(Mark One)/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 28, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______
Commission File Number 0-24620
DARLING INTERNATIONAL INC.(Exact name of registrant as specified in its charter)
251 O'CONNOR RIDGE BLVD., SUITE 300, IRVING, TEXAS 75038(Address of principal executive offices)(972) 717-0300(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/
There were 62,325,368 shares of common stock, $0.01 par value, outstanding at August 7, 2003.
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DARLING INTERNATIONAL INC. AND SUBSIDIARIESFORM 10-Q FOR THE THREE MONTHS ENDED JUNE 28, 2003
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
PART II: OTHER INFORMATION
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DARLING INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETSJune 28, 2003 and December 28, 2002(in thousands, except shares and per share data)
June 28, December 28, 2003 2002 ---------- ------------ ASSETS (unaudited) - ------ Current assets: Cash and cash equivalents ................................... $ 15,261 $ 15,537 Accounts receivable ......................................... 23,154 24,099 Inventories ................................................. 8,917 7,006 Prepaid expenses ............................................ 7,118 4,975 Deferred income taxes ....................................... 2,637 3,659 Assets held for sale (note 10) .............................. 968 968 Other ....................................................... 44 63 --------- --------- Total current assets .................................... 58,099 56,307 Property, plant and equipment, less accumulated depreciation of $156,634 at June 28, 2003 and $153,029 at December 28, 2002 73,172 72,954 Collection routes and contracts, less accumulated amortization of $26,020 at June 28, 2003 and $23,956 at December 28, 2002 ..... 21,615 23,088 Goodwill, less accumulated amortization of $1,077 at June 28, 2003 and December 28, 2002 ......................................... 4,429 4,429 Deferred loan costs .............................................. 3,269 3,822 Other noncurrent assets .......................................... 2,529 2,312 --------- --------- $ 163,113 $ 162,912 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Current portion of long-term debt (note 6) .................. $ 7,813 $ 8,372 Accounts payable, principally trade ......................... 9,206 9,902 Accrued expenses ............................................ 31,168 28,567 Accrued interest ............................................ 266 314 --------- --------- Total current liabilities ............................... 48,453 47,155 Long-term debt, less current portion (note 6) .................... 53,778 60,067 Other non-current liabilities .................................... 7,129 7,518 Deferred income taxes ............................................ 2,637 3,659 --------- --------- Total liabilities ....................................... 111,997 118,399 --------- --------- Redeemable Preferred Stock, $0.01 par value, 1,000,000 shares authorized, 100,000 shares outstanding (notes 2 and 6) ........ 9,296 8,599 Stockholders' equity (note 6): Common stock, $0.01 par value; 100,000,000 shares authorized; 62,310,368 and 62,302,448 shares issued and outstanding at June 28, 2003 and at December 28, 2002, respectively ..... 623 623 Additional paid-in capital .................................. 74,055 74,747 Treasury stock, at cost; 21,000 shares at June 28, 2003 and December 28, 2002 ...................................... (172) (172) Accumulated comprehensive loss .............................. (3,907) (3,907) Accumulated deficit ......................................... (28,779) (35,377) --------- --------- Total stockholders' equity .............................. 41,820 35,914 --------- --------- Contingencies (note 3) $ 163,113 $ 162,912 ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONSThree Months and Six Months ended June 28, 2003 and June 29, 2002(in thousands, except per share data)(unaudited)
Three Months Ended Six Months Ended ---------------------------------------------------- June 28, June 29, June 28, June 29, 2003 2002 2003 2002 --------- ---------- --------- ---------- Net sales .................................................. $ 78,536 $ 60,189 $ 147,187 $ 118,868 --------- --------- --------- --------- Costs and expenses: Cost of sales and operating expenses .................. 60,033 44,623 111,083 88,367 Selling, general and administrative expenses .......... 8,879 8,285 17,399 15,443 Depreciation and amortization ......................... 3,623 3,937 7,280 8,025 --------- --------- --------- --------- Total costs and expenses ........................... 72,535 56,845 135,762 111,835 --------- --------- --------- --------- Operating income ................................... 6,001 3,344 11,425 7,033 --------- --------- --------- --------- Other income (expense): Interest expense ...................................... (419) (1,385) (911) (5,270) Other, net ............................................ (453) 746 130 1,493 --------- --------- --------- --------- Total other expense ............................... (872) (639) (781) (3,777) --------- --------- --------- --------- Income from continuing operations before income taxes ...... 5,129 2,705 10,644 3,256 Income taxes ............................................... (1,949) (1,358) (4,045) (1,372) --------- --------- --------- --------- Income from continuing operations ..................... 3,180 1,347 6,599 1,884 Discontinued operations Loss from discontinued operations, net of tax (note 11) - (98) - (52) --------- --------- --------- --------- Net income ................................................. 3,180 1,249 6,599 1,832 Preferred dividends and accretion (note 2) ............ (342) (255) (697) (255) --------- --------- --------- --------- Net income applicable to common shareholders .......... $ 2,838 $ 994 $ 5,902 $ 1,577 ========= ========= ========= ========= Basic income per share (note 2): Continuing operations ................................. $ 0.05 $ 0.03 $ 0.10 $ 0.06 Discontinued operations ............................... - - - - --------- --------- --------- --------- Total ............................................. $ 0.05 $ 0.03 $ 0.10 $ 0.06 ========= ========= ========= ========= Diluted income per share (note 2): Continuing operations ................................. $ 0.05 $ 0.03 $ 0.09 $ 0.06 Discontinued operations ............................... - - - - --------- --------- --------- --------- Total ............................................. $ 0.05 $ 0.03 $ 0.09 $ 0.06 ========= ========= ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWSSix Months ended June 28, 2003 and June 29, 2002(in thousands)(unaudited)
Six Months Ended --------------------------- June 28, June 29, 2003 2002 --------------------------- Cash flows from operating activities: Income from continuing operations ................................ $ 6,599 $ 1,884 Adjustments to reconcile net income to net cash provided by continuing operating activities: Depreciation and amortization ................................. 7,280 8,025 Gain on disposal of property, plant, equipment and other assets (11) (1,612) Gain on early extinguishment of debt .......................... (555) - Changes in operating assets and liabilities: Accounts receivable .......................................... 945 3,828 Inventories and prepaid expenses ............................. (4,054) (3,799) Accounts payable and accrued expenses ........................ 1,905 2,251 Accrued interest ............................................. 48 2,635 Other ........................................................ (248) (1,500) --------- --------- Net cash provided by continuing operations ............................ 11,909 11,712 Net cash provided by discontinued operations .......................... - 550 --------- --------- Net cash provided by operating activities ................ 11,909 12,262 --------- --------- Cash flows from investing activities: Capital expenditures ............................................. (4,876) (7,398) Business acquisitions ............................................ (1,131) - Gross proceeds from disposal of property, plant and equipment and other assets .............................................. 28 1,604 --------- --------- Net cash used by investing activities ................... (5,979) (5,794) --------- --------- Cash flows from financing activities: Proceeds from debt ............................................... 102,662 94,034 Payments on debt ................................................. (108,692) (98,339) Common and preferred stock issuance costs ........................ - (2,840) Paid in capital on common stock issued ........................... 4 - Contract payments ................................................ (180) (196) --------- --------- Net cash used by financing activities ................... (6,206) (7,341) --------- --------- Net decrease in cash and cash equivalents ............................. (276) (873) Cash and cash equivalents at beginning of period ...................... 15,537 3,668 --------- --------- Cash and cash equivalents at end of period ............................ $ 15,261 $ 2,795 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest ..................................................... $ 1,950 $ 2,635 ========= ========= Income taxes, net of refunds ................................. $ 2,772 $ 619 ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
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Notes to Consolidated Financial StatementsJune 28, 2003(unaudited)
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DARLING INTERNATIONAL INC. AND SUBSIDIARIESFORM 10-Q FOR THE THREE MONTHSENDED JUNE 28, 2003
PART I
The following discussion summarizes factors affecting the Company's results of operations for the three and six months ended June 28, 2003 and June 29, 2002, and information with respect to the liquidity and capital resources of the Company at June 28, 2003. The following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below under the heading "Forward Looking Statements" and elsewhere in this report, and under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 28, 2002, and in the Company's other public filings with the SEC. The following discussion should be read in conjunction with the Company's historical consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
Three Months Ended June 28, 2003 Compared to Three Months Ended June 29, 2002
GENERAL
The Company recorded income from continuing operations of $3.2 million for the second quarter of the fiscal year ending January 3, 2004 ("Fiscal 2003"), as compared to income from continuing operations of $1.3 million for the second quarter of the fiscal year ended December 28, 2002 ("Fiscal 2002"), an improvement of $1.9 million. Principal factors affecting these comparative results, which are discussed further in the following section were higher sales prices and lower interest expense, partially offset by higher raw material prices, higher energy expense, higher payroll and related benefits, and higher income tax expense.
NET SALES
The Company collects and processes animal by-products (fat, bones and offal) and used restaurant cooking oil to produce finished products of tallow, protein, and yellow grease. Sales are significantly affected by finished goods prices, quality of raw material, and volume of raw material. Net sales include the sales of produced finished goods, collection fees, grease trap services, and finished goods purchased for resale, which constitutes approximately 6.6% of total sales for the second quarter of Fiscal 2003 and approximately 7.6% of total sales for the second quarter of Fiscal 2002.
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During the second quarter of Fiscal 2003, net sales increased by $18.3 million (30.4%), to $78.5 million, as compared to $60.2 million during the second quarter of Fiscal 2002, primarily due to the following: 1) Increases in aggregate finished goods prices resulted in an $13.7 million increase in sales in the second quarter of Fiscal 2003, compared to the second quarter of Fiscal 2002, (average yellow grease prices increased 44.5%; average tallow prices increased 45.4%; and average protein prices decreased 1.5%); 2) Finished products purchased for resale increased $3.4 million; 3) Improved recovery of collection expenses, $0.8 million; and 4) Other net increase of $0.4 million.
COST OF SALES AND OPERATING EXPENSES
Cost of sales and operating expenses include prices paid to raw material suppliers, the cost of product purchased for resale, and the cost to collect and process raw material. The Company utilizes both fixed and formula pricing methods for the purchase of raw materials. Fixed prices are adjusted where possible for changes in competition and significant changes in market conditions. Raw materials purchased under formula prices are correlated with specific finished goods prices.
During the second quarter of Fiscal 2003, cost of sales and operating expenses increased $15.4 million (34.5%) to $60.0 million as compared to $44.6 million during the second quarter of Fiscal 2002 primarily as a result of: 1) Higher raw material prices of $6.8 million, which are due in part to higher finished product prices, which increase formula raw material pricing arrangements with raw material suppliers; 2) Higher finished products purchased for resale increased cost of sales $3.4 million; 3) Higher energy prices, $1.9 million; 4) Higher factory and collection payroll and related benefits of $1.4 million; 5) Higher fleet fuel expense, $0.4 million; 6) Higher sewage disposal expense of $0.4 million; 7) Higher insurance expense of $0.3 million; and 8) Other expense increased $0.8 million.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs were $8.9 million during the second quarter of Fiscal 2003, a $0.6 million increase from $8.3 million for the second quarter of Fiscal 2002, primarily due to increases in legal expenses of $0.3 million, marketing expenses of $0.1 million, and other increases of $0.2 million.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization charges decreased $0.3 million to $3.6 million during the second quarter of Fiscal 2003 as compared to $3.9 million during the second quarter of Fiscal 2002. The decrease is primarily due to various property and equipment assets becoming fully depreciated during Fiscal 2002 and Fiscal 2003.
INTEREST EXPENSE
Interest expense decreased $1.0 million from $1.4 million during the second quarter of Fiscal 2002 to $0.4 million during the second quarter of Fiscal 2003, primarily due to changes resulting from the effect of the provisions of SFAS 15 as it applies to the Company's May 13, 2002, Recapitalization Agreement (see note 6 to the consolidated financial statements included elsewhere herein), which reduced interest expense on bank debt by approximately $1.1 million, partially offset by higher bank and letter of credit fees included in interest expense of $0.1 million.
OTHER INCOME (EXPENSE)
Other income (expense) decreased $1.2 million from net other income of $0.7 million during the second quarter of Fiscal 2002 to net other expense of $0.5 million during the second quarter of Fiscal 2003, primarily due to gain on insurance proceeds received in excess of net book value of assets destroyed by fire at the Company's Norfolk, Nebraska plant of $0.7 million during the second quarter of Fiscal 2002, and other net expense of $0.5 million in the second quarter of Fiscal 2003.
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INCOME TAXES
The Company recorded income tax expense of $1.9 million during the second quarter of Fiscal 2003 based on its estimate of the effective tax rate for the entire year.
CAPITAL EXPENDITURES
The Company made capital expenditures of $2.2 million during the second quarter of Fiscal 2003 compared to capital expenditures of $3.8 million during the second quarter of Fiscal 2002, a decrease of $1.6 million, primarily due to capital investment in the expansion of the Company's Sioux City, Iowa plant location incurred in Fiscal 2002.
Six Months Ended June 28, 2003 Compared to Six Months Ended June 29, 2002
The Company recorded income from continuing operations of $6.6 million for the first six months of the fiscal year ending January 3, 2004 ("Fiscal 2003"), as compared to income from continuing operations of $1.9 million for the first six months of the fiscal year ended December 28, 2002 ("Fiscal 2002"), an improvement of $4.7 million. Principal factors affecting these comparative results, which are discussed further in the following section were higher sales prices and lower interest expense, partially offset by higher raw material prices, higher energy expense, higher payroll and related benefits, and higher income tax expense.
Net sales include the sales of produced finished goods, collection fees, grease trap services, and finished goods purchased for resale, which constitutes approximately 6.7% of total sales for the first six months of Fiscal 2003 and approximately 8.2% of total sales for the first six months of Fiscal 2002. During the first six months of Fiscal 2003, net sales increased by $28.3 million (23.8%), to $147.2 million, as compared to $118.9 million during the first six months of Fiscal 2002, primarily due to the following: 1) Increases in aggregate finished goods prices resulted in an $22.5 million increase in sales in the first six months of Fiscal 2003, compared to the first six months of Fiscal 2002 (average yellow grease prices increased 47.4%; average tallow prices increased 47.6%; and average protein prices decreased 1.9%); 2) Finished products purchased for resale increased $5.2 million; 3) Improved recovery of collection expenses, $1.4 million; and 4) Other net decreases of $0.8 million.
During the first six months of Fiscal 2003, cost of sales and operating expenses increased $22.7 million (25.7%) to $111.1 million as compared to $88.4 million during the first six months of Fiscal 2002 primarily as a result of: 1) Higher raw material prices of $9.3 million, which are due in part to higher finished product prices, which increase formula raw material pricing arrangements with raw material suppliers; 2) Higher finished products purchased for resale increased cost of sales $5.2 million; 3) Higher energy prices, $3.4 million; 4) Higher factory and collection payroll and related benefits of $2.2 million; 5) Higher fleet fuel expense, $0.8 million; 6) Higher insurance expense of $0.6 million; and 7) Other expense increased $1.2 million.
Selling, general and administrative costs were $17.4 million during the first six months of Fiscal 2003, a $2.0 million increase from $15.4 million for the first six months of Fiscal 2002, primarily due to increases in employee benefits of $1.0 million, increased legal expense of $0.4 million, increased professional fees of $0.3 million, and other increases of $0.3 million.
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Depreciation and amortization charges decreased $0.7 million to $7.3 million during the first six months of Fiscal 2003 as compared to $8.0 million during the first six months of Fiscal 2002. The decrease is primarily due to various property and equipment assets becoming fully depreciated during Fiscal 2002 and Fiscal 2003.
Interest expense decreased $4.4 million from $5.3 million during the first six months of Fiscal 2002 to $0.9 million during the first six months of Fiscal 2003, primarily due to changes resulting from the effect of the provisions of Statement 15 as it applies to the Company's May 13, 2002, Recapitalization Agreement (see note 6 to the consolidated financial statements included elsewhere herein), which reduced interest expense in Fiscal 2003 on bank debt by approximately $3.1 million, and due to forbearance fees accrued in the first six months of Fiscal 2002 of approximately $1.7 million, partially offset by higher amortization of deferred loan costs of $0.3 million and by higher letter of credit fees included in interest expense of $0.1 million.
Other income (expense) decreased $1.4 million from net other income of $1.5 million during the first six months of Fiscal 2002 to net other income of $0.1 million during the first six months of Fiscal 2003, primarily due to inclusion of a gain on extinguishment of debt of $0.6 million during the first six months of Fiscal 2003, which resulted from retirement of debt with a carrying value, net of related unamortized debt issuance costs, of $4.7 million and a cash payment of $4.1 million, due to SFAS 15 accounting, and other net expense of $0.5 million. Included in net other income in the first six months of Fiscal 2002 was a gain of $1.7 million resulting from insurance proceeds received in excess of net book value of assets destroyed by fire at the Company's Norfolk, Nebraska facility, and other net expense of $0.2 million.
The Company recorded income tax expense of $4.0 million during the first six months of Fiscal 2003 based on its estimate of the effective tax rate for the entire year.
The Company made capital expenditures of $4.9 million and acquired rendering and grease businesses for a net investment of approximately $1.1 million, which included machinery, equipment and routes during the first six months of Fiscal 2003 compared to capital expenditures of $7.4 million during the first six months of Fiscal 2002, a decrease of $1.4 million, primarily due to capital investment in the expansion of the Company's Sioux City, Iowa plant location incurred in Fiscal 2002.
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FINANCING, LIQUIDITY, AND CAPITAL RESOURCES
On May 13, 2002, the Company consummated a recapitalization and executed a new amended and restated Credit Agreement with its lenders. The Credit Agreement reflects the effect of applying the provisions of Statement of Financial Accounting Standards No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings ("SFAS 15"). SFAS 15 requires that the previously existing amount of debt owed by the Company to the lenders be reduced by the fair value of the equity interest granted and that no gain from restructuring the Company's bank debt be recognized. As a result the carrying amount of the term loan of $61.5 million exceeds its contractual amount of $52.0 million by $9.5 million at June 28, 2003. Interest expense on the remaining carrying amount of debt reported in our financial statements is based on a new effective interest rate (0.53% at June 28, 2003) that equates the present value of the future cash payment specified by the new terms of the term loan with the carrying amount of the debt, with the result that the effective interest rate is less than the contract rate because a portion of the future cash payment is applied in accordance with SFAS 15 to reduce the carrying amount of the debt, rather than being applied to and included in interest expense.
In connection with the Company's recapitalization and its entry into the Credit Agreement, the Company exchanged borrowings outstanding under its previous Credit Agreement, a portion of the accrued interest and commitment fees, and forbearance fees payable for 46,705,086 shares of newly issued common stock, equal to 75% of the Company's then total outstanding common stock on a fully diluted basis (exclusive of stock options issued and outstanding), and 100,000 shares of 6% cumulative redeemable Series A Preferred Stock with a liquidation preference of $100 per share and a face value of $10.0 million, recorded at a discount of approximately $1.9 million, resulting in a yield of 10%, which approximates the market yield at the date of issue. The term loan and the revolving credit facility (under which there were no borrowings at the date of the recapitalization) mature on May 10, 2007.
The Company's Credit Agreement consists of the following elements at June 28, 2003 (in thousands):
Substantially all assets of the Company are either pledged or mortgaged as collateral for borrowings under the Credit Agreement. The Credit Agreement contains certain terms and covenants, which, among other matters, restrict the incurrence of additional indebtedness, the payment of cash dividends, the retention of certain proceeds from sales of assets, and the annual amount of capital expenditures, and requires the maintenance of certain minimum financial ratios. As of June 28, 2003, no cash dividends could be paid to the Company's stockholders pursuant to the Credit Agreement.
The classification of long-term debt in the accompanying June 28, 2003 consolidated balance sheet is based on the contractual and excess cash flow repayment terms of the debt issued under the Credit Agreement pursuant to the recapitalization.
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On June 28, 2003, the Company had working capital of $9.6 million and its working capital ratio was 1.20 to 1 compared to working capital of $9.2 million and a working capital ratio of 1.19 to 1 on December 28, 2002. At June 28, 2003, the Company had unrestricted cash of $15.1 million and funds available under the revolving credit facility of $6.9 million.
Net cash provided by operating activities was $11.9 million and $12.3 million for the six months ended June 28, 2003 and June 29, 2002, respectively. Cash used by investing activities was $6.0 million for the six months ended June 28, 2003 compared to $5.8 million in the six months ended June 29, 2002. Net cash used by financing activities was $6.2 million in the six months ended June 28, 2003 compared to cash used of $7.3 million in the six months ended June 29, 2002, principally due to reductions of long-term debt.
Based upon current actuarial estimates, the Company does not expect any payments will be necessary in order to meet minimum pension funding requirements during Fiscal 2003. The minimum pension funding requirements are determined annually, based upon a third party actuarial estimate. The actuarial estimate may vary from year to year, due to fluctuations in return on investments or other factors beyond the control of management of the Company or the administrator of the Company's pension funds. No assurance can be given that the minimum pension funding requirements will not increase in the future.
The Company's management believes that cash flows from operating activities at the current level in Fiscal 2003, unrestricted cash, and funds available under the Credit Agreement should be sufficient to meet the Company's working capital needs and capital expenditures for at least the next 12 months.
The current economic environment in the Company's markets has the potential to adversely impact its liquidity in a variety of ways, including through reduced sales, potential inventory buildup, or higher operating costs.
The principal products that the Company sells are commodities, the prices of which are quoted on established commodity markets and are subject to volatile changes. Although the current market prices of these commodities are favorable, a decline in these prices has the potential to adversely impact the Company's liquidity. A disruption in international sales, a decline in commodities prices, or a rise in energy prices, resulting from the recent war with Iraq and the subsequent political instability and uncertainty, has the potential to adversely impact the Company's liquidity. There can be no assurance that a decline in commodities prices, a rise in energy prices, a slowdown in the U.S. or international economy, or other factors, including political instability in the Middle East or elsewhere, and the macroeconomic effects of those events, will not cause the Company to fail to meet management's expectations, or otherwise result in liquidity concerns.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The following table summarizes the Company's expected material contractual payment obligations, including both on- and off-balance sheet arrangements at June 28, 2003 (in thousands):
The Company's off-balance sheet contractual obligations and commercial commitments as of June 28, 2003 relate to operating lease obligations, letters of credit, forward purchase agreements, and employment agreements. The Company has excluded these items from the balance sheet in accordance with accounting principles generally accepted in the United States of America.
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The following table summarizes the Company's other commercial commitments, including both on- and off-balance sheet arrangements at June 28, 2003.
CRITICAL ACCOUNTING POLICIES
The Company follows certain significant accounting policies when preparing its consolidated financial statements. A complete summary of these policies is included in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 28, 2002.
Certain of the policies require management to make significant and subjective estimates or assumptions which may deviate from actual results. In particular, management makes estimates regarding the fair value of the Company's reporting units in assessing potential impairment of goodwill, estimates regarding future undiscounted cash flows from the future use of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, estimates regarding the net realizable value of long-lived assets held for sale, estimates regarding pension expense, estimates of bad debts and estimates regarding self insured risks including insurance, environmental and litigation contingencies.
In assessing impairment of goodwill, the Company uses estimates and assumptions in determining the estimated fair value of reporting units. In assessing the impairment of long-lived assets where there has been a change in circumstances indicating the carrying value of a long-lived asset may not be recoverable, the Company has estimated future undiscounted net cash flows from use of the asset based on actual historical results and expectations about future economic circumstances including future business volume, finished product prices and operating costs. The estimates of fair value of reporting units and of future net cash flows from use of the asset could change if actual prices and costs differ due to industry conditions or other factors affecting the level of business volume or the Company's performance. In assessing impairment of long-lived assets held for sale, the Company has estimated the net realizable value of such assets based on information from various external sources regarding possible selling prices for such assets. The estimate of reserve for bad debts is based upon the Company's bad debt experience, market conditions, aging of trade accounts receivable, and interest rates, among other factors. Pension expense is based upon actuarial estimates. These estimates could change based on changes in market conditions, interest rates, and other factors. In estimating liabilities for self insured risks, the Company considers information from outside consultants and experts, and past historical experience, in projecting future costs expected to be incurred. These estimates could change if future events are different than assumed by management, actual costs to settle the liabilities differ from those estimated and the circumstances associated with the self insured risks change.
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ACCOUNTING MATTERS
The Company adopted Statement of Financial Accounting Standard No. 143 ("SFAS 143"), Accounting for Asset Retirement Obligations,on December 29, 2002 (the first day of Fiscal 2003). The adoption of SFAS 143 did not have a material effect on the Company's financial statements.
The Company adopted Statement of Financial Accounting Standard No. 146 ("SFAS 146"), Accounting for Costs Associated with Exit or Disposal Activities, on December 29, 2002. The adoption of SFAS 146 did not have a material effect on the Company's financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. This Statement is effective for contracts entered into or modified and for hedging relationships designated after June 20, 2003. The Company will adopt the provisions of this standard in the third quarter of 2003 and does not expect the adoption of this standard to have an impact on the Company's consolidated financial statements.
The Company adopted Statement of Financial Accounting Standard No. 150 ("SFAS 150"), Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, on the first day of the third quarter of Fiscal 2003. The adoption of SFAS 150 will affect accounting for the Company's 100,000 shares of preferred stock outstanding, which was issued in May, 2002, has a carrying amount of $9.3 million and accumulated preferred stock dividends payable of $0.7 million at June 28, 2003, and was part of the Company's recapitalization discussed in Note 6, and elsewhere, herein. The Company's preferred stock contains a mandatory redemption feature which requires redemption of the preferred stock on May 10, 2007, at face value of the preferred stock of $10.0 million, plus accumulated preferred stock dividends payable. SFAS 150 requires that mandatory redeemable financial instruments, such as the Company's preferred stock, be reported as a liability rather than as a component of stockholders' equity. The Company has followed this accounting policy since the issuance of the preferred stock. SFAS 150 also requires that preferred stock dividends and accretion related to the preferred stock outstanding shall be included in interest expense, beginning in the third quarter of Fiscal 2003, on a prospective basis. Preferred stock dividends and accretion are estimated to be approximately $0.3 million and $0.3 million in the third and fourth quarters of Fiscal 2003, respectively, and are estimated to be approximately $1.2 million in Fiscal 2004. Accumulated preferred stock dividends payable are estimated to be approximately $3.4 million on May 10, 2007, if no cash payment of dividends occurs until the redemption date.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking" statements that involve risks and uncertainties. The words "believe," "anticipate," "expect," "estimate," "intend," and similar expressions identify forward-looking statements. All statements other than statements of historical facts included in the Quarterly Report on Form 10-Q, including, without limitation, the statements under the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 to the consolidated financial statements, and located elsewhere herein regarding industry prospects and the Company's financial position are forward-looking statements. Actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.
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In addition to those factors discussed elsewhere in this report, and in other public filings with the SEC, including, without limitation, under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 28, 2002, important factors that could cause actual results to differ materially from the Company's expectations include: the Company's continued ability to obtain sources of supply for its rendering operations; general economic conditions in the American, European and Asian markets; and prices in the competing commodity markets which are volatile and are beyond the Company's control. Among other things, future profitability may be affected by the Company's ability to grow its business which faces competition from companies which may have substantially greater resources than the Company.
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Market risks affecting the Company are exposures to changes in prices of the finished products the Company sells, interest rates on debt, availability of raw material supply, and the price of natural gas used in the Company's plants. Raw materials available to the Company are impacted by seasonal factors, including holidays, when raw material inage declines; warm weather, which can adversely affect the quality of raw material processed and finished products produced; and cold weather, which can impact the collection of raw material. Predominantly all of the Company's finished products are commodities which are generally sold at prices prevailing at the time of sale. The Company used, through June, 2002, interest rate and, through March, 2001, natural gas swaps, to manage these related risks. The Company is not party to any interest rate swap agreements subsequent to June, 2002. Beginning in April, 2001, the Company is using natural gas forward purchase agreements with its suppliers to manage the price risk of natural gas used in its facilities.
As of June 28, 2003, the Company has forward purchase agreements in place for purchases of approximately $4.2 million of natural gas for the months of July, August and September, 2003, which approximates 85% of the Company's usage for these months.
Evaluation of Disclosure Controls and Procedures. As required by Exchange Act Rule 13a-15(b), the Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. As defined in Exchange Act Rule 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls and procedures are controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. It should be noted that any system of controls, however well designed and operated, is based in part upon certain assumptions and can provide only reasonable, and not absolute, assurance that the objectives of the system are met.
Changes in Internal Control Over Financial Reporting. As required by Exchange Act Rule 13a-15(d), the Company's management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company's internal control over financial reporting to determine whether any change occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.
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PART II: Other Information
The matters voted upon at the annual meeting of stockholders held on May 13, 2003 were as follows:
The election of five directors to serve until the next annual meeting of stockholders or until their successors have been elected and qualified. The number of votes cast for and against the election of each nominee, as well as the number of abstentions and broker non-votes with respect to the election of each nominee, were as follows:
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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