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Article by DailyStocks_admin    (09-19-08 03:08 AM)

The Daily Magic Formula Stock for 09/18/2008 is Darling International Inc. According to the Magic Formula Investing Web Site, the ebit yield is 12% and the EBIT ROIC is 50-75%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

GENERAL

Founded by the Swift meat packing interests and the Darling family in 1882, Darling International Inc. (“Darling”) was incorporated in Delaware in 1962 under the name “Darling-Delaware Company, Inc.” On December 28, 1993, Darling changed its name from “Darling-Delaware Company, Inc.” to “Darling International Inc.” The address of Darling’s principal executive office is 251 O’Connor Ridge Boulevard, Suite 300, Irving, Texas, 75038, and its telephone number at this address is (972) 717-0300.

Darling is a leading provider of rendering, recycling and recovery solutions to the nation’s food industry. Darling collects and recycles animal by-products and used cooking oil from food service establishments and provides grease trap cleaning services to many of the same establishments. 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 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. The Company sells these products nationally and internationally, primarily to producers of oleo-chemicals, bio-fuels, soaps, pet foods, leather goods and livestock feed for use as ingredients in their products or for further processing. The Company’s business and operations in fiscal 2007 include 52 weeks of contribution from the assets acquired in the Transaction, as compared to 33 weeks of contribution from these assets in fiscal 2006.

Commencing in 1998, as part of an overall strategy to better commit financial resources, the Company’s operations were organized into two segments. These are: 1) Rendering, the core business of turning inedible food by-products from meat and poultry processors into high quality feed ingredients and fats for other industrial applications; and 2) Restaurant Services, a group focused on growing the grease collection business and grease collection equipment sales while expanding the line of services, which includes grease trap servicing, and the National Service Center (“NSC”), offered to food service establishments and food processors. 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. For the financial results of the Company’s business segments, see Note 15 of Notes to Consolidated Financial Statements.

PROCESSING OPERATIONS

The Company creates finished products primarily through the drying, grinding, separating and blending of its various raw materials. The process starts with the collection of animal processing by-products (fat, bones, feathers and offal) from meat packers, grocery stores, butcher shops, meat markets and food service establishments, as well as used cooking oil from food service establishments and grocery stores.

The animal processing by-products are ground and heated to extract water and separate oils from animal tissue as well as to make the material suitable as an ingredient for animal feed. Protein is separated from the cooked material by pressing the material, then grinding and sifting it through screens. The separated tallow is centrifuged and/or refined for purity. The primary finished products derived from the processing of animal by-products are tallow and protein. Other by-products include feather meal and blood meal. Used cooking oil from food service establishments is processed under a separate procedure that involves heat processing and settling, as well as refining, resulting in derived yellow grease, feed-grade animal fat or oleo-chemical feedstocks.

PURCHASE AND COLLECTION OF RAW MATERIALS

The Company operates a fleet of approximately 970 trucks and tractor-trailers to collect raw materials from approximately 115,000 food service establishments, butcher shops, grocery stores and independent meat and poultry processors. The raw materials collected are manufactured into the finished products sold by the Company. The Company replaces or upgrades its vehicle fleet as needed to maintain efficient operations.

Rendering materials are collected in one of two manners. Certain large suppliers, such as large meat processors and poultry processors, are furnished with bulk trailers in which the raw material is loaded. The Company transports these trailers directly to a processing facility. Certain of the Company’s rendering facilities are highly dependent on one or a few suppliers. Should any of these suppliers choose alternate methods of disposal, cease their operations, have their operations interrupted by casualty or otherwise cease using the Company’s collection services, these operating facilities would be materially and adversely affected. The Company provides the remaining suppliers, primarily grocery stores and butcher shops, with containers in which to deposit the raw material. The containers are picked up by or emptied into Company trucks on a periodic basis. The type and frequency of service is determined by individual supplier requirements, the volume of raw material generated by the supplier, supplier location and weather, among other factors.

Used cooking oil from food service establishments is placed in various sizes and types of containers which are supplied by the Company. In some instances, these containers are loaded directly onto the trucks, while in other instances the oil is pumped through a vacuum hose into the truck. The Company also sells a container for used cooking oil collection to food service establishments called CleanStar ® , which is a proprietary self-contained collection system that is housed either inside or outside the establishment, with the used cooking oil pumped directly into collection vehicles via an outside valve. The frequency of all forms of raw material collection is determined by the volume of oil generated by the food service establishment.

The raw materials collected by the Company are transported either directly to a processing plant or to a transfer station where materials from several collection routes are loaded into trailers and transported to a processing plant. Collections of animal processing by-products generally are made during the day, and materials are delivered to plants for processing within 24 hours of collection to deter spoilage. Collection of used cooking oil can be made at any time of the day or night, depending on supplier preference; these materials may be held for longer periods of time before processing. Depending on market conditions, the Company charges a collection fee to offset a portion of the expense incurred in collecting raw material.

During the 2007 fiscal year, the Company’s largest single supplier accounted for approximately 5% of the total raw material processed by the Company, and the 10 largest raw materials suppliers accounted for approximately 25% of the total raw material processed by the Company. For a discussion of the Company’s competition for raw materials, see “Competition.” Many of the Company’s suppliers supply raw material under long-term supplier agreements. While the Company does not anticipate problems in the availability or supply of raw material in the future, a significant decrease in raw material volume could materially and adversely affect the Company’s business and results of operations.


RAW MATERIALS PRICING

The Company has two primary pricing arrangements with its raw materials suppliers. Approximately 57% of the Company's annual volume of raw materials is acquired on a "formula" basis. Under a formula arrangement, the charge or credit for raw materials is tied to published finished product commodity prices after deducting a fixed service charge. The Company acquires the remaining annual volume of raw material under "non-formula" arrangements whereby suppliers are either paid a fixed price, are not paid, or are charged for the expense of collection, depending on various economic and competitive factors.

The credit received or amount charged for raw material under both formula and non-formula arrangements is based on various factors, including the type of raw materials, the expected value of the finished product to be produced, the anticipated yields, the volume of material generated by the supplier and processing and transportation costs. Competition among processors to procure raw materials also affects the price paid for raw materials. See "Competition."

Formula prices are generally adjusted on a weekly, monthly or quarterly basis while non-formula prices or charges are adjusted as needed to respond to changes in finished product prices or related operating costs.


FINISHED PRODUCTS

The finished products that result from processing of animal by-products are oils, primarily BFT and YG; MBM, a protein; and hides. Oils are used as ingredients in the production of pet food, animal feed, soaps and as a substitute for traditional fuels. Oleo-chemical producers use these oils as feedstocks to produce specialty ingredients used in paint, rubber, paper, concrete, plastics and a variety of other consumer and industrial products. MBM is used primarily as a high protein additive in pet food and animal feed. Hides are sold to leather distributors and manufacturers for the production of leather goods.

Predominantly all of the Company's finished products are commodities or are priced relative to these commodities. While the Company's finished products are generally sold at prices prevailing at the time of sale, the Company’s ability to deliver large quantities of finished products from multiple locations and to coordinate sales from a central location enables the Company to occasionally receive a premium over the then-prevailing market price.


MARKETING, SALES AND DISTRIBUTION OF FINISHED PRODUCTS

The Company sells its finished products worldwide. Commodity sales are primarily managed through the Company's commodity trading department which is headquartered in Irving, Texas. The Company also maintains sales offices in Des Moines, Iowa and Los Angeles, California for the sale and distribution of selected products. This sales force is in contact with several hundred customers daily and coordinates the sale and assists in the distribution of most finished products produced at the Company's processing plants. The Company sells its finished products internationally through commodities brokers, Company agents and directly to customers, in various countries.

The Company has no material foreign operations, but exports a portion of its products to customers in various foreign countries or regions including Asia, the Pacific Rim, North Africa, Mexico and South America. Total export sales were $171.6 million, $112.7 million and $77.6 million for the years ended December 29, 2007, December 30, 2006 and December 31, 2005, respectively. The level of export sales varies from year to year depending on the relative strength of domestic versus overseas markets. The Company obtains payment protection for most of its foreign sales by requiring payment before shipment or by requiring bank letters of credit or guarantees of payment from U.S. government agencies. The Company ordinarily is paid for its products in U.S. dollars and has not experienced any material currency translation losses or any material foreign exchange control difficulties. See Note 15 of Notes to Consolidated Financial Statements for a breakdown of the Company’s sales by country.

Following diagnosis of the first U.S. case of bovine spongiform encephalopathy (“BSE”) on December 23, 2003, many countries banned imports of U.S.-produced beef and beef products, including MBM and initially BFT, though this initial ban on tallow was relaxed to permit imports of U.S.-produced tallow with less than 0.15% impurities. As of February 18, 2008, most foreign markets that were closed to U.S. beef following the discovery of the first U.S. case of BSE had been reopened, although Japan only permits imports of U.S. beef from cattle 20 months of age or younger at slaughter. South Korea, which previously permitted U.S. boneless beef from cattle 30 months of age or younger to be imported, suspended such imports on October 5, 2007. Export markets for MBM containing beef material produced in the U.S. have remained closed with the exception of the Indonesia market, which is now open for MBM and has made an impact upon MBM prices especially on the West Coast of the U.S.

The Company’s management monitors market conditions and prices for its finished products on a daily basis. If market conditions or prices were to significantly change, the Company’s management would evaluate and implement any measures that it may deem necessary to respond to the change in market conditions. For larger formula-based pricing suppliers, the indexing of finished product price to raw material cost effectively fixes the gross margin on finished product sales at a stable level, providing some protection to the Company from price declines.

Finished products produced by the Company are distributed primarily by truck and rail from the Company's plants shortly following production. While there are some temporary inventory accumulations at various port locations for export shipments, inventories rarely exceed three weeks’ production and, therefore, the Company uses limited working capital to carry inventories and reduces its exposure to fluctuations in commodity prices. Other factors that influence competition, markets and the prices that the Company receives for its finished products include the quality of the Company's finished products, consumer health consciousness, worldwide credit conditions and U.S. government foreign aid. From time to time, the Company enters into arrangements with its suppliers of raw materials pursuant to which these suppliers buy back the Company’s finished products.


COMPETITION

Management of the Company believes that the most competitive aspect of the business is the procurement of raw materials rather than the sale of finished products. During the last ten plus years, pronounced consolidation within the meat packing industry has resulted in bigger and more efficient slaughtering operations, the majority of which utilize “captive” processors (rendering operations integrated with the meat or poultry packing operation). Simultaneously, the number of small meat packers, which have historically been a dependable source of supply for non-captive processors, has decreased significantly. Although the total amount of slaughtering may be flat or only moderately increasing, the availability, quantity and quality of raw materials available to the independent processors from these sources have all decreased. These factors have been offset, in part, however, by increasing environmental consciousness. The need for food service establishments to comply with environmental regulations concerning the proper disposal of used restaurant cooking oil is offering a growth area for this raw material source. The rendering and restaurant services industries are highly fragmented and very competitive. The Company competes with other rendering and restaurant services businesses and alternative methods of disposal of animal processing by-products and used restaurant cooking oil provided by trash haulers, waste management companies and bio-diesel companies, as well as the alternative of illegal disposal. Major competitors for the collection of raw material include: Baker Commodities in the West and Griffin Industries in Texas and the Southeast. Each of these businesses competes in both the Rendering and Restaurant Services segments. Another major competitor in the restaurant services business is Restaurant Technologies, Inc.

In marketing its finished products domestically and abroad, the Company faces competition from other processors and from producers of other suitable commodities. Tallows and greases are, in certain instances, substitutes for soybean oil and palm stearine, while MBM is a substitute for soybean meal. Consequently, the prices of tallow, yellow grease and MBM correlate with these substitute commodities. The markets for finished products are impacted mainly by the worldwide supply of and demand for fats, oils, proteins and grains.


SEASONALITY

The amount of raw materials made available to the Company by its suppliers is relatively stable on a weekly basis except for those weeks which include major holidays, during which the availability of raw materials declines because major meat and poultry processors are not operating. Weather is also a factor. Extremely warm weather adversely affects the ability of the Company to make higher quality products because the raw material deteriorates more rapidly than in cooler weather, while extremely cold weather, in certain instances, can hinder the collection of raw materials. Weather can vary significantly from one year to the next and may impact comparability of operating results of the Company between periods.

INTELLECTUAL PROPERTY

The Company maintains valuable trademarks, service marks, copyrights, trade names, trade secrets, proprietary technologies and similar intellectual property, and considers its intellectual property to be of material value. The Company has registered or applied for registration of certain of its intellectual property, including the tricolor triangle used in the Company’s signage and logos and the names "Darling," "Darling Restaurant Services" and "CleanStar." Company policy generally is to pursue intellectual property protection considered necessary or advisable.


EMPLOYEES AND LABOR RELATIONS

As of December 29, 2007, the Company employed approximately 1,880 persons full-time. Approximately 45.7% of the total number of employees are covered by collective bargaining agreements; however, the Company has no national or multi-plant union contracts. Management believes that the Company’s relations with its employees and their representatives are good. There can be no assurance, however, that new agreements will be reached without union action or will be on terms satisfactory to the Company.


REGULATIONS

The Company is subject to the rules and regulations of various federal, state and local governmental agencies. Material rules and regulations and the applicable agencies include:



The Food and Drug Administration (“FDA”), which regulates food and feed safety. Effective August 1997, the FDA promulgated a rule prohibiting the use of mammalian proteins, with some exceptions, in feeds for cattle, sheep and other ruminant animals (21 CFR 589.2000, referred to herein as the “BSE Feed Rule”). 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.

Interim regulations published by the FDA in 2004 and amended in 2006 prohibit: 1) specified risk materials (“SRM”) from human food and 2) SRM and materials from non-ambulatory or dead cattle from cosmetics. Edible BFT that is either derived from SRM-free raw materials or contains less than 0.15% insoluble impurities are permitted in human food supplements and cosmetics. Derivatives of BFT (glycerin and fatty acids) are exempt from these regulations.

See Item 1A “Risk Factors – The Company’s business may be affected by the impact of BSE and other food safety issues,” for more information regarding certain FDA rules that affect the Company’s business, including a proposed amendment to the BSE Feed Rule.




The United States Department of Agriculture (“USDA”), which regulates collection and production methods. Within the USDA, two agencies exercise direct regulatory oversight of the Company’s activities:



– Animal and Plant Health Inspection Service (“APHIS”) certifies facilities and claims made for exported materials, and



– Food Safety Inspection Service (“FSIS”) regulates sanitation and food safety programs.

On December 30, 2003, the Secretary of Agriculture announced new beef slaughter/meat processing regulations to assure consumers of the safety of the meat supply. These regulations prohibit non-ambulatory animals from entering the food chain, require removal of SRM at slaughter and prohibit carcasses from cattle tested for BSE from entering the food chain until the animals are shown negative for BSE.




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.

These material rules and regulations and other rules and regulations promulgated by other agencies may influence the Company’s operating results at one or more facilities.

CEO BACKGROUND

Randall C. Stuewe
45
Mr. Stuewe has served as our Chairman and Chief Executive Officer since February 2003. From 1996 to 2002, Mr. Stuewe worked for ConAgra Foods, Inc. as executive vice president and most recently as president of Gilroy Foods. Prior to serving at ConAgra Foods, he spent twelve years in management, sales and trading positions at Cargill, Incorporated.

O. Thomas Albrecht
61
Mr. Albrecht was employed by McDonald’s Corporation from 1977 until his retirement in March 2001. Most recently, from 1995 until March 2001, Mr. Albrecht served as a senior vice president and chief purchasing officer of McDonald’s Corporation. Since March 1, 2007, Mr. Albrecht has served as President of R&J Construction Supply, Inc. Mr. Albrecht has served as a director of our company since May 2002.

C. Dean Carlson
70
Mr. Carlson served as chairman of National By-Products, LLC (“NBP”) from January 1990 until May 2006. He also served as NBP’s President and Chief Executive Officer from January 1990 until January 2001. He served in several other positions at NBP from 1964 through 1989. Mr. Carlson has served as a director of our company since May 2006.

Marlyn Jorgensen
68
Mr. Jorgensen served as a director of NBP from 1990 until May 2006. Since 1974, Mr. Jorgensen has been a member of the American Soybean Association and served as its president in 1990. He is also a member of the Iowa Farm Bureau and Iowa Producers Cooperative, in each of which he has held numerous positions. Mr. Jorgensen has served as a director of our company since May 2006.

Charles Macaluso
64
Since 1998, Mr. Macaluso has been a principal of Dorchester Capital, LLC, a management consulting and corporate advisory service firm focusing on operational assessment, strategic planning and workouts. From 1996 to 1998, he was a partner at Miller Associates, Inc., a workout, turnaround partnership focusing on operational assessment, strategic planning and crisis management. Mr. Macaluso currently serves as a director of the following companies: Global Crossing Ltd. (NYSE: GX), where he serves on the audit committee; Lazy Days RV SuperCenters, Inc., where he serves on the audit committee; GEO Specialty Chemicals, where he serves as the chairman of the board and a member of the audit committee; and Global Power Equipment Group Inc., where he serves as chairman of the board. Mr. Macaluso has served as a director of our company since May 2002.

John D. March
60
Mr. March was employed by Cargill, Incorporated from 1971 until his retirement in December 2007, where he held a variety of managerial positions throughout his career. Most recently, from January 2000 until April 2008, Mr. March served as Corporate Vice President Platform Leader – Cargill Grain and Oilseed Supply Chain; Cargill Food Ingredients – North America. Mr. March currently serves as a director of BioFuel Energy Corp. Mr. March has served as a director of our company since March 2008.


Michael Urbut
59
Mr. Urbut has served as a director of FSB Global Holdings, Inc. or its predecessor Fresh Start Bakeries, Inc. since May 1999 and currently serves as chair of its audit committee. Previous to 1999, Mr. Urbut worked in various management capacities at several foodservice-related companies. Mr. Urbut has served as a director of our company since May 2005.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

The Company is a leading provider of rendering, recycling and recovery solutions to the nation’s food industry. The Company collects and recycles animal by-products and used cooking oil from food service establishments and provides grease trap cleaning services to many of the same establishments. The Company’s operations are organized into two segments: Rendering and Restaurant Services. With the May 15, 2006 acquisition of substantially all of the assets (the “Transaction”) of National By-Products, LLC (“NBP”), the Company now processes such raw materials at 39 facilities located throughout the U.S. into finished products such as protein (primarily meat and bone meal, “MBM”), tallow (primarily bleachable fancy tallow, “BFT”), yellow grease (“YG”) and hides. The Company sells these products nationally and internationally, primarily to producers of oleo-chemicals, bio-fuels, soaps, pet foods, leather goods and livestock feed for use as ingredients in their products or for further processing. The Company’s year end results for fiscal 2007 include 52 weeks of contribution from the assets acquired in the Transaction, as compared to 33 weeks of contribution from these assets in fiscal 2006. For additional information on the Company’s business, see Item 1, “Business,” and for additional information on the Company’s segments, see Note 15 of Notes to Consolidated Financial Statements.

During fiscal 2007 the Company benefited from significantly higher finished product prices. 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. Raw material volumes improved modestly during fiscal 2007, but export markets in most foreign countries for U.S. produced finished beef products and cattle by-products remained closed. Fiscal 2007 also reflects the integration and resulting synergies of the Transaction completed on May 15, 2006. The Company continues to face challenges relating to volatile commodity markets, volatile natural gas and diesel prices and unsettled trade issues in relation to beef production and exports of its finished products.

Operating income increased by $61.4 million in fiscal 2007 compared to fiscal 2006. The continuing challenges faced by the Company indicate there can be no assurance that operating results achieved by the Company in fiscal 2007 are indicative of future operating performance of the Company.


Summary of Critical Issues Faced by the Company during Fiscal 2007



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.


Summary of Critical Issues and Known Trends Faced by the Company in Fiscal 2007 and Thereafter

BSE and Other Food Safety Issues

Effective August 1997, the FDA promulgated the BSE Feed Rule prohibiting the use of mammalian proteins, with some exceptions, in feeds for cattle, sheep and other ruminant animals. The intent of this rule is to prevent the spread of BSE, commonly referred to as “mad cow disease.” As previously noted, the FDA has proposed an amendment to the BSE Feed Rule. Management has followed this proposed amendment throughout its history in order to assess and minimize the impact of its implementation on the Company. See the risk factor entitled “The Company’s business may be affected by the impact of BSE and other food safety issues,” beginning on page 11, for more information about BSE, including the proposed amendment to the BSE Feed Rule, and other food safety issues and their potential effects on the Company, including the effects of potential additional government regulations, finished product export restrictions by foreign governments, market price fluctuations for finished goods, reduced demand for beef and beef products by consumers and increases in operating costs resulting from BSE-related concerns.

Even though the export markets for U.S. beef have been significantly re-opened, most of these markets remain closed to MBM derived from U.S. beef. Continued concern about BSE in the U.S. may result in additional regulatory and market related challenges that may affect the Company’s operations and/or increase the Company’s operating costs.


Other Critical Issues and Challenges



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.

These challenges indicate there can be no assurance that fiscal 2007 operating results are indicative of future operating performance of the Company.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Three Months Ended June 28, 2008 Compared to Three Months Ended June 30, 2007


Summary of Key Factors Impacting Second Quarter 2008 Results:

Principal factors that contributed to a $22.3 million increase in operating income, which are discussed in greater detail in the following section, were:




Higher finished product prices.

These increases were partially offset by:




Higher raw material costs, and



Higher energy costs, primarily related to natural gas and diesel fuel.


Summary of Key Indicators of 200 8 Performance:

Principal indicators which management routinely monitors and compares to previous periods as an indicator of problems or improvements in operating results include:




Finished product commodity prices,



Raw material volume,



Production volume and related yield of finished product, and



Collection fees and collection operating expense.

These indicators and their importance are discussed below in greater detail.


Prices for finished product commodities that the Company produces are quoted each business day on the Jacobsen index, an established trading exchange price publisher. These finished products are MBM, BFT and YG. The prices quoted are for delivery of the finished product at a specified location. These prices are relevant because they provide an indication of a component of revenue and achievement of business plan benchmarks on a daily basis. The Company’s actual sales prices for its finished products may vary significantly from the Jacobsen index because the Company’s finished products are delivered to multiple locations in different geographic regions which utilize different price indexes. Average Jacobsen prices (at the specified delivery point) for the second quarter of fiscal 2008 compared to average Jacobsen prices for the second quarter of fiscal 2007 follow:

The increases in average price of the finished products the Company sells had a favorable impact on revenue that was partially offset by a negative impact to the Company’s raw material cost resulting from formula pricing arrangements, which compute raw material cost based upon the price of finished product.

Raw material volume represents the quantity (pounds) of raw material collected from suppliers, including beef, pork, poultry and used cooking oils. Raw material volumes provide an indication of future production of finished products available for sale and are a component of potential future revenue.

Finished product production volumes are the end result of the Company’s production processes, and directly impact goods available for sale and thus become an important component of sales revenue. Yield on production is a ratio of production volume (pounds) divided by raw material volume (pounds), and provides an indication of effectiveness of the Company’s production process. Factors impacting yield on production include quality of raw material and warm weather during summer months, which rapidly degrades raw material.

Natural gas and heating oil commodity prices are quoted each day on the NYMEX exchange for future months of delivery of natural gas and diesel fuel. The prices are important to the Company because natural gas and diesel fuel are major components of factory operating and collection costs and natural gas and diesel fuel prices are an indicator of achievement of the Company’s business plan.

The Company charges collection fees, which are included in net sales in order to offset a portion of the expense incurred in collecting raw material. Each month the Company monitors both the collection fee charged to suppliers, which is included in net sales, and collection expense, which is included in cost of sales. The importance of monitoring collection fees and collection expense is that they provide management an indication of achievement of the Company’s business plan.


Net Sales. The Company collects and processes animal by-products (fat, bones and offal), including hides, and used restaurant cooking oil to produce finished products of MBM, BFT and YG and hides. Sales are significantly affected by finished goods prices, quality and mix of raw material, and volume of raw material. Net sales include the sales of produced finished goods, collection fees, fees for grease trap services and finished goods purchased for resale.

During the second quarter of f iscal 200 8 , net sales increased by $ 61.5 million ( 38.6 %) to $ 220.9 million as compared to $ 159.4 million during the second quarter of f iscal 200 7 . The increase in net sales was primarily due to the following (in millions of dollars):

Cost of Sales and Operating Expenses. Cost of sales and operating expenses include cost of raw material, the cost of product purchased for resale, and the cost to collect raw material, which includes diesel fuel and processing costs including natural gas. The Company utilizes both fixed and formula pricing methods for the purchase of raw materials. Fixed prices are adjusted where possible for changes in competition and significant changes in finished goods market conditions, while raw materials purchased under formula prices are correlated with specific finished goods prices. Energy costs, particularly diesel fuel and natural gas, are significant components of the Company’s cost structure. The Company has the ability to burn alternative fuels at a majority of its plants to help manage the Company’s price exposure to volatile energy markets.

During the second quarter of fiscal 2008, cost of sales and operating expenses increased $39.4 million (32.3%) to $161.3 million as compared to $121.9 million during the second quarter of fiscal 2007.

Depreciation and Amortization. Depreciation and amortization charges were $5.8 million during the second quarter of fiscal 2008 and fiscal 2007, respectively.

Interest Expense. Interest expense was $0.8 million during the second quarter of fiscal 2008 compared to $1.3 million during the second quarter of fiscal 2007, a decrease of $0.5 million, primarily due to a decrease in the balance related to the Company’s outstanding debt.

Other Income/Expense. Other income was $0.1 million in the second quarter of fiscal 2008, compared to other expense of $0.1 million during the second quarter of fiscal 2007. The decrease in other expense is primarily due to increased interest income as a result of more cash included in interest bearing accounts and decreases in other non-operating expenses.

Income Taxes. The Company recorded income tax expense of $15.0 million for the second quarter of fiscal 2008, compared to $6.5 million recorded in the second quarter of fiscal 2007, an increase of $8.5 million, primarily due to increased pre-tax earnings of the Company in fiscal 2008. The effective tax rate for the second quarter of fiscal 2008 is 38.4% and differs from the statutory rate of 35% due to state income taxes. The effective rate for the second quarter of fiscal 2007 of 40.6% differs from the statutory rate of 35% primarily due to state taxes and nondeductible expense limitations for income tax purposes.

CONF CALL

Brad Phillips

Good morning, ladies and gentlemen. Thank you for joining us to review Darling's fourth quarter and full fiscal 2007 earnings results.

We issued our 2007 fourth quarter and year end earnings results as yesterday afternoon and if you do not have a copy the release can be found on our website at www.darlingii.com.

Randal Stuewe, our Chairman and CEO, will begin today's call with an overview of our fourth quarter and full year financial performance and some of the trends that impacted our results.

John Muse, Executive Vice President, Finance and Administration, will then provide you with some additional details about our financial results. Randy will conclude the prepared portion of the call with some general remarks about the business, after which time we will be happy to answer your questions.

Before we begin, I would like to remind everyone that this conference call contains certain forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties regarding the business operations of Darling and the industry in which it operates. These statements are identified by words such as may, will, begin, look forward, expect, believe, intend, anticipate, should, estimate, continue and other words referring to events to occur or circumstances to occur in the future.

These statements reflect Darling's current view of current events and are based on its assessment of and are subject to a variety of risks and uncertainties beyond its control, including business and economic conditions in its existing markets that can cause actual results to differ materially from those projected in such forward-looking statements.

Other risks and uncertainties regarding Darling, its business and the industry in which it operates are referenced from time to time in the company's filings with the Securities and Exchange Commission. Darling is under no obligation to and expressly disclaims any such obligations to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

With that, I would now like to turn the call over to Randy.

Randal Stuewe

Thanks Brad. Good morning, everybody, and thanks for joining us today. It's my pleasure to welcome you to our conference call to discuss our recently released financial results for the fourth quarter and for our year ending 2007. We are very pleased to report a solid finish to our fiscal year 2007, as we achieved record net income of $44.5 million or $0.56 per share. We leveraged the momentum we build throughout the year and capped it off with a record fourth quarter EBITDA.

Key contributors impacting our successful year were strong raw material volumes, higher finished product prices, the inclusion of full year of operations for national byproducts and the resulting synergies, and continued customer growth in the restaurant services segment.

Let me provide you with some high level detail on the fourth quarter. Our earnings improvement was primarily the result of higher finished product prices and stronger than expected raw material volumes. Additionally, we received the needed clarification from the IRS to be able to realize a $1.2 million gain from the alternative fuel mixture tax credit. This resulted from our prior use of fats and grease in our boilers at our plants. However, this increase was partially offset by a $2.2 million charge, related to the company's decision to settle a litigation matter involving a contract dispute.

For the year, the company benefited from significantly higher finished product prices as the corresponding commodities remained strong throughout the year. These higher prices are indicative of tightening grain and oil seeds situations driven primarily by a combination of things. First, new global bio-fuel demands, second growing consumption from China and India and third weather related issues that affected various grain producing regions throughout the world.

Interestingly enough, our fats prices were relatively flat after the first quarter but the proteins prices improved steady throughout the year. While currently we are at a historical high for some grains and oil seeds, the reality is that our product prices have lagged and are only beginning to show signs of strength.

Raw material volumes improved modestly throughout the year and were primarily results from an improvement in hog and cattle slaughter, with incremental tonnage coming from integrated packers, an increase in dead stock due to extreme weather conditions in the Mid-West, a foreseen virus that attacks stocks and provides dead stock to our Iowa plants and strong poultry tonnage on the West Coast.

Our restaurant services group continues to make progress by adding new customers and services. We are pleased to announce that we have recently been named as an improved nationwide vendor to the McDonald's restaurants system for both cooking oil and nationwide grease trap service. Additionally, our grease strap business has made substantial progress in leveraging our position and improving margins.

Now, taking a look at commodities; extremely favorable commodity markets continue and the commodity futures markets for soybean oil, soybean meal, and corn reflect continued strength throughout 2008. We expect volatility to remain high as final acreage tallies, plantings, and ultimate crop production conditions will remain in flux.

Before, I turn the call over to John for his more detailed review of our financial results I'd like to update you on the progress we've made towards our future investment strategy in the Renewable Fuels area.

As we've commented on previous calls, we've been methodical in our evaluation of potential technologies available to process our feedstock. Recent legislation mandating biofuel use by the petroleum industry has created new interest in our supply chain. Our development work using our various feed stocks has been completed, and we continue to make progress towards identifying partners and potential plant locations. We will continue to be patient and will fully evaluate all our options before finalizing an investment strategy and moving forward into this industry.

Needless to say, we are enthusiastic as ever about the potential opportunities that renewable fuel brings to Darling. While final Congressional decisions related to energy legislation continue to be deliberated, we are confident of our abilities to execute an appropriate strategy to benefit from this emergent industry. We look forward to updating you further as the year progresses.

With that, I'd like to turn the call over to John for his review of our financials. John?

John Muse

Thanks, Randy, and good morning to everyone. Net income for the fourth quarter of 2007 increased to $14.4 million or $0.18 per share as compared to $6.1 million or $0.07 a share for the 2006 comparable period. The $8.3 million increase in net income for the fourth quarter resulted primarily from significant higher prices for finished products and a $1.2 million gain over recording of income received under the Alternative Fuel Mixture Credits, which was partially offset by $2.2 million charge related to the company's settlement of the litigation matter involving a contract dispute.

The company also reported net sales of $175.4 million for the quarter as compared to $128.1 million for the fourth quarter of 2006. The majority of the $47 million increase in sales is attributable to higher finished product prices and the purchase of finished products for resale.

Operating income for the fourth quarter of 2007 was $25.2 million as compared to $11.4 million for the fourth quarter of '06. At the segment level, rendering generated net sales of $128.4 million for the fourth quarter as compared to $90.5 million in the fourth quarter of '06. The Restaurant Services business generated sales of $47.1 million as compared to $37.7 million in the fourth quarter of '06.

Now, turning to the year ended December 29, 2007; Darling reported net income of $45.5 million or $0.56 per share as compared to a net income of $5.1 million or $0.07 per share for the 2006 comparable period. The $40.4 million increase resulted primarily from four areas; one, higher finished product prices, second, resulting synergies from the full year integration of national byproducts, increased raw material volume and lastly a $2.2 million gain on completing the sale of a judgment against a service provider in 2007.

However, these gains were partially offset by $2.2 million charge related to the company's settlement of a litigation matter involving a contract dispute and $1.2 million charge related to a mass termination withdrawal liability arising from a multi-employer pension plan termination. The 2006 impact of $4.5 million charge related to prepayment fees and write-off of deferred loan costs in connection with the termination of the company's previous subordinated debt and senior credit facility.

Interest expense was $5 million during 2007, compared to $7.2 million during 2006, a decrease of $2.2 million or 30.6%. The decrease in interest expense is primarily due to a decrease in rates and a decrease in outstanding balance related to the company's outstanding debt. Other expense was $0.6 million in 2007, $4.1 million decrease from other expense of $4.7 million in 2006, which was associated with charges related to the retiring of the company's subordinated debt and restructuring revolving credit facility in 2006.

At the segment level, rendering generated net sales of $464 million in fiscal 2007 as compared to $279 million in 2006, which is an increase of $185 million or 66%. Restaurant services generated net sales of $180.8 million in 2007, as compared to $128 million in 2006. This is an increase in sales of $52.4 million.

Now moving onto the balance sheet. As of December 29, 2007 Darling's cash and cash equivalents totaled $16.3 million compared to $5.3 million at the end of 2006. At the end of the year, the company's working capital was $34.4 million with a working capital ratio of 1.432 to 1, compared to working capital of $17.9 million and a working capital ratio of 1.31 to 1 at December 30, 2006.

The increase in working capital is primarily due to the increase in commodity prices. At December 29, 2007, the company had funds available under the revolving credit facility of $106 million compared to funds available under the revolving credit facility of $71 million at December 30, 2006.

During the fourth quarter, debt was reduced by another $11 million, so for 2007 debt was reduced to a total of $39.3 million. And finally, our capital expenditures were $15.6 million during 2007 compared to $11.8 million in 2006, an increase of $3.8 million. I will now turn the call back over to Randy

Randal Stuewe

Thanks, John. Before we open the call up to your questions, I would like to close with a few additional comments. Let me reiterate that we are all proud of our results for 2007. It was a very good year for Darling. As I mentioned earlier in the call the company recorded record earnings, coupled with our fourth quarter earnings per share of $0.18. We hope to continue to be build on the significant momentum we have created to carry us into 2008. We were able to reduce our debt by more than $39 million and as a result, we are proud to post a strong balance sheet that will better position us to grow or invest in new business opportunities.

And finally, we are led by a strong management team and a group of dedicated employees that are committed to maximizing opportunities and delivering shareholder value. We are now ready to take your questions, so I'll turn it over to the operator to facilitate the Q&A session.

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