy meal (CIF Rotterdam)$ 492.00/MT$ 363.00/MT$ 129.00/MT35.5 %

Segment Results

Segment operating income for the nine months ended October 2, 2021 was $673.4 million, which reflects an increase of $316.8 million or 88.8% as compared to the nine months ended September 26, 2020.

(in thousands, except percentages)Feed IngredientsFood IngredientsFuel IngredientsCorporateTotal
Nine Months Ended October 2, 2021
Net Sales$2,193,002 $926,952 $311,347 $— $3,431,301 
Cost of sales and operating expenses1,584,667 706,260 219,534 — 2,510,461 
Gross Margin608,335 220,692 91,813 — 920,840 
Gross Margin %27.7 %23.8 %29.5 %— %26.8 %
Gain on sale of assets(490)(1)(302)— (793)
Selling, general and administrative expenses162,594 75,150 13,822 42,239 293,805 
Restructuring and asset impairment charges— — 778 — 778 
Depreciation and amortization162,404 45,666 19,214 8,298 235,582 
Equity in net income of Diamond Green Diesel— — 281,964 — 281,964 
Segment operating income/(loss)283,827 99,877 340,265 (50,537)673,432 
Equity in net income of other unconsolidated subsidiaries4,199 — — — 4,199 
Segment income/(loss)288,026 99,877 340,265 (50,537)677,631 

(in thousands, except percentages)Feed IngredientsFood IngredientsFuel IngredientsCorporateTotal
Nine Months Ended September 26, 2020
Net Sales$1,499,340 $841,070 $211,674 $— $2,552,084 
Cost of sales and operating expenses1,117,931 652,334 147,358 — 1,917,623 
Gross Margin381,409 188,736 64,316 — 634,461 
Gross Margin %25.4 %22.4 %30.4 %— %24.9 %
Loss/(gain) on sale of assets293 (30)(53)— 210 
Selling, general and administrative expenses153,459 71,406 10,645 40,869 276,379 
Depreciation and amortization159,968 60,925 24,705 8,113 253,711 
Equity in net income of Diamond Green Diesel— — 252,411 — 252,411 
Segment operating income/(loss)67,689 56,435 281,430 (48,982)356,572 
Equity in net income of other unconsolidated subsidiaries2,467 — — — 2,467 
Segment income/(loss)70,156 56,435 281,430 (48,982)359,039 
 
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Feed Ingredients Segment

Raw material volume. In the nine months ended October 2, 2021, the raw material processed by the Company's Feed Ingredients segment totaled approximately 6.65 million metric tons. Compared to the nine months ended September 26, 2020, overall raw material volume processed in the Feed Ingredients segment increased approximately 1.0%.

Sales. During the nine months ended October 2, 2021, net sales for the Feed Ingredients segment were $2,193.0 million as compared to $1,499.3 million during the nine months ended September 26, 2020, an increase of approximately $693.7 million or 46.3%. Net sales for fats were approximately $829.5 million and $484.3 million for the nine months ended October 2, 2021 and September 26, 2020, respectively. Protein net sales were approximately $771.9 million and $596.8 million for the nine months ended October 2, 2021 and September 26, 2020, respectively. Other rendering net sales, which include hides, pet food and service charges, were approximately $132.1 million and $125.6 million for the nine months ended October 2, 2021 and September 26, 2020, respectively. Total rendering net sales were approximately $1,733.5 million and $1,206.7 million for the nine months ended October 2, 2021 and September 26, 2020, respectively. Used cooking oil net sales were approximately $207.4 million and $132.3 million for the nine months ended October 2, 2021 and September 26, 2020, respectively. Bakery net sales were approximately $222.9 million and $129.5 million for the nine months ended October 2, 2021 and September 26, 2020, respectively, and other net sales, which includes trap services, were approximately $29.2 million and $30.8 million for the nine months ended October 2, 2021 and September 26, 2020, respectively.

The increase in net sales for the Feed Ingredients segment was primarily due to the following (in millions of dollars):
FatsProteinsOther RenderingTotal RenderingUsed Cooking OilBakeryOtherTotal
Net sales nine months ended September 26, 2020484.3 596.8 125.6 $1,206.7 132.3 129.5 30.8 $1,499.3 
Increase/(decrease) in sales volumes(2.0)(1.2)— (3.2)0.6 1.9 — (0.7)
Increase in finished product prices334.2 156.8 — 491.0 73.1 91.5 — 655.6 
Increase due to currency exchange rates13.0 19.5 1.1 33.6 1.4 — — 35.0 
Other change— — 5.4 5.4 — — (1.6)3.8 
Total change345.2 175.1 6.5 526.8 75.1 93.4 (1.6)693.7 
Net sales nine months ended October 2, 2021$829.5 $771.9 $132.1 $1,733.5 $207.4 $222.9 $29.2 $2,193.0 

Margins. In the Feed Ingredients segment for the nine months ended October 2, 2021, the gross margin percentage increased to 27.7% as compared to 25.4% for the comparable period of fiscal 2020. The increase is primarily due to higher overall finished product prices as compared to fiscal 2020.

Segment operating income. Feed Ingredients operating income for the nine months ended October 2, 2021 was $283.8 million, an increase of $216.1 million or 319.2% as compared to the nine months ended September 26, 2020. The increase is due to higher overall finished product prices as compared to fiscal 2020.

Food Ingredients Segment

Raw material volume. In the nine months ended October 2, 2021, the raw material processed by the Company's Food Ingredients segment totaled approximately 823,000 metric tons. Compared to the nine months ended September 26, 2020, overall raw material volume processed in the Food Ingredients segment increased approximately 4.1%.

Sales. Overall sales increased in the Food Ingredients segment primarily due to higher sales volumes and sales prices in the collagen markets and higher edible fat prices.

Margins. In the Food Ingredients segment for the nine months ended October 2, 2021 and September 26, 2020, the gross margin percentage increased to 23.8% as compared to 22.4% for the comparable period of fiscal 2020. The increase is primarily due to higher overall finished product prices as compared to fiscal 2020.

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Segment operating income. Food Ingredients operating income was $99.9 million for the nine months ended October 2, 2021, an increase of $43.5 million or 77.1% as compared to the nine months ended September 26, 2020. The increase is primarily due to higher sales volumes and prices in Europe, North America and China collagen markets and higher fat prices in the edible fat market. This was partially offset by a weaker Brazilian real and lower volumes in Brazil as a result of the COVID-19 pandemic in South America. In addition, segment operating income increased as a result of lower depreciation expense.

Fuel Ingredients Segment

Raw material volume. In the nine months ended October 2, 2021, the raw material processed by the Company's Fuel Ingredients segment totaled approximately 946,000 metric tons. Compared to the nine months ended September 26, 2020, overall raw material volume processed in the Fuel Ingredients segment decreased approximately 0.9%.

Sales. Overall sales increased in the Fuel Ingredients segment primarily due to higher sales volumes and prices in Europe.

Margins. In the Fuel Ingredients segment (exclusive of the equity contribution from the DGD Joint Venture) for the nine months ended October 2, 2021, the gross margin percentage decreased to 29.5% as compared to 30.4% for the comparable period of fiscal 2020. The decrease is primarily due to considerably higher raw material prices in Europe that more than offset alternative fuel mixture credits recorded in the current period as a reduction to other operating expenses in fiscal 2021 as compared to fiscal 2020.

Segment operating income. The Company's Fuel Ingredients segment operating income (inclusive of the equity contribution from the DGD Joint Venture) for the nine months ended October 2, 2021 was $340.3 million, an increase of $58.9 million or 20.9% as compared to the same period in fiscal 2020. The increase is primarily due to an increase in renewable identification number (RIN) prices and renewable diesel fuel prices at the DGD Joint Venture in fiscal 2021 as compared to the same period in fiscal 2020, as well as higher sales prices in our European market.

Foreign Currency Exchange

    During the first nine months of fiscal 2021, the euro and Canadian dollar strengthened against the U.S. dollar as compared to the same period in fiscal 2020. Using actual results for the nine months ended October 2, 2021 and using the prior year's average currency rate for the nine months ended September 26, 2020, foreign currency translation would result in a decrease in operating income of approximately $21.8 million. The average rate assumptions used in this calculation were the actual fiscal average rates for the nine months ended October 2, 2021 of €1.00:USD$1.20 and CAD$1.00:USD$0.80 as compared to the average rates for the nine months ended September 27, 2020 of €1.00:USD$1.12 and CAD$1.00:USD$0.74, respectively.

Corporate Activities

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $42.2 million during the nine months ended October 2, 2021, compared to $40.9 million during the nine months ended September 26, 2020, an increase of $1.3 million.  The increase is primarily due to an increase in insurance costs, tax and license costs and corporate related benefits that were partially offset by a decrease in legal costs and other miscellaneous costs.

Depreciation and Amortization.  Depreciation and amortization charges increased slightly by $0.2 million to $8.3 million during the nine months ended October 2, 2021, as compared to $8.1 million during the nine months ended September 26, 2020.

Interest Expense. Interest expense was $47.1 million during the nine months ended October 2, 2021, compared to $55.8 million during the nine months ended September 26, 2020, a decrease of $8.7 million. The decrease is primarily due to lower amortization of deferred loan costs and lower interest on the Term loan B as a result of partial note pay-downs.

Foreign Currency Loss.  Foreign currency losses were $1.3 million for the nine months ended October 2, 2021 as compared to foreign currency losses of $0.7 million for the nine months ended September 26, 2020. The increase in foreign currency losses is due primarily to an increase in losses on the revaluation of non-functional currency assets and liabilities as compared to the same period in fiscal 2020.

Other Expense, net. Other expense was $3.2 million in the nine months ended October 2, 2021, compared to other expense of $5.3 million for the nine months ended September 26, 2020. The decrease in other expense was primarily due to a decrease in the non-service component of pension expense and casualty losses as compared to the same period in fiscal 2020.
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Equity in Net Income in Investment of Other Unconsolidated Subsidiaries. The change in this line item is not significant and primarily represents the Company's pro rata share of the net income from foreign unconsolidated subsidiaries.
Income Taxes. The Company recorded income tax expense of $126.3 million for the nine months ended October 2, 2021, compared to $43.1 million recorded in the nine months ended September 26, 2020, an increase of $83.2 million, which is primarily due to increased pre-tax earnings of the Company for the first nine months of fiscal 2021. The effective tax rate for the first nine months of fiscal 2021 is 20.2%. The effective tax rate for the first nine months of fiscal 2021 differs from the federal statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes), biofuel tax incentives, certain taxable income inclusion items in the U. S. based on foreign earnings, and discrete items, including excess tax benefits from stock-based compensation. The effective tax rate for the first nine months ended September 26, 2020 was 14.5%. The effective tax rate for the first nine months ended September 26, 2020 differed from the statutory rate of 21% due to the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes), biofuel tax incentives, compensation related expenses not deductible for tax purposes, and discrete items, including the recognition of a previously unrecognized tax benefit and the favorable impact of the final U.S. GILTI regulations related to the High-Tax Exclusion. The Company's effective tax rate excluding discrete items is 22.1% for the nine months ended October 2, 2021, compared to 18.2% for the nine months ended September 26, 2020.

Non-U.S. GAAP Measures

For a discussion of the reasons the Company's management believes the following Non-GAAP financial measures provide useful information to investors and the purposes for which the Company's management uses such measures, see “Results of Operations - Three Months Ended October 2, 2021 Compared to the Three Months Ended September 26, 2020 - Non-U.S. GAAP Measures.”

Reconciliation of Net Income to (Non-GAAP) Adjusted EBITDA and (Non-GAAP) Pro Forma Adjusted EBITDA
First Nine Months of Fiscal 2021 As Compared to First Nine Months of Fiscal 2020
Nine Months Ended
(dollars in thousands)October 2,
2021
September 26,
2020
Net income attributable to Darling$495,160 $252,074 
Depreciation and amortization235,582 253,711 
Interest expense47,105 55,803 
Income tax expense126,324 43,058 
Restructuring and asset impairment charges778 — 
Foreign currency loss1,299 709 
Other expense, net3,210 5,278 
Equity in net income of Diamond Green Diesel(281,964)(252,411)
Equity in net income of other unconsolidated subsidiaries(4,199)(2,467)
Net income attributable to non-controlling interests4,533 2,117 
Darling's Adjusted EBITDA$627,828 $357,872 
Foreign currency exchange impact (1)(21,791)— 
Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP)$606,037 $357,872 
DGD Joint Venture Adjusted EBITDA (Darling's Share)$300,227 $269,177 
Darling plus Darling's share of DGD Joint Venture Adjusted EBITDA$928,055 $627,049 

(1) The average rates assumption used in this calculation was the actual fiscal average rate for the nine months ended October 2, 2021 of €1.00:USD$1.20 and CAD$1.00:USD$0.80 as compared to the average rate for the nine months ended September 26, 2020 of €1.00:USD$1.12 and CAD$1.00:USD$0.74, respectively.


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FINANCING, LIQUIDITY AND CAPITAL RESOURCES

Credit Facilities

Indebtedness

Certain Debt Outstanding at October 2, 2021. On October 2, 2021, debt outstanding under the Company's Amended Credit Agreement, the Company's 5.25% Notes and the Company's 3.625% Notes consists of the following (in thousands):    
    
Senior Notes: 
5.25 % Notes due 2027$500,000 
Less unamortized deferred loan costs(5,159)
Carrying value of 5.25% Notes due 2027$494,841 
3.625 % Notes due 2026 - Denominated in euros$597,297 
Less unamortized deferred loan costs(5,423)
Carrying value of 3.625% Notes due 2026$591,874 
  
Amended Credit Agreement: 
Term Loan B$200,000 
Less unamortized deferred loan costs(2,081)
Carrying value of Term Loan B$197,919 
Revolving Credit Facility: 
Maximum availability$1,000,000 
Ancillary Facilities50,297 
Borrowings outstanding33,000 
Letters of credit issued4,130 
Availability$912,573 
Other Debt$63,240 

During the first nine months of fiscal 2021, the U.S. dollar strengthened as compared to the euro at January 2, 2021. Using the euro based debt outstanding at October 2, 2021 and comparing the closing balance sheet rate at October 2, 2021 to the balance sheet rate at January 2, 2021, the U.S. dollar debt balances of euro based debt decreased by approximately $34.4 million at October 2, 2021. The closing balance sheet rate assumption used in this calculation was the actual fiscal closing balance sheet rate at October 2, 2021 of €1.00:USD$1.1598 as compared to the closing balance sheet rate at January 2, 2021 of €1.00:USD$1.22750.

Senior Secured Credit Facilities. On January 6, 2014, Darling, Darling International Canada Inc. (“Darling Canada”) and Darling International NL Holdings B.V. (“Darling NL”) entered into a Second Amended and Restated Credit Agreement (as subsequently amended, the “Amended Credit Agreement”), restating its then existing Amended and Restated Credit Agreement dated September 27, 2013, with the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents from time to time party thereto. The Amended Credit Agreement provides for senior secured credit facilities in the aggregate principal amount of $1.525 billion comprised of (i) the Company's $525.0 million term loan B facility and (ii) the Company's $1.0 billion five-year revolving loan facility (up to $150.0 million of which will be available for a letter of credit subfacility and $50.0 million of which will be available for a swingline sub-facility) (collectively, the “Senior Secured Credit Facilities”). The Amended Credit Agreement also permits Darling and the other borrowers thereunder to incur ancillary facilities provided by any revolving lender party to the Senior Secured Credit Facilities (with certain restrictions). Effective September 18, 2020, the Company, and certain of its subsidiaries entered into an amendment (the “Sixth Amendment”) with its lenders to the Amended Credit Agreement. Among other things, the Sixth Amendment (i) extended the maturity date of the revolving credit facility under the Credit Agreement from December 16, 2021 to September 18, 2025, (ii) increased the leverage ratio applicable to achieving the lowest applicable margin on borrowings under the revolving credit facility from 1.0 to 1.5, (iii) eliminated or modified certain of the negative covenants to increase the allowances for certain actions, including the incurrence of debt and investments, (iv) limited guarantees from, and security with respect to, entities organized outside of the United States and Canada to a limited group of foreign subsidiary holding companies, (v) included a collateral release mechanism, subject to the consent of the term loan B lenders, upon the Company achieving certain investment grade credit ratings, and (vi) made other market updates and changes.

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As of October 2, 2021, the Company had availability of $912.6 million under the revolving credit facility, taking into account that the Company had $33.0 million in outstanding borrowings, $50.3 million in ancillary facilities and letters of credit issued of $4.1 million.

As of October 2, 2021, the Company has borrowed all $525.0 million under the terms of the term loan B facility and repaid approximately $325.0 million, which when repaid, cannot be reborrowed. The term loan B facility is repayable in quarterly installments of 0.25% of the aggregate principal amount of the relevant term loan B facility on the last day of each March, June, September and December of each year commencing on the last day of each month falling on or after the last day of the first full quarter following December 18, 2017, and continuing until the last day of each quarter period ending immediately prior to December 18, 2024; and one final installment in the amount of the relevant term loan B facility then outstanding, due on December 18, 2024. The term loan B facility will mature on December 18, 2024.

The interest rate applicable to any borrowings under the revolving credit facility will equal either LIBOR/euro interbank offered rate/CDOR plus 1.50% per annum or base rate/Canadian prime rate plus 0.50% per annum, subject to certain step-downs or step-ups based on the Company's total leverage ratio. The interest rate applicable to any borrowings under the term loan B facility will equal the base rate plus 1.00% or LIBOR plus 2.00%.

5.25 % Senior Notes due 2027. On April 3, 2019, Darling issued and sold $500.0 million aggregate principal amount of 5.25% Senior Notes due 2027 (the “5.25% Notes”). The 5.25% Notes, which were offered in a private offering, were issued pursuant to a Senior Notes Indenture, dated as of April 3, 2019 (the “5.25% Indenture”), among Darling, the subsidiary guarantors party thereto from time to time, and Regions Bank, as trustee. The 5.25% Notes are guaranteed on a senior unsecured basis by Darling and all of Darling's restricted subsidiaries (other than foreign subsidiaries).

3.625% Senior Notes due 2026. On May 2, 2018, Darling Global Finance B.V. issued and sold €515.0 million aggregate principal amount of 3.625% Senior Notes due 2026 (the “3.625% Notes”). The 3.625% Notes, which were offered in a private offering, were issued pursuant to a Senior Notes Indenture, dated as of May 2, 2018 (the “3.625% Indenture”), among Darling Global Finance B.V., Darling, the subsidiary guarantors party thereto from time to time, Citibank, N.A., London Branch, as trustee and principal paying agent, and Citigroup Global Markets Deutschland AG, as principal registrar. The 3.625% Notes are guaranteed on a senior unsecured basis by Darling and all of Darling's restricted subsidiaries (other than any foreign subsidiary or any receivable entity) that guarantee the Senior Secured Credit Facilities.

Other debt consists of U.S and European overdraft ancillary facilities and finance lease obligations, note arrangements in Brazil, China and European notes that are not part of the Company's Amended Credit Agreement, 5.25% Notes or 3.625% Notes.

The classification of long-term debt in the Company’s October 2, 2021 consolidated balance sheet is based on the contractual repayment terms of the 5.25% Notes, the 3.625% Notes and debt issued under the Amended Credit Agreement.
 
As a result of the Company's borrowings under its Amended Credit Agreement, the 5.25% Indenture and the 3.625% Indenture, the Company is highly leveraged. Investors should note that, in order to make scheduled payments on the indebtedness outstanding under the Amended Credit Agreement, the 5.25% Notes and the 3.625% Notes, and otherwise, the Company will rely in part on a combination of dividends, distributions and intercompany loan repayments from the Company's direct and indirect U.S. and foreign subsidiaries. The Company is prohibited under the Amended Credit Agreement, the 5.25% Indenture and the 3.625% Indenture from entering (or allowing such subsidiaries to enter) into contractual limitations on the Company's subsidiaries’ ability to declare dividends or make other payments or distributions to the Company. The Company has also attempted to structure the Company's consolidated indebtedness in such a way as to maximize the Company's ability to move cash from the Company's subsidiaries to Darling or another subsidiary that will have fewer limitations on the ability to make upstream payments, whether to Darling or directly to the Company's lenders as a Guarantor. Nevertheless, applicable laws under which the Company's direct and indirect subsidiaries are formed may provide limitations on such dividends, distributions and other payments. In addition, regulatory authorities in various countries where the Company operates or where the Company imports or exports products may from time to time impose import/export limitations, foreign exchange controls or currency devaluations that may limit the Company's access to profits from the Company's subsidiaries or otherwise negatively impact the Company's financial condition and therefore reduce the Company's ability to make required payments under the Amended Credit Agreement, the 5.25% Notes and the 3.625% Notes, or otherwise. In addition, fluctuations in foreign exchange values may have a negative impact on the Company's ability to repay indebtedness denominated in U.S. or Canadian dollars or euros. See “Risk Factors - Our business may be adversely impacted by fluctuations in exchange rates, which could affect our ability to comply with our financial covenants” and “- Our ability to repay our indebtedness depends in part on the performance
42


of our subsidiaries, including our non-guarantor subsidiaries, and their ability to make payments” in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2021 as filed with the SEC on March 2, 2021.
 
As of October 2, 2021, the Company believes it is in compliance with all of the financial covenants under the Amended Credit Agreement, as well as all of the other covenants contained in the Amended Credit Agreement, the 5.25% Indenture and the 3.625% Indenture.

Working Capital and Capital Expenditures

On October 2, 2021, the Company had working capital of $347.4 million and its working capital ratio was 1.46 to 1 compared to working capital of $311.7 million and a working capital ratio of 1.46 to 1 on January 2, 2021.  As of October 2, 2021, the Company had unrestricted cash of $67.2 million and funds available under the revolving credit facility of $912.6 million, compared to unrestricted cash of $81.6 million and funds available under the revolving credit facility of $893.9 million at January 2, 2021. The Company diversifies its cash investments by limiting the amounts deposited with any one financial institution.

Net cash provided by operating activities was $452.0 million for the first nine months ended October 2, 2021, as compared to net cash provided by operating activities of $470.4 million for the first nine months ended September 26, 2020, a decrease of $18.4 million due primarily to an increase in net income of approximately $245.5 million less a decrease in distributions from unconsolidated subsidiaries of approximately $203.9 million. Additionally, changes in operating assets and liabilities impacted cash provided by operating activities, which includes an approximately $121.9 million decrease in cash provided by accounts receivable, an approximately $53.5 million decrease in cash provided by inventory and prepaid expense, an approximately $57.7 million increase in cash provided by accounts payable and accrued expenses, an approximately $10.4 million increase in income taxes refundable/payable and an approximately $40.1 million increase in cash provided by other primarily from a reduction of foreign governmental sales taxes and hedging activities.  Cash used by investing activities was $219.7 million for the first nine months ended October 2, 2021, compared to $187.3 million for the first nine months ended September 26, 2020, an increase in cash used by investing activities of $32.4 million, primarily due to an increase in capital asset spending and investments in unconsolidated subsidiaries.  Net cash used by financing activities was $240.1 million for the first nine months ended October 2, 2021, compared to net cash used by financing activities of $287.5 million for the first nine months ended September 26, 2020, a decrease in net cash used by financing activities of $47.4 million, primarily due to a decrease in debt payments that more than offset an increase in the repurchase of common stock and minimum withholding taxes on stock awards in the first nine months ended October 2, 2021 compared to the first nine months ended September 26, 2020.

Capital expenditures of $191.7 million were made during the first nine months of fiscal 2021, compared to $184.9 million in the first nine months of fiscal 2020, for a net increase of $6.8 million or 3.7%.  The Company expects to incur additional capital expenditures of approximately $120 million for the remainder of fiscal 2021 including compliance and expansion projects. The Company intends to finance these costs using cash flows from operations. Capital expenditures related to compliance with environmental regulations were $23.8 million and $26.2 million during the first nine months ended October 2, 2021 and September 26, 2020, respectively.

Accrued Insurance and Pension Plan Obligations

Based upon the annual actuarial estimate, current accruals and claims paid during the first nine months of fiscal 2021, the Company has accrued approximately $11.9 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 October 2, 2021.  The self insurance reserve is composed of estimated liability for claims arising for workers’ compensation, 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 cost of health care, the pending number of claims or other factors beyond the control of management of the Company. 

Based upon current actuarial estimates, the Company expects to contribute approximately $0.3 million to its domestic pension plans in order to meet minimum pension funding requirements during the next twelve months.  In addition, the Company expects to make payments of approximately $3.4 million under its foreign pension plans in the next twelve months.  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.  The Company has made tax
43


deductible discretionary and required contributions to its domestic pension plans for the first nine months ended October 2, 2021 of approximately $0.2 million. Additionally, the Company has made required and tax deductible discretionary contributions to its foreign pension plans for the first nine months ended October 2, 2021 of approximately $2.6 million.

The U.S. Pension Protection Act of 2006 (“PPA”) went into effect in January 2008.  The stated goal of the PPA is to improve the funding of U.S. pension plans.  U.S. plans in an under-funded status are required to increase employer contributions to improve the funding level within PPA timelines.  Volatility in the world equity and other financial markets, including that associated with the current COVID-19 outbreak, could have a material negative impact on U.S. pension plan assets and the status of required funding under the PPA.  The Company participates in various U.S. multiemployer pension plans which provide defined benefits to certain employees covered by labor contracts.  These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts to meet their pension benefit obligations to their participants. The Company's contributions to each individual U.S. multiemployer plan represent less than 5% of the total contributions to each plan. Based on the most currently available information, the Company has determined that, if a withdrawal were to occur, withdrawal liabilities for two of the U.S. plans in which the Company currently participates could be material to the Company, with one of these material plans certified as critical or red zone under PPA guidelines. With respect to the other U.S. multiemployer pension plans in which the Company participates and which are not individually significant, five plans have certified as critical or red zone and two have certified as endangered or yellow zone as defined by the PPA. The Company currently has withdrawal liabilities recorded on four U.S. multiemployer plans in which it participated. During the first nine months of fiscal 2021, the Company was notified by one of these multiemployer plans that the Company's withdrawal liability has increased and as a result the Company recorded an additional liability of approximately $1.3 million. As of October 2, 2021, the Company has an aggregate accrued liability of approximately $3.9 million representing the present value of scheduled withdrawal liability payments on the multiemployer plans that have given notice of withdrawal. While the Company has no ability to calculate a possible current liability for under-funded multiemployer plans that could terminate or could require additional funding under the PPA, the amounts could be material.

DGD Joint Venture

In January 2011, Darling, through a wholly-owned subsidiary, entered into a limited liability company agreement (as subsequently amended, the “DGD LLC Agreement”) with Valero to form the DGD Joint Venture. The DGD Joint Venture is owned 50% / 50% with Valero and was formed to design, engineer, construct and operate a renewable diesel plant located adjacent to Valero's refinery in Norco, Louisiana (the “DGD Norco Facility”). The DGD Norco Facility reached mechanical completion and began the production of renewable diesel and certain other co-products in late June 2013. In October 2021, the DGD Joint Venture completed an expansion of the DGD Norco Facility that increased its renewable diesel production by 400 million gallons per year, so that it is now capable of producing 690 million gallons per year of renewable diesel, as well as separating renewable naphtha (approximately 30 million gallons) and other light end renewable hydrocarbons for sale into low carbon fuel markets. The expansion of the DGD Norco Facility was completed and became operational in October 2021, at a total cost, including naphtha production and improved logistics capability, of approximately $1.1 billion, which was substantially funded by DGD Joint Venture cash flow.

On May 1, 2019, Darling, through its wholly owned subsidiary Darling Green Energy LLC, (“Darling Green”), and Diamond Alternative Energy, LLC, a wholly owned subsidiary of Valero (“Diamond Alternative” and together with Darling Green, the “DGD Lenders”) entered into a revolving loan agreement (the “DGD Loan Agreement”) with the DGD Joint Venture. The DGD Lenders have committed to make loans available to the DGD Joint Venture in the total amount of $50.0 million with each lender committed to $25.0 million of the total commitment. Any borrowings by the DGD Joint Venture under the DGD Loan Agreement are at the applicable annum rate equal to the sum of (a) the LIBO Rate (meaning Reuters BBA Libor Rates Page 3750) on such day plus (b) 2.50%. The DGD Loan Agreement matures on April 29, 2022, unless extended by agreement of the parties. As of October 2, 2021, no amounts were owed to the DGD Lenders under the DGD Loan Agreement. Subsequent to October 2, 2021, the DGD Joint Venture borrowed all $50.0 million available under the DGD Loan Agreement, including the Company's full $25.0 million commitment.

On March 30, 2021, the DGD Joint Venture entered into a $400.0 million senior, unsecured revolving credit facility, with CoBank ACB acting as lead arranger and the administrative agent for the lending group, which is comprised of Farm Credit System institutions. The new revolving credit facility matures March 30, 2024 and is non-recourse to the joint venture partners. As of October 2, 2021, the DGD Joint Venture has borrowings outstanding of $100.0 million under this unsecured revolving credit facility.

Based on the sponsor support agreements executed in connection with the initial construction of the DGD Norco Facility, the Company contributed a total of approximately $111.7 million for initial completion of the DGD Norco Facility
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including the Company's portion of cost overruns and working capital funding. In the three months ended October 2, 2021, each joint venture partner made a $25.0 million voluntary capital contribution to the DGD Joint Venture. Subsequent to October 2, 2021, each joint venture partner made a capital contribution of approximately $37.75 million. As of October 2, 2021, under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $1,072.6 million included on the consolidated balance sheet.

In January 2021, the joint venture partners approved the construction of a new facility to be located next to Valero’s Port Arthur Refinery in Port Arthur, Texas, capable of producing 470 million gallons per year of renewable diesel and 20 million gallons per year of renewable naphtha and having similar logistics flexibilities as those of the DGD Norco Facility. Construction is underway, and the new plant is anticipated to commence operations in the first half of 2023, with the total cost of the expansion project estimated to be approximately $1.45 billion. Once operational, the new plant is expected to increase the DGD Joint Venture’s total renewable diesel production capacity to almost 1.2 billion gallons per year. Based on forecasted margins as of the date of this report, the Port Arthur expansion project is expected to be substantially funded by DGD Joint Venture cash flow; however, if the DGD Joint Venture cash flow is not sufficient to fully fund the project, the DGD Joint Venture may need to borrow funds or the joint venture partners may be required to contribute additional funds to complete the project.

The Company’s original investment in DGD has expanded since 2011 to the point that it is now integral to how Darling operates its business. Darling traditionally collected and converted used cooking oil and animal fats into feed ingredients which were sold on a caloric value to feed animals as well as for industrial technical uses. Over the past decade, the world’s increasing focus on climate change and greenhouse gas has provided a new finished market for the Company’s finished fats ingredients. With Darling’s significant fats ownership, this has and continues to transform how Darling operates. In 2020, a large portion of Darling’s total U.S. finished fats products were sold to the DGD Norco Facility as feedstock for renewable diesel. In 2020, DGD was Darling’s largest finished product customer in terms of sales, with Darling recording sales of approximately $264.1 million to DGD.

From a procurement, production and distribution standpoint, DGD has become integral to Darling’s base business. DGD is integrated to the Company’s operations via the combined vertical operating structure from collecting raw fats, to processing collected fats at Darling facilities nationwide to transporting the refined fats to the DGD Norco Facility as feedstock. The Darling supply chain has become more efficient and sustainable with transparency for verification to obtain full value to low carbon intensity markets. The development of the low carbon markets in North America and Europe has influenced how Darling operates its core business and has also been a driver for the recent DGD expansions, which are making DGD much more relevant to Darling’s earnings. Since 2011 when construction began on DGD, Darling has invested substantially to increase its U.S. railcar fleet to efficiently manage nationwide transportation of Darling fats to DGD. Additionally, Darling acquired an Iowa location on the Mississippi River that further enhances the ability of the Company's Midwest network of facilities to collect and deliver feedstocks to DGD via water, rail or truck from a centralized location. Darling has also stepped up collection efforts by providing indoor used cooking oil collection units in exchange for extended collection contracts at eating establishments and has moved to more of a centralized digital marketing effort with restaurant chains and franchise groups and invested in internet search engine key words to improve visibility with restaurants. The Company also includes DGD in marketing efforts to emphasize environmental sustainability that restaurants participate in when their used cooking oil is collected by Darling. From a production standpoint, Darling now isolates used cooking oil from other fats to preserve identification to qualify for a higher carbon intensity value. As a result, the Company includes its equity in net income of the DGD Joint Venture as operating income.

Financial Impact of Significant Debt Outstanding

The Company has a substantial amount of indebtedness, which could make it more difficult for the Company to satisfy its obligations to its financial lenders and its contractual and commercial commitments, limit the Company's ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements on commercially reasonable terms or at all, require the Company to use a substantial portion of its cash flows from operations to pay principal and interest on its indebtedness instead of other purposes, thereby reducing the amount of the Company's cash flows from operations available for working capital, capital expenditures, acquisitions and other general corporate purposes, increase the Company's vulnerability to adverse economic, industry and business conditions, expose the Company to the risk of increased interest rates as certain of the Company's borrowings are at variable rates of interest, limit the Company's flexibility in planning for, or reacting to, changes in the Company's business and the industry in which the Company operates, place the Company at a competitive disadvantage compared to other, less leveraged competitors, and/or increase the Company's cost of borrowing.


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Cash Flows and Liquidity Risks

Management believes that the Company’s cash flows from operating activities, unrestricted cash and funds available under the Amended 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, 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 negative impacts from the current COVID-19 outbreak and those other factors discussed below under the heading “Forward Looking Statements”. These factors, coupled with volatile prices for natural gas and diesel fuel, currency exchange fluctuations, general performance of the U.S. and global economies, disturbances in world financial, credit, commodities and stock markets, and any decline in consumer confidence, including the inability of consumers and companies to obtain credit due to lack of liquidity in the financial markets, among others, could negatively impact the Company’s results of operations in fiscal year 2021 and thereafter.  The Company reviews the appropriate use of unrestricted cash periodically. As of the date of this report, no decision has been made as to non-ordinary course material cash usages at this time; however, potential usages could include: opportunistic capital expenditures and/or acquisitions and joint ventures;  investments relating to the Company’s renewable energy strategy, including, without limitation, potential required funding obligations with respect to the DGD Joint Venture expansion projects or potential investments in additional renewable diesel and/or biofuel projects; investments in response to governmental regulations relating to human and animal food safety or other regulations; unexpected funding required by the legislation, regulation or mass termination of multiemployer plans; and paying dividends or repurchasing stock, subject to limitations under the Amended Credit Agreement, the 5.25% Notes and the 3.625% Notes, as well as suitable cash conservation to withstand adverse commodity cycles. The Company's Board of Directors has approved a share repurchase program of up to an aggregate of $200.0 million of the Company's Common Stock depending on market conditions. The repurchases may be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. The program runs through August 13, 2022, unless further extended or shortened by the Board of Directors. During the first nine months of fiscal 2021, the Company has repurchased approximately $97.9 million of its common stock in the open market. As of October 2, 2021, the Company had approximately $102.1 million remaining in its share repurchase program.

Each of the factors described above has the potential to adversely impact the Company's 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.

Sales prices for the principal products that the Company sells are typically influenced by sales prices for agricultural-based alternative ingredients, 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 decline in raw material availability, a decline in agricultural-based alternative ingredients prices, increases in energy prices or the impact of U.S. and foreign regulation (including, without limitation, China), changes in foreign exchange rates, imposition of currency controls and currency devaluations 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 or other factors could cause the Company to fail to meet management's expectations or could cause liquidity concerns.

Supplemental Guarantor Financial Information

The following is a description of the terms and conditions of the guarantees with respect to senior notes for which Darling is an issuer or provides full and unconditional guarantee.

Note Guarantees

The Company's 5.25% Notes and 3.625% Notes (see Note 8 (Debt) to the Company's Consolidated Financial Statements included herein) are guaranteed on a senior unsecured basis by the following Notes Guarantors, each of which is a 100% directly or indirectly owned subsidiary of Darling and which collectively constitute all of Darling's existing restricted subsidiaries that are Credit Agreement Guarantors (other than Darling's foreign subsidiaries, Darling Global Finance B.V., which issued the 3.625% Notes and is discussed further below, or any receivables entity): Darling National LLC, Griffin Industries LLC and its subsidiary Craig Protein Division, Inc., DarPro Storage Solutions LLC, Darling Global Holdings Inc., Rousselot Inc., Rousselot Dubuque Inc., Sonac USA LLC and Rousselot Peabody Inc (collectively, the “Notes Guarantors”). In addition, the 3.625% Notes, which were issued by Darling Global Finance B.V., a wholly-owned indirect subsidiary of Darling, are guaranteed on a senior unsecured basis by Darling. The Notes Guarantors, and Darling in the case of the 3.625% Notes, fully and unconditionally guaranteed the 5.25% Notes and 3.625% Notes on a joint and several basis. The following financial tables present summarized financial information for (i) Darling, (ii) the combined
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Notes Guarantors, (iii) the combined other subsidiaries of the Company that did not guarantee the 5.25% Notes or the 3.625% Notes (the “Non-guarantors”), and (iv) eliminations necessary to arrive at the Company's consolidated summarized financial information, which include summarized condensed consolidated balance sheets as of October 2, 2021 and January 2, 2021, and the summarized condensed consolidating statements of operations for the three and nine months ended October 2, 2021 and September 26, 2020. Separate financial information is not presented for Darling Global Finance B.V. since it was formed as a special purpose finance subsidiary for the purpose of issuing euro-denominated notes such as the 3.625% Notes and therefore does not have any substantial operations or assets.

Summarized Financial Information

Condensed Balance Sheet Information
(in thousands)
October 2, 2021ParentNotes GuarantorsNon-guarantorsEliminationsConsolidated
Current assets$178,275 $1,061,470 $1,188,191 $(1,324,292)$1,103,644 
Noncurrent assets7,010,953 2,447,136 4,156,875 (8,792,888)4,822,076 
Current liabilities1,459,135 99,469 521,884 (1,324,291)756,197 
Noncurrent liabilities1,372,514 32,526 785,196 (289,950)1,900,286 
Stockholders' equity4,357,579 3,376,611 4,037,986 (8,502,939)3,269,237 
January 2, 2021
Current assets$103,728 $881,669 $1,177,869 $(1,176,272)$986,994 
Noncurrent assets6,476,886 2,465,785 3,753,644 (8,069,978)4,626,337 
Current liabilities1,345,233 77,573 428,771 (1,176,272)675,305 
Noncurrent liabilities1,254,518 19,755 826,157 (116,613)1,983,817 
Stockholders' equity3,980,863 3,250,126 3,676,585 (7,953,365)2,954,209 

Condensed Statements of Operations Information
(in thousands) 
For the three months ended October 2, 2021ParentNotes GuarantorsNon-guarantorsEliminationsConsolidated
Net sales$279,473 $462,066 $540,465 $(96,088)$1,185,916 
Total costs and expenses259,507 404,684 466,101 (96,088)1,034,204 
Equity in net income of Diamond Green Diesel— — 53,951 — 53,951 
Operating income19,966 57,382 128,315 — 205,663 
Net income attributable to Darling146,812 44,497 95,083 (139,580)146,812 
For the three months ended September 26, 2020
Net sales$173,659 $309,837 $416,297 $(49,224)$850,569 
Total costs and expenses194,246 287,005 382,186 (49,224)814,213 
Equity in net income of Diamond Green Diesel— — 91,099 — 91,099 
Operating income (loss)(20,587)22,832 125,210 — 127,455 
Net income attributable to Darling101,125 21,876 113,481 (135,357)101,125 

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Condensed Statements of Operations Information (continued)
(in thousands) 
For the nine months ended October 2, 2021ParentNotes GuarantorsNon-guarantorsEliminationsConsolidated
Net sales$806,611 $1,332,468 $1,548,583 $(256,361)$3,431,301 
Total costs and expenses784,359 1,172,725 1,339,110 (256,361)3,039,833 
Equity in net income of Diamond Green Diesel— — 281,964 — 281,964 
Operating income22,252 159,743 491,437 — 673,432 
Net income attributable to Darling495,160 126,484 377,589 (504,073)495,160 
For the nine months ended September 26, 2020
Net sales$540,493 $930,788 $1,225,680 $(144,877)$2,552,084 
Total costs and expenses606,440 855,705 1,130,655 (144,877)2,447,923 
Equity in net income of Diamond Green Diesel— — 252,411 — 252,411 
Operating income (loss)(65,947)75,083 347,436 — 356,572 
Net income attributable to Darling252,074 63,051 283,093 (346,144)252,074 

OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

Based upon the underlying purchase agreements, the Company has commitments to purchase $216.4 million of commodity products consisting of approximately $67.9 million of finished products, approximately $118.8 million of natural gas and diesel fuel and approximately $29.7 million of other commitments during the next five years, which are not included in liabilities on the Company’s balance sheet at October 2, 2021.  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 or products occurs and ownership passes to the Company during the remainder of fiscal 2021 and through fiscal 2024, in accordance with accounting principles generally accepted in the United States.

The following table summarizes the Company’s other commercial commitments, including both on- and off-balance sheet arrangements that are part of the Company's Amended Credit Agreement and other foreign bank guarantees that are not a part of the Company's Amended Credit Agreement at October 2, 2021 (in thousands):
            
Other commercial commitments: 
Standby letters of credit$4,130 
Standby letters of credit (ancillary facility)27,400 
Foreign bank guarantees11,827 
Total other commercial commitments:$43,357 

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 the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2021, filed with the SEC on March 2, 2021.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. This ASU amends Topic 740 Income Taxes, which eliminates certain exceptions in accounting for income taxes, improves consistency in application and clarifies existing guidance. The standard is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The adoption of this ASU in the first quarter of fiscal 2021 did not have a material impact on the Company's consolidated financial statements.

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes “forward-looking” statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements.   Statements that are not statements of historical facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “estimate,” “project,”
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“planned,” “contemplate,” “potential,” “possible,” “proposed,” “intend,” “believe,” “anticipate,” “expect,” “may,” “will,” “would,” “should,” “could,” and similar expressions are intended to identify forward-looking statements.  All statements other than statements of historical facts included in this report are forward looking statements, including, without limitation, the statements under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and located elsewhere herein regarding industry prospects, the Company’s financial position and the Company's use of cash.  Forward-looking statements are based on the Company's current expectations and assumptions regarding its business, the economy and other future conditions. The Company cautions readers that any such forward-looking statements it makes are not guarantees of future performance and that actual results may differ materially from anticipated results or expectations expressed in its forward-looking statements as a result of a variety of factors, including many that are beyond the Company's control.
 
In addition to those factors discussed 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: existing and unknown future limitations on the ability of the Company's direct and indirect subsidiaries to make their cash flow available to the Company for payments on the Company's indebtedness or other purposes; global demands for bio-fuels and grain and oilseed commodities, which have exhibited volatility, and can impact the cost of feed for cattle, hogs and poultry, thus affecting available rendering feedstock and selling prices for the Company’s products; 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, reduced consumer demand or other factors, reduced volume from food service establishments, or otherwise; reduced demand for animal feed; reduced finished product prices, including a decline in fat and used cooking oil finished product prices;  changes to worldwide government policies relating to renewable fuels and greenhouse gas (“GHG”) emissions that adversely affect programs like the U.S. government's renewable fuel standard, low carbon fuel standards (“LCFS”) and tax credits for biofuels both in the United States and abroad; possible product recall resulting from developments relating to the discovery of unauthorized adulterations to food or food additives; the occurrence of 2009 H1N1 flu (initially known as “Swine Flu”), highly pathogenic strains of avian influenza (collectively known as “Bird Flu”), severe acute respiratory syndrome (“SARS”), bovine spongiform encephalopathy (or “BSE”), porcine epidemic diarrhea (“PED”) or other diseases associated with animal origin in the United States or elsewhere, such as the outbreak of ASF in China and elsewhere; the occurrence of pandemics, epidemics or disease outbreaks, such as the current COVID-19 outbreak; unanticipated costs and/or reductions in raw material volumes related to the Company’s compliance with the existing or unforeseen new U.S. or foreign (including, without limitation, China) regulations (including new or modified animal feed, Bird Flu, SARS, PED, BSE or ASF or similar or unanticipated regulations) affecting the industries in which the Company operates or its value added products; risks associated with the DGD Joint Venture, including possible unanticipated operating disruptions and issues relating to the announced expansion projects; risks and uncertainties relating to international sales and operations, including imposition of tariffs, quotas, trade barriers and other trade protections imposed by foreign countries; difficulties or a significant disruption in the Company's information systems or failure to implement new systems and software successfully; risks relating to possible third party claims of intellectual property infringement; increased contributions to the Company’s pension and benefit plans, including multiemployer and employer-sponsored defined benefit pension plans as required by legislation, regulation or other applicable U.S. or foreign law or resulting from a U.S. mass withdrawal event; bad debt write-offs; loss of or failure to obtain necessary permits and registrations; continued or escalated conflict in the Middle East, North Korea, Ukraine or elsewhere; uncertainty regarding the exit of the U.K. from the European Union; and/or unfavorable export or import markets.  These factors, coupled with volatile prices for natural gas and diesel fuel, climate conditions, currency exchange fluctuations, general performance of the U.S. and global economies, disturbances in world financial, credit, commodities and stock markets, and any decline in consumer confidence and discretionary spending, including the inability of consumers and companies to obtain credit due to lack of liquidity in the financial markets, among others, could cause actual results to vary materially from the forward-looking statements included in this report or negatively impact the Company's results of operations. 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's announced share repurchase program may be suspended or discontinued at any time and purchases of shares under the program are subject to market conditions and other factors, which are likely to change from time to time. For more detailed discussion of these factors see the Risk Factors discussion in Item 1A of Part I of the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2021. 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 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Market risks affecting the Company include exposures to changes in prices of the finished products the Company sells, interest rates on debt, availability of raw material supplies and the price of natural gas and diesel fuel used in the
49


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. Additionally, with the acquisition of foreign entities we are exposed to foreign currency exchange risks, imposition of currency controls and the possibility of currency devaluation.

The Company makes limited use of derivative instruments to manage cash flow risks related to natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. Natural gas swaps and options are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential impact of seasonal weather demands on natural gas that increases natural gas prices. Heating oil swaps and options are entered into with the intent of managing the overall cost of diesel fuel usage by reducing the potential impact of seasonal weather demands on diesel fuel that increases diesel fuel prices. Soybean meal options are entered into with the intent of managing the impact of changing prices for poultry meal sales. Corn options and future contracts are entered into with the intent of managing U.S. forecasted sales of BBP by reducing the impact of changing prices. Foreign currency forward contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency. 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 October 2, 2021, the Company had corn option contracts and foreign exchange forward and option contracts outstanding that qualified and were designated for hedge accounting as well as corn forward contracts and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.

In fiscal 2020 and fiscal 2021, the Company entered into corn option contracts on the Chicago Board of Trade that are designated as cash flow hedges. Under the terms of the corn option contracts, the Company hedged a portion of its U.S. forecasted sales of BBP into the fourth quarter of fiscal 2022. As of October 2, 2021 and January 2, 2021 the aggregate fair value of these corn option contracts was approximately $2.2 million and $6.8 million, respectively. These amounts are included in other current assets, accrued expenses and noncurrent liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss. The Company may enter into corn option contracts in the future from time to time.

In fiscal 2020 and fiscal 2021, the Company entered into foreign exchange forward and option contracts that are considered cash flow hedges. Under the terms of the foreign exchange contracts, the Company hedged a portion of its forecasted collagen sales in currencies other than the functional currency through the fourth quarter of fiscal 2022. As of October 2, 2021 and January 2, 2021, the aggregate fair value of these foreign exchange contracts was approximately $2.5 million and $11.6 million, respectively and are included in other current assets, accrued expenses and noncurrent assets on the balance sheet, with an offset recorded in accumulated other comprehensive loss.

In fiscal 2020 and fiscal 2021, the Company entered into soybean meal forward contracts to hedge a portion of its forecasted poultry meal sales into the third quarter of fiscal 2021. As of October 2, 2021 and January 2, 2021, the aggregate fair value of the soybean meal contracts was zero and $0.4 million, respectively. The amounts are included in other current assets on the balance sheet, with an offset recorded in accumulated other comprehensive loss.

As of October 2, 2021, the Company had the following outstanding forward and option contract amounts that were entered into to hedge foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency (in thousands):

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Functional CurrencyContract CurrencyRange ofU.S.
TypeAmountTypeAmountHedge ratesEquivalent
Brazilian real22,978 Euro3,536 6.18 - 6.98$4,264 
Brazilian real1,116,635 U.S. dollar237,950 3.35 - 6.25237,950 
Euro33,298 U.S. dollar39,070 1.16 - 1.2439,070 
Euro24,960 Polish zloty114,000 4.51 - 4.6428,949 
Euro7,160 Japanese yen929,960 129.70 - 132.308,304 
Euro20,692 Chinese renminbi157,474 7.58 - 7.6723,999 
Euro13,670 Australian dollar21,850 1.6015,855 
Euro2,810 British pound2,400 0.853,259 
Euro34 Canadian dollar50 1.4839 
Polish zloty2,057 U.S. dollar524 3.92524 
Polish zloty20,589 Euro4,483 4.59 - 4.605,198 
British pound179 Euro210 0.85243 
Japanese yen228,482 U.S. dollar2,070 108.79 - 110.802,070 
U.S. dollar514 Japanese yen57,000 110.90514 
U.S. dollar293,089 Euro250,000 1.17293,089 
$663,327 

The above foreign currency contracts that are not designated as hedges had an aggregate fair value of approximately $3.7 million and are included in other current assets and accrued expenses at October 2, 2021.

Additionally, the Company had corn forward contracts that are marked to market because they did not qualify for hedge accounting at October 2, 2021. These contracts have an aggregate fair value of approximately $0.5 million and are included in other current assets and accrued expenses at October 2, 2021.

As of October 2, 2021, the Company had forward purchase agreements in place for purchases of approximately $118.8 million of natural gas and diesel fuel and approximately $29.7 million of other commitments during the next five years. As of October 2, 2021, the Company had forward purchase agreements in place for purchases of approximately $67.9 million of finished product during the next five years.

Foreign Exchange

The Company has significant international operations and is subject to certain opportunities and risks, including currency fluctuations. As a result, the Company is affected by changes in foreign currency exchange rates, particularly with respect to the euro, Brazilian real, Canadian dollar, Australian dollar, Chinese renminbi, British pound, Polish zloty, and Japanese yen.

Item 4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.  As required by Rule 13a-15(b) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), 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 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. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

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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.

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 quarter 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, 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.
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DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 2021

PART II:  Other Information
 

Item 1.  LEGAL PROCEEDINGS

The information required by this Item 1 is contained within Note 16 (Contingencies) on pages 21 through 22 of this Form 10-Q and is incorporated herein by reference.

Item 1A.  RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties that are not currently known or that are currently deemed to be immaterial may also materially and adversely affect our business operations and financial condition or the market price of our common stock.

Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On August 3, 2020, the Company’s Board of Directors approved the extension for an additional two years of its previously announced share repurchase program and refreshed the amount of the program back up to its original amount of an aggregate of $200.0 million of the Company's common stock depending on market conditions. During the third quarter of fiscal 2021, the Company repurchased approximately $22.3 million worth of its common stock in the open market. As of October 2, 2021, the Company had approximately $102.1 million remaining under the share repurchase program initially approved in August 2017 and subsequently extended to August 13, 2022.

The following table is a summary of equity securities purchased by the Company during the third quarter of fiscal 2021.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total Number of Shares Purchased (1)
Average Price Paid per Share (2)
Total Number of Shares Purchased as part of Publicly Announced Plans or Programs (4)
Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Plan or Programs at End of Period.
July 2021:
July 4, 2021 through July 31, 20212,937 67.79 $124,359,544 
August 2021:
August 1, 2021 through August 28, 2021334,879 (3)75.00 319,330 102,105,660 
September 2021:
August 29, 2021 through October 2, 202112,736 74.30 102,105,660 
Total350,552 74.15 319,330 $102,105,660 

(1)    All shares purchased during the third quarter were acquired by the Company pursuant to the announced share repurchase program (other than shares withheld for taxes on restricted stock and exercised options and the strike price on exercised options).
(2)    The average price paid per share is calculated on a trade date basis and excludes commissions.
(3)    Includes 15,549 shares withheld for taxes on restricted stock and options.
(4)    Represents purchases made during the quarter under the authorization from the Company's Board of Directors, as announced, to repurchase up to an aggregate of $200.0 million of the Company's common stock over the period ending August 13, 2022, unless extended or shortened by the Board of Directors.
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Item 6.  EXHIBITS

 The following exhibits are filed herewith:
 31.1
 31.2
32
 101Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of October 2, 2021 and January 2, 2021; (ii) Consolidated Statements of Operations for the three and nine months ended October 2, 2021 and September 26, 2020; (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three and nine months ended October 2, 2021 and September 26, 2020; (iv) Consolidated Statements of Stockholders' Equity for the nine months ended October 2, 2021 and September 26, 2020; (v) Consolidated Statements of Cash Flows for the nine months ended October 2, 2021 and September 26, 2020; (vi) Notes to the Consolidated Financial Statements.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 DARLING INGREDIENTS INC.
Date:   November 9, 2021By: /s/  Brad Phillips
  Brad Phillips
  Chief Financial Officer
  (Principal Financial Officer and Duly Authorized Officer)
 
 




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