Darling International Inc.

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Darling International Inc.

251 O'Connor Ridge Boulevard, Suite 300
Irving, Texas 75038
U.S.A.
Telephone: (972) 717-0300
Fax: (972) 717-1588
Web site: http://www.darlingii.com

Public Company
Incorporated: 1962 as Darling-Delaware Company, Inc.
Employees: 1,110
Sales: $308.9 million (2005)
Stock Exchanges: American
Ticker Symbol: DAR
NAIC: 311613 Rendering and Meat Byproduct Processing

Darling International Inc. is the largest rendering company in the United States, primarily serving the food industry. The Irving, Texas-based company collects and recycles used restaurant cooking oil and byproducts from the beef, pork, and poultry processing industries. Darling's CleanStar system allows restaurants to dispose of hot used cooking oil in an environmentally friendly way with the press of a button, pumping the liquid to a sealed tank, where it can later be transferred to a collection truck. Darling also offers Torvac, a grease-trap maintenance program to help restaurants comply with grease-trap ordinances and regulations. The used cooking oil and animal byproducts collected by Darling are then converted into tallow, yellow grease, and meat and bone meal, and sold to be made into animal feed, lubricants, antifreeze, soap, shampoos, cleansing creams, textiles, tires, inks, glues, solvents, paints, esters, explosives, and bio-diesel fuel. In addition, animal hides are used to make leather shoes, upholstery, and clothing. Darling maintains 44 transfer stations and plants spread across the country. The company also exports to more than 35 other countries. Darling is a public company listed on the American Stock Exchange.

CHICAGO, 19TH-CENTURY ROOTS

The practice of rendering, or processing the remains of slaughtered animals into tallow, essentially fat, to be converted into soaps and other products, is one of the oldest industries, dating back at least as far as the ancient Egyptians. In the United States in the latter half of the 1800s the meatpacking giants that emerged in Chicago, where western cattle were shipped by rail, took rendering and recycling to the extreme, looking to make commercial use of every drop of blood and fiber of the animals they processed. One of those meatpackers was Massachusetts-born Gustavus Franklin Swift, a butcher by trade who came to Chicago in 1875 to become a cattle dealer as well as a butcher. However, the practice of shipping hogs and cattle to the East resulted in a considerable loss of weight, and profits, and was soon superseded by packing the meat in Chicago. Swift pioneered the use of refrigerated rail cars, making western beef popular in the East and across the sea, while making himself extremely wealthy. Although an experienced butcher, Swift was not as well versed in the rendering business. To benefit from a state-of-the industry rendering operation he turned to Rhode Island-based L.B. Darling & Company.

Darling's founder was Lucius Bowles Darling. Massachusetts-born like Swift, he moved to Rhode Island in 1849 at the age of 22. Here he established a small abattoir, or slaughterhouse, where he began developing new ways to make use of every part of the slaughtered animals, much of which had been previously wasted. The most profitable product he developed was fertilizer, made from ground bones. In time fertilizer became his sole business. He took on his brother Lyman as a partner in 1874, creating L.B. Darling & Company, and in 1881 his two sons, Ira C. and Lucius Bowles, Jr., joined the company, which was enjoying strong growth. A year later Ira Darling moved to Chicago to establish a branch office. Given that the city had become the center of the cattle industry it was an understandable move, and because Swift was one of the largest meatpackers an alliance with Swift was also desirable. The new venture took the name Ira C. Darling & Co. When Ira Darling died in July 1891, the company was incorporated as Darling & Co., and his brother Lucius assumed the responsibility of running it.

FORMATION OF DARLING-DELAWARE: 1962

The Darling family sold its interest in the company to Edward Morris in 1903 but not before expanding to Long Island City, New York, through the acquisition two years earlier of the Van Iderstine Company, founded by Peter Van Iderstine in 1855. From the 1920s to the 1950s, Darling expanded throughout the Great Lakes area, by opening or acquiring facilities to produce fertilizers, feed, and fatty acids. The subsidiaries added along the way were then reorganized in 1962 when Darling-Delaware Company, Inc., was incorporated to house them all.

Darling was a traditional renderer into the 1980s, producing proteins and fats, but changes in the meat processing industry forced a shift in direction. Because the larger processors joined forces to render their own material, independents such as Darling found themselves scrambling to locate raw material. The company had been profitable for many years and as a result had a considerable amount of cash on hand, about $22 million. Some of the shareholders wanted Darling to begin paying out cash, while others, including Chairman Edward M. Bakwin, thought the money would be better spent by diversifying into other areas, part of a plan to make Darling less susceptible to the cyclical nature of the rendering business, dependent as it was on the fluctuating availability of raw material. Unable to gain support for his approach, Bakwin made an attempt to raise $90 million from Chicago's Harris Trust, a price that many considered inadequate in light of the $22 million in cash, nearly $200 million in annual revenues, and other hidden value that included some oil and gas properties.

One of Darling's investors, William Shirley, who owned a Dallas rendering plant, brought the company to the attention of Richard Rainwater, who was working for Fort Worth, Texas-based investors, brothers Sid and Lee Bass. They became interested in making a bid for Darling, and turned to Edward Rose, head of Dallas's Cardinal Investment Co. to handle the arrangements. Other investors were brought on board, including Rainwater, Michael Milken, Drexel Burnham, and Equitable Life. Rose outbid Bakwin, offering $96 million, which Darling shareholders accepted. Other than $12 million in cash, most of the $96 million was borrowed from banks.

KEY DATES

1882:: Company is formed as Ira C. Darling & Company.
1891:: Ira Darling dies; company is renamed Darling & Co.
1962:: Company reorganizes as Darling-Delaware Company.
1986:: Company is sold to a private investment group; Dallas becomes the new headquarters.
1993:: Name is changed to Darling International Inc.
1997:: Torvac is acquired.
2006:: National By-Products is acquired.

In August 1986 Darling's headquarters was moved to Dallas, and the new investors quickly took steps to make their minimal investment produce a maximum payoff. The non-rendering assets were quickly sold for $10 million, which added to the $22 million in cash reduced the price of the acquisition by a third. They then engaged in what Forbes described as "mortgaging out"—"one of the financier's trustiest techniques in a rising market." For example, according to Forbes, "You put $20 million down on a $100 million building with a cash flow of $10 million. You spruce it up, put in new tenants, build the cash flow to $15 million, and slap a new $150 million mortgage on the property. After paying off the old mortgage you still have $70 million left over with which to repay your original down payment and provide a very handsome profit."

The sprucing up of Darling was the quick acquisition of 17 fat rendering plants at the cost of $71 million. As a result, revenues soared from $197 million in 1986 to $459 million pro forma in 1988. "It was time to mortgage out," in the words of Forbes. "In early 1989 the investors paid themselves a cash dividend of $180 million. The money came not out of Darling-Delaware's retained earnings and paid-in capital (which only amounted to about $25 million), but mostly, in effect, from bondholders. At about the same time, through Drexel, the company raised $175 million in junk debt." According to the Securities and Exchange Commission filing made in connection with the junk bonds, Rainwater received $9.5 million of the dividend, Rose accepted $25.8 million, and Investment Limited Partnership, which included the Bass brothers, the Equitable, and other investors, took $62 million.

Already in debt, however, Darling was not able to handle the additional burden it took on to complete the $180 million cash dividend. Owing more than $300 million the company had to contend with $43 million in annual interest payments, and by early 1990 was unable to comply with all of its bank covenants. The banks demanded that Darling pay down some of its loans by selling off $25 million in assets over the next year. To ward off lawsuits from bondholders, who might contend that the investors had saddled the company with an unrealistic amount of debt in order to take the cash dividend, Investment Limited Partnership bought $24 million worth of shares in the company, a deal that increased its interest from 35 percent to 60 percent. Other investors, who had put in $8 million to receive an $80 million share of the dividend, bought just $2.4 million in new equity. The influx of cash did little to help the company keep up with interest payments on the bank loans, let alone the interest on its high-yield junk bonds. Nor did it stave off legal action from disgruntled bondholders, who filed a lawsuit in 1991.

REORGANIZATION AS DARLING INTERNATIONAL: 1993

The Darling investors and bondholders wrangled in court for three years, the matter finally settled in late 1993 in what was deemed to be the longest financial restructuring in the history of corporate America. The agreement the parties reached called for bondholders to receive a 95 percent interest in Darling, cash, and a $70 million balloon note that was due in 2000. In addition, the company's main subsidiary, Darling & Company, was merged with Darling-Delaware, and the resulting entity assumed the name Darling International Inc. The bondholder's stock was then registered in August 1994 and a month later the company gained a listing on the NASDAQ. (A switch to the American Stock Exchange would come in September 1997.)

Darling returned to the acquisition trail in 1996, paying $10.4 million for Kearny, New Jersey-based Standard Tallow Corp. The addition helped bolster Darling's Northeast business, but soon the company began to engineer a significant change to its strategy, making the transition from a commodity-based rendering company to one that manufactured value-added products and leveraged technology. The company introduced Esteem Products, highly refined feed products made through the use of newly developed technologies. A Restaurant Services group was launched to focus on the grease collection business and to offer other services to restaurants and food processors. In addition, in the fall of 1996 Darling acquired Atlanta-based International Processing Corp. (IPC), the United States' largest recycler of bakery waste. While Darling focused on the production of ingredients for livestock feed, IPC focused on feed ingredients for the poultry industry. The company also became involved in the grease-trap cleaning business through the 1997 acquisition of Torvac.

Due to these changes Darling enjoyed solid results initially. Sales increased from to $488.9 million in 1996 to $498.4 million in 1997, while net income totaled more than $7.6 million in 1996 and $5.4 million in 1997. However, business conditions quickly deteriorated in 1998 as the price of the company's finished goods experienced a significant drop and the volume of materials processed also declined. Hence, revenues fell to $337 million and the company posted a $16.8 million loss from continuing operations in 1998. To focus resources on its core business, Darling discontinued its new Bakery By-Products Recycling business, leaving it with three business segments: Rendering, Restaurant Services, and Esteem Products. One positive development was the introduction of the CleanStar 2000 system. It helped restaurants discard used cooking oil by pumping it into a 1,200-pound stainless steel container kept inside the building but accessible to a collection truck through an outside valve, thus avoiding a disturbance in the kitchen.

Poor conditions continued in 1999, as another $78.4 million in sales were lost, most of which was due to the ongoing dip in finished product prices. Darling took a number of cost-cutting measures, closing and consolidating facilities, and then selling the underlying real estate. The company also renegotiated its bank financing agreement. Nevertheless, sales continued to deteriorate in 2000, falling below $230 million. The company also lost another $19.2 million. Business picked up somewhat in 2001 and 2002, when sales increased to $262.2 million in 2002 and Darling posted its first profit, nearly $9 million, for the first time in five years. Nevertheless, the company was forced in 2002 to engineer a debt-equity swap with lenders. In May 2003 Darling hired Chicago investment bank BMO Nesbitt Burns to help determine ways to increase the value of shareholders' interests and provide them with some possible liquidity. Everything was on the table, including the sale of the company. Some offers for the business were made, but none were deemed to be high enough and all were rejected. Instead, Darling was able to secure a major endorsement of confidence from MSD Capital Limited Partnership, an investment vehicle of computer mogul Michael Dell, which bought almost a 10 percent stake in Darling.

After suffering through a difficult stretch for the rendering industry, which had to contend with low commodity prices, Darling was able to weather the tough times to emerge in 2003 as a company that derived most of its profits from grease-trap maintenance and the collection of used cooking oil. As a result, the company was less reliant on its traditional, and more cyclical, tallow and bonemeal business. Darling beefed up its sales force and devoted more money to marketing and succeeded in signing up a significant number of restaurant chains to use its services. Sales increased to $323.3 million and net income totaled $18.2 million in 2003. Business dipped slightly in 2004, but Darling was still able to record revenues of $308.9 million and nearly $7.7 million in net income in 2005. At the close of the year, Darling also reached an agreement to acquire one of its chief competitors, Des Moines, Iowa-based National By-Products (NBP), in a $141 million cash and stock deal that was completed in May 2006. By adding NBP's 42 operating facilities and 14 large-scale production facilities spread across the Midwest, Darling was able to improve its holdings in the region, and take advantage of their proximity to meat processing plants in Iowa and Wisconsin. Darling also gained size that would allow it to better compete in the market place and position itself for even further growth.

Ed Dinger