Attached files

file filename
EX-32 - SEC 906 CERTIFICATION - DARLING INGREDIENTS INC.ex32-20170930.htm
EX-31.2 - SEC 302 CERTIFICATION - DARLING INGREDIENTS INC.ex312-20170930.htm
EX-31.1 - SEC 302 CERTIFICATION - DARLING INGREDIENTS INC.ex311-20170930.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
 
FORM 10-Q
 
 (Mark One)      
/X/  QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2017
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   001-13323

DARLING INGREDIENTS INC.
(Exact name of registrant as specified in its charter)
 
 Delaware
 
 36-2495346
 (State or other jurisdiction     
 
(I.R.S. Employer
of incorporation or organization)   
 
Identification Number)
 
 
 
 251 O'Connor Ridge Blvd., Suite 300
 
 
 Irving, Texas
 
 75038
(Address of principal executive offices)  
 
(Zip Code)
 
Registrant's telephone number, including area code:  (972) 717-0300
 
    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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).        Yes    X        No ___

 Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     
X
 
 
 
 
 
 
 
Accelerated filer    
 
 
 
 
 
 
 
 
 
 
 
 
Non-accelerated filer 
 
 
(Do not check if a smaller reporting company)
 
Smaller reporting company       
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
 
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of Exchange Act.
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes            No  X  
 
There were 164,681,819 shares of common stock, $0.01 par value, outstanding at November 2, 2017.




DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017
 
 
TABLE OF CONTENTS   

 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  56
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2






DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
September 30, 2017 and December 31, 2016
(in thousands, except share data)

 
September 30,
2017
 
December 31,
2016
ASSETS
(unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
110,146

 
$
114,564

Restricted cash
282

 
293

Accounts receivable, net
414,947

 
388,397

Inventories
375,098

 
330,815

Prepaid expenses
39,272

 
29,984

Income taxes refundable
5,370

 
7,479

Other current assets
17,101

 
21,770

Total current assets
962,216

 
893,302

Property, plant and equipment, less accumulated depreciation of
   $1,019,845 at September 30, 2017 and $842,186 at December 31, 2016
1,621,867

 
1,515,575

Intangible assets, less accumulated amortization of
   $364,842 at September 30, 2017 and $301,187 at December 31, 2016
697,908

 
711,927

Goodwill
1,298,266

 
1,225,893

Investment in unconsolidated subsidiaries
290,028

 
292,717

Other assets
47,018

 
43,613

Deferred income taxes
17,219

 
14,990

 
$
4,934,522

 
$
4,698,017

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
18,215

 
$
23,247

Accounts payable, principally trade
213,592

 
180,895

Income taxes payable
21,974

 
4,913

Accrued expenses
292,483

 
242,796

Total current liabilities
546,264

 
451,851

Long-term debt, net of current portion
1,734,176

 
1,727,696

Other non-current liabilities
96,354

 
96,114

Deferred income taxes
353,041

 
346,134

Total liabilities
2,729,835

 
2,621,795

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

     Common stock, $0.01 par value; 250,000,000 shares authorized;
        167,843,895 and 167,641,415 shares issued at September 30, 2017
        and at December 31, 2016, respectively
1,678

 
1,676

Additional paid-in capital
1,512,726

 
1,499,431

     Treasury stock, at cost;  3,185,406 and 3,028,857 shares at
       September 30, 2017 and at December 31, 2016, respectively
(43,155
)
 
(40,909
)
Accumulated other comprehensive loss
(224,092
)
 
(340,006
)
Retained earnings
875,498

 
852,802

Total Darling's stockholders’ equity
2,122,655

 
1,972,994

Noncontrolling interests
82,032

 
103,228

 Total stockholders' equity
$
2,204,687

 
$
2,076,222

 
$
4,934,522

 
$
4,698,017


 The accompanying notes are an integral part of these consolidated financial statements.

3



DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
Three and nine months ended September 30, 2017 and October 1, 2016
(in thousands, except per share data)
(unaudited)


 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Net sales
$
937,681

 
$
853,856

 
$
2,714,101

 
$
2,510,838

Costs and expenses:
 

 
 

 
 
 
 
Cost of sales and operating expenses
744,028

 
671,167

 
2,134,419

 
1,947,175

Selling, general and administrative expenses
83,141

 
76,508

 
256,589

 
234,135

Acquisition and integration costs

 

 

 
401

Depreciation and amortization
77,202

 
70,653

 
221,306

 
212,440

Total costs and expenses
904,371

 
818,328

 
2,612,314

 
2,394,151

Operating income
33,310

 
35,528

 
101,787

 
116,687

 
 
 
 
 
 
 
 
Other expense:
 

 
 

 
 
 
 
Interest expense
(22,531
)
 
(23,867
)
 
(66,657
)
 
(71,748
)
Foreign currency gain/(loss)
(2,055
)
 
354

 
(4,430
)
 
(2,241
)
Other expense, net
(1,447
)
 
(2,007
)
 
(5,103
)
 
(5,685
)
Total other expense
(26,033
)
 
(25,520
)
 
(76,190
)
 
(79,674
)
 
 
 
 
 
 
 
 
Equity in net income of unconsolidated subsidiaries
7,703

 
18,138

 
16,669

 
37,633

Income before income taxes
14,980

 
28,146

 
42,266

 
74,646

 
 
 
 
 
 
 
 
Income tax expense/(benefit)
6,296

 
(744
)
 
15,856

 
9,102

 
 
 
 
 
 
 
 
Net income
8,684

 
28,890

 
26,410

 
65,544

 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
(923
)
 
(196
)
 
(3,671
)
 
(3,772
)
 
 
 
 
 
 
 
 
Net income attributable to Darling
$
7,761

 
$
28,694

 
$
22,739

 
$
61,772

 
 
 
 
 
 
 
 
Basic income per share
$
0.05

 
$
0.17

 
$
0.14

 
$
0.38

Diluted income per share
$
0.05

 
$
0.17

 
$
0.14

 
$
0.37



 



The accompanying notes are an integral part of these consolidated financial statements.

4



DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and nine months ended September 30, 2017 and October 1, 2016
(in thousands)
(unaudited)


 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Net income
$
8,684

 
$
28,890

 
$
26,410

 
$
65,544

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation
46,211

 
(5,839
)
 
111,002

 
43,684

Pension adjustments
759

 
727

 
2,278

 
2,104

Natural gas swap derivative adjustments
22

 

 
22

 

Corn option derivative adjustments
850

 
734

 
(1,121
)
 
1,255

Total other comprehensive income/(loss), net of tax
47,842

 
(4,378
)
 
112,181

 
47,043

Total comprehensive income
$
56,526

 
$
24,512

 
$
138,591

 
$
112,587

Comprehensive income/(loss) attributable to noncontrolling interests
109

 
(94
)
 
(62
)
 
1,211

Comprehensive income attributable to Darling
$
56,417

 
$
24,606

 
$
138,653

 
$
111,376







The accompanying notes are an integral part of these consolidated financial statements.


5



DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2017 and October 1, 2016
(in thousands)
(unaudited)
 
September 30,
2017
 
October 1,
2016
Cash flows from operating activities:
 
 
 
Net Income
$
26,410

 
$
65,544

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
221,306

 
212,440

Loss/(gain) on disposal of property, plant, equipment and other assets
(537
)
 
873

Gain on insurance proceeds from insurance settlements

 
(356
)
Deferred taxes
(14,242
)
 
(5,223
)
Increase/(decrease) in long-term pension liability
1,574

 
(1,105
)
Stock-based compensation expense
14,710

 
7,953

Write-off deferred loan costs
443

 
292

Deferred loan cost amortization
6,581

 
8,393

Equity in net income of unconsolidated subsidiaries
(16,669
)
 
(37,633
)
Distributions of earnings from unconsolidated subsidiaries
26,600

 
26,317

Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
Accounts receivable
(5,311
)
 
(3,058
)
Income taxes refundable/payable
18,332

 
1,432

Inventories and prepaid expenses
(31,058
)
 
(11,368
)
Accounts payable and accrued expenses
39,937

 
27,438

Other
(19,294
)
 
(11,377
)
Net cash provided by operating activities
268,782

 
280,562

Cash flows from investing activities:
 
 
 
Capital expenditures
(196,446
)
 
(168,224
)
       Acquisitions, net of cash acquired
(12,144
)
 
(8,511
)
       Investment in unconsolidated subsidiary
(4,750
)
 

Gross proceeds from disposal of property, plant and equipment and other assets
4,953

 
4,492

Proceeds from insurance settlement
3,301

 
1,537

Payments related to routes and other intangibles
(5,635
)
 

Net cash used by investing activities
(210,721
)
 
(170,706
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt
24,069

 
28,765

Payments on long-term debt
(94,250
)
 
(128,364
)
Borrowings from revolving credit facility
142,000

 
83,000

Payments on revolving credit facility
(147,327
)
 
(93,028
)
Net cash overdraft financing
2,590

 

Deferred loan costs
(1,177
)
 

Issuance of common stock
22

 
143

Repurchase of common stock

 
(5,000
)
Minimum withholding taxes paid on stock awards
(2,140
)
 
(1,843
)
Acquisition of noncontrolling interest
(429
)
 

Distributions to noncontrolling interests
(2,513
)
 
(885
)
Net cash used by financing activities
(79,155
)
 
(117,212
)
Effect of exchange rate changes on cash
16,676

 
(943
)
Net decrease in cash and cash equivalents
(4,418
)
 
(8,299
)
Cash and cash equivalents at beginning of period
114,564

 
156,884

Cash and cash equivalents at end of period
$
110,146

 
$
148,585

Supplemental disclosure of cash flow information:
 
 
 
Accrued capital expenditures
$
(3,532
)
 
$
(3,302
)
Cash paid during the period for:
 
 
 
Interest, net of capitalized interest
$
58,219

 
$
62,395

Income taxes, net of refunds
$
13,719

 
$
14,018

Non-cash financing activities
 
 
 
Debt issued for assets
$
3

 
$
10

Contribution of assets to unconsolidated subsidiary
$

 
$
2,674


The accompanying notes are an integral part of these consolidated financial statements.

6



DARLING INGREDIENTS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
September 30, 2017
(unaudited)

(1)
General

The accompanying consolidated financial statements for the three and nine month periods ended September 30, 2017 and October 1, 2016, have been prepared by Darling Ingredients Inc., a Delaware corporation (“Darling”, and together with its subsidiaries, the “Company”) in accordance with generally accepted accounting principles in the United States (“GAAP”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The information furnished herein reflects all adjustments (consisting only of normal recurring accruals) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations.  However, management of the Company believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading.  The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Form 10-K for the fiscal year ended December 31, 2016

(2)
Summary of Significant Accounting Policies

(a)
Basis of Presentation

The consolidated financial statements include the accounts of Darling and its consolidated subsidiaries. Noncontrolling interests represent the outstanding ownership interest in the Company's consolidated subsidiaries that are not owned by the Company. In the accompanying Consolidated Statements of Operations, the noncontrolling interest in net income of the consolidated subsidiaries is shown as an allocation of the Company's net income and is presented separately as “Net income attributable to noncontrolling interests”. In the Company's Consolidated Balance Sheets, noncontrolling interests represent the ownership interests in the Company consolidated subsidiaries' net assets held by parties other than the Company. These ownership interests are presented separately as “Noncontrolling interests” within “Stockholders' Equity.” All significant intercompany balances and transactions have been eliminated in consolidation.

(b)
Fiscal Periods

The Company has a 52/53 week fiscal year ending on the Saturday nearest December 31.  Fiscal periods for the consolidated financial statements included herein are as of September 30, 2017, and include the 13 and 39 weeks ended September 30, 2017, and the 13 and 39 weeks ended October 1, 2016.

(c)
Revenue Recognition

The Company recognizes revenue on sales when products are shipped and the customer takes ownership and assumes risk of loss.  Certain customers may be required to prepay prior to shipment in order to maintain payment protection related to certain foreign and domestic sales.  These amounts are recorded as unearned revenue and recognized when the products have shipped and the customer takes ownership and assumes risk of loss. The Company recognizes service revenue in the fiscal month the service occurs.

(d)
Foreign Currency Translation and Remeasurement

Foreign currency translation is included as a component of accumulated other comprehensive loss and reflects the adjustments resulting from translating the foreign currency denominated financial statements of foreign subsidiaries into U.S. dollars. The functional currency of the Company's foreign subsidiaries is the currency of the primary economic environment in which the entity operates, which is generally the local currency of the country. Accordingly, assets and liabilities of the foreign subsidiaries are translated into U.S. dollars at fiscal period end exchange rates, including intercompany foreign currency transactions that are of long-term investment nature. Income and expense items are translated at average exchange rates occurring during the period. Changes

7



in exchange rates that affect cash flows and the related receivables or payables are recognized as transaction gains and losses in determining net income. The Company incurred net foreign currency translation gains of approximately $114.7 million and approximately $46.2 million for the nine months ended September 30, 2017 and October 1, 2016, respectively.

(e)
Earnings Per Share

Basic income per common share is computed by dividing net income attributable to Darling by the weighted average number of common shares including non-vested and restricted shares outstanding during the period.  Diluted income per common share is computed by dividing net income attributable to Darling by the weighted average number of common shares outstanding during the period increased by dilutive common equivalent shares determined using the treasury stock method.
 
Net Income per Common Share (in thousands, except per share data)
 
Three Months Ended
 
 
 
September 30, 2017
 
 
 
 
 
October 1, 2016
 
 
 
Income
 
Shares
 
Per Share
 
Income
 
Shares
 
Per Share
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net Income attributable to Darling
$
7,761

 
164,735

 
$
0.05

 
$
28,694

 
164,653

 
$
0.17

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Effect of dilutive securities:
 

 
 

 
 

 
 

 
 

 
 

Add: Option shares in the money and dilutive effect of non-vested stock awards
 

 
4,759

 
 

 
 

 
1,717

 
 

Less: Pro forma treasury shares
 

 
(2,313
)
 
 

 
 

 
(934
)
 
 

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Net income attributable to Darling
$
7,761

 
167,181

 
$
0.05

 
$
28,694

 
165,436

 
$
0.17

 
Net Income per Common Share (in thousands, except per share data)
 
Nine Months Ended
 
 
 
September 30, 2017
 
 
 
 
 
October 1, 2016
 
 
 
Income
 
Shares
 
Per Share
 
Loss
 
Shares
 
Per Share
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net Income attributable to Darling
$
22,739

 
164,734

 
$
0.14

 
$
61,772

 
164,574

 
$
0.38

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Effect of dilutive securities:
 

 
 

 
 

 
 

 
 

 
 

Add: Option shares in the money and dilutive effect of non-vested stock awards
 

 
3,645

 
 

 
 

 
1,222

 
 

Less: Pro forma treasury shares
 

 
(1,751
)
 
 

 
 

 
(642
)
 
 

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Net income attributable to Darling
$
22,739

 
166,628

 
$
0.14

 
$
61,772

 
165,154

 
$
0.37


For the three months ended September 30, 2017 and October 1, 2016, respectively, 212,525 and 1,228,334 outstanding stock options were excluded from diluted income per common share as the effect was antidilutive. For the three months ended September 30, 2017 and October 1, 2016, respectively, 437,897 and 887,413 shares of non-vested stock and stock equivalents were excluded from diluted income per common share as the effect was antidilutive.

For the nine months ended September 30, 2017 and October 1, 2016, respectively, 723,052 and 1,122,165 outstanding stock options were excluded from diluted income per common share as the effect was antidilutive. For the nine months ended September 30, 2017 and October 1, 2016, respectively, 650,758 and 812,780 shares of non-vested stock and stock equivalents were excluded from diluted income per common share as the effect was antidilutive.

(3)
Acquisition of Noncontrolling Interest

During the third quarter of fiscal 2017, the Company, through a wholly-owned international subsidiary, acquired the minority interest in one of its international subsidiaries for approximately $19.1 million, including transaction costs. Except for an insignificant amount, the actual funding was accrued and will occur per the terms of the share purchase agreement underlying the transaction.


8



(4)
Inventories

A summary of inventories follows (in thousands):

        
 
September 30, 2017
 
December 31, 2016
Finished product
$
184,778

 
$
156,542

Work in process
100,147

 
87,284

Raw material
37,609

 
39,859

Supplies and other
52,564

 
47,130

 
$
375,098

 
$
330,815


In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2015-11, Simplifying the Measurement of Inventory. This ASU amends Topic 330, Inventory. The ASU simplifies the measurement of inventory by requiring certain inventory to be measured at the lower of cost and net realizable value. The adoption of this standard on January 1, 2017 did not have a material impact on the Company's consolidated financial statements.

(5)
Intangible Assets

The gross carrying amount of intangible assets not subject to amortization and intangible assets subject to amortization is as follows (in thousands):
        
 
 
September 30, 2017
 
December 31, 2016
Indefinite Lived Intangible Assets
 
 
 
Trade names
$
54,629

 
$
51,687

 
54,629

 
51,687

Finite Lived Intangible Assets:
 

 
 

Routes
401,919

 
374,989

Permits
511,210

 
493,311

Non-compete agreements
3,985

 
3,638

Trade names
76,618

 
76,033

Royalty, consulting, land use rights and leasehold
14,389

 
13,456

 
1,008,121

 
961,427

Accumulated Amortization:
 
 
 
Routes
(129,504
)
 
(105,934
)
Permits
(201,656
)
 
(170,165
)
Non-compete agreements
(2,244
)
 
(1,788
)
Trade names
(28,343
)
 
(21,042
)
Royalty, consulting, land use rights and leasehold
(3,095
)
 
(2,258
)
 
(364,842
)
 
(301,187
)
Total Intangible assets, less accumulated amortization
$
697,908

 
$
711,927


Gross intangible routes, permits, trade names, non-compete agreements and other intangibles partially decreased in fiscal 2017 as a result of approximately $6.7 million of asset retirements and also increased due to acquired intangibles of approximately $9.0 million and the remaining increase is due to foreign currency translation. Amortization expense for the three and nine months months ended September 30, 2017 and October 1, 2016, was approximately $20.0 million, $19.6 million and $58.4 million and $58.4 million, respectively.

(6)
Goodwill

Changes in the carrying amount of goodwill (in thousands):

9



 
Feed Ingredients
Food Ingredients
Fuel Ingredients
Total
Balance at December 31, 2016
 
 
 
 
Goodwill
$
813,621

$
317,008

$
111,178

$
1,241,807

Accumulated impairment losses
(15,914
)


(15,914
)
 
797,707

317,008

111,178

1,225,893

Goodwill acquired during year
1,880



1,880

Foreign currency translation
34,308

24,086

12,099

70,493

Balance at September 30, 2017
 

 

 
 

Goodwill
849,809

341,094

123,277

1,314,180

Accumulated impairment losses
(15,914
)


(15,914
)
 
$
833,895

$
341,094

$
123,277

$
1,298,266


(7)
Investment in Unconsolidated Subsidiaries

On January 21, 2011, a wholly-owned subsidiary of Darling entered into a limited liability company agreement with a wholly-owned subsidiary of Valero Energy Corporation (“Valero”) to form Diamond Green Diesel Holdings LLC (the “DGD Joint Venture”). The DGD Joint Venture is owned 50% / 50% with Valero and was formed to design, engineer, construct and operate a renewable diesel plant (the “DGD Facility”), which is capable of processing approximately 12,000 barrels per day of input feedstock to produce renewable diesel fuel and certain other co-products, and is located adjacent to Valero's refinery in Norco, Louisiana. The DGD Joint Venture reached mechanical completion and began the production of renewable diesel in late June 2013.

On May 31, 2011, the DGD Joint Venture and Diamond Green Diesel LLC, a wholly-owned subsidiary of the DGD Joint Venture (“Opco”), entered into (i) a facility agreement (the “Facility Agreement”) with Diamond Alternative Energy, LLC, a wholly-owned subsidiary of Valero (the “Lender”), and (ii) a loan agreement (the “Loan Agreement”) with the Lender, which provided the DGD Joint Venture with a 14 year multiple advance term loan facility of approximately $221.3 million (the “JV Loan”) to support the design, engineering and construction of the DGD Facility, which is now in production. The Facility Agreement and the Loan Agreement prohibit the Lender from assigning all or any portion of the Facility Agreement or the Loan Agreement to unaffiliated third parties. Opco has also pledged substantially all of its assets to the Lender, and the DGD Joint Venture has pledged all of Opco's equity interests to the Lender, until the JV Loan has been paid in full and the JV Loan has terminated in accordance with its terms.

In addition to the DGD Joint Venture, the Company has investments in other unconsolidated subsidiaries that are insignificant to the Company. Selected financial information for the Company's DGD Joint Venture is as follows (in thousands):

(in thousands)
 
September 30, 2017
December 31, 2016
Assets:
 
 
 
Total current assets
 
$
218,357

$
268,734

Property, plant and equipment, net
 
390,723

354,871

Other assets
 
5,482

12,164

Total assets
 
$
614,562

$
635,769

Liabilities and members' equity:
 
 
 
Total current portion of long term debt
 
$
17,023

$
17,023

Total other current liabilities
 
32,924

23,200

Total long term debt
 
40,986

53,753

Total other long term liabilities
 
443

418

Total members' equity
 
523,186

541,375

Total liabilities and member's equity
 
$
614,562

$
635,769




10



 
 
Three Months Ended
 
Nine Months Ended
(in thousands)
 
September 30, 2017
September 30, 2016
 
September 30, 2017
September 30, 2016
Revenues:
 
 
 
 
 
 
Operating revenues
 
$
175,585

$
141,656

 
$
451,768

$
345,650

Expenses:
 
 
 
 
 
 
Total costs and expenses less depreciation, amortization and accretion expense
 
154,446

96,569

 
395,743

244,643

Depreciation, amortization and accretion expense
 
6,733

7,445

 
22,867

20,370

Total costs and expenses
 
161,179

104,014

 
418,610

265,013

Operating income
 
14,406

37,642

 
33,158

80,637

Other income
 
408

114

 
959

199

Interest and debt expense, net
 
(455
)
(1,406
)
 
(2,306
)
(6,148
)
Net income
 
$
14,359

$
36,350

 
$
31,811

$
74,688


As of September 30, 2017 under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $261.6 million on the consolidated balance sheet and has recorded an equity net gain of approximately $15.9 million and $37.3 million for the nine months ended September 30, 2017 and October 1, 2016, respectively. In the first quarter of fiscal 2017, the Company received a dividend distribution of $25.0 million from the DGD Joint Venture. Additionally, the biodiesel blenders tax credit expired on December 31, 2016, as a result the DGD Joint Venture fiscal 2017 results do not include any blenders tax credits, while fiscal 2016 included blenders tax credits.

(8)
Debt

Debt consists of the following (in thousands): 
        
 
September 30, 2017
 
December 31, 2016
Amended Credit Agreement:
 
 
 
Revolving Credit Facility ($5.3 million denominated in euro at December 31, 2016)
$

 
$
5,280

Term Loan A ($64.8 million and $76.9 million denominated in CAD at September 30, 2017 and December 31, 2016, respectively)
108,053

 
120,103

Less unamortized deferred loan costs
(814
)
 
(1,083
)
Carrying value Term Loan A
107,239

 
119,020

 
 
 
 
Term Loan B
537,500

 
583,500

Less unamortized deferred loan costs
(4,874
)
 
(6,298
)
Carrying value Term Loan B
532,626

 
577,202

 
 
 
 
5.375% Senior Notes due 2022 with effective interest of 5.72%
500,000

 
500,000

Less unamortized deferred loan costs
(6,655
)
 
(7,667
)
Carrying value 5.375% Senior Notes due 2022
493,345

 
492,333

 
 
 
 
4.75% Senior Notes due 2022 - Denominated in euro with effective interest of 5.10%
608,318

 
543,840

Less unamortized deferred loan costs - Denominated in euro
(8,769
)
 
(8,956
)
Carrying value 4.75% Senior Notes due 2022
599,549

 
534,884

 
 
 
 
Other Notes and Obligations
19,632

 
22,224

 
1,752,391

 
1,750,943

Less Current Maturities
18,215

 
23,247

 
$
1,734,176

 
$
1,727,696


As of September 30, 2017, the Company had outstanding debt under a term loan facility denominated in Canadian dollars of CAD$80.6 million. See below for discussion relating to the Company's debt agreements. In addition, as of

11



September 30, 2017, the Company had capital lease obligations denominated in Canadian dollars included in debt. The current and long-term capital lease obligation was approximately CAD$0.9 million and CAD$0.5 million, respectively.

As of September 30, 2017, the Company had outstanding debt under the Company's 4.75% Senior Notes due 2022 denominated in euros of €515.0 million. See below for discussion relating to the Company's debt agreements. In addition, at September 30, 2017, the Company had capital lease obligations denominated in euros included in debt. The current and long-term capital lease obligation was approximately €0.3 million and €0.1 million, respectively.

Senior Secured Credit Facilities. On January 6, 2014, Darling, Darling International Canada Inc. (“Darling Canada”) and Darling International NL Holdings B.V. (“Darling NL”) entered into a Second Amended and Restated Credit Agreement (as subsequently amended, the “Amended Credit Agreement”), restating its then existing Amended and Restated Credit Agreement dated September 27, 2013 (the Former Credit Agreement), with the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents from time to time party thereto.

Effective December 16, 2016, the Company, and certain of its subsidiaries entered into an amendment (the “Fourth Amendment”) with its lenders to the Amended Credit Agreement. Among other things, the Fourth Amendment extended the maturity date of the term A loans and revolving credit facility loans under the Amended Credit Agreement from September 27, 2018 to December 16, 2021, subject to a 91-day “springing” adjustment if the term B loans are outstanding 91 days prior to the maturity date (January 6, 2021) of the term B loans.

The Company's Amended Credit Agreement provides for senior secured credit facilities in the aggregate principal amount of $2.65 billion comprised of (i) the Company's $350.0 million term loan A facility, (ii) the Company's $1.3 billion term loan B facility and (iii) the Company's $1.0 billion five-year revolving loan facility (approximately $150.0 million of which is available for a letter of credit sub-facility and $50.0 million of which is available for a swingline sub-facility) (collectively, the “Senior Secured Credit Facilities”). The Amended Credit Agreement also permits Darling and the other borrowers thereunder to incur ancillary facilities provided by any revolving lender party to the Senior Secured Credit Facilities (with certain restrictions). Up to $500.0 million of the revolving loan facility is available to be borrowed by (x) Darling in U.S. dollars, Canadian dollars, euros and other currencies to be agreed and available to each applicable lender, (y) Darling Canada in Canadian dollars and (z) Darling NL, Darling Ingredients International Holding B.V. (“Darling BV”) and CTH Germany GmbH (“CTH”) in U.S. dollars, Canadian dollars, euros and other currencies to be agreed and available to each applicable lender. The revolving loan facility and term loan A facility will mature on December 16, 2021, subject to a 91-day “Springing” adjustment if the term B loans are outstanding 91 days prior to the maturity date (January 6, 2021) of the term B loans. The revolving loan facility will be used for working capital needs, general corporate purposes and other purposes not prohibited by the Amended Credit Agreement.

The interest rate applicable to any borrowings under the term loan A facility and the revolving loan facility will equal either LIBOR/euro interbank offered rate/CDOR plus 2.00% per annum or base rate/Canadian prime rate plus 1.00% per annum, subject to certain step-downs based on the Company's total leverage ratio. The interest rate applicable to any borrowings under the term loan B facility will equal (a) for U.S. dollar term loans, either the base rate plus 1.50% or LIBOR plus 2.50%, and (b) for euro term loans, the euro interbank offered rate plus 2.75%, in each case subject to a step-down based on Darling’s total leverage ratio. For term loan B loans, the LIBOR rate shall not be less than 0.75%.

As of September 30, 2017, the Company had $43.3 million outstanding under the term loan A facility at LIBOR plus a margin of 2.00% per annum for a total of 3.24% per annum. The Company had $525.5 million outstanding under the term loan B facility at LIBOR plus a margin of 2.50% per annum for a total of 3.74% per annum and $12.0 million outstanding under the term loan B facility at base rate plus a margin of 1.50% per annum for a total of 5.75% per annum. The Company had CAD$80.6 million outstanding under the term loan A facility at CDOR plus a margin of 2.00% per annum for a total of 3.3947% per annum. As of September 30, 2017, the Company had unused capacity of $976.0 million under the Amended Credit Agreement taking into account amounts borrowed and letters of credit issued of $24.0 million. The Company also has foreign bank guarantees that are not part of the Company's Amended Credit Agreement in the amount of approximately $12.2 million at September 30, 2017.

5.375 % Senior Notes due 2022. On January 2, 2014, Darling Escrow Corporation, a wholly-owned subsidiary of Darling, issued and sold $500.0 million aggregate principal amount of its 5.375% Notes due 2022 (the “5.375% Notes”). The 5.375% Notes, which were offered in a private offering in connection with the Company's acquisition in January 2014 of its Darling Ingredients International business from VION Holding, N.V. (the “VION Acquisition”), were issued pursuant to a 5.375% Notes Indenture, dated as of January 2, 2014 (the “Original 5.375% Indenture”) (as supplemented, the “5.375% Indenture”), among Darling Escrow Corporation, the subsidiary guarantors party thereto from time to time, and U.S. Bank National Association, as trustee (the “5.375% Trustee”).

12




4.75 % Senior Notes due 2022. On June 3, 2015, Darling Global Finance B.V. (the “4.75% Issuer”), a wholly-owned subsidiary of Darling, issued and sold €515.0 million aggregate principal amount of the 4.75% Senior Notes due 2022 (the “4.75% Notes”). The 4.75% Notes, which were offered in a private offering, were issued pursuant to a Senior Notes Indenture, dated as of June 3, 2015 (the “4.75% Indenture”), among the 4.75% Issuer, Darling, the subsidiary guarantors party thereto from time to time, Citibank, N.A., London Branch, as trustee (the “4.75% Trustee”) and principal paying agent, and Citigroup Global Markets Deutschland AG, as principal registrar.

As of September 30, 2017, the Company believes it is in compliance with all of the financial covenants under the Amended Credit Agreement, as well as all of the other covenants contained in the Amended Credit Agreement, the 5.375% Indenture and the 4.75% Indenture. 

(9)
Income Taxes
 
The Company has provided income taxes for the three and nine month periods ended September 30, 2017 and October 1, 2016, based on its estimate of the effective tax rate for the entire 2017 and 2016 fiscal years. The Company’s estimated annual effective tax rate is based on forecasts of income by jurisdiction, permanent differences between book and tax income, including Subpart F income, the relative proportion of income and losses by jurisdiction, and statutory income tax rates. Discrete events such as the assessment of the ultimate outcome of tax audits, audit settlements, recognizing previously unrecognized tax benefits due to the lapsing of statutes of limitation, recognizing or derecognizing deferred tax assets due to projections of income or loss and changes in tax laws are recognized in the period in which they occur.
 
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company expects to indefinitely reinvest the earnings of its foreign subsidiaries outside of the United States and has generally not provided deferred income taxes on the accumulated earnings of its foreign subsidiaries except for the accumulated earnings of certain joint venture companies.

The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable income to realize its deferred income tax assets.  In making this determination, the Company considers all available positive and negative evidence and makes certain assumptions.  The Company considers, among other things, its deferred tax liabilities, the overall business environment, its historical earnings and losses, current industry trends and its outlook for future years.

Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. As of September 30, 2017, the Company had $2.9 million of gross unrecognized tax benefits and $1.6 million of related accrued interest and penalties. An indemnity receivable of $3.3 million has been recorded for the uncertain tax positions related to the VION Acquisition. It is reasonably possible within the next twelve months that the Company’s gross unrecognized tax benefits may decrease by up to $1.9 million, excluding interest and penalties, primarily due to potential settlements and expiration of certain statutes of limitations.

The Company’s major taxing jurisdictions include the United States (federal and state), Canada, the Netherlands, Belgium, Brazil, Germany, France and China. The Company is subject to regular examination by various tax authorities and although the final outcome of these examinations is not yet determinable, the Company does not anticipate that any of the examinations will have a significant impact on the Company's results of operations or financial position. The statute of limitations for the Company’s major tax jurisdictions is open for varying periods, but is generally closed through the 2010 tax year.

(10)  
Other Comprehensive Income

The Company follows FASB authoritative guidance for reporting and presentation of comprehensive income and its components.  Other comprehensive income (loss) is derived from adjustments that reflect pension adjustments, corn option adjustments and foreign currency translation adjustments. The components of other comprehensive income (loss) and the related tax impacts for the three and nine months months ended September 30, 2017 and October 1, 2016 are as follows (in thousands):




13





 
Three Months Ended
 
Before-Tax
Tax (Expense)
Net-of-Tax
 
Amount
or Benefit
Amount
 
September 30, 2017
October 1, 2016
September 30, 2017
October 1, 2016
September 30, 2017
October 1, 2016
Defined benefit pension plans
 
 
 
 
 
 
Amortization of prior service cost/(benefit)
$
9

$
8

$
(3
)
$
(2
)
$
6

$
6

Amortization of actuarial loss
1,204

1,168

(451
)
(447
)
753

721

Amortization of settlement






Total defined benefit pension plans
1,213

1,176

(454
)
(449
)
759

727

Natural gas swap derivatives
 
 
 
 
 
 
Gain/(loss) activity recognized in other comprehensive income (loss)
36


(14
)

22


Total natural gas swap derivatives
36


(14
)

22


Corn option derivatives
 
 
 
 
 
 
Loss/(gain) reclassified to net income
(1,352
)
(861
)
525

334

(827
)
(527
)
Gain/(loss) activity recognized in other comprehensive income (loss)
2,740

2,060

(1,063
)
(799
)
1,677

1,261

Total corn option derivatives
1,388

1,199

(538
)
(465
)
850

734

 
 
 
 
 
 
 
Foreign currency translation
46,211

(5,839
)


46,211

(5,839
)
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
48,848

$
(3,464
)
$
(1,006
)
$
(914
)
$
47,842

$
(4,378
)

 
Nine Months Ended
 
Before-Tax
Tax (Expense)
Net-of-Tax
 
Amount
or Benefit
Amount
 
September 30, 2017
October 1, 2016
September 30, 2017
October 1, 2016
September 30, 2017
October 1, 2016
Defined benefit pension plans
 
 
 
 
 
 
Amortization of prior service cost/(benefit)
$
27

$
22

$
(8
)
$
(7
)
$
19

$
15

Amortization of actuarial loss
3,610

3,502

(1,351
)
(1,338
)
2,259

2,164

Amortization of settlement

(123
)

48


(75
)
Total defined benefit pension plans
3,637

3,401

(1,359
)
(1,297
)
2,278

2,104

Natural gas swap derivatives
 
 
 
 
 
 
Gain/(loss) activity recognized in other comprehensive income (loss)
36


(14
)

22


Total natural gas swap derivatives
36


(14
)

22


Corn option derivatives
 
 
 
 
 
 
Loss/(gain) reclassified to net income
(3,750
)
(3,204
)
1,455

1,243

(2,295
)
(1,961
)
Gain/(loss) activity recognized in other comprehensive income (loss)
1,918

5,255

(744
)
(2,039
)
1,174

3,216

Total corn option derivatives
(1,832
)
2,051

711

(796
)
(1,121
)
1,255

 
 
 
 
 
 
 
Foreign currency translation
111,002

43,684



111,002

43,684

 
 
 
 
 
 
 
Other comprehensive income (loss)
$
112,843

$
49,136

$
(662
)
$
(2,093
)
$
112,181

$
47,043


The following table presents the amounts reclassified out of each component of other comprehensive income (loss), net of tax for the three and nine months months ended September 30, 2017 and October 1, 2016 as follows (in thousands):


14



 
Three Months Ended
Nine Months Ended
 
 
September 30, 2017
October 1, 2016
September 30, 2017
October 1, 2016
Statement of Operations Classification
Derivative instruments
 
 
 
 
 
Corn option derivatives
$
1,352

$
861

$
3,750

$
3,204

Cost of sales and operating expenses
 
1,352

861

3,750

3,204

Total before tax
 
(525
)
(334
)
(1,455
)
(1,243
)
Income taxes
 
827

527

2,295

1,961

Net of tax
Defined benefit pension plans
 
 
 
 
 
Amortization of prior service cost
$
(9
)
$
(8
)
$
(27
)
$
(22
)
(a)
Amortization of actuarial loss
(1,204
)
(1,168
)
(3,610
)
(3,502
)
(a)
Amortization of settlement



123

(a)
 
(1,213
)
(1,176
)
(3,637
)
(3,401
)
Total before tax
 
454

449

1,359

1,297

Income taxes
 
(759
)
(727
)
(2,278
)
(2,104
)
Net of tax
Total reclassifications
$
68

$
(200
)
$
17

$
(143
)
Net of tax

(a)
These items are included in the computation of net periodic pension cost. See Note 12 Employee Benefit Plans for additional information.

The following table presents changes in each component of accumulated comprehensive income (loss) as of September 30, 2017 as follows (in thousands):

 
 
Nine Months Ended September 30, 2017
 
 
Foreign Currency
Derivative
Defined Benefit
 
 
 
Translation
Instruments
Pension Plans
Total
Accumulated Other Comprehensive Income (loss) December 31, 2016, attributable to Darling, net of tax
 
$
(308,910
)
$
2,468

$
(33,564
)
$
(340,006
)
Other comprehensive gain before reclassifications
 
111,002

(2,295
)

108,707

Amounts reclassified from accumulated other comprehensive income/(loss)
 

1,196

2,278

3,474

Net current-period other comprehensive income
 
111,002

(1,099
)
2,278

112,181

Noncontrolling interest
 
(3,733
)


(3,733
)
Accumulated Other Comprehensive Income (loss) September 30, 2017, attributable to Darling, net of tax
 
(194,175
)
$
1,369

$
(31,286
)
$
(224,092
)

(11)    Stockholders' Equity

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU amends Topic 718, Compensation - Stock Compensation, which simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees' maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. The Company adopted this standard in the quarter ended April 1, 2017 and prior periods were not recasted. The impact of the adoption resulted in the following:

The Company recorded a tax expense of less than $0.1 million within income tax expense for the nine months ended September 30, 2017 related to the excess tax expense on stock options, nonvested stock, director restricted stock units and performance units. Prior to the adoption this amount would have been recorded as reduction of additional paid-in capital.

The Company has made a policy election to account for forfeitures in the period they occur, rather than estimating a forfeiture rate. Applying this guidance on a modified retrospective basis resulted in an insignificant adjustment to opening retained earnings.


15



The Company no longer reclassifies the excess tax benefit from operating activities to financing activities in the statement of cash flows. The Company elected to apply this change in presentation prospectively and thus prior periods have not been adjusted.

The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares of common stock in the computation of the Company's diluted earnings per share for the nine months ended September 30, 2017. This increased the Company's diluted weighted average common shares outstanding by approximately 155,000 shares in the nine months ended September 30, 2017.

Fiscal 2017 Long-Term Incentive Opportunity Awards (2017 LTIP). On February 6, 2017, the Compensation Committee (the “Committee”) of the Company's Board of Directors adopted the 2017 LTIP pursuant to which they awarded certain of the Company's key employees, 956,809 stock options and 559,388 performance share units (the “PSUs”) under the Company's 2017 Omnibus Incentive Plan. The stock options vest 33.33% on the first, second and third anniversaries of the grant date. The PSUs are tied to a three-year forward-looking performance period and will be earned based on the Company's average return on capital employed (ROCE), as calculated in accordance with the terms of the award agreement, relative to the average ROCE of the Company's performance peer group companies, with the earned award to be determined in the first quarter of fiscal 2020, after the final results for the relevant performance period are determined. The PSUs were granted at a target of 100%, but each PSU will reduce or increase depending on the Company's ROCE relative to that of the performance peer group companies and is also subject to the application of a total shareholder return (TSR) cap/collar modifier depending on the Company's TSR during the performance period relative to that of the performance peer group companies. In addition, certain of the PSUs have a two-year holding requirement after vesting before the PSUs are settled in shares of the Company's Common Stock.

On August 7, 2017, the Company's Board of Directors, approved the extension for an additional two years of its previously announced share repurchase program of up to an aggregate of $100.0 million of the Company's common stock depending on market conditions.

(12)    Employee Benefit Plans

The Company has retirement and pension plans covering a substantial number of its domestic and foreign employees.  Most retirement benefits are provided by the Company under separate final-pay noncontributory and contributory defined benefit and defined contribution plans for all salaried and hourly employees (excluding those covered by union-sponsored plans) who meet service and age requirements. Although various defined benefit formulas exist for employees, generally these are based on length of service and earnings patterns during employment. Effective January 1, 2012, the Company's Board of Directors authorized the Company to proceed with the restructuring of its domestic retirement benefit program to include the closing of Darling's salaried and hourly defined benefit plans to new participants as well as the freezing of service and wage accruals thereunder effective December 31, 2011 (a curtailment of these plans for financial reporting purposes) and the enhancing of benefits under the Company's domestic defined contribution plans. The Company-sponsored domestic hourly union plan has not been curtailed; however, several locations of the Company-sponsored domestic hourly union plan have been curtailed as a result of collective bargaining renewals for those sites.

Net pension cost for the three and nine months months ended September 30, 2017 and October 1, 2016 includes the following components (in thousands):

 
Pension Benefits
 
Pension Benefits
 
Three Months Ended

Nine Months Ended
 
September 30,
2017
October 1,
2016

September 30,
2017
October 1,
2016
Service cost
$
759

$
599

 
$
2,244

$
1,921

Interest cost
1,672

1,702

 
5,020

5,217

Expected return on plan assets
(1,799
)
(1,886
)
 
(5,377
)
(5,661
)
Amortization of prior service cost
9

8

 
27

22

Amortization of net loss
1,204

1,168

 
3,610

3,502

Curtailment gain

(62
)
 

(1,285
)
Settlement gain


 

(123
)
Net pension cost
$
1,845

$
1,529

 
$
5,524

$
3,593



16



The Company's funding policy for employee benefit pension plans is to contribute annually not less than the minimum amount required nor more than the maximum amount that can be deducted for federal and foreign income tax purposes.  Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Based on actuarial estimates at September 30, 2017, the Company expects to contribute approximately $4.6 million to its pension plans to meet funding requirements during the next twelve months. Additionally, the Company has made tax deductible discretionary and required contributions to its pension plans for the nine months ended September 30, 2017 and October 1, 2016 of approximately $2.6 million and $2.9 million, respectively.  

The Company participates in various multiemployer pension plans which provide defined benefits to certain employees covered by labor contracts.  These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts to meet their pension benefit obligations to their participants.   The Company's contributions to each multiemployer plan represent less than 5% of the total contributions to each such plan. Based on the most currently available information, the Company has determined that, if a withdrawal were to occur, withdrawal liabilities on two of the plans in which the Company currently participates could be material to the Company, with one of these material plans certified as critical or red zone. With respect to the other multiemployer pension plans in which the Company participates and which are not individually significant, six plans have certified as critical or red zone, one plan has certified as endangered or yellow zone as defined by the Pension Protection Act of 2006.

The Company has received notices of withdrawal liability from two U.S. multiemployer plans in which it participated. As of September 30, 2017, the Company has an aggregate accrued liability of approximately $1.8 million representing the present value of scheduled withdrawal liability payments under these multiemployer plans. While the Company has no ability to calculate a possible current liability for under-funded multiemployer plans that could terminate or could require additional funding under the Pension Protection Act of 2006, the amounts could be material.

(13)
Derivatives

The Company’s operations are exposed to market risks relating to commodity prices that affect the Company’s cost of raw materials, finished product prices and energy costs and the risk of changes in interest rates and foreign currency exchange rates.

The Company makes limited use of derivative instruments to manage cash flow risks related to natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes.  Natural gas swaps and options are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential impact of seasonal weather demands on natural gas that increases natural gas prices.  Heating oil swaps and options are entered into with the intent of managing the overall cost of diesel fuel usage by reducing the potential impact of seasonal weather demands on diesel fuel that increases diesel fuel prices.  Corn options and future contracts are entered into with the intent of managing U.S. forecasted sales of bakery by-products (“BBP”) by reducing the impact of changing prices.  Foreign currency forward contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency. At September 30, 2017, the Company had natural gas swap contracts and corn option contracts outstanding that qualified and were designated for hedge accounting as well as corn option and forward contracts, foreign currency forward contracts and soybean meal option contracts that did not qualify and were not designated for hedge accounting.

Entities are required to report all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding the instrument. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair value, cash flows or foreign currencies. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside of earnings) and is subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness, as well as the ineffective portion of the gain or loss, are reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change.

Cash Flow Hedges

In the first nine months of fiscal 2017, the Company entered into natural gas swap contracts that are considered cash flow hedges. Under the terms of the natural gas swap contracts, the Company fixed the expected purchase cost of a portion

17



of its U.S. plants' forecasted natural gas usage into the first quarter of fiscal 2018. As of September 30, 2017, some of the contracts have expired and settled according to the contracts while the remaining contract positions and activity are disclosed below.

In fiscal 2016 and the first nine months of fiscal 2017, the Company entered into corn option contracts on the Chicago Board of Trade that are designated as cash flow hedges. Under the terms of the corn option contracts, the Company hedged a portion of its U.S. forecasted sales of BBP into the fourth quarter of fiscal 2018. As of September 30, 2017, some of the contracts have been settled while the remaining contract positions and activity are disclosed below. From time to time, the Company may enter into corn option contracts in the future.

As of September 30, 2017, the Company had the following outstanding forward contract amounts that were entered into to hedge the future payments of intercompany note transactions, foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency. All of these transactions are currently not designated for hedge accounting (in thousands):

Functional Currency
 
Contract Currency
Type
Amount
 
Type
Amount
Brazilian real
33,790

 
Euro
9,030

Brazilian real
80,286

 
U.S. dollar
24,430

Brazilian real
953

 
Mexican peso
5,472

Euro
82,573

 
U.S. dollar
97,985

Euro
7,463

 
Polish zloty
32,000

Euro
4,040

 
Japanese yen
526,400

Euro
60,758

 
Chinese renminbi
474,901

Euro
11,455

 
Australian dollar
17,200

Euro
2,281

 
British pound
2,000

Polish zloty
35,960

 
Euro
8,383

Japanese yen
40,395

 
U.S. dollar
362


The Company estimates the amount that will be reclassified from accumulated other comprehensive gain at September 30, 2017 into earnings over the next 12 months will be approximately $2.2 million. As of September 30, 2017, no amounts have been reclassified into earnings as a result of the discontinuance of cash flow hedges.

The following table presents the fair value of the Company’s derivative instruments under FASB authoritative guidance as of September 30, 2017 and December 31, 2016 (in thousands):

Derivatives Designated
Balance Sheet
Asset Derivatives Fair Value
as Hedges
Location
September 30, 2017
December 31, 2016
Corn options
Other current assets
$
2,876

$
4,235

Corn options
Other assets
106


Natural gas swaps
Other current assets
82


 
 
 
 
Total asset derivatives designated as hedges
$
3,064

$
4,235

 
 
 
 
Derivatives Not
Designated as
Hedges
 
 

 

Foreign currency contracts
Other current assets
$
1,153

$
8,939

Corn options and futures
Other current assets
1,167

151

Soybean meal options
Other current assets
64


 
 
 
 
Total asset derivatives not designated as hedges
$
2,384

$
9,090

 
 
 
 
Total asset derivatives
 
$
5,448

$
13,325



18



Derivatives Designated
Balance Sheet
Liability Derivatives Fair Value
as Hedges
Location
September 30, 2017
December 31, 2016
Natural gas swaps
Accrued expenses
$
4

$

 
 
 
 
Total liability derivatives designated as hedges
$
4

$

 
 
 
 
Derivatives Not
Designated as
Hedges
 
 

 

Foreign currency contracts
Accrued expenses
$
1,063

$
608

Corn options and futures
Accrued expenses
21

122

 
 
 
 
Total liability derivatives not designated as hedges
$
1,084

$
730

 
 
 
 
Total liability derivatives
$
1,088

$
730


The effect of the Company’s derivative instruments on the consolidated financial statements as of and for the three months ended September 30, 2017 and October 1, 2016 is as follows (in thousands):

 
 
 
Derivatives
Designated as
Cash Flow Hedges
 
Gain or (Loss)
Recognized in Other Comprehensive Income (“OCI”)
on Derivatives
(Effective Portion) (a)
Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion) (b)
Gain or (Loss)
Recognized in Income
on Derivatives
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing) (c)
 
2017
2016
2017
2016
2017
2016
Corn options
$
2,740

$
2,060

$
1,352

$
861

$
1,655

$
323

Natural gas swaps
36




34


 
 
 
 
 
 
 
Total
$
2,776

$
2,060

$
1,352

$
861

$
1,689

$
323


(a)
Amount recognized in accumulated OCI (effective portion) is reported as accumulated other comprehensive income/(loss) of approximately $2.8 million and $2.1 million recorded net of taxes of approximately $(1.1) million and $(0.8) million as of September 30, 2017 and October 1, 2016, respectively.
(b)
Gains and (losses) reclassified from accumulated OCI into income (effective portion) for corn options are included in cost of sales, respectively, in the Company’s consolidated statements of operations.
(c)
Gains and (losses) recognized in income on derivatives (ineffective portion) for corn options are included in other income/ (expense), net in the Company’s consolidated statements of operations.

The effect of the Company’s derivative instruments on the consolidated financial statements as of and for the nine months ended September 30, 2017 and October 1, 2016 is as follows (in thousands):

 
 
 
Derivatives
Designated as
Cash Flow Hedges
 
Gain or (Loss)
Recognized in Other Comprehensive Income (“OCI”)
on Derivatives
(Effective Portion) (a)
Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion) (b)
Gain or (Loss)
Recognized in Income
on Derivatives
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing) (c)
 
2017
2016
2017
2016
2017
2016
Corn options
$
1,918

$
5,255

$
3,750

$
3,204

$
350

$
537

Natural gas swaps
36




34


 
 
 
 
 
 
 
Total
$
1,954

$
5,255

$
3,750

$
3,204

$
384

$
537



19



(a)
Amount recognized in accumulated OCI (effective portion) is reported as accumulated other comprehensive income/(loss) of approximately $2.0 million and $5.3 million recorded net of taxes of approximately $(0.8) million and $(2.0) million as of September 30, 2017 and October 1, 2016, respectively.
(b)
Gains and (losses) reclassified from accumulated OCI into income (effective portion) for corn options are included in cost of sales, respectively, in the Company’s consolidated statements of operations.
(c)
Gains and (losses) recognized in income on derivatives (ineffective portion) for corn options are included in other income/ (expense), net in the Company’s consolidated statements of operations.

The table below summarizes the effect of derivatives not designated as hedges on the Company's consolidated statements of operations for the three and nine months months ended September 30, 2017 and October 1, 2016 (in thousands):

 
 
 
 
Loss or (Gain) Recognized in Income on Derivatives Not Designated as Hedges
 
 
 
 
Three Months Ended
Nine Months Ended
Derivatives not designated as hedging instruments
 
Location
 
September 30, 2017
October 1, 2016
September 30, 2017
October 1, 2016
 
 
 
 
 
 
 
 
Foreign Exchange
 
Foreign currency loss/(gain)
 
$
3,142

$
1,871

$
12,418

$
5,954

Foreign Exchange
 
Selling, general and administrative expense
 
(2,118
)
(786
)
(3,107
)
(7,565
)
Corn options and futures
 
Net sales
 
165

267

125

612

Corn options and futures
 
Cost of sales and operating expenses
 
(1,566
)
(997
)
(1,250
)
(1,610
)
Heating Oil swaps and options
 
Net sales
 
492

323

492

476

Soybean Meal
 
Net sales
 
(131
)

(412
)
7

Soybean Oil
 
Net sales
 


45


Total
 
 
 
$
(16
)
$
678

$
8,311

$
(2,126
)

At September 30, 2017, the Company had forward purchase agreements in place for purchases of approximately $58.6 million of natural gas and diesel fuel.  These forward purchase agreements have no net settlement provisions and the Company intends to take physical delivery of the underlying product.  Accordingly, the forward purchase agreements are not subject to the requirements of fair value accounting because they qualify and the Company has elected to account for these as normal purchases as defined in the FASB authoritative guidance.

(14)    Fair Value Measurements

FASB authoritative guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The following table presents the Company’s financial instruments that are measured at fair value on a recurring and nonrecurring basis as of September 30, 2017 and are categorized using the fair value hierarchy under FASB authoritative guidance.  The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value. 


20



 
 
Fair Value Measurements at September 30, 2017 Using
 
 
Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable
Inputs
Significant
Unobservable
Inputs
(In thousands of dollars)
Total
(Level 1)
(Level 2)
(Level 3)
Assets:
 
 
 
 
Derivative instruments
$
5,448

$

$
5,448

$

Total Assets
$
5,448

$

$
5,448

$

 
 
 
 
 
Liabilities:
 
 
 
 
Derivative instruments
$
1,088

$

$
1,088

$

5.375% Senior notes
517,500


517,500


4.75% Senior notes
637,213


637,213


Term loan A
108,323


108,323


Term loan B
544,541


544,541


Total Liabilities
$
1,808,665

$

$
1,808,665

$


 
 
Fair Value Measurements at December 31, 2016 Using
 
 
Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable
Inputs
Significant
Unobservable
Inputs
(In thousands of dollars)
Total
(Level 1)
(Level 2)
(Level 3)
Assets:
 
 
 
 
Derivative instruments
$
13,325

$

$
13,325

$

Total Assets
$
13,325

$

$
13,325

$

 
 
 
 
 
Liabilities:
 
 
 
 
Derivative instruments
$
730

$

$
730

$

5.375% Senior notes
520,300


520,300


4.75% Senior notes
575,111


575,111


Term loan A
120,403


120,403


Term loan B
593,347


593,347


Revolver debt
5,201


5,201


Total Liabilities
$
1,815,092

$

$
1,815,092

$