Darling Ingredients Inc. Cooks Up a Deceivingly Great Quarter

Though Darling Ingredients (DAR -1.27%) just announced a surprise net loss and lower revenue in its third quarter, investors rightly applauded the rendering and biodiesel specialist's results. Before we talk about why, let's take a look at Darling's headline numbers:

Darling Ingredients results: The raw numbers

Data Source: Darling Ingredients.

What happened with Darling Ingredients this quarter?

• Darling's net loss was a direct result of increased tax expense caused by a delay in the passage of extenders tax legislation.
• That legislation is expected to be passed in mid-December, and should be similar to last year's package, notably including the Biofuel Tax Credit and Look-Through Rule.
• Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $106.1 million was down from $117.2 million in last year's third quarter, but comparable on a currency-neutral basis. Adjusted EBITDA also saw sequential improvement from $105.5 million last quarter.
• Total debt was reduced by $75.8 million so far in 2015, up from $70 million at the end of last quarter.
• Feed Ingredients revenue was down 13.5%, to $525.2 million, and operating income was down 23.2%, to $35.6 million.
• Declines driven by lower finished-product prices for proteins, fats, and used cooking oil in the U.S., stabilizing prices in Europe.
• Price of proteins pressured as "large grain supplies and strong slaughter" resulted in market surpluses. At the same time, restaurant services improved spreads, and two new pet-food plants are now running and "well positioned" for next year.
• Food Ingredients revenue was down 10.7%, to $269.2 million, and operating income was down 17.7%, to $11.6 million.
• Driven by scheduled downtime at three gelatin plants to expand and modernize.
• Edible fats saw margins stabilize, and CTH (which primarily sells natural sausage casings) incurred an inventory writedown due to an Asian border closure.
• Fuel Ingredients revenue fell 15.2%, to $59.3 million, while operating income dropped 91.1%, to $246,000, excluding contributions from Darling's Diamond Green Diesel joint venture with Valero. 
• Hurt by foreign exchange, operational challenges at Ecoson that have since been resolved, and Canadian biofuels operations operating at a loss without tax credits.
• Including DGD, Fuel Ingredients segment loss was $12.1 million, similar to last quarter, due to "uncertain regulatory environment with respect to the U.S. mandated [renewable volume obligation] requirements" for 2015, and declining petroleum prices."
• Diamond Green Diesel remained strong, producing 41.5 million gallons of renewable diesel.
• Assuming the U.S. Biofuels Tax Extenders package is passed again this year, it will retroactively add around $20 million to Darling's share of income from the DGD joint venture in Q3.

What management had to say 
Darling CEO Randall Stuewe stated,

Despite a difficult pricing environment, we continued to execute in the third quarter on our long term strategy of building our global platform to create sustainable feed, food and fuel ingredients for a growing world population. [...] We remain confident that the reinstatement of the US Tax Extenders will retroactively deliver the blenders tax credit as expected. [...] Operationally, our global team continues to find ways to improve our cost structure and maintain our margins. Targets for working capital improvement, operating cost reductions and SG&A improvement are all being met. From a balance sheet perspective, we remain focused on delivering and setting the stage for future growth.

Looking forward 
Darling management doesn't usually provide specific financial guidance, and this quarter was no different. But they did reiterate their plans to continue both carefully managing costs, and deleveraging. Regarding the latter, Darling has set a goal of comfortably paying down between $125 million and $150 million in debt next year.

Investors are left with another solid quarterly performance from Darling as it works to improve its financial profile despite operating in a difficult market. When these markets begin to shift back in Darling's favor -- and assuming the relevant tax legislation passes as expected -- Darling should be better positioned than ever to return to sustained, profitable growth.