X
|
ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
|
|
For
the fiscal year ended December 29,
2007
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TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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||
For
the transition period from _______________ to
_______________
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Delaware
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36-2495346
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||
(State
or other jurisdiction
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(I.R.S.
Employer
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||
of
incorporation or organization)
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Identification
Number)
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||
251
O'Connor Ridge Blvd., Suite 300
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|||
Irving,
Texas
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75038
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||
(Address
of principal executive offices)
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(Zip
Code)
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Title of Each Class
|
Name of Exchange on Which
Registered
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|||
Common
Stock $0.01 par value per share
|
New
York Stock Exchange (“NYSE”)
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Large
accelerated filer
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X
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
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|||||||
(Do
not check if a smaller
reporting
company)
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Page No.
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|||
PART
I.
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|||
Item
1.
|
BUSINESS
|
4 | |
Item
1A.
|
RISK
FACTORS
|
9 | |
Item
1B.
|
UNRESOLVED
STAFF COMMENTS
|
15 | |
Item
2.
|
PROPERTIES
|
15 | |
Item
3.
|
LEGAL
PROCEEDINGS
|
17 | |
Item
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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17 | |
PART
II.
|
|||
Item
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
18 | |
Item
6.
|
SELECTED
FINANCIAL DATA
|
21 | |
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
23 | |
Item
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
|
41 | |
Item
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
42 | |
Item
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
|
78 | |
Item
9A.
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CONTROLS
AND PROCEDURES
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78 | |
Item
9B.
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OTHER
INFORMATION
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79 | |
PART
III.
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|||
Item
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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80 | |
Item
11.
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EXECUTIVE
COMPENSATION
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80 | |
Item
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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80 | |
Item
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS,
AND
DIRECTOR INDEPENDENCE
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80 | |
Item
14.
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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80 | |
PART
IV.
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|||
Item
15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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81 | |
SIGNATURES
|
85 |
ITEM
1.
|
BUSINESS
|
Fiscal
2007
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Fiscal
2006
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Fiscal
2005
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|||||||||||||||||||||||
Continuing
operations:
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|||||||||||||||||||||||||
Rendering
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$ | 464,468 | 72.0 | % | $ | 279,011 | 68.6 | % | $ | 192,340 | 62.3 | % | |||||||||||||
Restaurant Services
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180,845 | 28.0 | 127,979 | 31.4 | 116,527 | 37.7 | |||||||||||||||||||
Total
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$ | 645,313 | 100.0 | % | $ | 406,990 | 100.0 | % | $ | 308,867 | 100.0 | % |
·
|
The Food and Drug
Administration (“FDA”), which regulates food and feed
safety. Effective August 1997, the FDA promulgated a rule
prohibiting the use of mammalian proteins, with some exceptions, in feeds
for cattle, sheep and other ruminant animals (21 CFR 589.2000, referred to
herein as the “BSE Feed Rule”). The intent of this rule is to
prevent further spread of BSE, commonly referred to as “mad cow disease.”
Company management believes the Company is in compliance with the
provisions of this rule.
|
·
|
The
United States Department
of Agriculture (“USDA”), which regulates collection and production
methods. Within the USDA, two agencies exercise direct
regulatory oversight of the Company’s
activities:
|
|
–
Animal and Plant Health
Inspection Service (“APHIS”) certifies facilities and claims made
for exported materials, and
|
|
–
Food Safety Inspection
Service (“FSIS”) regulates sanitation and
food safety programs.
|
·
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The
Environmental Protection
Agency (“EPA”), which regulates air and water discharge
requirements, as well as local and state agencies governing air and water
discharge.
|
·
|
State Departments of
Agriculture, which regulate animal by-product collection and
transportation procedures and animal feed
quality.
|
·
|
The
United States Department
of Transportation (“USDOT”), as well as local and state agencies,
which regulate the operation of the Company’s commercial
vehicles.
|
·
|
The
Securities and Exchange
Commission (“SEC”), which regulates securities and information
required in annual and quarterly reports filed by publicly traded
companies.
|
ITEM
1A.
|
RISK
FACTORS
|
·
|
The
FDA, which regulates food and feed
safety;
|
·
|
The
USDA, including its agencies APHIS and FSIS, which regulates collection
and production methods;
|
·
|
The
EPA, which regulates air and water discharge requirements, as well as
local and state agencies governing air and water
discharge;
|
·
|
State
Departments of Agriculture, which regulate animal by-product collection
and transportation procedures and animal feed
quality;
|
·
|
The
USDOT, as well as local and state transportation agencies, which regulate
the operation of the Company’s commercial vehicles;
and
|
·
|
The
SEC, which regulates securities and information required in annual and
quarterly reports filed by publicly traded
companies.
|
·
|
On
January 18, 2008, APHIS published a final rule (“Clarification Rule”) that
addressed discrepancies in import regulations created in 2005 when a final
rule allowing the importation of cattle and bovine products derived from
countries posing a minimal risk for BSE (“Minimal Risk Rule”) was
implemented. The Minimal Risk Rule classified Canada as a
minimal risk country. The Clarification Rule became effective
on February 19, 2008 and allows products derived from poultry and pork
processed in the same facility as Canadian beef to be imported into the
U.S. Regulations affecting the importation of pork and poultry
products were not harmonized with the Minimal Risk Rule to recognize
countries classified as a minimal risk for BSE. As a result, imports of
Canadian pork and poultry products processed in the same facility as
Canadian beef were prohibited until the Clarification Rule went into
effect. Import regulations may affect the Company’s access to
raw materials for processing.
|
·
|
On
November 19, 2007, APHIS implemented revised import regulations that
allowed Canadian cattle over 30 months of age and born after March 1, 1999
and bovine products derived from such cattle to be imported into the US
for any use. Imports of Canadian cattle younger than 30 months of age have
been allowed since March 2005. Canada banned the skull, brain, trigeminal
ganglia, eyes, tonsils, spinal cord and dorsal root ganglia of cattle aged
30 months or older and the distal ileum of cattle of all ages from all
animal feed, pet food and fertilizers on July 12, 2007. Canada
also prohibits the exportation of such
materials.
|
·
|
On
May 22, 2007, a report released by the World Organization for Animal
Health (“OIE”) formally classified the U.S. as a “controlled risk” country
for BSE. In the same report, the OIE recommended tightening
feed rules in the U.S. and eliminating SRM from the feed chain as Canada
has done. The OIE advised that proper implementation of an SRM
ban in the U.S. will be a key factor in maintaining a controlled risk
status for BSE.
|
·
|
In
2005, the FDA proposed to amend the BSE Feed Rule by also prohibiting from
the food or feed of all animals: (1) brain and spinal cord from
cattle 30 months and older that are inspected and passed for human
consumption; (2) the brain and spinal cord from cattle of any
age not inspected and passed for human consumption; and (3) the
entire carcass of cattle not inspected and passed for human consumption if
the brain and spinal cord has not been removed (“Proposed
Rule”). In addition, the Proposed Rule provides that tallow
containing more than 0.15% insoluble impurities also be banned from all
animal food and feed if this tallow is derived from the proposed
prohibited materials. In November 2007, the FDA submitted a
final draft of the Proposed Rule to the Office of Management and Budget
(“OMB”) for review. The OMB is an office of the White House and
is typically allowed up to 90 days to review proposed, interim and final
rules submitted by regulatory agencies, among its other
functions. Once its review is completed, the OMB may allow the
FDA to publish the Proposed Rule as a final rule or recommend the FDA
address economic or other issues before submitting it to the OMB
again. Although management will continue to monitor the
Proposed Rule and other regulatory issues, it is possible that, if
implemented, the Proposed Rule or other FDA regulatory action could
negatively impact the Company’s operations and financial
performance.
|
·
|
On
November 7, 2007, the FDA released its Food Protection Plan (the “2007
Plan”), which describes prevention, intervention and response strategies
the FDA proposes to use for improving food and animal feed safety for
imported and domestically produced ingredients and products. The 2007 Plan
also lists additional resources and authorities that, in the FDA’s
opinion, are needed to implement the 2007 Plan. Legislation
will be necessary for the FDA to obtain these additional authorities. As
of February 18, 2008, Congress has not granted these authorities to the
FDA.
|
·
|
On
September 27, 2007, the Food and Drug Administration Amendments Act of
2007 (the “2007 Act”) was signed into law as a result of Congressional
concern for pet food and livestock feed safety, following the discovery of
adulterated imported pet food and livestock feed in March
2007. The 2007 Act directs the Secretary of Health and Human
Services and the FDA to promulgate significant new requirements for the
pet food and animal feed industries. The impact of the 2007 Act
on the Company will not be clear until the FDA interprets the 2007 Act and
issues guidance or proposes new
regulations.
|
· | incur additional indebtedness; | |
·
|
pay
dividends and make other distributions;
|
|
·
|
make restricted payments; | |
·
|
create
liens;
|
|
·
|
merge, consolidate or acquire other businesses; | |
·
|
sell
or otherwise dispose of assets;
|
|
·
|
make investments, loans and advances; | |
·
|
guarantee indebtedness or other obligations; | |
·
|
enter into operating leases or sale-leaseback, synthetic leases, or similar transactions; | |
·
|
make changes to its capital structure; and | |
·
|
engage in new lines of business unrelated to the Company’s current businesses. |
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS
|
ITEM
2.
|
PROPERTIES
|
LOCATION
|
DESCRIPTION
|
Bellevue,
NE
|
Rendering/Yellow
Grease
|
Berlin,
WI
|
Rendering/Yellow
Grease
|
Blue
Earth, MN
|
Rendering/Yellow
Grease
|
Boise,
ID
|
Rendering/Yellow
Grease
|
Clinton,
IA
|
Rendering/Yellow
Grease
|
Coldwater,
MI
|
Rendering/Yellow
Grease
|
Collinsville,
OK
|
Rendering/Yellow
Grease
|
Dallas,
TX
|
Rendering/Yellow
Grease
|
Denver,
CO
|
Rendering/Yellow
Grease
|
Des
Moines, IA
|
Rendering/Yellow
Grease
|
Detroit,
MI
|
Rendering/Yellow
Grease/Trap
|
E.
St. Louis, IL
|
Rendering/Yellow
Grease/Trap
|
Fresno,
CA
|
Rendering/Yellow
Grease
|
Houston,
TX
|
Rendering/Yellow
Grease/Trap
|
Kansas
City, KS
|
Rendering/Yellow
Grease/Trap
|
Los
Angeles, CA
|
Rendering/Yellow
Grease/Trap
|
Mason
City, IL
|
Rendering/Yellow
Grease
|
Newark,
NJ
|
Rendering/Yellow
Grease/Trap
|
San
Francisco, CA *
|
Rendering/Yellow
Grease/Trap
|
Sioux
City, IA
|
Rendering/Yellow
Grease
|
Tacoma,
WA *
|
Rendering/Yellow
Grease/Trap
|
Turlock,
CA
|
Rendering/Yellow
Grease
|
Wahoo,
NE
|
Rendering/Yellow
Grease
|
Wichita,
KS
|
Rendering/Yellow
Grease/Trap
|
Denver,
CO
|
Edible
Meat and Tallow
|
Fairfax,
MO
|
Protein
Blending
|
Grand
Island, NE *
|
Pet
Food
|
Kansas
City, KS
|
Protein
Blending
|
Kansas
City, MO
|
Hides
|
Lynn
Center, IL
|
Protein
Blending
|
Omaha,
NE
|
Rendering
|
Omaha,
NE
|
Protein
Blending
|
Omaha,
NE
|
Technical
Tallow
|
Chicago,
IL
|
Yellow
Grease/Trap
|
Ft.
Lauderdale, FL
|
Yellow
Grease/Trap
|
Indianapolis,
IN
|
Yellow
Grease/Trap
|
Little
Rock, AR
|
Yellow
Grease/Trap
|
No.
Las Vegas, NV
|
Yellow
Grease/Trap
|
Tampa,
FL
|
Yellow
Grease/Trap
|
|
*
Property is leased. Rent expense for these leased properties was
$0.7 million in the aggregate in fiscal
2007.
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
ITEM 5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY
SECURITIES
|
Market
Price
|
||||||||
Fiscal
Quarter
|
High
|
Low
|
||||||
2007:
|
||||||||
First Quarter
|
$ | 6.60 | $ | 5.17 | ||||
Second Quarter
|
$ | 9.47 | $ | 6.28 | ||||
Third Quarter
|
$ | 10.17 | $ | 7.31 | ||||
Fourth Quarter
|
$ | 12.10 | $ | 9.34 | ||||
2006:
|
||||||||
First Quarter
|
$ | 4.80 | $ | 3.79 | ||||
Second Quarter
|
$ | 4.92 | $ | 3.91 | ||||
Third Quarter
|
$ | 4.59 | $ | 3.95 | ||||
Fourth Quarter
|
$ | 5.55 | $ | 3.96 | ||||
·
|
the
number of securities to be issued upon the exercise of outstanding
options;
|
·
|
the
weighted-average exercise price of the outstanding options;
and
|
·
|
the
number of securities that remain available for future issuance under the
plans.
|
Plan
Category
|
(a)
Number
of securities to be issued upon exercise of outstanding
options,
warrants and rights
|
(b)
Weighted-average
exercise price of outstanding
options,
warrants
and
rights
|
(c)
Number
of securities remaining available
for
future issuance
under
equity
compensation
plans
(excluding
securities reflected in column (a))
|
|||||||||
Equity
compensation plans approved
by
security holders
|
1,320,705 | (1) |
$
|
3.06 | 3,481,742 | |||||||
Equity
compensation plans not
approved
by security holders
|
– | – | – | |||||||||
Total
|
1,320,705 |
$
|
3.06 | 3,481,742 |
(1)
|
Includes
shares underlying options that have been issued pursuant to the Company’s
2004 Omnibus Incentive Plan (the “2004 Plan”) as approved by the Company‘s
stockholders. See Note 11 of Notes to Consolidated Financial
Statements for information regarding the material features of the 2004
Plan.
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
Fiscal 2007
|
Fiscal 2006
|
Fiscal 2005
|
Fiscal 2004
|
Fiscal 2003
|
|
Fifty-two
Weeks
Ended
December
29,
2007
|
Fifty-two
Weeks
Ended
December
30,
2006 (g)
|
Fifty-two
Weeks
Ended
December 31,
2005
|
Fifty-two
Weeks
Ended
January
1,
2005
|
Fifty-three
Weeks
Ended
January 3,
2004
|
Statement
of Operations Data:
|
||||||||||||||||||||
Net
sales
|
$ | 645,313 | $ | 406,990 | $ | 308,867 | $ | 320,229 | $ | 323,267 | ||||||||||
Cost
of sales and operating
expenses (a)
|
483,453 | 321,416 | 241,707 | 237,925 | 245,175 | |||||||||||||||
Selling,
general and administrative
expenses (b)
|
57,999 | 45,649 | 35,240 | 36,509 | 35,808 | |||||||||||||||
Depreciation
and amortization
|
23,214 | 20,686 | 15,787 | 15,224 | 15,124 | |||||||||||||||
Operating
income
|
80,647 | 19,239 | 16,133 | 30,571 | 27,160 | |||||||||||||||
Interest
expense
|
5,045 | 7,184 | 6,157 | 6,759 | 2,363 | |||||||||||||||
Other
(income)/expense, net (c) (d)
|
570 | 4,682 | (903 | ) | 299 | (3,914 | ) | |||||||||||||
Income
from continuing operations
before income taxes
|
75,032 | 7,373 | 10,879 | 23,513 | 28,711 | |||||||||||||||
Income
tax expense
|
29,499 | 2,266 | 3,184 | 9,245 | 10,632 | |||||||||||||||
Income
from continuing operations
|
45,533 | 5,107 | 7,695 | 14,268 | 18,079 | |||||||||||||||
Income/(loss)
from discontinued
operations, net
of tax
|
- | - | 46 | (376 | ) | 112 | ||||||||||||||
Net
Income
|
$ | 45,533 | $ | 5,107 | $ | 7,741 | $ | 13,892 | $ | 18,191 | ||||||||||
Basic
earnings per common share
|
$ | 0.56 | $ | 0.07 | $ | 0.12 | $ | 0.22 | $ | 0.29 | ||||||||||
Diluted
earnings per common share
|
$ | 0.56 | $ | 0.07 | $ | 0.12 | $ | 0.22 | $ | 0.29 | ||||||||||
Weighted
average shares
outstanding
|
80,772 | 74,310 | 63,929 | 63,840 | 62,588 | |||||||||||||||
Diluted
weighted average shares
outstanding
|
81,896 | 75,259 | 64,525 | 64,463 | 63,188 | |||||||||||||||
Other
Financial Data:
|
||||||||||||||||||||
Adjusted
EBITDA (e)
|
$ | 103,861 | $ | 39,925 | $ | 31,920 | $ | 45,795 | $ | 42,284 | ||||||||||
Depreciation
|
18,332 | 16,134 | 11,903 | 11,345 | 10,958 | |||||||||||||||
Amortization
|
4,882 | 4,552 | 3,884 | 3,879 | 4,166 | |||||||||||||||
Capital
expenditures (f)
|
15,552 | 11,800 | 21,406 | 13,312 | 11,586 | |||||||||||||||
Balance
Sheet Data:
|
||||||||||||||||||||
Working
capital
|
$ | 34,385 | $ | 17,865 | $ | 40,407 | $ | 39,602 | $ | 31,189 | ||||||||||
Total
assets
|
351,338 | 320,806 | 190,772 | 182,809 | 174,649 | |||||||||||||||
Current
portion of long-term debt
|
6,250 | 5,004 | 5,026 | 5,030 | 7,489 | |||||||||||||||
Total
long-term debt less current
portion
|
37,500 | 78,000 | 44,502 | 49,528 | 48,188 | |||||||||||||||
Stockholders’
equity
|
200,984 | 151,325 | 73,680 | 67,235 | 55,282 | |||||||||||||||
(a)
|
Included
in cost of sales and operating expenses is a settlement with certain past
insurers of approximately $2.8 million recorded in fiscal 2004 as a credit
(recovery) of claims expense and previous insurance
premiums.
|
(b)
|
Included
in selling, general and administrative expenses is a loss on a legal
settlement of approximately $2.2 million offset by a gain on a separate
legal settlement of approximately $1.0 million in fiscal
2007.
|
(c)
|
Included
in other (income)/expense in fiscal 2006 is a write-off of deferred loan
costs of approximately $2.6 million and early retirement fees of
approximately $1.9 million for the early retirement of senior subordinated
notes and termination of the previous senior credit
agreement.
|
(d)
|
Included
in other (income)/expense is gain on early retirement of debt of
approximately $1.3 million in fiscal 2004 and $4.7 million in fiscal
2003. Also included in other (income)/expense is loss on
redemption of preferred stock of approximately $1.7 million in fiscal
2004.
|
(e)
|
Adjusted
EBITDA is presented here not as an alternative to net income, but rather
as a measure of the Company’s operating performance and is not intended to
be a presentation in accordance with generally accepted accounting
principles. Since EBITDA is not calculated identically by all
companies, the presentation in this report may not be comparable to those
disclosed by other companies.
|
|
Adjusted
EBITDA is calculated below and represents, for any relevant period, net
income/(loss) plus depreciation and amortization, interest expense,
(income)/loss from discontinued operations, net of tax, income tax
provision and other income/(expense). The Company believes
adjusted EBITDA is a useful measure for investors because it is frequently
used by securities analysts, investors and other interested parties in the
evaluation of companies in our industry. In addition,
management believes that adjusted EBITDA is useful in evaluating our
operating performance compared to that of other companies in our industry
because the calculation of adjusted EBITDA generally eliminates the
effects of financing, income taxes and certain non-cash and other items
that may vary for different companies for reasons unrelated to overall
operating performance. As a result, the Company’s management
uses adjusted EBITDA as a measure to evaluate performance and for other
discretionary purposes. However, adjusted EBITDA is not a
recognized measurement under U.S. GAAP, should not be considered as an
alternative to net income as a measure of operating results or to cash
flow as a measure of liquidity, and is not intended to be a presentation
in accordance with generally accepted accounting
principles. Also, since adjusted EBITDA is not calculated
identically by all companies, the presentation in this report may not be
comparable to those disclosed by other
companies.
|
|
In
addition to the foregoing, management also uses or will use adjusted
EBITDA to measure compliance with certain financial covenants under the
Company’s credit agreement. The amounts shown below for
adjusted EBITDA differ from the amounts calculated under similarly titled
definitions in the Company’s credit agreement, as those definitions permit
further adjustment to reflect certain other non-cash
charges.
|
(dollars
in thousands)
|
December
29,
2007
|
December 30,
2006
|
December 31,
2005
|
January 1,
2005
|
January 3,
2004
|
|||||||||||||||
Net
income
|
$ | 45,533 | $ | 5,107 | $ | 7,741 | $ | 13,892 | $ | 18,191 | ||||||||||
Depreciation
and amortization
|
23,214 | 20,686 | 15,787 | 15,224 | 15,124 | |||||||||||||||
Interest
expense
|
5,045 | 7,184 | 6,157 | 6,759 | 2,363 | |||||||||||||||
(Income)/loss
from discontinued
operations,
net of tax
|
- | - | (46 | ) | 376 | (112 | ) | |||||||||||||
Income
tax expense
|
29,499 | 2,266 | 3,184 | 9,245 | 10,632 | |||||||||||||||
Other
(income)/expense
|
570 | 4,682 | (903 | ) | 299 | (3,914 | ) | |||||||||||||
Adjusted
EBITDA
|
$ | 103,861 | $ | 39,925 | $ | 31,920 | $ | 45,795 | $ | 42,284 | ||||||||||
(f)
|
Excludes
the capital assets acquired as part of substantially all of the assets of
NBP of approximately $51.9 million in fiscal
2006.
|
(g)
|
Fiscal
2006 includes 33 weeks of contribution from the acquired NBP
assets.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
·
|
Higher
finished product prices are indicative of tightening grain and oilseed
supplies driven by a combination of new demand for bio-fuels, growing
consumption from China and India, and back-to-back droughts in various
grain and oilseed producing regions of the world. Higher
finished product prices were favorable to the Company’s sales revenue, but
this favorable result was partially offset by the negative impact on raw
material cost due to the Company’s formula pricing arrangements with raw
material suppliers, which index raw material cost to the prices of
finished product derived from the raw material. The financial
impact of finished goods prices on sales revenue and raw material cost is
summarized below in “Results of Operations.” Comparative sales
price information from the Jacobsen index, an established trading exchange
publisher used by management, is listed below in “Summary of Key
Indicators.”
|
·
|
The
Company has the ability to burn alternative fuels, including its fats and
greases, at a majority of its plants as a way to help manage the Company’s
exposure to high natural gas prices. Beginning October 1, 2006,
the federal government effected a program which will provide federal tax
credits under certain circumstances for commercial use of alternative
fuels in lieu of fossil-based fuels. Beginning in the fourth
quarter of 2006, the Company filed documentation with the Internal Revenue
Service (“IRS”) to recover these Alternative Fuel Mixture Credits as a
result of its use of fats and greases to fuel boilers at its
plants. The Company has received approval from the IRS to apply
for these credits. However, the federal regulations relating to
the Alternative Fuel Mixture Credits are complex and further clarification
is needed by the Company prior to recognition of certain tax credits
received. As of December 29, 2007, the Company has applied for
and received approximately $1.9 million in Alternative Fuel Mixture
Credits from the IRS relating to these credits. During the
fourth quarter of 2007, the Company received further clarification on a
portion of these tax credits received and as a result has recorded
approximately $1.2 million to income as a reduction of energy
costs. The remaining $0.7 million of received credits are
included in current liabilities on the balance sheet as deferred income
while the Company pursues further clarification. The Company
expects to continue to burn alternative fuels at its plants in future
periods as long as the price of natural gas remains
high.
|
·
|
Raw
material volumes during fiscal 2007 improved modestly as some of our
export oriented suppliers processed additional volumes and overall
consumption of meat products improved. Contributing to this increase was a
full fiscal year of contribution from the acquired NBP locations as
compared to 33 weeks of contribution from these locations in fiscal
2006.
|
·
|
Energy
prices for natural gas and diesel fuel are expected to remain volatile
in fiscal 2008. The Company consumes significant volumes of
natural gas to operate boilers in its plants, which generate steam to heat
raw material. High natural gas prices represent a significant cost of
factory operation included in cost of sales. The Company also
consumes significant volumes of diesel fuel to operate its fleet of
tractors and trucks used to collect raw material. High diesel fuel
prices represent a significant component of cost of collection expenses
included in cost of sales. Though the Company will continue to
manage these costs and attempt to minimize these expenses, prices remained
relatively volatile throughout fiscal 2007 and represent an ongoing
challenge to the Company’s operating results for future
periods.
|
·
|
Expenses
related to compliance with requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 (the “Sarbanes Act”) are expected to continue
throughout 2008 and thereafter. The Company expects recurring
compliance costs related to the required updating of documentation and the
testing and auditing of the Company’s system of internal control over
financial reporting, as required by the Sarbanes
Act.
|
·
|
Avian
influenza (“H5N1”), or Bird Flu, a highly contagious disease that affects
chickens and other poultry species, is well established in Asia and
periodically spreads into Europe. The H5N1 strain is highly pathogenic,
which has caused concern that a pandemic could occur if the disease
migrates from birds to humans. This highly pathogenic strain was not
detected in North or South America during 2007, but low pathogenic strains
that are not a threat to human health were reported in the U.S. and Canada
during that period. The USDA has developed safeguards to
protect the U.S. poultry industry from the H5N1 strain of Bird
Flu. These safeguards are based on import restrictions, disease
surveillance and a response plan for isolating and depopulating infected
flocks if the disease is detected. Notwithstanding these
safeguards, any significant outbreak of Bird Flu in the U.S. could
have a negative impact on the Company’s business by reducing demand for
MBM.
|
·
|
Higher
finished product prices,
|
·
|
The
inclusion of the operations of NBP, and
|
·
|
Increased
raw material volume.
|
·
|
Higher
raw material costs,
|
·
|
Higher
payroll and incentive-related benefits,
|
·
|
Higher
plant repair and maintenance expenses, and
|
·
|
Higher
energy costs, primarily related to natural gas and diesel
fuel.
|
·
|
Finished
product commodity prices quoted on the Jacobsen index,
|
·
|
Raw
material volume,
|
·
|
Production
volume and related yield of finished product,
|
·
|
Energy
prices for natural gas quoted on the NYMEX index and diesel
fuel,
|
·
|
Collection
fees and collection operating expense, and
|
·
|
Factory
operating expenses.
|
Avg.
Price
Fiscal
2007
|
Avg.
Price
Fiscal
2006
|
Increase
|
%
Change
|
||||
MBM
(Illinois)
|
$233.51/ton
|
$153.48
/ton
|
$80.03/ton
|
52.1%
|
|||
MBM
(California)
|
$235.00/ton
|
$126.27
/ton
|
$108.73/ton
|
86.1%
|
|
||
BFT
(Chicago)
|
$
27.89/cwt
|
$ 16.87
/cwt
|
$11.02/cwt
|
65.3%
|
|||
YG
(Illinois)
|
$ 21.62/cwt
|
$ 12.64
/cwt
|
$8.98/cwt
|
71.0%
|
Renderingg
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
Higher
finished goods prices
|
$ | 98.0 | $ | 27.1 | $ | – | $ | 125.1 | ||||||||
Net
sales due to contribution from NBP assets
|
84.8 | 6.7 | – | 91.5 | ||||||||||||
Purchases
of finished product for resale
|
8.3 | 6.0 | – | 14.3 | ||||||||||||
Higher
raw material volume
|
6.8 | (1.7 | ) | – | 5.1 | |||||||||||
Other
sales increases
|
1.8 | 0.5 | – | 2.3 | ||||||||||||
Product
transfers
|
(12.9 | ) | 12.9 | – | – | |||||||||||
$ | 186.8 | $ | 51.5 | $ | – | $ | 238.3 |
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
Higher
raw material costs
|
$ | 61.2 | $ | 9.4 | $ | – | $ | 70.6 | ||||||||
Cost
of sales and operating expenses related
to
NBP assets
|
65.6 | 3.6 | – | 69.2 | ||||||||||||
Purchases
of finished product for resale
|
8.3 | 6.0 | – | 14.3 | ||||||||||||
Plant
repairs and maintenance
|
3.5 | 0.5 | – | 4.0 | ||||||||||||
Higher
energy costs, primarily natural gas and
diesel
fuel
|
2.6 | 0.8 | – | 3.4 | ||||||||||||
Multi-employer
pension plan mass withdrawal
termination
liability
|
1.1 | – | – | 1.1 | ||||||||||||
Higher
raw material volume
|
1.4 | (0.4 | ) | – | 1.0 | |||||||||||
Other
expenses
|
(0.2 | ) | 0.1 | (0.2 | ) | (0.3 | ) | |||||||||
Sale
of judgment
|
(1.2 | ) | – | – | (1.2 | ) | ||||||||||
Product
transfers
|
(12.9 | ) | 12.9 | – | – | |||||||||||
$ | 129.4 | $ | 32.9 | $ | (0.2 | ) | $ | 162.1 |
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
Payroll
and related benefits expense
|
$ | (0.7 | ) | $ | (0.7 | ) | $ | 1.5 | $ | 0.1 | ||||||
Incentive
compensation
|
– | 0.2 | 6.7 | 6.9 | ||||||||||||
Selling,
general and administrative expenses
related
to NBP assets
|
1.8 | 0.2 | 0.9 | 2.9 | ||||||||||||
Other
expenses
|
0.6 | 0.2 | 0.5 | 1.3 | ||||||||||||
Legal
settlements
|
– | – | 1.2 | 1.2 | ||||||||||||
$ | 1.7 | $ | (0.1 | ) | $ | 10.8 | $ | 12.4 |
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
Write-off
of deferred loan costs
|
$ | – | $ | – | $ | (2.6 | ) | $ | (2.6 | ) | ||||||
Subordinated
debt prepayment fees
|
– | – | (1.9 | ) | (1.9 | ) | ||||||||||
Decrease
in interest income
|
– | – | 0.3 | 0.3 | ||||||||||||
Increase
in other expense
|
– | – | 0.1 | 0.1 | ||||||||||||
$ | – | $ | – | $ | (4.1 | ) | $ | (4.1 | ) |
·
|
The
inclusion of the operations of NBP,
|
·
|
Higher
raw material volume, and
|
·
|
Improved
recovery of collection expenses.
|
·
|
Lower
finished product sales prices,
|
·
|
Higher
plant repair and maintenance expenses, and
|
·
|
Higher
legal fees.
|
·
|
Finished
product commodity prices quoted on the Jacobsen index,
|
·
|
Raw
material volume,
|
·
|
Production
volume and related yield of finished product,
|
·
|
Energy
prices for natural gas quoted on the NYMEX index and diesel
fuel,
|
·
|
Collection
fees and collection operating expense, and
|
·
|
Factory
operating expenses.
|
Avg.
Price
Fiscal
2006
|
Avg.
Price
Fiscal
2005
|
Increase/
(Decrease)
|
%
Change
|
||||
MBM
(Illinois)
|
$153.48/ton
|
$167.53
/ton
|
$(14.05/ton)
|
(8.4%)
|
|||
MBM
(California)
|
$126.27/ton
|
$142.26
/ton
|
$(15.99/ton)
|
(11.2%)
|
|||
BFT
(Chicago)
|
$
16.87/cwt
|
$ 17.46
/cwt
|
$(0.59/cwt)
|
(3.4%)
|
|||
YG
(Illinois)
|
$ 12.64/cwt
|
$ 14.44
/cwt
|
$(1.80/cwt)
|
(12.5%)
|
Renderingg
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
Net
sales due to acquisition of NBP
|
$ | 110.7 | $ | 7.3 | $ | – | $ | 118.0 | ||||||||
Higher
raw material volume
|
8.1 | (1.7 | ) | – | 6.4 | |||||||||||
Improved
recovery of collection expenses
|
2.6 | 1.9 | – | 4.5 | ||||||||||||
Higher
yields on production
|
0.8 | (0.7 | ) | – | 0.1 | |||||||||||
Lower
finished goods prices
|
(18.1 | ) | (3.2 | ) | – | (21.3 | ) | |||||||||
Purchases
of finished product for resale
|
(6.0 | ) | (2.6 | ) | – | (8.6 | ) | |||||||||
Other
sales decreases
|
(1.4 | ) | 0.4 | – | (1.0 | ) | ||||||||||
Product
transfers
|
(10.0 | ) | 10.0 | – | – | |||||||||||
$ | 86.7 | $ | 11.4 | $ | – | $ | 98.1 |
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
Cost
of sales and operating expenses of NBP
|
$ | 94.4 | $ | 3.3 | $ | (0.1 | ) | $ | 97.6 | |||||||
Payroll
and related benefits
|
0.9 | 1.1 | 0.1 | 2.1 | ||||||||||||
Plant
repairs and maintenance
|
2.0 | – | – | 2.0 | ||||||||||||
Higher
raw material volume
|
1.8 | (0.4 | ) | – | 1.4 | |||||||||||
Sewer
and trap disposal
|
0.4 | 0.7 | – | 1.1 | ||||||||||||
Lower
raw material prices
|
(13.0 | ) | (2.7 | ) | – | (15.7 | ) | |||||||||
Purchases
of finished product for resale
|
(6.0 | ) | (2.6 | ) | – | (8.6 | ) | |||||||||
Lower
energy costs, primarily natural gas and
diesel
fuel
|
(0.2 | ) | 0.3 | (0.2 | ) | (0.1 | ) | |||||||||
Other
|
(1.0 | ) | 0.9 | – | (0.1 | ) | ||||||||||
Product
transfers
|
(10.0 | ) | 10.0 | – | – | |||||||||||
$ | 69.3 | $ | 10.6 | $ | (0.2 | ) | $ | 79.7 |
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
Selling,
general and administrative expenses of
NBP
|
$ | 3.0 | $ | 0.3 | $ | 2.3 | $ | 5.6 | ||||||||
Payroll
and related benefits expense
|
0.1 | 0.5 | 1.7 | 2.3 | ||||||||||||
Higher
legal expense
|
– | – | 2.0 | 2.0 | ||||||||||||
Higher
audit fees
|
– | – | 0.7 | 0.7 | ||||||||||||
Other
expenses
|
(0.3 | ) | (0.1 | ) | 0.2 | (0.2 | ) | |||||||||
$ | 2.8 | $ | 0.7 | $ | 6.9 | $ | 10.4 |
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||||||
Write-off
of deferred loan costs
|
$ | – | $ | – | $ | 2.6 | $ | 2.6 | ||||||||
Subordinated
debt prepayment fees
|
– | – | 1.9 | 1.9 | ||||||||||||
Decrease
in gain on disposal of assets
|
– | – | 0.5 | 0.5 | ||||||||||||
Decrease
in interest income
|
– | – | 0.4 | 0.4 | ||||||||||||
Increase
in other expense
|
– | – | 0.2 | 0.2 | ||||||||||||
$ | – | $ | – | $ | 5.6 | $ | 5.6 |
·
|
The
Credit Agreement provides for a total of $175.0 million in financing
facilities, consisting of a $50.0 million term loan facility and a $125.0
million revolving credit facility, which includes a $35.0 million letter
of credit sub-facility.
|
·
|
The
$125.0 million revolving credit facility has a term of five years and
matures on April 7, 2011.
|
·
|
As
of December 29, 2007, the Company has borrowed all $50.0 million under the
term loan facility, which provides for scheduled quarterly amortization
payments of $1.25 million over a six-year term ending April 7,
2012. The Company has reduced the term loan facility by quarterly
payments totaling $6.25 million, for an aggregate of $43.75 million
principal outstanding under the term loan facility at December 29,
2007.
|
·
|
Alternative
base rate loans under the Credit Agreement bear interest at a rate per
annum based on the greater of (a) the prime rate and (b) the federal funds
effective rate (as defined in the Credit Agreement) plus ½ of 1%, plus, in
each case, a margin determined by reference to a pricing grid and adjusted
according to the Company’s adjusted leverage ratio. Eurodollar
loans bear interest at a rate per annum based on the then-applicable LIBOR
multiplied by the statutory reserve rate plus a margin determined by
reference to a pricing grid and adjusted according to the Company’s
adjusted leverage ratio.
|
·
|
The
Credit Agreement provided sufficient liquidity to complete the Transaction
and to retire the Company’s senior subordinated notes in the aggregate
amount of $37.6 million in principal, accrued interest and fees on June 1,
2006. Additionally, the Credit Agreement has an extended term,
lower interest rates, fewer restrictions on investments, and improved
flexibility for paying dividends or repurchasing Company stock (all of
which are subject to the terms of the Credit Agreement) than the Company’s
prior credit facility.
|
·
|
The
Credit Agreement contains restrictive covenants that are customary for
similar credit arrangements and requires the maintenance of certain
minimum financial ratios. The Credit Agreement also requires
the Company to make certain mandatory prepayments of outstanding
indebtedness using the net cash proceeds received from certain
dispositions of property, casualty or condemnation, any sale or issuance
of equity interests in a public offering or in a private placement,
unpermitted additional indebtedness incurred by the Company, and excess
cash flow under certain
circumstances.
|
Credit
Agreement:
|
|||
Term
Loan
|
$ | 43,750 | |
Revolving
Credit Facility:
|
|||
Maximum availability
|
$ | 125,000 | |
Borrowings outstanding
|
– | ||
Letters of credit issued
|
18,881 | ||
Availability
|
$ | 106,119 |
Total
|
Less
than
1
Year
|
1 –
3
Years
|
3 –
5
Years
|
More
than
5
Years
|
||||||||||||||||
Contractual
obligations(a):
|
||||||||||||||||||||
Long-term
debt obligations (b)
|
$ | 43,750 | $ | 6,250 | $ | 10,000 | $ | 27,500 | $ | – | ||||||||||
Operating
lease obligations (c)
|
41,821 | 9,943 | 14,616 | 7,502 | 9,760 | |||||||||||||||
Estimated
interest payable (d)
|
11,014 | 2,781 | 4,576 | 3,179 | 478 | |||||||||||||||
Purchase
commitments (e)
|
10,437 | 10,437 | – | – | – | |||||||||||||||
Derivative
obligations (f)
|
1,867 | 547 | 1,057 | 263 | – | |||||||||||||||
Other
long-term liabilities (g)
|
1,332 | 191 | 137 | 74 | 930 | |||||||||||||||
Pension
funding obligation (h)
|
– | – | – | – | – | |||||||||||||||
Total
|
$ | 110,221 | $ | 30,149 | $ | 30,386 | $ | 38,518 | $ | 11,168 |
(a)
|
The
above table does not reflect uncertain tax positions of approximately $0.5
million because the timing of the cash settlement can not be reasonably
estimated.
|
(b)
|
See
Note 8 to the consolidated financial
statements.
|
(c)
|
See
Note 7 to the consolidated financial
statements.
|
(d)
|
Interest
payable was calculated using the current rate for term debt and current
rates on other liabilities.
|
(e)
|
Purchase
commitments were determined based on specified contracts for natural gas
and finish product purchases.
|
(f)
|
Represents
liabilities for interest rate swap contracts that were valued at December
29, 2007. The ultimate settlement amounts of these swap
contracts are unknown because they are subject to continuing market risk
until the derivatives are settled.
|
(g)
|
Includes
other contractual liabilities and a pension plan termination withdrawal
liability from the multi-employer plan that terminated during Fiscal
2007.
|
(h)
|
Pension
funding requirements are determined annually based upon a third party
actuarial estimate. The Company does not expect to make
contributions to its pension plan in fiscal 2008. The Company
is not able to estimate pension funding requirements beyond the next
twelve months. The accrued pension benefit liability was approximately
$9.2 million at the end of Fiscal 2007. The Company knows that
two of the multi-employer pension plans that have not terminated to which
it contributes and which are not administered by the Company were
under-funded as of the latest available information, and while the Company
has no ability to calculate a possible current liability for the
under-funded multi-employer plans to which the Company contributes, the
amounts could be material.
|
Other
commercial commitments:
|
|||
Standby
letters of credit
|
$ | 18,881 | |
Total
other commercial commitments:
|
$ | 18,881 |
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
|
Total
|
Less
than
1
Year
|
1 –
3
Years
|
3 –
5
Years
|
More
than
5
Years
|
||||||||||||||||
Long-term
debt:
|
||||||||||||||||||||
Variable
rate
|
$ | 43,750 | $ | 6,250 | $ | 10,000 | $ | 27,500 | $ | – | ||||||||||
Average
interest rate
|
5.88 | % | 5.88 | % | 5.88 | % | 5.88 | % | – | |||||||||||
Total
|
$ | 43,750 | $ | 6,250 | $ | 10,000 | $ | 27,500 | $ | – |
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Page
|
||||
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial Statements
|
43 | |||
Report
of Independent Registered Public Accounting Firm on Internal Control
Over Financial
Reporting
|
44 | |||
Consolidated
Balance Sheets -
|
||||
December
29, 2007 and December 30, 2006
|
45 | |||
Consolidated
Statements of Operations -
|
||||
Three
years ended December 29, 2007
|
46 | |||
Consolidated
Statements of Stockholders’ Equity -
|
||||
Three
years ended December 29, 2007
|
47 | |||
Consolidated
Statements of Cash Flows -
|
||||
Three
years ended December 29, 2007
|
49 | |||
Notes
to Consolidated Financial Statements
|
50 | |||
Financial
Statement Schedule:
|
||||
II
- Valuation and Qualifying Accounts -
|
||||
Three
years ended December 29, 2007
|
77 | |||
ASSETS
|
December
29,
2007
|
December
30,
2006
|
||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 16,335 | $ | 5,281 | ||||
Restricted cash
|
433 | 480 | ||||||
Accounts
receivable, less allowance for bad debts of $1,466
at
December 29, 2007 and $1,639 at December 30, 2006
|
59,401 | 42,381 | ||||||
Inventories
|
22,481 | 14,562 | ||||||
Other
current assets
|
8,417 | 5,036 | ||||||
Deferred
income taxes
|
8,026 | 6,921 | ||||||
Total
current assets
|
115,093 | 74,661 | ||||||
Property,
plant and equipment, net
|
128,685 | 132,149 | ||||||
Intangible
assets, less accumulated amortization of $42,481
|
||||||||
at
December 29, 2007 and $37,599 at December 30,
2006
|
29,037 | 33,657 | ||||||
Goodwill
|
71,856 | 71,856 | ||||||
Other
assets
|
6,667 | 6,683 | ||||||
Deferred
income taxes
|
– | 1,800 | ||||||
$ | 351,338 | $ | 320,806 | |||||
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Current
portion of long-term debt
|
$ | 6,250 | $ | 5,004 | ||||
Accounts
payable, principally trade
|
24,879 | 17,473 | ||||||
Accrued
expenses
|
49,579 | 34,319 | ||||||
Total
current liabilities
|
80,708 | 56,796 | ||||||
Long-term
debt, net
|
37,500 | 78,000 | ||||||
Other
noncurrent liabilities
|
27,225 | 34,685 | ||||||
Deferred
income taxes
|
4,921 | – | ||||||
Total
liabilities
|
150,354 | 169,481 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity:
|
||||||||
Common
stock, $.01 par value; 100,000,000 shares
authorized,
|
||||||||
81,544,466 and 80,875,453
shares issued
|
||||||||
at December 29, 2007 and
December 30, 2006, respectively
|
815 | 809 | ||||||
Additional
paid-in capital
|
152,264 | 150,045 | ||||||
Treasury stock, at cost; 182,366
and 21,000 shares at
December 29, 2007 and December
30, 2006, respectively
|
(1,547 | ) | (172 | ) | ||||
Accumulated
other comprehensive loss
|
(8,598 | ) | (11,733 | ) | ||||
Accumulated
earnings
|
58,050 | 12,376 | ||||||
Total
stockholders’ equity
|
200,984 | 151,325 | ||||||
$ | 351,338 | $ | 320,806 |
December
29,
2007
|
December
30,
2006
|
December
31,
2005
|
||||||||||
Net
sales
|
$ | 645,313 | $ | 406,990 | $ | 308,867 | ||||||
Costs
and expenses:
|
||||||||||||
Cost
of sales and operating expenses
|
483,453 | 321,416 | 241,707 | |||||||||
Selling,
general and administrative expenses
|
57,999 | 45,649 | 35,240 | |||||||||
Depreciation
and amortization
|
23,214 | 20,686 | 15,787 | |||||||||
Total costs and
expenses
|
564,666 | 387,751 | 292,734 | |||||||||
Operating income
|
80,647 | 19,239 | 16,133 | |||||||||
Other
income/(expense):
|
||||||||||||
Interest
expense
|
(5,045 | ) | (7,184 | ) | (6,157 | ) | ||||||
Other,
net
|
(570 | ) | (4,682 | ) | 903 | |||||||
Total other
income/(expense)
|
(5,615 | ) | (11,866 | ) | (5,254 | ) | ||||||
Income
from continuing operations before
income taxes
|
75,032 | 7,373 | 10,879 | |||||||||
Income
taxes
|
29,499 | 2,266 | 3,184 | |||||||||
Income
from continuing operations
|
45,533 | 5,107 | 7,695 | |||||||||
Income
from discontinued operations,
net of tax
|
– | – | 46 | |||||||||
Net
income
|
$ | 45,533 | $ | 5,107 | $ | 7,741 | ||||||
Basic
and diluted earnings per share:
|
||||||||||||
Continuing
operations
|
$ | 0.56 | $ | 0.07 | $ | 0.12 | ||||||
Discontinued
operations
|
– | – | – | |||||||||
Total
|
$ | 0.56 | $ | 0.07 | $ | 0.12 | ||||||
Common
Stock
|
|
||||||||
Number
of Outstanding
Shares
|
$.01
par Value
|
Additional
Paid-In
Capital
|
Treasury
Stock
|
Accumulated
Other
Compre- hensive Loss |
Retained
Earnings
(Accumulated
Deficit)
|
Unearned
Compensation
|
Total
Stockholders’
Equity/
(Deficit)
|
Balances
at January 1, 2005
|
63,897,346 | $ | 639 | $ | 77,393 | $ | (172 | ) | $ | (7,331 | ) | $ | (3,294 | ) | $ | - | $ | 67,235 | ||||||||||||||
Net
income
|
– | – | – | – | – | 7,741 | – | 7,741 | ||||||||||||||||||||||||
Minimum
pension liability
adjustment, net of tax
|
– | – | – | – | (2,148 | ) | – | – | (2,148 | ) | ||||||||||||||||||||||
Natural
gas hedge
derivative adjustment
|
– | – | – | – | 197 | – | – | 197 | ||||||||||||||||||||||||
Total
comprehensive
income
|
– | – | – | – | – | – | – | 5,790 | ||||||||||||||||||||||||
Issuance
of non-vested
stock
|
489,150 | 5 | 1,923 | – | – | – | (1,928 | ) | – | |||||||||||||||||||||||
Amortization
of unearned
compensation
|
– | – | – | – | – | – | 601 | 601 | ||||||||||||||||||||||||
Issuance
of common stock
|
50,914 | – | 54 | – | – | – | – | 54 | ||||||||||||||||||||||||
Balances
at December 31,
2005
|
64,437,410 | $ | 644 | $ | 79,370 | $ | (172 | ) | $ | (9,282 | ) | $ | 4,447 | $ | (1,327 | ) | $ | 73,680 | ||||||||||||||
Net
income
|
– | – | – | – | – | 5,107 | – | 5,107 | ||||||||||||||||||||||||
Minimum
pension liability
adjustment,
net of tax
|
– | – | – | – | 2,415 | – | – | 2,415 | ||||||||||||||||||||||||
Interest
rate swap
derivative adjustment,
net of tax
|
– | – | – | – | (408 | ) | – | – | (408 | ) | ||||||||||||||||||||||
Total
comprehensive
income
|
– | – | – | – | – | – | – | 7,114 | ||||||||||||||||||||||||
Adjustment
to initially
apply FASB
Statement
No. 158, net
of tax
(revised)
|
– | – | – | – | (4,458 | ) | – | – | (4,458 | ) | ||||||||||||||||||||||
Adjustment
to opening
stockholders’
equity
|
– | – | – | – | – | 2,822 | – | 2,822 | ||||||||||||||||||||||||
Adjustment
to initially
apply FASB
Statement
No. 123R
|
– | – | (1,327 | ) | – | – | – | 1,327 | – | |||||||||||||||||||||||
Stock-based
compensation
|
– | – | 1,488 | – | – | – | – | 1,488 | ||||||||||||||||||||||||
Tax
benefits associated
with stock-based
compensation
|
– | – | 50 | – | – | – | – | 50 | ||||||||||||||||||||||||
Issuance
of common stock
|
16,417,043 | 165 | 70,464 | – | – | – | – | 70,629 | ||||||||||||||||||||||||
Balances
at December 30,
2006
|
80,854,453 | $ | 809 | $ | 150,045 | $ | (172 | ) | $ | (11,733 | ) | $ | 12,376 | $ | – | $ | 151,325 |
Common
Stock
|
|
||||||||
Number
of Outstanding
Shares
|
$.01
par Value
|
Additional
Paid-In
Capital
|
Treasury
Stock
|
Accumulated
Other
Compre- hensive Loss |
Retained
Earnings
(Accumulated
Deficit)
|
Unearned
Compensation
|
Total
Stockholders’
Equity/
(Deficit)
|
Net
income
|
– | – | – | – | – | 45,533 | – | 45,533 | |||||||||||||||||||||||
Unrecognized
net actuarial
loss of defined benefit
plans:
|
|||||||||||||||||||||||||||||||
Pension liability
adjustments, net
of tax
|
– | – | – | – | 3,870 | – | – | 3,870 | |||||||||||||||||||||||
Interest
rate swap derivative
adjustment, net of tax
|
– | – | – | – | (735 | ) | – | – | (735 | ) | |||||||||||||||||||||
Total
comprehensive income
|
– | – | – | – | – | – | – | 48,668 | |||||||||||||||||||||||
Adjustment
to initially apply
FIN 48
|
– | – | – | – | – | 141 | – | 141 | |||||||||||||||||||||||
Stock-based compensation | – | – | 365 | – | – | – | – | 365 | |||||||||||||||||||||||
Tax
benefits associated with
stock-based compensation
|
– | – | 1,223 | – | – | – | – | 1,223 | |||||||||||||||||||||||
Treasury
stock
|
(161,366 | ) | – | – | (1,375 | ) | – | – | – | (1,375 | ) | ||||||||||||||||||||
Issuance
of common stock
|
669,013 | 6 | 631 | – | – | – | – | 637 | |||||||||||||||||||||||
Balances
at December 29,
2007
|
81,362,100 | $ | 815 | $ | 152,264 | $ | (1,547 | ) | $ | (8,598 | ) | $ | 58,050 | $ | – | $ | 200,984 |
December
29,
2007
|
December
30,
2006
|
December 31,
2005
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ | 45,533 | $ | 5,107 | $ | 7,741 | ||||||
Adjustments
to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
Depreciation
and amortization
|
23,214 | 20,686 | 15,787 | |||||||||
Deferred
income taxes
|
5,616 | (3,929 | ) | (3,850 | ) | |||||||
Gain
on sale of assets
|
(5 | ) | (42 | ) | (555 | ) | ||||||
Increase/(decrease)
in long-term pension liability
|
(5,664 | ) | 1,336 | 715 | ||||||||
Stock-based
compensation expense
|
1,235 | 1,588 | 601 | |||||||||
Write-off
of deferred loan costs
|
– | 2,569 | – | |||||||||
Changes
in operating assets and liabilities, net
of
effects from acquisition:
|
||||||||||||
Restricted
cash
|
47 | 1,869 | 30 | |||||||||
Accounts
receivable
|
(17,020 | ) | (2,787 | ) | 793 | |||||||
Inventories
and prepaid expenses
|
(7,728 | ) | 867 | (3,074 | ) | |||||||
Accounts
payable and accrued expenses
|
18,916 | (1,336 | ) | 1,276 | ||||||||
Other
|
1,563 | 2,904 | 5,074 | |||||||||
Net
cash provided by discontinued operations
|
– | – | 46 | |||||||||
Net
cash provided by operating activities
|
65,707 | 28,832 | 24,584 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Capital
expenditures
|
(15,552 | ) | (11,800 | ) | (21,406 | ) | ||||||
Acquisition
of NBP, net of cash acquired
|
– | (80,166 | ) | – | ||||||||
Gross
proceeds from sale of property, plant and equipment
and
other assets
|
217 | 739 | 1,115 | |||||||||
Payments
related to routes and other intangibles
|
(262 | ) | – | (347 | ) | |||||||
Net
cash used in investing activities
|
(15,597 | ) | (91,227 | ) | (20,638 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Proceeds
from long-term debt
|
42,500 | 126,500 | – | |||||||||
Payments
on long-term debt
|
(81,754 | ) | (93,024 | ) | (5,030 | ) | ||||||
Contract
payments
|
(167 | ) | (245 | ) | (178 | ) | ||||||
Deferred
loan costs
|
– | (1,634 | ) | (41 | ) | |||||||
Issuance
of common stock
|
517 | 29 | 54 | |||||||||
Minimum
withholding taxes paid on stock awards
|
(1,375 | ) | – | – | ||||||||
Excess
tax benefits from stock-based compensation
|
1,223 | 50 | – | |||||||||
Net
cash provided/(used) in financing activities
|
(39,056 | ) | 31,676 | (5,195 | ) | |||||||
Net
increase/(decrease) in cash and cash equivalents
|
11,054 | (30,719 | ) | (1,249 | ) | |||||||
Cash
and cash equivalents at beginning of year
|
5,281 | 36,000 | 37,249 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 16,335 | $ | 5,281 | $ | 36,000 | ||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Cash
paid during the year for:
|
||||||||||||
Interest
|
$ | 5,151 | $ | 6,345 | $ | 5,765 | ||||||
Income
taxes, net of refunds
|
$ | 26,307 | $ | 2,684 | $ | 3,859 | ||||||
NOTE
1.
|
GENERAL
|
(a)
|
NATURE
OF OPERATIONS
|
Darling International Inc., a Delaware corporation (“Darling”), is a recycler of food and animal by-products and provides grease trap services to food service establishments. Darling collects and recycles animal by-products and used cooking oil from food service establishments. Darling processes raw materials at 39 facilities located throughout the United States into finished products such as protein (primarily meat and bone meal, “MBM”), tallow (primarily bleachable fancy tallow, “BFT”), yellow grease (“YG”) and hides. Darling sells these products nationally and internationally, primarily to producers of oleo-chemicals, soaps, pet foods, leather goods, livestock feed and bio-fuels for use as ingredients in their products or for further processing. As further discussed in Note 3, on May 15, 2006, Darling, through its wholly-owned subsidiary Darling National LLC, a Delaware limited liability company (“Darling National”), completed the acquisition of substantially all of the assets (the “Transaction”) of National By-Products, LLC, an Iowa limited liability company (“NBP”). Darling and its subsidiaries, including Darling National, are collectively referred to herein as (the “Company”). The Company’s year end results include 52 weeks of contribution from the assets acquired in the Transaction, as compared to 33 weeks of contributions from these assets in fiscal 2006. The Company’s operations are currently organized into two segments: Rendering and Restaurant Services. For additional information on the Company’s segments, see Note 15. |
(b)
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
(1)
|
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and
transactions have been eliminated in
consolidation.
|
(2)
|
Fiscal
Year
The
Company has a 52/53 week fiscal year ending on the Saturday nearest
December 31. Fiscal years for the consolidated financial
statements included herein are for the 52 weeks ended December 29, 2007,
the 52 weeks ended December 30, 2006, and the 52 weeks ended December 31,
2005.
|
(3)
|
Accounts
Receivable and Allowance for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from customers’ non-payment of trade accounts receivable owed to
the Company. These trade receivables arise in the ordinary
course of business from sales of raw material, finished product or
services to the Company’s customers. The estimate of allowance
for doubtful accounts is based upon the Company’s bad debt experience,
prevailing market conditions, and aging of trade accounts receivable,
among other factors. If the financial condition of the
Company’s customers deteriorates, resulting in the customers’ inability to
pay the Company’s receivables as they come due, additional allowances for
doubtful accounts may be required.
|
(4)
|
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO)
method.
|
(5)
|
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Depreciation is
computed by the straight-line method over the estimated useful lives of
assets: 1) Buildings and improvements, 15 to 30 years;
2)
Machinery and equipment, 3 to 10 years; and 3) Vehicles, 2 to 6
years.
Maintenance
and repairs are charged to expense as incurred and expenditures for major
renewals and improvements are
capitalized.
|
(6)
|
Goodwill
and Other Intangible Assets
|
|
Goodwill
and other intangible assets not subject to amortization are tested for
impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be
impaired. Statement of Financial Accounting Standards No. 142,
Goodwill and Other
Intangible Assets (“SFAS 142”) requires a two-step process for
testing impairment. First, the fair value of each reporting
unit is compared to its carrying value to determine whether an indication
of impairment exists. If impairment is indicated, then the fair
value of the reporting unit’s goodwill is determined by allocating the
unit’s fair value of its assets and liabilities (including any
unrecognized intangible assets) as if the reporting unit had been acquired
in a business combination. The amount of impairment for
goodwill is measured as the excess of its carrying value over its fair
value.
The
fair values of the Company’s reporting units containing goodwill exceed
the related carrying values; consequently, there has been no impairment of
goodwill for the periods presented. Goodwill was approximately $71.9
million at December 29, 2007 and December 30, 2006.
Intangible
assets subject to amortization consist of: 1) collection
routes which are made up of groups of suppliers of raw materials in
similar geographic areas from which the Company derives collection fees
and a dependable source of raw materials for processing into finished
products; 2) permits that represent licensing of operating
plants that have been acquired, giving those plants the ability to
operate; 3) non-compete agreements that represent contractual arrangements
with former competitors whose businesses were acquired; and 4)
royalty and consulting agreements. Amortization expense is
calculated using the straight-line method over the estimated useful lives
of the assets ranging from: 8-20 years for collection
routes; 20 years for permits; and 3-10 years for non-compete
covenants.
The
gross carrying amount of intangible assets subject to amortization include
(in thousands):
|
December
29,
2007
|
December
30,
2006
|
||||||||
Intangible
Assets:
|
|||||||||
Routes
|
$ | 48,239 | $ | 47,987 | |||||
Permits
|
20,500 | 20,500 | |||||||
Non-compete
agreements
|
2,366 | 2,356 | |||||||
Royalty
and consulting agreements
|
413 | 413 | |||||||
71,518 | 71,256 | ||||||||
Accumulated
Amortization:
|
|||||||||
Routes
|
(38,437 | ) | (34,779 | ) | |||||
Permits
|
(1,676 | ) | (650 | ) | |||||
Non-compete
agreements
|
(2,059 | ) | (1,880 | ) | |||||
Royalty
and consulting agreements
|
(309 | ) | (290 | ) | |||||
(42,481 | ) | (37,599 | ) | ||||||
Intangible
assets, less accumulated
amortization
|
$ | 29,037 | $ | 33,657 |
Amortization
expense for the three years ended December 29, 2007, December 30, 2006 and
December 31, 2005, was approximately $4,882,000, $4,552,000 and
$3,884,000, respectively. Amortization expense for the
next five fiscal years is estimated to be $4,905,000, $2,072,000,
$1,817,000, $1,570,000 and
$1,469,000.
|
(7)
|
Environmental
Expenditures
|
|
Environmental expenditures incurred to mitigate or prevent environmental impacts that have yet to occur and that otherwise may result from future operations are capitalized. Expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenues are expensed or charged against established environmental reserves. Reserves are established when environmental impacts have been identified which are probable to require mitigation and/or remediation and the costs are reasonably estimable. |
(8)
|
Income
Taxes
|
|
The
Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
Statement
of Financial Accounting Standards No. 109 – Accounting for Income
taxes requires the Company to periodically assess whether it is
more likely than not that it will generate sufficient taxable income to
realize its deferred income tax assets. In making this
determination, the Company considers all available positive and negative
evidence and makes certain assumptions. The Company considers,
among other things, its deferred tax liabilities, the overall business
environment, its historical earnings and losses, current industry trends
and its outlook for future years. Although the Company is
unable to carryback any of its net operating losses, based upon recent
favorable operating results and future projections, certain net operating
losses can be carried forward and utilized.
In
June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN
48”), which prescribes accounting for and disclosure of uncertain tax
positions (“UTP”). FIN 48 requires application of a more likely
than not threshold to the recognition and de-recognition of
UTP. FIN 48 permits recognition of the amount of tax benefit
that has a greater than 50 percent likelihood of being realized upon
settlement. It further requires that a change in judgment
related to the expected ultimate resolution of UTP be recognized in
earnings in the quarter of change. Effective December 31, 2006
the Company adopted the provisions of FIN 48 resulting in a reduction in
the Company’s existing reserves for uncertain state and federal income tax
positions of approximately $0.1 million. This reduction was
recorded as a cumulative effect adjustment to retained
earnings. At the adoption date of December 31, 2006, the
Company had $0.7 million of gross unrecognized tax benefits. If
the Company recognized such tax benefits, the net impact on the Company’s
effective tax rate would be $0.6 million, which includes the effect of the
reversal of the $0.1 million deferred tax asset. At December
29, 2007, the Company had $0.5 million of gross unrecognized tax benefits;
if recognized, the net impact on the Company’s effective tax rate would be
$0.4 million, which includes the effect of the reversal of $0.1 million in
deferred tax asset. Additionally, at December 31, 2006, the
Company had an accrual for interest and penalties of $0.1
million. The Company recognizes accrued interest and penalties,
as appropriate, related to unrecognized tax benefits as a component of
income tax expense.
|
The following table shows a reconciliation of the change in the unrecognized tax benefit balance for federal, state and foreign taxes for the period ended December 29, 2007 (in thousands). |
2007
|
|||||
Balance
December 31, 2006
|
$ | 689 | |||
Additions
for tax positions related to the current year
|
– | ||||
Reductions
for tax positions related to the current year
|
– | ||||
Additions
for tax positions related to prior years
|
41 | ||||
Reductions
for tax positions related to prior years
|
(73 | ) | |||
Settlements
|
(68 | ) | |||
Lapses
in statutes of limitations
|
(46 | ) | |||
Balance
December 29, 2007
|
$ | 543 | |||
The Company’s major taxing
jurisdictions include the U.S. (federal and state). The Company
is no longer subject to federal examinations on years prior to fiscal
2005. The number of years open for state tax audits varies,
depending on the tax jurisdiction, but are generally from three to five
years. Currently, several state examinations are either in
progress or scheduled to begin. The Company does not anticipate
that any state or federal audits will have a significant impact on the
Company’s results of operations or financial position. In
addition, the Company does not reasonably expect any significant changes
to the estimated amount of liability associated with the Company’s UTP in
fiscal 2008.
|
(9)
|
Net
Income per Common Share
|
Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the year increased by dilutive common equivalent shares determined using the treasury stock method. |
|
Net
Income per Common Share (in thousands)
|
December
29,
|
December
30,
|
December
31,
|
|||||||||||
|
2007
|
|
2006
|
|
2005
|
||||||||
Income
|
Shares
|
Per-Share
|
Income
|
Shares
|
Per-Share
|
Income
|
Shares
|
Per-Share
|
|||||
Basic:
|
|||||||||||||
Income
from continuing
|
|||||||||||||
operations
|
$45,533
|
80,772
|
$0.56
|
$5,107
|
74,310
|
$0.07
|
$7,695
|
63,929
|
$0.12
|
||||
Income
from discontinued
|
|||||||||||||
operations,
net of tax
|
–
|
80,772
|
–
|
–
|
74,310
|
–
|
46
|
63,929
|
–
|
||||
Net
income
|
45,533
|
80,772
|
0.56
|
5,107
|
74,310
|
0.07
|
7,741
|
63,929
|
0.12
|
||||
Diluted:
|
|||||||||||||
Effect
of dilutive securities
|
|||||||||||||
Add:
Option shares in the money and
|
|||||||||||||
dilutive
effect of restricted stock
|
–
|
1,772
|
–
|
–
|
1,264
|
–
|
–
|
1,053
|
–
|
||||
Less:
Pro-forma treasury shares
|
–
|
(648)
|
–
|
–
|
(315)
|
–
|
–
|
(457)
|
–
|
||||
Income
from continuing
|
|||||||||||||
operations
|
$45,533
|
81,896
|
$0.56
|
$5,107
|
75,259
|
$0.07
|
$7,695
|
64,525
|
$0.12
|
||||
Income
from discontinued
|
|||||||||||||
operations,
net of tax
|
–
|
81,896
|
–
|
–
|
75,259
|
–
|
46
|
64,525
|
–
|
||||
Net
income
|
$45,533
|
81,896
|
$0.56
|
$5,107
|
75,259
|
$0.07
|
$7,741
|
64,525
|
$0.12
|
For fiscal 2007, 2006 and
2005, respectively, 5,187, 771,950 and 726,092 outstanding stock options
were excluded from diluted income per common share as the effect was
antidilutive. For fiscal 2007, 2006 and 2005, respectively,
117,179, 248,848 and 286,168 shares of non-vested stock and restricted
stock were excluded from diluted income per common share as the effect was
antidilutive. For fiscal 2007, 2006 and 2005, respectively,
60,713, 99,821 and zero shares of contingent issuable stock were excluded
from diluted income per common share as the effect was
antidilutive.
|
(10)
|
Stock
Based Compensation
|
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment
(“SFAS 123(R)”). SFAS 123(R) requires all entities to
recognize compensation expense in an amount equal to the fair value of the
share-based payments (e.g., stock options and non-vested and
restricted stock) granted to employees or by incurring liabilities to an
employee or other supplier (a) in amounts based, at least in part, on the
price of the entity’s shares or other equity instruments, or (b) that
require or may require settlement by issuing the entity’s equity shares or
other equity instruments.
Effective
January 1, 2006, the Company adopted the provisions of SFAS 123(R) and
related interpretations, using the modified prospective
method. Using the modified prospective method of SFAS 123(R),
the Company began recognizing compensation expense for the remaining
unvested portions of stock-based compensation granted prior to January 1,
2006. As a result of adopting SFAS 123(R), for the year ended
December 30, 2006, the Company recorded additional stock option expense of
approximately $0.5 million, which reduced income from continuing
operations and income before income taxes by approximately $0.5 million,
reduced net income by $0.4 million, and reduced basic and diluted earnings
per share by $0.01 per share. Total stock-based compensation
recognized under SFAS 123(R) in the statements of operations for the years
ended December 29, 2007, December 30, 2006 and December 31, 2005 was
approximately $1.4 million, $1.6 million and $0.6 million, respectively,
which is included in selling, general and administrative costs, and the
related income tax benefit recognized was approximately $0.4 million, $0.6
million and $0.2 million, respectively. See Note 11 for further
information on the Company’s stock-based compensation plans.
SFAS
123(R) requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as
an operating cash flow as required under the Accounting Principles Board
(“APB”) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. For the year
ended December 29, 2007 and December 30, 2006, the Company recognized $1.2
million and $50,000, respectively in such tax deductions, which were
recorded as an increase in financing cash flows and a reduction in
operating cash flows.
Prior
to adopting SFAS 123(R), the Company accounted for its stock options under
the Company’s 2004 Omnibus Incentive Plan (the “2004 Plan”) in accordance
with the provisions of APB Opinion No. 25. Under the
intrinsic-value method, compensation expense is recorded only to the
extent that the grant price is less than market on the measurement
date. All options granted under the 2004 Plan were issued at or
above market price, and therefore no stock-based compensation was recorded
due to option grants.
The
following table illustrates the effect on net income and income per share
if the fair value based method, net of applicable taxes, had been applied
to all outstanding and vested awards in fiscal 2005 (in thousands, except
per share amounts).
|
December
31,
2005
|
|||||
Reported
net income
|
$ | 7,741 | |||
Add:
Stock-based employee compensation
expense included in
reported net
income,
net of tax
|
391 | ||||
Deduct:
Total stock-based employee compensation expense determined under
fair-value-based method for all rewards, net
of tax
|
(973 | ) | |||
Pro
forma net income
|
$ | 7,159 | |||
Earnings
per share:
|
|||||
Basic
– as reported
|
$ | 0.12 | |||
Basic
– pro forma
|
$ | 0.11 | |||
Diluted
– as reported
|
$ | 0.12 | |||
Diluted
– pro forma
|
$ | 0.11 |
The fair value of each stock
option grant under the Company’s stock option plan was estimated on the
date of grant using the Black Scholes option-pricing model with the
following weighted average assumptions and results for fiscal 2007 and
2005. No options were granted during fiscal
2006.
|
Weighted
Average
|
2007
|
2005
|
||||||
Expected
dividend yield
|
0.0%
|
0.0%
|
||||||
Risk-free
interest rate
|
4.57%
|
3.94%
|
||||||
Expected
term
|
5.75
years
|
5.9
years
|
||||||
Expected
volatility
|
52.1%
|
55.0%
|
||||||
Fair
value of options granted
|
$
4.30
|
$
2.04
|
The
expected lives for options granted during 2007 and 2005 were computed
using the simplified method as prescribed by Staff Accounting Bulletin No.
107.
At
December 29, 2007, $1.1 million of total future equity-based compensation
expense (determined using the Black-Scholes option pricing model) related
to outstanding non-vested options and stock awards is expected to be
recognized ratably over a weighted average period of 1.7
years.
|
(11)
|
Statements
of Cash Flows
The
Company considers all short-term highly liquid instruments, with an
original maturity of three months or less, to be cash
equivalents.
|
(12)
|
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 a loss contingency
covered by FASB Statement No. 5, the disclosure will also include an
estimate of the possible loss or range of loss or state that an estimate
cannot be made.
|
(13)
|
Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed
of
|
|
The
Company follows Statement of Financial Accounting Standards No. 144, Accounting for the Impairment
of Disposal of Long-Lived Assets (“SFAS 144”). The
Company reviews the carrying value of long-lived assets for impairment
when events or changes in circumstances indicate that the carrying amount
of an asset, or related asset group, may not be recoverable from estimated
future undiscounted cash flows. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an
asset or asset group to estimated undiscounted future cash flows expected
to be generated by the asset or asset group. If the carrying
amount of the asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the
asset exceeds the fair value of the asset. SFAS 144 requires
discontinued operations to be carried at the lower of cost or fair value
less costs to sell and requires the classification of operating results of
discontinued operations to be separately presented, net of tax, within the
statement of operations.
|
(14)
|
Financial
Instruments
|
|
The
carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates fair value due to the
short maturity of these instruments. In addition, the
carrying amount of the Company’s outstanding borrowings under the Credit
Agreement described in Notes 2 and 8 approximates the fair value due to
the floating interest rates on the
borrowings.
|
(15)
|
Derivative
Instruments
|
|
The
Company makes limited use of derivative instruments to manage cash flow
risks related to interest expense. Interest rate swaps are entered into
with the intent of managing overall borrowing costs by reducing the
potential impact of increases in interest rates on floating-rate long-term
debt. The Company does not use derivative instruments for trading
purposes.
Under
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), entities are
required to report all derivative instruments in the statement of
financial position at fair value. The accounting for changes in the fair
value (i.e., gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding the instrument. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair value, cash flows or
foreign currencies. If the hedged exposure is a cash flow
exposure, the effective portion of the gain or loss on the derivative
instrument is reported initially as a component of other comprehensive
income (outside of earnings) and is subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts
excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss are reported in earnings
immediately. If the derivative instrument is not designated as a hedge,
the gain or loss is recognized in earnings in the period of
change.
|
|
On
May 19, 2006, the Company entered into two interest rate swap agreements
that are considered cash flow hedges according to SFAS
133. Under the terms of these swap agreements, beginning June
30, 2006, the cash flows from the Company’s $50.0 million floating-rate
term loan facility under the Company’s credit agreement have been
exchanged for fixed-rate contracts that bear interest, payable
quarterly. The first swap agreement for $25.0 million matures
April 7, 2012 and bears interest at 5.42%, which does not include the
borrowing spread per the Company’s credit agreement, with amortizing
payments that mirror the term loan facility. The second swap
agreement for $25.0 million matures April 7, 2012 and bears interest at
5.415%, which does not include the borrowing spread per the Company’s
credit agreement, with amortizing payments that mirror the term loan
facility. The Company’s receive rate on each swap agreement is
based on three-month LIBOR. At December 29, 2007, the fair
value of these interest swap agreements was $1.9 million and is included
in non-current other liabilities on the balance sheet, with the offset
recorded to accumulated other comprehensive loss.
A
summary of the derivative adjustment recorded to accumulated other
comprehensive income, the net change arising from hedging transactions,
and the amounts recognized in earnings during the years ended December 29,
2007 and December 30, 2006 are as follows (in
thousands):
|
2007
|
2006
|
||||||||
Derivative
adjustment included in accumulated other
comprehensive loss at December 30, 2006 and
December 31, 2005
|
$ | 408 | $ | – | |||||
Net
change arising from current period hedging
transactions
|
689 | 404 | |||||||
Reclassifications
into earnings
|
46 | 4 | |||||||
Accumulated
other comprehensive loss at
December 29, 2007 and December 30, 2006 (a)
|
$ | 1,143 | $ | 408 |
|
(a)
|
Reported
as accumulated other comprehensive loss of approximately $1.9 million and
$0.7 million recorded net of taxes of approximately
$0.7
million and
$0.3 million at December 29, 2007 and December 30, 2006,
respectively.
|
|
The
Company estimates the amount that will be reclassified from accumulated
other comprehensive loss at December 29, 2007 into earnings in fiscal 2008
will be approximately $0.5 million.
At
December 29, 2007, the Company has forward purchase agreements in place
for purchases of approximately $5.3 million of natural gas for the months
of January through March of 2008. These forward purchase
agreements have no net settlement provisions and the Company intends to
take physical delivery. Accordingly, the forward purchase agreements are
not subject to the requirements of SFAS 133 because they qualify as normal
purchases as defined in the
standard.
|
(16)
|
Comprehensive
Income
|
|
The
Company follows the provisions of SFAS No. 130, Reporting Comprehensive
Income (“SFAS 130”). SFAS 130 establishes standards for reporting
and presentation of comprehensive income and its components. In
accordance with SFAS 130, the Company has presented the components of
comprehensive income in its consolidated statements of stockholders’
equity.
|
(17)
|
Revenue
Recognition
|
|
The
Company recognizes revenue on sales when products are shipped and the
customer takes ownership and assumes risk of loss. Collection
fees are recognized in the month the service is
provided.
|
NOTE
2.
|
FINANCING
|
(a)
|
Credit
Agreement
|
The
Company entered into a $175 million credit agreement (the “Credit
Agreement”) with lenders on April 7, 2006 which replaced the former senior
credit agreement executed in April 2004. The Credit Agreement
provides for a total of $175.0 million in financing facilities, consisting
of a $50.0 million term loan facility and a $125.0 million revolver
facility, which includes a $35.0 million letter of credit
sub-facility. As of December 29, 2007, the Company has borrowed
all $50.0 million under the term loan facility which provides for
quarterly scheduled amortization payments of $1.25 million over the
six-year term ending April 7, 2012; at that point, the remaining balance
of $22.5 million will be payable in full. The revolving credit
facility has a five-year term ending April 7, 2011. The
proceeds of the revolving credit facility may be used for: (i)
the payment of fees and expenses payable in connection with the Credit
Agreement, acquisitions and the repayment of indebtedness; (ii)
financing the working capital needs of the Company and its subsidiaries;
and (iii) other general corporate purposes. The proceeds of the
term loan facility and a portion of the revolving credit facility were
used to pay a portion of the consideration for the
Transaction. See Note 3 for further discussion regarding the
Transaction.
The
Credit Agreement allows for borrowings at per annum rates based on the
following loan types. Alternate base rate loans under the
Credit Agreement will bear interest at a rate per annum based on the
greater of (a) the prime rate and (b) the Federal Funds Effective Rate
plus 1/2 of 1% plus, in each case, a margin determined by reference to a
pricing grid and adjusted according to the Company’s adjusted leverage
ratio. Eurodollar loans will bear interest at a rate per annum
based on the then applicable London Inter-Bank Offer Rate ("LIBOR")
multiplied by the statutory reserve rate plus a margin determined by
reference to a pricing grid and adjusted according to the Company’s
adjusted leverage ratio. At December 29, 2007 under the Credit
Agreement, the interest rate for $42.5 million of the term loan that was
outstanding was based on LIBOR plus a margin of 1.0% per annum for a total
of 5.875% per annum and the interest rate for $1.25 million of the term
loan was based on prime plus a margin of 0.0% for a total of 7.25% per
annum. At December 29, 2007 there were no outstanding
borrowings under the Company’s revolving facility.
The
Credit Agreement contains certain restrictive covenants that are customary
for similar credit arrangements and requires the maintenance of certain
minimum financial ratios. The Credit Agreement also requires
the Company to make certain mandatory prepayments of outstanding
indebtedness using the net cash proceeds received from certain
dispositions of property, casualty or condemnation, any sale or issuance
of equity interests in a public offering or in a private placement,
unpermitted additional indebtedness incurred by the Company, and excess
cash flow under certain circumstances.
On
April 7, 2006, the Company repaid the balance on the term facility under
its former senior credit agreement and incurred a write-off of deferred
loan costs of approximately $1.5
million.
|
|
The Company’s Credit Agreement consisted of the following elements at December 29, 2007 and December 30, 2006, respectively (in thousands): |
December
29,
2007
|
December
30,
2006
|
||||||||
Credit
Agreement:
|
|||||||||
Term
Loan
|
$ | 43,750 | $ | 47,500 | |||||
Revolving
Credit Facility:
|
|||||||||
Maximum
availability
|
$ | 125,000 | $ | 125,000 | |||||
Borrowings
outstanding
|
– | 35,500 | |||||||
Letters
of credit issued
|
18,881 | 18,391 | |||||||
Availability
|
$ | 106,119 | $ | 71,109 | |||||
|
The
obligations under the Credit Agreement are guaranteed by Darling National
and are secured by substantially all of the property of the Company,
including a pledge of all equity interests in Darling
National. As of December 29, 2007, the Company was in
compliance with all the covenants contained in the Credit
Agreement.
|
(b)
|
Senior
Subordinated Notes
|
On
December 31, 2003, the Company issued senior subordinated notes in the
principal amount of $35.0 million. On June 1, 2006, the Company
retired the senior subordinated notes using money available under the
Credit Agreement and incurred charges of $1.925 million for prepayment
fees and approximately $1.1 million to write off deferred loan
costs.
|
NOTE
3.
|
ACQUISITION
|
On
May 15, 2006, Darling, through its wholly-owned subsidiary Darling
National, completed the acquisition of substantially all of the assets of
NBP (the “Transaction”). The purchase was accounted for as an
asset purchase pursuant to the terms of the asset purchase agreement, by
and among Darling, Darling National and NBP, whereby Darling National
acquired substantially all of the assets and liabilities of
NBP. The assets acquired in the Transaction has increased
Darling’s capabilities by growing revenues, diversifying the raw material
supplies and creating a larger platform to grow Darling’s restaurant
services business.
As
a result of the Transaction, effective May 15, 2006, the Company began
including the operations of NBP into the Company’s consolidated financial
statements. The following table presents selected pro forma
information, for comparative purposes, assuming the Transaction had
occurred on January 2, 2005 for the periods presented (unaudited) (in
thousands, except per share data):
The
selected unaudited pro forma information is not necessarily indicative of
the consolidated results of operations for future periods or the results
of operations that would have been realized had the Transaction actually
occurred on January 2, 2005.
|
December
30,
2006
|
December
31,
2005
|
||||||||
Net
sales
|
$ | 480,347 | $ | 497,039 | |||||
Income
from continuing operations
|
9,194 | 18,040 | |||||||
Net
income
|
9,194 | 18,086 | |||||||
Earnings
per share
|
|||||||||
Basic
and diluted
|
$ | 0.11 | $ | 0.22 |
|
The
Transaction was accounted for using the purchase method of accounting for
business combinations and, accordingly, the results of operations related
to the Transaction have been included in the Company’s consolidated
financial statements since the date of acquisition.
The
purchase price for the Transaction totaled $150.7 million, which included
the issuance of approximately 16.3 million shares of Darling common stock
valued at $70.5 million.
The
following table summarizes the fair value of the assets acquired and
liabilities assumed as of May 15, 2006 (in thousands):
|
Accounts
receivable, net
|
$ | 13,708 | |||
Inventory,
net
|
7,184 | ||||
Other
current assets
|
135 | ||||
Deferred
tax asset
|
425 | ||||
Identifiable
intangibles
|
25,740 | ||||
Property
and equipment
|
51,892 | ||||
Goodwill
|
68,343 | ||||
Accounts
payable
|
(7,837 | ) | |||
Accrued
expenses
|
(7,650 | ) | |||
Other
liabilities
|
(1,274 | ) | |||
Purchase
price
|
$ | 150,666 |
|
As
a result of the acquisition of NBP, the Company reduced its valuation
allowance for pre-acquisition deferred tax assets of approximately $0.9
million, resulting in a reduction of the $68.3 million of goodwill to
$67.4 million.
The
$67.4 million of goodwill was assigned to the rendering and restaurant
services segments in the amounts of $53.0 million and $14.4 million,
respectively. Of the total amount, $62.0 million is expected to
be deductible for tax purposes. Identifiable intangibles
include $5.1 million in routes with a weighted average useful life of 20
years, $20.5 million in permits with a weighted average useful life of 20
years, and $0.1 million in non-compete agreements with a useful life of 5
years.
|
NOTE
4.
|
INVENTORIES
|
A summary of inventories follows (in thousands): |
December
29,
2007
|
December
30,
2006
|
||||||||
Finished product
|
$ | 19,678 | $ | 11,909 | |||||
Supplies and other
|
2,803 | 2,653 | |||||||
$ | 22,481 | $ | 14,562 |
NOTE
5.
|
PROPERTY,
PLANT AND EQUIPMENT
|
A summary of property, plant and equipment follows (in thousands): |
December
29,
2007
|
December
30,
2006
|
||||||||
Land
|
$ | 17,501 | $ | 17,971 | |||||
Buildings
and improvements
|
45,684 | 44,450 | |||||||
Machinery
and equipment
|
205,376 | 195,702 | |||||||
Vehicles
|
54,482 | 54,960 | |||||||
Construction
in process
|
4,799 | 3,127 | |||||||
327,842 | 316,210 | ||||||||
Accumulated
depreciation
|
(199,157 | ) | (184,061 | ) | |||||
$ | 128,685 | $ | 132,149 |
NOTE
6.
|
ACCRUED
EXPENSES
|
Accrued expenses consist of the following (in thousands): |
December
29,
2007
|
December
30,
2006
|
||||||||
Compensation
and benefits
|
$ | 16,411 | $ | 7,175 | |||||
Utilities
and sewage
|
5,230 | 4,599 | |||||||
Accrued
income, ad valorem, and franchise taxes
|
2,277 | 4,478 | |||||||
Reserve
for self insurance, litigation, environmental and
tax matters (Note 14)
|
5,750 | 6,414 | |||||||
Medical
claims liability
|
3,298 | 3,494 | |||||||
Other
accrued expense
|
16,613 | 8,159 | |||||||
$ | 49,579 | $ | 34,319 |
NOTE
7.
|
LEASES
|
The Company leases four plants and storage locations, three office locations and a portion of its transportation equipment under operating leases. Leases are noncancellable and expire at various times through the year 2028. Minimum rental commitments under noncancellable leases as of December 29, 2007, are as follows (in thousands): |
Period Ending Fiscal
|
Operating Leases
|
||||
2008
|
$ | 9,943 | |||
2009
|
8,424 | ||||
2010
|
6,192 | ||||
2011
|
4,725 | ||||
2012
|
2,777 | ||||
Thereafter
|
9,760 | ||||
Total
|
$ | 41,821 |
|
Rent
expense for the fiscal years ended December 29, 2007, December 30, 2006
and December 31, 2005 was $7.8 million, $6.2 million and $5.5 million,
respectively.
|
NOTE
8.
|
DEBT
|
Debt consists of the following (in thousands): |
December
29,
2007
|
December 30,
2006
|
||||||||
Credit
Agreement (Note 2):
|
|||||||||
Revolving
Credit Facility
|
$ | – | $ | 35,500 | |||||
Term
Loan
|
43,750 | 47,500 | |||||||
Other
Notes
|
– | 4 | |||||||
43,750 | 83,004 | ||||||||
Less
Current Maturities
|
6,250 | 5,004 | |||||||
$ | 37,500 | $ | 78,000 |
|
Maturities of long-term debt at December 29, 2007 follow (in thousands): |
Contractual
Debt
Payment
|
|
2008
|
$ 6,250
|
2009
|
5,000
|
2010
|
5,000
|
2011
|
5,000
|
2012
|
22,500
|
$43,750
|
|
As of December 29, 2007, current maturities of debt of $6.25 million will be due during fiscal 2008, which include a scheduled payment of $1.25 million due December 31, 2007 and scheduled installment payments of $1.25 million due each quarter. |
NOTE
9.
|
OTHER
NONCURRENT LIABILITIES
|
|
Other
noncurrent liabilities consist of the following (in
thousands):
|
December
29,
2007
|
December 30,
2006
|
||||||||
Accrued
pension liability
|
$ | 9,164 | $ | 18,698 | |||||
Reserve
for self insurance, litigation, environmental and tax matters
(Note 14)
|
15,053 | 15,087 | |||||||
Other
|
3,008 | 900 | |||||||
$ | 27,225 | $ | 34,685 |
NOTE
10.
|
INCOME
TAXES
|
Income tax expense/(benefit) attributable to income from continuing operations before income taxes consists of the following (in thousands): |
December
29,
2007
|
December
30,
2006
|
December 31,
2005
|
|||||||||||
Current:
|
|||||||||||||
Federal
|
$ | 22,418 | $ | 4,294 | $ | 4,826 | |||||||
State
|
3,301 | 523 | 176 | ||||||||||
Deferred:
|
|||||||||||||
Federal
and State
|
3,780 | (2,551 | ) | (1,818 | ) | ||||||||
$ | 29,499 | $ | 2,266 | $ | 3,184 |
|
Income tax expense for the years ended December 29, 2007, December 30, 2006 and December 31, 2005, differed from the amount computed by applying the statutory U.S. federal income tax rate to income from continuing operations before income taxes as a result of the following (in thousands): |
December
29,
2007
|
December
30,
2006
|
December
31,
2005
|
|||||||||||
Computed
“expected” tax expense
|
$ | 26,261 | $ | 2,581 | $ | 3,753 | |||||||
State
income taxes
|
2,827 | 273 | 393 | ||||||||||
Section
199 deduction
|
(832 | ) | (143 | ) | – | ||||||||
Non-deductible
employee compensation
|
500 | – | – | ||||||||||
Tax
credits
|
(49 | ) | (208 | ) | (257 | ) | |||||||
Reversal
of reserve for taxes
|
(51 | ) | (272 | ) | (700 | ) | |||||||
Other,
net
|
843 | 35 | (5 | ) | |||||||||
$ | 29,499 | $ | 2,266 | $ | 3,184 | ||||||||
|
The tax effects of temporary
differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 29, 2007 and December 30,
2006 are presented below (in
thousands):
|
December
29,
2007
|
December
30,
2006
|
||||||||
Deferred
tax assets:
|
|||||||||
Net operating loss
carryforwards
|
$ | 7,262 | $ | 12,163 | |||||
Loss contingency
reserves
|
6,944 | 6,938 | |||||||
Employee benefits
|
2,843 | 2,746 | |||||||
Pension liability
|
4,535 | 7,306 | |||||||
Other
|
2,383 | 2,279 | |||||||
Total gross deferred tax
assets
|
23,967 | 31,432 | |||||||
Less valuation
allowance
|
(4,793 | ) | (9,416 | ) | |||||
Net deferred tax
assets
|
19,174 | 22,016 | |||||||
Deferred
tax liabilities:
|
|||||||||
Intangible assets
amortization
|
(3,016 | ) | (2,035 | ) | |||||
Property, plant and equipment
depreciation
|
(11,159 | ) | (10,115 | ) | |||||
Other
|
(1,894 | ) | (1,145 | ) | |||||
Total gross deferred tax
liabilities
|
(16,069 | ) | (13,295 | ) | |||||
$ | 3,105 | $ | 8,721 |
|
At
December 29, 2007, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $19,475,000 expiring through
2020. The availability of the net operating loss carryforwards
to reduce future taxable income is subject to various
limitations. As a result of the change in ownership which
occurred pursuant to the May 2002 recapitalization, utilization of the net
operating loss carryforwards is limited to approximately $687,000 per year
for the remaining life of the net operating losses.
The
net change in the total valuation allowance was a decrease of $4,623,000
for the year ended December 29, 2007 due to the expected expiration of net
operating loss carryforwards in future
periods.
|
NOTE
11.
|
STOCKHOLDERS’
EQUITY AND STOCK-BASED COMPENSATION
|
On
May 11, 2005, the shareholders approved the 2004 Plan. The 2004
Plan replaced both the 1994 Employee Flexible Stock Option Plan and the
Non-Employee Directors Stock Option Plan and thus broadens the array of
equity alternatives available to the Company. Under the 2004
Plan, the Company is allowed to grant stock options, stock appreciation
rights, non-vested and restricted stock (including performance stock),
restricted stock units (including performance units), other stock-based
awards, non-employee director awards, dividend equivalents and cash-based
awards. There are up to 6,074,969 common shares available under
the 2004 Plan which may be granted to any participant in any plan year as
defined in the 2004 Plan. Some of those shares are subject to
outstanding awards as detailed in the tables below. To the
extent these outstanding awards are forfeited or expire without exercise,
the shares will be returned to and available for future grants under the
2004 Plan. The 2004 Plan’s purpose is to attract, retain and
motivate employees, directors and third party service providers of the
Company and to encourage them to have a financial interest in the
Company. The 2004 Plan is administered by the Compensation
Committee (the “Committee”) of the Board of Directors. The
Committee has the authority to select plan participants, grant awards, and
determine the terms and conditions of such awards as defined in the 2004
Plan. The Company’s stock options granted under the 2004 Plan
generally terminate 10 years after date of grant. At December
29, 2007, the number of equity awards available for issuance under the
2004 Plan was 3,481,742.
The
following is a summary of stock-based compensation granted during the
years ended December 29, 2007, December 30, 2006 and December 31,
2005.
Nonqualified Stock
Options. On March 17, 2005, under the previous
Non-Employee Director Stock Option Plan, the Company granted 20,000
nonqualified non-employee director stock options, in the aggregate, to
five directors. The exercise price for these options was $4.04
per share (fair market value at grant date). Under the 2004
Plan, on May 11, 2005, the Company granted 4,000 nonqualified stock
options to the non-employee director newly elected to the board by the
stockholders. The exercise price for the May 11, 2005 stock
options was $3.95 per share (fair market value at grant
date). On May 8, 2007, following their election to the board by
the stockholders, the Company granted 8,000 nonqualified stock options in
the aggregate to the two most recent non-employee
directors. The exercise price for the May 8, 2007 stock options
was $8.03 per share (fair market value at grant date). All of
the non-employee director stock options vest 25 percent six months after
the grant date and 25 percent on each anniversary date
thereafter.
On
November 19, 2004, subject to the approval of the 2004 Plan, the Company
issued 276,600 nonqualified stock options to four of the executive
officers of the Company, that is the Chief Executive Officer and the
Executive Vice Presidents of Finance and Administration, Operations, and
Commodities (collectively with the Executive Vice President of Sales and
Services these officers are referred to in this note as “Named Executive
Officers”). The nonqualified stock options at November 19, 2004
were issued at an exercise price of $4.16. This exercise price
represents a 10% premium to the fair market value of the Company’s common
stock at the issue date. On May 11, 2005, these issued stock
options were authorized by the shareholders and made effective as a result
of the approval of the 2004 Plan. Additionally, on June 16,
2005, the Company granted an aggregate 194,350 nonqualified stock options
under the 2004 Plan to the Named Executive Officers at an exercise price
of $3.94, which represented a 10% premium to the fair market value of the
Company’s common stock at the grant date. The nonqualified stock options
vest over a three-year period at 33-1/3 percent per year.
Incentive Stock
Options. On June 16, 2005, the Company granted 82,500 incentive
stock options to various additional employees. The exercise
price was equal to the fair market value at the grant date of $3.58 per
share. These incentive stock options vest 20 percent at grant
date and 20 percent on each anniversary date thereafter.
A
summary of stock option activity as of December 29, 2007 and changes
during the year ended is presented
below.
|
Number
of shares
|
Weighted-avg.
exercise
price
per
share
|
Weighted-avg.
remaining
contractual
life
|
|||||||||
Options
outstanding at December 30, 2006
|
1,673,985 |
2.71
|
|||||||||
Granted
|
8,000 |
8.03
|
|||||||||
Exercised
|
(352,280 | ) |
1.47
|
||||||||
Forfeited
|
(9,000 | ) |
4.02
|
||||||||
Expired
|
– |
N/A
|
|||||||||
Options
outstanding at December 29, 2007
|
1,320,705 |
3.06
|
6.1
years
|
||||||||
Options
exercisable at December 29, 2007
|
1,183,422 |
2.95
|
6.0
years
|
|
For
the year ended December 29, 2007, the amount of cash received from the
exercise of options was approximately $0.5 million and the related tax
benefits were approximately $0.2 million. For the years ended
December 30, 2006 and December 31, 2005, the amount of cash received from
the exercise of options and the related tax benefits were
insignificant. The total intrinsic value of options exercised
for the years ended December 29, 2007, December 30, 2006 and December 31,
2005 was approximately $2.5 million, $0.2 million and $0.1 million,
respectively. The fair value of shares vested for the years
ended December 29, 2007, December 30, 2006 and December 31, 2005 was
approximately $0.6 million, $0.7 million and $0.6 million,
respectively. At December 29, 2007, the aggregate intrinsic
value of options outstanding was approximately $11.4 million and the
aggregate intrinsic value of options exercisable was approximately $10.3
million.
Non-Vested Stock
Awards. On November 19, 2004, subject to the approval of
the 2004 Plan, the Company issued 477,200 non-vested stock awards to the
Chief Executive Officer and the Executive Vice Presidents of Finance and
Administration, Operations, and Commodities. On May 11, 2005,
upon approval of the 2004 Plan these awards were authorized by the
shareholders and made effective. Additionally, on June 16,
2005, the Company granted 11,950 non-vested stock awards to the Executive
Vice President of Sales and Services. These non-vested stock
awards contain vesting periods of four to six years from date of
issuance. The six-year awards contain accelerated vesting
provisions based upon specified increases in the Company’s stock
price. During the second quarter of 2005, the Company recorded
$1.9 million of unearned compensation for the market value of the shares
on the date of grant. The unearned compensation is being
amortized to expense over the estimated lapse in restrictions of 1.3 - 4
years. During fiscal 2007 the accelerated vesting provisions on
the six-year awards were met and those shares vested.
On
March 9, 2006, the Company’s board of directors approved the contingent
issuance of 296,500 shares of common stock to certain members of
management upon completion of the Transaction. These contingent
shares had a fair value of approximately $0.6 million at date of
grant. These shares were issued in the third quarter of fiscal
2007 as a result of the Company’s average stock price for the 90-day
period ending on June 30, 2007 exceeded $4.31 per share.
A
summary of the Company’s non-vested stock awards as of December 29, 2007,
and changes during the year ended is as
follows:
|
Non-Vested
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||||
Stock
awards outstanding December 30, 2006
|
779,675 | $ | 3.48 | ||||||
Shares
granted
|
– | N/A | |||||||
Shares
vested
|
(529,675 | ) | 2.86 | ||||||
Shares
forfeited
|
— | — | |||||||
Stock
awards outstanding December 29, 2007
|
250,000 | $ | 3.95 |
|
Restricted Stock
Awards. On March 9, 2006, the Company's Board of
Directors approved a Non-Employee Director Restricted Stock Award Plan
(the "Director Restricted Stock Plan") pursuant to and in accordance with
the 2004 Plan in order to attract and retain highly qualified persons to
serve as non-employee directors and to more closely align such directors'
interests with the interests of the stockholders of the Company by
providing a portion of their compensation in the form of Company common
stock.
Under
the Director Restricted Stock Plan, $20,000 in restricted Company common
stock (the "Restricted Stock") will be awarded to each non-employee
director on the third business day after the Company releases its earnings
for its prior completed fiscal year (the "Date of Award"). The Restricted
Stock will be subject to a right of repurchase at $0.01 per share upon
termination of the holder as a member of the Company's board of directors
for cause and will not be transferable. These restrictions will lapse with
respect to 100% of the Restricted Stock upon the earliest to occur of (i)
ten years after the Date of Award, (ii) a Change of Control (as defined in
the 2004 Plan), and (iii) termination of the non-employee director's
service with the Company, other than for "cause" (as defined in the
Director Restricted Stock Plan). On March 20, 2007 and March
21, 2006, the Company issued 20,232 and 21,925 shares of restricted stock
in the aggregate, respectively, to its non-employee directors under the
Director Restricted Stock Plan.
A
summary of the Company’s directors’ restricted stock awards as of December
29, 2007, and changes during the year ended is as
follows:
|
Restricted
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||||
Stock
awards outstanding December 30, 2006
|
17,540 | $ | 4.56 | ||||||
Restricted
shares granted
|
20,232 | 5.93 | |||||||
Restricted
shares where the restriction lapsed
|
(7,757 | ) | 5.16 | ||||||
Restricted
shares forfeited
|
— | N/A | |||||||
Stock
awards outstanding December 29, 2007
|
30,015 | $ | 5.33 |
|
Long-Term Incentive Opportunity
Awards. The Committee has adopted a Long-Term Incentive Plan
(the “LTIP”) for the Company’s key employees, as a subplan under the terms
of the 2004 Plan. The principal purpose of the LTIP is to
encourage the Company’s executives to enhance the value of the Company
and, hence, the price of the Company’s stock and the stockholders’
return. In addition, the LTIP is designed to create retention
incentives for the individual and to provide an opportunity for increased
equity ownership by executives. The Committee awarded dollar
value performance based restricted stock opportunities under the LTIP for
fiscal 2007 to certain of the Company’s officers, including each of the
Named Executive Officers (the “2007 Restricted Stock
Awards”). The restricted stock underlying the 2007 Restricted
Stock Awards is issued only if a predetermined financial objective is met
by the Company. The Company met the financial objective for
fiscal 2007. Accordingly, in accordance with the terms of the
2007 Restricted Stock Awards, it is anticipated that the restricted stock
will be granted and issued to the executives on the third business day
after the Company releases its annual financial results for fiscal
2007. The amount of restricted stock to be issued will be
calculated using the closing price of the Company’s common stock on the
second business day after the Company releases its annual financial
results for fiscal 2007. These awards vest in four equal
installments, with the first installment vesting immediately upon the
grant date and the remaining three installments vesting on the next three
anniversary dates of the grant. The award is treated as a
liability until the grant date when the number of shares to be issued is
known, and then it becomes equity-classified. At December 29,
2007 the Company recorded a liability of approximately $0.9 million on the
balance sheet for the long-term incentive
opportunities.
|
NOTE
12.
|
EMPLOYEE
BENEFIT PLANS
|
The
Company has retirement and pension plans covering substantially all of its
employees. As a condition to the Transaction, the Company was required to
provide the non-union employees of NBP with benefits that were comparable
to those in effect for those employees on the closing date of the
Transaction. Accordingly, the Company continued to maintain
certain of the NBP benefit plans following the closing of the Transaction,
including the Darling National LLC Retirement Savings Plan, a defined
contribution plan, and the Darling National LLC Pension Retirement Plan, a
defined benefit plan.
Under
the transition rules of Code Section 410(b), affected plans in an
acquisition are allowed to be treated separately for discrimination
coverage testing purposes until the end of the plan year following the
acquisition. For the Transaction, the transition period lasted
through December 31, 2007. Therefore, following the completion
of the Transaction, the Company initiated a project to review its employee
retirement benefit programs in the context of comparable programs in the
manufacturing industry sector. As a result of this review,
effective January 1, 2008, the Company announced a series of changes to
the benefits provided by its 401(k) defined contribution plans and its
defined benefit plans.
Effective
January 1, 2008, the Darling National LLC Pension Retirement Plan was
merged into the Darling International Inc. Hourly Employees’ Retirement
Plan, which plan was then amended and restated. Employees from
both plans are entitled to their accrued benefit as of December 31, 2007
under their prior plan design, plus benefit accruals after January 1, 2008
using the new benefit of $20 for each year of service with no cap on
service years. Previously, these hourly employees had been
accruing $20-$30 per year of service, depending on location of
employment.
Also
effective January 1, 2008, the Darling International Inc. Salaried
Employees’ Retirement Plan, a defined benefit plan, was
amended. Effective January 1, 2008, all of the Company’s
eligible salaried employees participate in this plan, including all former
Darling National salaried employees who did not have a defined benefit
plan prior to January 1, 2008. All eligible salaried employees
are entitled to their accrued benefit as of December 31, 2007, which
accrued benefit is an amount equal to 1.8% times years of service (up to
25 years) times final average pay plus 0.5% for each additional service
year beyond 25 years, with a total service year cap of 40
years. Effective January 1, 2008, for service years earned
going forward, the benefit accrual will be 0.25% times years of service
times final average pay.
|
|
Also
effective January 1, 2008, the Darling National LLC Retirement Savings
Plan was amended and restated to, among other things, update the plan for
the Economic Growth and Tax Relief Reconciliation Act and change the name
of the plan to the Darling International Inc. Hourly 401(k) Savings
Plan. Effective January 1, 2008, all of the Company’s hourly
employees are eligible to participate in this plan, which allows for
elective deferrals, an employer match equal to 100% of the first $10 per
pay period deferred by a participant, with a maximum of $520 per year, and
an employer contribution equal to $520 per year. Previously,
certain of the Company’s hourly employees were only given the opportunity
to make deferrals. The $520 employer contribution will be a new
contribution for all participating hourly employees. This plan
accepted the transfer of assets and liabilities of the hourly employees
that had account balances in the Darling International Inc. 401(k) Savings
Plan which existed prior to January 1, 2008.
Effective
January 1, 2008, the Darling International Inc. 401(k) Savings Plan, a
defined contribution plan, was amended and restated and became the Darling
International Inc. Salaried 401(k) Savings Plan and now includes all
eligible salaried employees. This plan received the assets and
liabilities of participating salaried employees under the Darling National
LLC Retirement Savings Plan. Effective January 1, 2008, the
Darling International Inc. Salaried 401(k) Savings Plan includes an
employer contribution based on age (ranging from 2-5% of compensation per
year), and will continue to allow for employee
deferrals. Previously, only the Darling National employees
received an employer match, which was equal to 100% of the first $10 per
pay period deferred by a participant, with a maximum of $520 per
year.
|
In
September 2006, the FASB issued SFAS 158, Employers’ Accounting for
Defined Benefit Pension and Other Post-Retirement Plans – an Amendment of
FASB Statements No. 87, 88, 106 and 132(R) (“SFAS 158”), which requires that
the Company recognize the over-funded or under-funded status of the
Company’s defined benefit post-retirement plans as an asset or liability
in the Company’s balance sheet, with changes in the funded status
recognized through comprehensive income in the year in which they
occur. Based on the funded status of the Company’s pension
plans as of December 30, 2006, the adoption of SFAS 158 increased the
Company’s total assets, as a result of deferred tax assets, by
approximately $2.2 million, increased total liabilities by approximately
$6.7 million and reduced total stockholder’s equity by approximately $4.5
million, net of taxes. The adoption of the funded status
portion of SFAS 158 did not affect the Company’s results of
operations.
In
addition, SFAS 158 requires that companies using a measurement date other
than the fiscal year end change to a fiscal year end measurement date
effective for years ending after December 15, 2008. The Company
will adopt the measurement date provision in 2008.
The
following table sets forth the plans’ funded status and amounts recognized
in the Company’s consolidated balance sheets based on the measurement date
(October 1, 2007 and 2006) (in
thousands):
|
December
29,
2007
|
December 30,
2006
|
||||||||
Change
in projected benefit obligation:
|
|||||||||
Projected
benefit obligation at beginning of period
|
$ | 88,719 | $ | 82,650 | |||||
Acquisition
|
– | 6,305 | |||||||
Service
cost
|
2,328 | 2,429 | |||||||
Interest
cost
|
5,011 | 4,673 | |||||||
Actuarial
(gain)
|
(1,822 | ) | (4,160 | ) | |||||
Benefits
paid
|
(3,570 | ) | (3,178 | ) | |||||
Other
|
76 | – | |||||||
Projected
benefit obligation at end of period
|
90,742 | 88,719 | |||||||
Change
in plan assets:
|
|||||||||
Fair
value of plan assets at beginning of period
|
69,898 | 60,083 | |||||||
Post
measurement date contributions
|
123 | – | |||||||
Acquisition
|
– | 5,141 | |||||||
Actual
return on plan assets
|
8,941 | 5,158 | |||||||
Employer
contribution
|
6,186 | 2,694 | |||||||
Benefits
paid
|
(3,570 | ) | (3,178 | ) | |||||
Fair
value of plan assets at end of period
|
81,578 | 69,898 | |||||||
Funded
status
|
(9,164 | ) | (18,821 | ) | |||||
Post-measurement
date contributions
|
– | 123 | |||||||
Net
amount recognized
|
$ | (9,164 | ) | $ | (18,698 | ) | |||
Amounts
recognized in the consolidated balance
sheets
consist of:
|
|||||||||
Non-current
liability
|
$ | (9,164 | ) | $ | (18,698 | ) | |||
Net
amount recognized
|
$ | (9,164 | ) | $ | (18,698 | ) | |||
Amounts
recognized in accumulated other
comprehensive
loss consist of:
|
|||||||||
Net
actuarial loss
|
$ | 11,107 | $ | 17,385 | |||||
Prior
service cost
|
499 | 541 | |||||||
Net
amount recognized (a)
|
$ | 11,606 | $ | 17,926 | |||||
(a)
|
Amounts
do not include deferred taxes of $4.2 million and $6.6 million at
December 29, 2007 and December 30, 2006,
respectively.
|
|
The accumulated benefit
obligation for all defined benefit pension plans was $84.0 million and
$82.0 million at December 29, 2007 and December 30, 2006,
respectively.
|
December
29,
2007
|
December
30,
2006
|
||||||||
Projected
benefit obligation
|
$ | 90,742 | $ | 88,719 | |||||
Accumulated
benefit obligation
|
83,953 | 82,025 | |||||||
Fair
value of plan assets
|
81,578 | 69,898 |
|
Net pension cost includes the
following components (in
thousands):
|
December
29,
2007
|
December
30,
2006
|
December
31,
2005
|
|||||||||||
Service
cost
|
$ | 2,328 | $ | 2,429 | $ | 1,998 | |||||||
Interest
cost
|
5,011 | 4,673 | 4,206 | ||||||||||
Expected
return on plan assets
|
(5,636 | ) | (5,192 | ) | (4,379 | ) | |||||||
Net
amortization and deferral
|
1,269 | 1,792 | 1,406 | ||||||||||
Net
pension cost
|
$ | 2,972 | $ | 3,702 | $ | 3,231 | |||||||
|
Amounts recognized in accumulated
other comprehensive income (loss) for the year ended (in
thousands):
|
2007
|
|||||
Actuarial
gains recognized:
|
|||||
Reclassification
adjustments
|
$ | 705 | |||
Actuarial
gain recognized during the period
|
3,139 | ||||
Prior
service (cost) credit recognized:
|
|||||
Reclassification
adjustments
|
72 | ||||
Prior
service cost arising during the period
|
(46 | ) | |||
$ | 3,870 | ||||
|
The estimated amount that will be
amortized from accumulated other comprehensive loss into net periodic
pension cost in fiscal 2008 is as follows (in
thousands):
|
2008
|
|||||
Net
actuarial loss
|
$ | 349 | |||
Prior
service cost
|
123 | ||||
$ | 472 |
|
Weighted average assumptions used
to determine benefit obligations
were:
|
December
29,
2007
|
December
30,
2006
|
December
31
2005
|
|||||||||||
Discount
rate
|
6.00% | 5.75% | 5.50% | ||||||||||
Rate
of compensation increase
|
4.10% | 4.08% | 4.32% |
|
Weighted average assumptions used
to determine net periodic benefit cost for the employee benefit pension
plans were:
|
December
29,
2007
|
December
30,
2006
|
December
31,
2005
|
|||||||||||
Discount
rate
|
5.75% | 5.50% |
6.00%
|
||||||||||
Rate
of increase in future compensation levels
|
4.08% | 4.32% | 4.66% | ||||||||||
Expected
long-term rate of return on assets
|
8.25% | 8.38% | 8.75% |
|
Consideration
was made to the long-term time horizon for the plans’ benefit obligations
as well as the related asset class mix in determining the expected
long-term rate of return. Historical returns are also
considered, over the long-term time horizon, in determining the expected
return. Considering the overall asset mix of approximately 60%
equity and 40% fixed income, several years in the last ten years having
strong double digit returns along with several years of single digit
losses, the Company believes it is reasonable to expect a long-term rate
of return of 8.25% for the plans’ investments as a whole.
Plan
Assets
The
Company’s pension plan weighted-average asset allocations at December 29,
2007 and December 30, 2006, by asset category, are as
follows:
|
Plan
Assets at
|
|||||||||
Asset Category
|
December
29,
2007
|
December 30,
2006
|
|||||||
Equity
Securities
|
60.9%
|
65.2%
|
|||||||
Debt
Securities
|
39.1%
|
34.8%
|
|||||||
Total
|
100.0%
|
100.0%
|
|
The
investment objectives have been established in conjunction with a
comprehensive review of the current and projected financial
requirements. The primary investment objectives
are: 1) to have the ability to pay all benefit and expense
obligations when due; 2) to maximize investment returns within reasonable
and prudent levels of risk in order to minimize contributions; and 3) to
maintain flexibility in determining the future level of
contributions.
Investment
results are the most critical element in achieving funding objectives,
while reliance on contributions is a secondary element.
The
investment guidelines are based upon an investment horizon of greater than
ten years; therefore, interim fluctuations are viewed with this
perspective. The strategic asset allocation is based on
this long-term perspective. However, because the participants’
average age is somewhat older than the typical average plan age,
consideration is given to retaining some short-term
liquidity. Analysis of the cash flow projections of the plans
indicates that benefit payments will continue to exceed
contributions.
Based
upon the plans’ time horizon, risk tolerances, performance expectations
and asset class constraints, target asset allocation ranges are as
follows:
|
Fixed
Income
|
35%
- 45%
|
|
|||||||
Domestic
Equities
|
45% - 55%
|
|
|||||||
International
Equities
|
7% - 13%
|
|
|
The fixed income asset allocation
may be invested in corporate and government bonds denominated in U.S.
dollars, private and publicly traded mortgages, private placement debt,
and cash equivalents. The average maturity of the asset class
will not exceed ten years. The portfolio is expected to be well
diversified.
|
|
The
domestic equity allocation is invested in stocks traded on one of the U.S.
stock exchanges. Securities convertible into such stocks,
convertible bonds and preferred stock, may also be
purchased. The majority of the domestic equities are invested
in large, mid, and small cap index accounts that are well
diversified. By definition, small cap investments carry greater
risk, but also are expected to create greater returns over
time. The plans target approximately 7.5% of the total asset
mix to small cap. American Depository Receipts (“ADR’s”) may
not account for more than 3% of the holdings. Small company
stocks may not exceed 15% of the plans’ assets. Small company
definitions fluctuate with market levels, but generally will be considered
companies with market capitalizations less than $500
million. The portfolio will be diversified in terms of
individual company securities and industries.
The
international equity allocation is invested in companies whose stock is
traded outside the U.S. and/or companies that conduct the major portion of
their business outside of the U.S. The portfolio may invest in
ADR’s. The emerging market portion of the international equity
investment is held below 20% due to greater volatility in the asset
class. The portfolio is expected to be diversified in terms of
companies, industries and countries.
All
investment objectives are expected to be achieved over a market cycle
anticipated to be a period of five years. Reallocations are
performed at a minimum of twice a year to retain target asset allocation
ranges.
|
Contributions
The
Company's funding policy for employee benefit pension plans is to
contribute annually not less than the minimum amount required nor more
than the maximum amount that can be deducted for federal income tax
purposes. Contributions are intended to provide not only for
benefits attributed to service to date but also for those expected to be
earned in the future.
Based
on current actuarial estimates, the Company does not expect to make any
payments to meet funding requirements for its pension plans in fiscal
2008.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in
thousands):
|
Year
Ending
|
Pension
Benefits
|
||
2008
|
$ 3,970
|
||
2009
|
4,110
|
||
2010
|
4,480
|
||
2011
|
4,860
|
||
2012
|
5,190
|
||
Years
2013 – 2017
|
33,450
|
|
The Company participates in
several multi-employer pension plans which provide defined benefits to
certain employees covered by labor contracts. These plans are
not administered by the Company and contributions are determined in
accordance with provisions of negotiated labor
contracts. Current information with respect to the Company's
proportionate share of the over-and under-funded status of all actuarially
computed value of vested benefits over these pension plans’ net assets is
not available. The Company’s portion of contributions to these
plans amounted to $2.6 million, $2.0 million and $1.8 million for the
years ended December 29, 2007, December 30, 2006 and December 31, 2005,
respectively.
|
|
In August 2006 the Pension
Protection Act of 2006 (“PPA”) was signed into law and went into effect in
January 2008. The stated goal of the PPA is to improve the
funding of pension plans. Plans in an under-funded status will
be required to increase employer contributions to improve the funding
level within PPA timelines. Should a multi-employer plan elect
to terminate rather than increase contributions, the Company will record a
liability for its cost of the plan termination when such liability becomes
probable and estimable. One multi-employer plan in which the
Company participates has given notification of a mass withdrawal
termination for the plan year ended June 30, 2007. Therefore,
at December 29, 2007 the Company has recorded a liability of approximately
$1.1 million related to this termination, which represents the net present
value of the liability as determined by the terminated
plan.
|
NOTE
13.
|
CONCENTRATION
OF CREDIT RISK
|
Concentration
of credit risk is limited due to the Company’s diversified customer base
and the fact that the Company sells commodities. No single
customer accounted for more than 10% of the Company’s net sales in fiscal
years 2007, 2006 and 2005.
|
NOTE
14.
|
CONTINGENCIES
|
The
Company is a party to several lawsuits, claims and loss contingencies
arising in the ordinary course of its business, including assertions by
certain regulatory agencies related to air, wastewater, and storm water
discharges from the Company’s processing facilities.
|
|
The
Company’s workers’ compensation, auto and general liability policies
contain significant deductibles or self-insured retentions. The
Company estimates and accrues its expected ultimate claim costs related to
accidents occurring during each fiscal year and carries this accrual as a
reserve until such claims are paid by the
Company.
|
|
As a result of the matters discussed above, the Company has established loss reserves for insurance, environmental and litigation matters. At December 29, 2007 and December 30, 2006, the reserves for insurance, environmental and litigation contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities for which there are no insurance recoveries were approximately $17.1 million and $17.9 million, respectively. Management of the Company believes these reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management; however, there can be no assurance that final costs related to these matters will not exceed current estimates. The Company believes that the likelihood is remote that any additional liability from such lawsuits and claims that may not be covered by insurance would have a material effect on the financial statements. | |
In
July 2007, a judgment was entered in a litigation matter involving a
contract dispute in which the Company was a party. The judgment
required the Company to convey an unused parcel of property recorded on
the books for approximately $500,000 to the counterparty for that
amount. In December 2007, a judgment was entered in the matter
awarding the counterparty approximately $2.6 million in attorneys’ fees
and costs. The Company filed appeals of both
judgments. The Company settled this matter during the first
quarter of fiscal 2008. Pursuant to the terms of the
settlement, the Company transferred the property to the counterparty for a
purchase price of $500,000, paid the counterparty approximately $2.2
million towards attorneys’ fees and costs and agreed to dismiss its
pending appeals with prejudice. In addition, the parties
exchanged mutual releases. The Company has recorded a charge of
$2.2 million for the attorneys’ fees and costs in the fourth quarter of
2007, which is included in selling, general and administrative
expenses.
|
|
In June 2006, the Company was
awarded damages of approximately $7.4 million as a result of a service
provider’s failure to provide steam under a service agreement to one of
the Company’s plants. At the time the damages were awarded,
collectibility of such damages was uncertain; however on October 12, 2006,
the Company entered into an agreement to sell its rights to such damages
to a third party for $2.2 million in cash. The agreement was
made subject to certain conditions which were satisfied on March 1,
2007. On March 8, 2007, the Company received $2.2 million,
completing the transaction. The Company recorded a gain with
the receipt of the $2.2 million in proceeds in the first quarter of
2007.
|
NOTE
15.
|
BUSINESS
SEGMENTS
|
The
Company sells its products domestically and internationally and operates
within two industry segments: Rendering and Restaurant
Services. The measure of segment profit (loss) includes all
revenues, operating expenses (excluding certain amortization of
intangibles), and selling, general and administrative expenses incurred at
all operating locations and excludes general corporate expenses.
|
|
Included
in corporate activities are general corporate expenses and the
amortization of intangibles. Assets of corporate activities include cash,
unallocated prepaid expenses, deferred tax assets, prepaid pension, and
miscellaneous other assets. The acquisition of substantially
all of the assets of NBP are reflected primarily in the Rendering
segment.
|
|
Rendering
Rendering
consists of the collection and processing of animal by-products, including
hides, from butcher shops, grocery stores, food service industry and meat
and poultry processors, converting these principally into useable oils and
proteins utilized by the agricultural, leather and oleo-chemical
industries.
|
|
Restaurant
Services
Restaurant
Services consists of the collection of used cooking oils from food service
establishments and recycling them into similar products such as
high-energy animal feed ingredients and industrial
oils. Restaurant Services also provides grease trap
servicing. Included in restaurant services is the National
Service Center (“NSC”). The NSC schedules services such as fat
and bone and used cooking oil collection as well as trap cleaning for
contracted customers using the Company’s resources or third party
providers.
|
|
Included
in corporate activities are general corporate expenses and the
amortization of intangibles related to “Fresh Start Reporting.”
Business Segment Net
Revenues (in thousands):
|
Year
Ended
|
December
29,
2007
|
December 30,
2006
|
|
December 31,
2005
|
Rendering:
|
||||||||||||||
Trade
|
$ | 464,468 | $ | 279,011 | $ | 192,340 | ||||||||
Intersegment
|
42,095 | 29,194 | 19,206 | |||||||||||
506,563 | 308,205 | 211,546 | ||||||||||||
Restaurant
Services:
|
||||||||||||||
Trade
|
180,845 | 127,979 | 116,527 | |||||||||||
Intersegment
|
5,311 | 3,111 | 4,808 | |||||||||||
186,156 | 131,090 | 121,335 | ||||||||||||
Eliminations
|
(47,406 | ) | (32,305 | ) | (24,014 | ) |
|
|||||||
Total
|
$ | 645,313 | $ | 406,990 | $ | 308,867 |
|
Business Segment
Profit/(Loss) (in
thousands):
|
Year
Ended
|
December
29,
2007
|
December 30,
2006
|
|
December 31,
2005
|
Rendering
|
$ | 85,654 | $ | 33,177 | $ | 21,668 | ||||||||
Restaurant
Services
|
34,953
|
14,789 |
15,385
|
|||||||||||
Corporate
Activities
|
(70,029 | ) | (35,675 | ) | (23,201 | ) | ||||||||
Interest
expense
|
(5,045 | ) |
(7,184
|
)
|
(6,157 | ) | ||||||||
Income from continuing
operations
|
$ | 45,533 | $ | 5,107 | $ | 7,695 |
|
Certain
assets are not attributable to a single operating segment but instead
relate to multiple operating segments operating out of individual
locations. These assets are utilized by both the Rendering and
Restaurant Services business segments and are identified in the category
Combined Rendering/Restaurant Services. Depreciation of
Combined Rendering/Restaurant Services assets is allocated based upon an
estimate of the percentage of corresponding activity attributed to each
segment. Additionally, although intangible assets are allocated
to operating segments, the amortization related to the adoption of “Fresh
Start Reporting” in 1993 is not considered in the measure of operating
segment profit/(loss) and is included in Corporate
Activities.
As
discussed in Note 14 Contingencies, the Company received proceeds of $2.2
million during the first quarter of fiscal 2007 as a result of a service
provider’s failure to provide steam under a service agreement to one of
the Company’s plants. The Company recorded approximately $1.2
million of the proceeds as a reduction of cost of sales in the Company’s
rendering segment and approximately $1.0 million as a reduction of selling
and general and administrative costs in the corporate
segment.
Business Segment
Assets (in
thousands):
|
December
29,
2007
|
December 30,
2006
|
|||||||
Rendering
|
$ | 162,091 | $ | 153,798 | ||||
Restaurant
Services
|
40,518 | 36,359 | ||||||
Combined
Rendering/Restaurant Services
|
106,958 | 105,402 | ||||||
Corporate
Activities
|
41,771 | 25,247 | ||||||
Total
|
$ | 351,338 | $ | 320,806 |
|
Business
Segment Property, Plant and Equipment (in
thousands):
|
December
29,
2007
|
December 30,
2006
|
December
31,
2005
|
|||||||||||
Depreciation
and amortization:
|
|||||||||||||
Rendering
|
$ | 13,509 | $ | 11,388 | $ | 7,928 | |||||||
Restaurant
Services
|
3,881 | 3,844 | 3,289 | ||||||||||
Corporate
Activities
|
5,824 | 5,454 | 4,570 | ||||||||||
Continuing
operations
|
$ | 23,214 | $ | 20,686 | $ | 15,787 | |||||||
Capital
expenditures:
|
|||||||||||||
Rendering
|
$ | 2,880 | $ | 1,421 | $ | 4,746 | |||||||
Restaurant
Services
|
538 | 254 | 2,208 | ||||||||||
Combined
Rendering/Restaurant Services
|
10,609 | 8,644 | 12,622 | ||||||||||
Corporate
Activities
|
1,525 | 1,481 | 1,830 | ||||||||||
Continuing
operations (a)
|
$ | 15,552 | $ | 11,800 | $ | 21,406 |
(a)
|
Excludes
the capital assets acquired as part of the acquisition of substantially
all of the assets of NBP of approximately $51.9 million in fiscal
2006.
|
|
The Company has no material
foreign operations, but exports a portion of its products to customers in
various foreign countries.
Geographic Area Net Trade
Revenues (in
thousands):
|
December
29,
2007
|
December
30,
2006
|
December 31,
2005
|
|||||||||||
Domestic
|
$ | 473,694 | $ | 294,301 | $ | 231,282 | |||||||
Foreign
|
171,619 |
112,689
|
77,585 | ||||||||||
Total
|
|
$ | 645,313 | $ | 406,990 | $ | 308,867 |
|
The Company
attributes revenues from external customers to individual foreign
countries based on the destination of the Company’s
shipments. For fiscal 2007, 2006 and 2005, no individual
foreign country comprised more than 5% of the Company’s consolidated
revenue, with the exception of sales to Mexico during fiscal 2005, which
totaled $17.5 million in revenue or 5.7% of consolidated fiscal 2005
revenue.
|
NOTE
16.
|
QUARTERLY
FINANCIAL DATA (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE
AMOUNTS):
|
Year
Ended December 29, 2007
|
||||||||||||||||
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
Net
sales
|
$ | 138,612 | $ | 159,425 | $ | 171,831 | $ | 175,445 | ||||||||
Operating
income
|
17,043 | 17,410 | 21,010 | 25,184 | ||||||||||||
Income
from continuing operations
|
9,580 | 9,482 | 12,100 | 14,371 | ||||||||||||
Net
income
|
9,580 | 9,482 | 12,100 | 14,371 | ||||||||||||
Basic
earnings per share
|
0.12 | 0.12 | 0.15 | 0.18 | ||||||||||||
Diluted
earnings per share
|
0.12 | 0.12 | 0.15 | 0.18 | ||||||||||||
Year
Ended December 30, 2006
|
||||||||||||||||
First
Quarter
|
Second
Quarter(a)
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
Net
sales
|
$ | 76,400 | $ | 87,231 | $ | 115,229 | $ | 128,130 | ||||||||
Operating
income
|
1,899 | 1,534 | 4,362 | 11,444 | ||||||||||||
Income/(loss)
from continuing
Operations
|
366 | (3,149 | ) | 1,801 | 6,089 | |||||||||||
Net
income/(loss)
|
366 | (3,149 | ) | 1,801 | 6,089 | |||||||||||
Basic
earnings/(loss) per share
|
0.01 | (0.04 | ) | 0.02 | 0.08 | |||||||||||
Diluted
earnings/(loss) per share
|
0.01 | (0.04 | ) | 0.02 | 0.07 | |||||||||||
(a)
|
Included
in net income/(loss) and income/(loss) from continuing operations in the
second quarter of fiscal 2006 is a write-off of deferred loan cost of
approximately $2.6
million and fees of approximately $1.9 for the early retirement of senior
subordinated notes and termination of the previous senior credit
agreement.
|
NOTE
17.
|
NEW
ACCOUNTING PRONOUNCEMENTS
|
Balance
at
|
Additions
Charged to:
|
Balance
at
|
||||||||||||||||||
Description
|
Beginning
of Period
|
Costs
and Expenses
|
Other
(a)
|
Deductions
(b)
|
End
of Period |
|||||||||||||||
Reserve
for bad debts:
|
||||||||||||||||||||
Year ended December 29, 2007
|
$ | 1,639 | $ | 407 | $ | – | $ | 580 | $ | 1,466 | ||||||||||
Year ended December 30, 2006
|
$ | 728 | $ | 874 | $ | 596 | $ | 559 | $ | 1,639 | ||||||||||
Year ended December 31, 2005
|
$ | 757 | $ | 484 | $ | – | $ | 513 | $ | 728 | ||||||||||
Deferred
tax valuation allowance:
|
||||||||||||||||||||
Year ended December 29, 2007
|
$ | 9,416 | $ | – | $ | – | $ | 4,623 | $ | 4,793 | ||||||||||
Year ended December 30, 2006
|
$ | 19,086 | $ | – | $ | – | $ | 9,670 | $ | 9,416 | ||||||||||
Year ended December 31, 2005
|
$ | 20,257 | $ | – | $ | – | $ | 1,171 | $ | 19,086 |
(a)
|
Includes
amounts acquired as part of the NBP
acquisition.
|
|
(b)
|
Deductions
consist of write-offs of uncollectible accounts receivable and reductions
of the deferred tax valuation allowance. In 2006, the
reductions in the deferred tax valuation allowance were offset against
deferred tax assets and/or goodwill, resulting in no deferred tax
benefit.
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
•
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
•
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
•
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
ITEM 9B.
|
OTHER
INFORMATION
|
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
ITEM
15.
|
EXHIBITS,
FINANCIAL STATEMENT
SCHEDULES
|
Page
|
||
(a)
|
Documents
filed as part of this report:
|
(1 | ) |
The
following consolidated financial statements are included in Item
8.
|
|||||
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial
Statements
|
43 | ||||||
Report
of Independent Registered Public Accounting Firm on Internal Control
Over
Financial
Reporting
|
44 | ||||||
Consolidated
Balance Sheets
|
|||||||
December
29, 2007 and December 30, 2006
|
45 | ||||||
Consolidated
Statements of Operations-
|
|||||||
Three
years ended December 29, 2007
|
46 | ||||||
Consolidated
Statements of Stockholders’ Equity -
|
|||||||
Three
years ended December 29, 2007
|
47 | ||||||
Consolidated
Statements of Cash Flows -
|
|||||||
Three
years ended December 29, 2007
|
49 | ||||||
Notes
to Consolidated Financial Statements
|
50 | ||||||
(2 | ) |
The
following financial statement schedule is included in Item
8.
|
|||||
Schedule II
- Valuation and Qualifying Accounts
|
|||||||
Three
years ended December 29, 2007
|
77 | ||||||
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. |
(3)
|
Exhibits.
|
||||||
Exhibit No. | Document | |
2.1
|
Asset
Purchase Agreement, dated as of December 19, 2005, among Darling
International Inc., Darling National LLC, and National By-Products LLC
(filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
December 19, 2005 and incorporated herein by
reference).
|
|
2.2
|
Claim
Purchase Agreement, dated as of October 12, 2006, by and between Darling
International Inc. and Trust Company of the West as trustee of the trust
established pursuant to an Individual Trust Agreement between the
Boilermaker-Blacksmith National Pension Trust and itself (filed as Exhibit
2.1 to the Company’s Current Report on Form 8-K filed October 18, 2006 and
incorporated herein by reference).
|
|
2.3
|
Amendment
No. 1 to Claim Purchase Agreement, dated as of December 31, 2006, by and
between Darling International Inc. and Trust Company of the West as
trustee of the trust established pursuant to an Individual Trust Agreement
between the Boilermaker-Blacksmith National Pension Trust and itself
(filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
January 3, 2007 and incorporated herein by reference).
|
|
3.1
|
Restated
Certificate of Incorporation of the Company, as amended (filed as Exhibit
3.1 to the Company’s Registration Statement on Form S-1 filed May 23, 2002
and incorporated herein by reference).
|
|
3.2
|
Amended
and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed August 13, 2007 and incorporated herein
by reference).
|
|
4.1
|
Specimen
Common Stock Certificate (filed as Exhibit 4.1 to the Company’s
Registration Statement on Form S-1 filed May 27, 1994 and incorporated
herein by reference).
|
|
4.2
|
Certificate
of Designation, Preference and Rights of Series A Preferred Stock (filed
as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed
May 23, 2002 and incorporated herein by reference).
|
|
10.1
|
Recapitalization
Agreement, dated as of March 15, 2002, among Darling International Inc.,
each of the banks or other lending institutions which is a signatory
thereto or any successor or assignee thereof, and Credit Lyonnais New York
Branch, individually as a bank and as agent (filed as Annex C to the
Company’s Definitive Proxy Statement filed on April 29, 2002, and
incorporated herein by reference).
|
|
10.2
|
First
Amendment to Recapitalization Agreement, dated as of April 1, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Annex D to the Company’s
Definitive Proxy Statement filed on April 29, 2002, and incorporated
herein by reference).
|
|
10.3
|
Second
Amendment to Recapitalization Agreement, dated as of April 29, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Exhibit 10.3 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
|
10.4
|
Registration
Rights Agreement, dated as of December 29, 1993, between Darling
International Inc., and the signatory holders identified therein (filed as
Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed on
May 27, 1994, and incorporated herein by reference).
|
|
10.5
|
Registration
Rights Agreement, dated as of May 10, 2002, between Darling International
Inc., and the holders identified therein (filed as Exhibit 10.6 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
|
10.6
*
|
Form
of Indemnification Agreement (filed as Exhibit 10.7 to the Company’s
Registration Statement on Form S-1 filed on May 27, 1994, and incorporated
herein by reference).
|
10.7
|
Credit
Agreement, dated as of April 7, 2006, among Darling International Inc.,
various lending institutions party thereto and JPMorgan Chase Bank, N.A.
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
|
10.8
|
First
Amendment to Note Purchase Agreement, dated as of April 7, 2006, among
Darling International Inc. and the securities purchasers party thereto
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
|
10.9
|
Leases,
dated July 1, 1996, between the Company and the City and County of San
Francisco (filed pursuant to temporary hardship exemption under cover of
Form SE).
|
|
10.10
|
Lease,
dated November 24, 2003, between Darling International Inc. and the Port
of Tacoma (filed as Exhibit 10.3 to the Company’s Annual Report on
Form 10-K filed March 29, 2004, and incorporated herein by
reference).
|
|
10.11
*
|
1994
Employee Flexible Stock Option Plan (filed as Exhibit 2 to the Company’s
Revised Definitive Proxy Statement filed on April 20, 2001, and
incorporated herein by reference).
|
|
10.12
*
|
Non-Employee
Directors Stock Option Plan (filed as Exhibit 10.13 to the Company’s
Registration Statement on Form S-1/A filed on June 5, 2002, and
incorporated herein by reference).
|
|
10.13
*
|
Darling
International Inc. 2004 Omnibus Incentive Plan (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed May 11, 2005, and
incorporated herein by reference).
|
|
10.14
*
|
Amendment
to Darling International Inc. 2004 Omnibus Incentive Plan (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 22,
2007 and incorporated herein by reference).
|
|
10.15
*
|
Darling
International Inc. Compensation Committee Long-Term Incentive Program
Policy Statement (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed June 22, 2005, and incorporated herein by
reference).
|
|
10.16
*
|
Integration
Success Incentive Award Plan (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed March 15, 2006 and incorporated herein by
reference).
|
|
10.17
*
|
Non-Employee
Director Restricted Stock Award Plan (filed as Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed March 15, 2006 and incorporated
herein by reference).
|
|
10.18
*
|
Notice
of Amendment to Grants and Awards, dated as of October 10, 2006 (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 10,
2006 and incorporated herein by reference).
|
|
10.19
*
|
Employment
Agreement, dated as of February 3, 2003, between Darling International
Inc. and Randall C. Stuewe (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed February 3, 2003, and incorporated herein by
reference).
|
|
10.20
*
|
Amendment
No. 1 to Employment Agreement, dated as of July 1, 2003, between Darling
International Inc. and Randall C. Stuewe (filed as Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q filed August 12, 2003, and
incorporated herein by reference).
|
|
10.21
*
|
Amendment
No. 2 to Employment Agreement, dated as of October 13, 2006, by and
between Darling International Inc. and Randall C. Stuewe (filed as Exhibit
10.1 to the Company’s Current Report on Form 8-K filed October 18, 2006
and incorporated herein by reference).
|
|
10.22
*
|
Amended
and Restated Employment Agreement, dated as of February 28, 2006, by and
among Darling International Inc., Darling National LLC and Mark A. Myers
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
May 17, 2006 and incorporated herein by
reference).
|
10.23
*
|
Form
of Senior Executive Termination Benefits Agreement (filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed November 29, 2007 and
incorporated herein by reference).
|
|
10.24
*
|
Form
of Indemnification Agreement between Darling International Inc. and its
directors and executive officers (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed February 25, 2008, and
incorporated herein by reference).
|
|
14
|
Darling
International Inc. Code of Business Conduct applicable to all employees,
including senior executive officers (filed as Exhibit 14 to the
Company’s Current Report on Form 8-K filed February 25, 2008, and
incorporated herein by reference).
|
|
21
|
Subsidiaries
of the Registrant (filed as Exhibit 21.1 to the Company’s Registration
Statement on Form S-4 filed on February 2, 2006, and incorporated herein
by reference).
|
|
23
|
Consent
of KPMG LLP (filed herewith).
|
|
31.1
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of Randall C. Stuewe, the Chief Executive Officer of the
Company (filed herewith).
|
|
31.2
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of John O. Muse, the Chief Financial Officer of the Company
(filed herewith).
|
|
32
|
Written
Statement of Chief Executive Officer and Chief Financial Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) (filed herewith).
|
|
The
Exhibits are available upon request from the Company.
|
||
*
|
Management
contract or compensatory plan or
arrangement.
|
DARLING
INTERNATIONAL INC.
|
|||
By:
|
/s/ Randall
C. Stuewe
|
||
Randall
C. Stuewe
|
|||
Chairman
of the Board and
|
|||
Chief
Executive Officer
|
|||
Date:
|
February
27, 2008
|
Signature
|
Title
|
Date
|
||||
/s/ Randall
C. Stuewe
|
Chairman
of the Board and
|
February
27, 2008
|
||||
Randall
C. Stuewe
|
Chief
Executive Officer
|
|||||
(Principal
Executive Officer)
|
||||||
/s/ John
O. Muse
|
|
Executive Vice President - |
February
27, 2008
|
|||
John
O. Muse
|
Finance
and Administration
|
|
||||
|
(Principal
Financial and Accounting Officer)
|
|||||
|
||||||
/s/ O.
Thomas Albrecht
|
Director
|
February
27, 2008
|
||||
O.
Thomas Albrecht
|
||||||
/s/ C.
Dean Carlson
|
Director
|
February
27, 2008
|
||||
C.
Dean Carlson
|
||||||
/s/ Marlyn
Jorgensen
|
Director
|
February
27, 2008
|
||||
Marlyn
Jorgensen
|
||||||
/s/ Charles
Macaluso
|
Director
|
February
27, 2008
|
||||
Charles
Macaluso
|
||||||
/s/ Michael
Urbut
|
Director
|
February
27, 2008
|
||||
Michael
Urbut
|
2.1
|
Asset
Purchase Agreement, dated as of December 19, 2005, among Darling
International Inc., Darling National LLC, and National By-Products LLC
(filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
December 19, 2005 and incorporated herein by
reference).
|
|
2.2
|
Claim
Purchase Agreement, dated as of October 12, 2006, by and between Darling
International Inc. and Trust Company of the West as trustee of the trust
established pursuant to an Individual Trust Agreement between the
Boilermaker-Blacksmith National Pension Trust and itself (filed as Exhibit
2.1 to the Company’s Current Report on Form 8-K filed October 18, 2006 and
incorporated herein by reference).
|
|
2.3
|
Amendment
No. 1 to Claim Purchase Agreement, dated as of December 31, 2006, by and
between Darling International Inc. and Trust Company of the West as
trustee of the trust established pursuant to an Individual Trust Agreement
between the Boilermaker-Blacksmith National Pension Trust and itself
(filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
January 3, 2007 and incorporated herein by reference).
|
|
3.1
|
Restated
Certificate of Incorporation of the Company, as amended (filed as Exhibit
3.1 to the Company’s Registration Statement on Form S-1 filed May 23, 2002
and incorporated herein by reference).
|
|
3.2
|
Amended
and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed August 13, 2007 and incorporated herein
by reference).
|
|
4.1
|
Specimen
Common Stock Certificate (filed as Exhibit 4.1 to the Company’s
Registration Statement on Form S-1 filed May 27, 1994 and incorporated
herein by reference).
|
|
4.2
|
Certificate
of Designation, Preference and Rights of Series A Preferred Stock (filed
as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed
May 23, 2002 and incorporated herein by reference).
|
|
10.1
|
Recapitalization
Agreement, dated as of March 15, 2002, among Darling International Inc.,
each of the banks or other lending institutions which is a signatory
thereto or any successor or assignee thereof, and Credit Lyonnais New York
Branch, individually as a bank and as agent (filed as Annex C to the
Company’s Definitive Proxy Statement filed on April 29, 2002, and
incorporated herein by reference).
|
|
10.2
|
First
Amendment to Recapitalization Agreement, dated as of April 1, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Annex D to the Company’s
Definitive Proxy Statement filed on April 29, 2002, and incorporated
herein by reference).
|
|
10.3
|
Second
Amendment to Recapitalization Agreement, dated as of April 29, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Exhibit 10.3 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
|
10.4
|
Registration
Rights Agreement, dated as of December 29, 1993, between Darling
International Inc., and the signatory holders identified therein (filed as
Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed on
May 27, 1994, and incorporated herein by reference).
|
|
10.5
|
Registration
Rights Agreement, dated as of May 10, 2002, between Darling International
Inc., and the holders identified therein (filed as Exhibit 10.6 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
|
10.6
|
*
|
Form
of Indemnification Agreement (filed as Exhibit 10.7 to the Company’s
Registration Statement on Form S-1 filed on May 27, 1994, and incorporated
herein by reference).
|
10.7
|
Credit
Agreement, dated as of April 7, 2006, among Darling International Inc.,
various lending institutions party thereto and JPMorgan Chase Bank, N.A.
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
|
10.8
|
First
Amendment to Note Purchase Agreement, dated as of April 7, 2006, among
Darling International Inc. and the securities purchasers party thereto
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
|
10.9
|
Leases,
dated July 1, 1996, between the Company and the City and County of San
Francisco (filed pursuant to temporary hardship exemption under cover of
Form SE).
|
|
10.10
|
Lease,
dated November 24, 2003, between Darling International Inc. and the Port
of Tacoma (filed as Exhibit 10.3 to the Company’s Annual Report on
Form 10-K filed March 29, 2004, and incorporated herein by
reference).
|
|
10.11
|
*
|
1994
Employee Flexible Stock Option Plan (filed as Exhibit 2 to the Company’s
Revised Definitive Proxy Statement filed on April 20, 2001, and
incorporated herein by reference).
|
10.12
|
*
|
Non-Employee
Directors Stock Option Plan (filed as Exhibit 10.13 to the Company’s
Registration Statement on Form S-1/A filed on June 5, 2002, and
incorporated herein by reference).
|
10.13
|
*
|
Darling
International Inc. 2004 Omnibus Incentive Plan (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed May 11, 2005, and
incorporated herein by reference).
|
10.14
|
*
|
Amendment
to Darling International Inc. 2004 Omnibus Incentive Plan (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 22,
2007 and incorporated herein by reference).
|
10.15
|
*
|
Darling
International Inc. Compensation Committee Long-Term Incentive Program
Policy Statement (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed June 22, 2005, and incorporated herein by
reference).
|
10.16
|
*
|
Integration
Success Incentive Award Plan (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed March 15, 2006 and incorporated herein by
reference).
|
10.17
|
*
|
Non-Employee
Director Restricted Stock Award Plan (filed as Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed March 15, 2006 and incorporated
herein by reference).
|
10.18
|
*
|
Notice
of Amendment to Grants and Awards, dated as of October 10, 2006 (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 10,
2006 and incorporated herein by reference).
|
10.19
|
*
|
Employment
Agreement, dated as of February 3, 2003, between Darling International
Inc. and Randall C. Stuewe (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed February 3, 2003, and incorporated herein by
reference).
|
10.20
|
*
|
Amendment
No. 1 to Employment Agreement, dated as of July 1, 2003, between Darling
International Inc. and Randall C. Stuewe (filed as Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q filed August 12, 2003, and
incorporated herein by reference).
|
|
10.21
|
*
|
Amendment
No. 2 to Employment Agreement, dated as of October 13, 2006, by and
between Darling International Inc. and Randall C. Stuewe (filed as Exhibit
10.1 to the Company’s Current Report on Form 8-K filed October 18, 2006
and incorporated herein by reference).
|
|
10.22
|
*
|
Amended
and Restated Employment Agreement, dated as of February 28, 2006, by and
among Darling International Inc., Darling National LLC and Mark A. Myers
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
May 17, 2006 and incorporated herein by reference).
|
|
10.23
|
*
|
Form
of Senior Executive Termination Benefits Agreement (filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed November 29, 2007 and
incorporated herein by reference).
|
10.24
|
*
|
Form
of Indemnification Agreement between Darling International Inc. and its
directors and executive officers (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed February 25, 2008, and
incorporated herein by reference).
|
|
14
|
Darling
International Inc. Code of Business Conduct applicable to all employees,
including senior executive officers (filed as Exhibit 14 to the Company’s
Current Report on Form 8-K filed February 25, 2008, and incorporated
herein by reference).
|
||
21
|
|
Subsidiaries
of the Registrant (filed as Exhibit 21.1 to the Company’s Registration
Statement on Form S-4 filed on February 2, 2006, and incorporated herein
by reference).
|
|
23
|
Consent
of KPMG LLP (filed herewith).
|
||
31.1
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of Randall C. Stuewe, the Chief Executive Officer of the
Company (filed herewith).
|
||
31.2
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of John O. Muse, the Chief Financial Officer of the Company
(filed herewith).
|
||
32
|
Written
Statement of Chief Executive Officer and Chief Financial Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) (filed herewith).
|
||
*
|
Management
contract or compensatory plan or
arrangement.
|