10-Q: Darling Ingredients Q3: Fuel Segment Drags Down Earnings

Darling Ingredients reported a significant decline in nine-month net income and EPS, primarily due to challenges in its Fuel Ingredients segment and the Diamond Green Diesel joint venture, despite growth in Feed and Food Ingredients.

Summary

• Total net sales for the three months ended September 27, 2025, increased by 10.0% to $1.56 billion, up from $1.42 billion in the prior year period.
• Operating income for the three months increased by 19.3% to $71.7 million, compared to $60.1 million in the prior year.
• Net income attributable to Darling for the three months rose by 14.2% to $19.4 million, up from $16.9 million.
• Diluted earnings per share for the three months increased to $0.12 from $0.11.
• For the nine months ended September 27, 2025, total net sales increased by 3.0% to $4.43 billion, from $4.30 billion in the prior year period.
• Operating income for the nine months decreased significantly by 49.1% to $176.0 million, down from $345.8 million.
• Net income attributable to Darling for the nine months plummeted by 96.7% to $5.9 million, from $177.0 million.
• Diluted earnings per share for the nine months fell to $0.04 from $1.10.
• Adjusted EBITDA (Non-GAAP) for the three months increased by 25.4% to $247.8 million, and for the nine months increased by 15.2% to $644.4 million.
• Darling's share of Diamond Green Diesel (DGD) Adjusted EBITDA for the three months was a loss of $2.9 million, a significant decrease from a gain of $39.1 million in the prior year.
• Darling's share of DGD Adjusted EBITDA for the nine months decreased by 80.2% to $45.8 million, from $230.8 million in the prior year.
• Combined Adjusted EBITDA (Non-GAAP) for the three months increased by 3.5% to $244.9 million, but for the nine months decreased by 12.7% to $690.2 million.
• The Fuel Ingredients segment experienced a 322.6% decrease in operating income for the three months and a 122.6% decrease for the nine months, primarily due to regulatory changes (Blenders Tax Credit to Production Tax Credit), tariffs, and operational issues at DGD plants.
• Feed Ingredients segment operating income increased by 196.4% for the three months and 5.2% for the nine months, driven by higher fat prices.
• Food Ingredients segment operating income increased by 38.0% for the three months and 15.4% for the nine months, due to increased sales volumes and fat prices, and a prior-year inventory expense adjustment.
• The company completed a debt refinancing, entering into a Third Amended and Restated Credit Agreement for $2.9 billion and issuing 750.0 million Euro 4.5% Senior Notes due 2032.
• A non-binding term sheet was signed on May 12, 2025, to form a joint venture with Tessenderlo Group NV, combining collagen and gelatin businesses, with Darling holding an 85% stake.

Sentiment

Score: 3

Explanation: The significant decline in nine-month net income and EPS, primarily driven by severe underperformance in the Fuel Ingredients segment and the DGD Joint Venture due to regulatory changes and operational issues, outweighs the positive performance in Feed and Food Ingredients. While debt refinancing and share repurchases are positive, the core profitability decline in a key growth area indicates a negative overall sentiment.

Positives

• Total net sales increased by 10.0% for the three months and 3.0% for the nine months, demonstrating overall revenue growth.
• Operating income for the three months increased by 19.3% to $71.7 million, indicating improved operational efficiency in the recent quarter.
• Net income attributable to Darling for the three months increased by 14.2% to $19.4 million, showing a positive trend in the short term.
• Adjusted EBITDA (Non-GAAP) increased by 25.4% for the three months and 15.2% for the nine months, reflecting strong underlying business performance excluding certain non-cash and financing items.
• The Feed Ingredients segment showed robust growth, with operating income increasing by 196.4% for the three months and 5.2% for the nine months, driven by higher fat prices and improved margins.
• The Food Ingredients segment also performed well, with operating income increasing by 38.0% for the three months and 15.4% for the nine months, supported by increased collagen sales volumes and fat prices.
• Successful debt refinancing was completed with a new $2.9 billion Senior Secured Credit Facilities and the issuance of 750.0 million Euro 4.5% Senior Notes due 2032, improving the debt structure.
• The company remains in compliance with all financial covenants under its credit agreements and senior notes.
• An active share repurchase program is in place, with $34.7 million of common stock repurchased in the first nine months of fiscal 2025, and $460.3 million remaining under the program.
• A non-binding term sheet was signed for a joint venture with Tessenderlo Group NV, indicating strategic growth initiatives in the collagen and gelatin markets with an 85% ownership stake for Darling.

Negatives

• Net income attributable to Darling for the nine months ended September 27, 2025, significantly decreased by 96.7% to $5.9 million, compared to $177.0 million in the prior year.
• Diluted earnings per share for the nine months fell sharply to $0.04, a 96.4% decrease from $1.10 in the prior year.
• The Fuel Ingredients segment experienced a substantial operating loss of $(30.5) million for the three months and $(35.5) million for the nine months, a decrease of 322.6% and 122.6% respectively, primarily due to regulatory changes and operational issues.
• Darling's share of Diamond Green Diesel (DGD) Adjusted EBITDA turned into a loss of $(2.9) million for the three months and decreased by 80.2% to $45.8 million for the nine months, indicating severe underperformance of the joint venture.
• The change from the Blenders Tax Credit (BTC) to the Production Tax Credit (PTC) in the U.S. and tariffs on imported feedstocks led to a reduction in incentives and decreased margins in the renewable fuel industry.
• DGD Joint Venture experienced lower sales volumes due to two catalyst turnarounds at the St. Charles plant in Q1 2025, a catalyst turnaround at the Port Arthur plant in Q3 2025, and one renewable diesel line that has not been running the majority of the year.
• Market mechanisms like Renewable Identification Numbers (RINs) were slow to react and unable to offset the decrease in value from the BTC to PTC change.
• Acquisition and integration costs increased significantly to $6.2 million for the three months and $11.1 million for the nine months, up from $0.2 million and $5.4 million respectively.
• Interest expense, while decreasing for the three and nine months, remains substantial at $56.9 million and $166.8 million respectively, reflecting the company's highly leveraged position.
• The company recorded a loss on early retirement of debt of $3.0 million for the nine months due to refinancing activities.
• Foreign currency translation would result in a decrease in operating income of approximately $7.6 million for the three months and $8.8 million for the nine months, indicating adverse currency movements.
• Other income, net, decreased significantly for the three months to $0.7 million from $4.7 million, and turned into an expense of $(2.5) million for the nine months from an income of $12.8 million, due to lower casualty insurance gains and pension plan termination losses.

Risks

• Existing and unknown future limitations on the ability of direct and indirect subsidiaries to make cash flow available for debt payments or other purposes.
• Reduced demands or prices for biofuels, biogases, or renewable electricity.
• Volatility in global demands for grain and oilseed commodities, impacting feed costs and selling prices for products.
• Reductions in raw material volumes due to weak margins in meat production, reduced consumer demand, government regulations, or reduced volume from food service establishments.
• Reduced demand for animal feed.
• Reduced finished product prices, including a decline in fat, used cooking oil, protein, or collagen prices.
• Changes to government policies around the world relating to renewable fuels and greenhouse gas (GHG) emissions that adversely affect prices, margins, or markets (e.g., RFS, LCFS, IR Act's 45Z, RED III), including loss or diminishment of tax credits.
• Potential impact of a U.S. government shutdown on biofuel policy implementation timelines.
• Climate-related adverse results, including with respect to climate goals, targets, or commitments.
• Possible product recall due to unauthorized adulterations or products not meeting specifications/standards.
• Occurrence of animal diseases (e.g., H1N1 flu, Bird Flu, SARS, BSE, PED, African Swine Fever) affecting animal production.
• Occurrence of pandemics, epidemics, or disease outbreaks, such as COVID-19.
• Unanticipated costs and/or reductions in raw material volumes related to compliance with existing or unforeseen new U.S. or foreign regulations.
• Risks associated with the DGD Joint Venture, including possible unanticipated operating disruptions and a decline in margins.
• Risks and uncertainties relating to international sales and operations, including imposition of tariffs, quotas, trade barriers, and other trade protections.
• Tax changes, such as global minimum tax measures, or issues related to administration, guidance, and/or regulations associated with biofuel policies, including the Clean Fuels Production Credit (CFPC).
• Difficulties or significant disruption (including cyber-attack) in information systems, networks, or data integrity, or failure to implement new systems successfully.
• Risks relating to possible third-party claims of intellectual property infringement.
• Increased contributions to pension and benefit plans, including multiemployer and employer-sponsored defined benefit pension plans, as required by legislation or resulting from a U.S. mass withdrawal event.
• Bad debt write-offs.
• Loss of or failure to obtain necessary permits and registrations.
• Continued or escalated conflict in the Middle East, North Korea, Ukraine, or elsewhere (e.g., Russia-Ukraine war).
• Uncertainty regarding the exit of the U.K. from the European Union (Brexit).
• Uncertainty regarding any administration changes in the U.S. or elsewhere, including impacts to trade, tariffs, and/or policies impacting the company (e.g., biofuel policies and mandates).
• Unfavorable export or import markets.

Future Outlook

The company expects to incur additional capital expenditures of approximately $125 million for the remainder of fiscal 2025, focusing on compliance, replacement, and expansion projects, to be financed by cash flows from operations. Management believes cash flows from operating activities, unrestricted cash, and available funds under the Amended Credit Agreement will be sufficient to meet working capital needs, capital expenditures, debt payments, and other needs for the next twelve months. However, the company faces unpredictable factors such as commodity price volatility, energy prices, government policies, and global demand, which make forward-looking financial or operational estimates difficult to provide.

Management Comments

• Management believes that Adjusted EBITDA is useful in evaluating the Company's operating performance compared to that of other companies in its industry because the calculation of Adjusted EBITDA generally eliminates the effects of financing, income taxes, non-cash and certain other items that may vary for different companies for reasons unrelated to overall operating performance.
• Management believes Pro forma Adjusted EBITDA to Foreign Currency is useful in evaluating the Company's operating performance on a constant currency basis.
• Management believes that DGD Adjusted EBITDA is useful in evaluating the Company's operating performance because the calculation of DGD Adjusted EBITDA generally eliminates non-cash and certain other items at DGD unrelated to overall operating performance.
• Management believes that Combined Adjusted EBITDA is useful in evaluating the Company's operating performance compared to that of other companies in its industry because the calculation of Adjusted EBITDA generally eliminates the effects of financing, income taxes, non-cash and certain other items that may vary for different companies for reasons unrelated to overall operating performance.
• Management believes that the Company's cash flows from operating activities, unrestricted cash and funds available under the Amended Credit Agreement, will be sufficient to meet the Company's working capital needs and maintenance and compliance-related capital expenditures, scheduled debt and interest payments, income tax obligations, and other contemplated needs through the next twelve months.
• The likelihood is remote that any additional liability from the pending lawsuits and claims that may not be covered by insurance would have a material effect on the Company's financial position, results of operations or cash flows.
• The Company has found no definitive evidence that the former Standard Tallow Corporation plant sites contributed any of the COCs to the Passaic River and, therefore, there is nothing that leads the Company to believe that this matter will have a material effect on the Company's financial position, results of operations or cash flows.

Industry Context

The renewable fuel industry is undergoing significant regulatory changes, particularly the transition from the Blenders Tax Credit (BTC) to the Production Tax Credit (PTC) in the United States, which has negatively impacted incentives and margins for companies like Darling Ingredients. Tariffs on imported feedstocks further exacerbate these challenges. While market mechanisms such as Renewable Identification Numbers (RINs) and Low Carbon Fuel Standards (LCFS) are intended to counterbalance these shifts, they have been slow to adapt, creating a difficult operating environment for renewable fuel producers. Geopolitical conflicts and global economic volatility continue to influence energy and commodity prices, impacting the company's diverse segments. The Feed and Food Ingredients segments, however, are benefiting from strong fat prices and increased sales volumes, indicating resilience in traditional markets despite broader industry headwinds in the fuel sector.

Comparison to Industry Standards

• The company's Fuel Ingredients segment, particularly the DGD Joint Venture, experienced significant challenges due to regulatory changes (BTC to PTC) and tariffs on imported feedstocks. This suggests that the renewable fuel industry as a whole is grappling with a less favorable incentive structure compared to previous periods.
• DGD's lower sales volumes due to catalyst turnarounds at the St. Charles and Port Arthur plants, and one renewable diesel line not running, indicate operational inefficiencies that may be specific to DGD or common across the renewable diesel sector facing capacity utilization issues.
• The slow reaction of market mechanisms like RINs to offset the decrease in value from the BTC to PTC change suggests a lag in regulatory and market adaptation that could be affecting all players in the U.S. renewable fuels market.
• The strong performance of the Feed Ingredients and Food Ingredients segments, driven by fat prices and sales volumes, suggests that these traditional rendering and collagen markets are experiencing favorable conditions, potentially outperforming other commodity-dependent sectors or demonstrating the company's competitive strength in these areas.

Corporate Governance

Legal Proceedings

• A Verified Stockholder Class Action Complaint (Jopke v. Darling Ingredients Inc.) was filed on May 21, 2025, alleging that certain provisions in the company's bylaws violated Delaware law. The Board amended the bylaws on July 7, 2025, leading to the dismissal of the action as moot on August 19, 2025, with the company agreeing to pay $70,000 in fees and expenses.
• The company is a Potentially Responsible Party (PRP) for alleged contamination in the Lower Passaic River area. It settled liabilities for the lower 8.3 miles for $0.6 million (effective April 16, 2021) and for the upper nine miles for $0.3 million (Consent Decree granted December 2024, but appealed).
• Occidental Chemical Corporation (OCC) filed a complaint on June 30, 2018, against over 100 companies, including Darling, seeking cost recovery or contribution for cleanup costs related to the Lower Passaic River. Darling asserts it is not responsible for the alleged contaminants and that its EPA settlements could preclude some of OCC's claims. The ultimate liability is currently undeterminable, but the company believes it will not have a material effect.

Related Party Transactions

• The company has a Raw Material Agreement with the DGD Joint Venture to supply animal fats and used cooking oil at market prices. Net sales to DGD were approximately $342.1 million for the three months ended September 27, 2025 (22% of total net sales) and $851.6 million for the nine months (19% of total net sales).
• Outstanding receivables due from DGD Joint Venture were $6.0 million at September 27, 2025.
• The company defers its portion of profit on sales to DGD relating to inventory assets remaining on DGD's balance sheet, amounting to approximately $20.9 million for the nine months ended September 27, 2025.
• Darling Green Energy LLC (a wholly owned subsidiary) and Diamond Alternative Energy, LLC (Valero's subsidiary) entered into a $200.0 million revolving loan agreement with the DGD Joint Venture, with each lender committed to $100.0 million. The DGD Joint Venture borrowed the full $200.0 million in January 2024, which was repaid in March 2024. No interest was paid to Darling for the three months ended September 27, 2025, and zero was owed as of that date.
• The company and Valero guarantee their proportionate share (up to $50 million each) of DGD's obligations under IMTT Terminaling Agreements (effective February 2020).
• The company and Valero guarantee their proportionate share (up to $160 million each, reducing over time) of DGD's obligations under GTL Terminaling Agreements (effective April 2021).

Stakeholder Impact

• **Shareholders**: Significant decrease in nine-month net income and EPS will likely negatively impact shareholder returns and sentiment, despite some positive segment performance and share repurchases. The volatility and underperformance of the Fuel Ingredients segment, particularly DGD, pose a concern for future profitability.
• **Employees**: The termination of two domestic defined benefit pension plans in Q2 2025 could impact employee benefits, though the company expects to meet funding requirements for remaining plans. Changes in incentive-based compensation could affect employee morale.
• **Customers**: The company's strategic joint venture in collagen and gelatin aims to better serve growing customer needs. Operational issues at DGD plants could potentially affect the supply chain for renewable fuels, though the company's diversified feedstock supply and global operations mitigate some risks.
• **Suppliers**: The company's continued demand for animal by-products and used cooking oil, especially for the DGD Joint Venture, provides a stable market for its raw material suppliers. However, tariffs on imported feedstocks could impact supplier relationships and costs.
• **Creditors**: The successful refinancing of debt and compliance with financial covenants provide reassurance to creditors regarding the company's ability to manage its substantial indebtedness. However, the high leverage and reliance on subsidiary cash flows, coupled with the underperformance of the Fuel segment, warrant continued monitoring.
• **Regulatory Authorities**: The company is actively engaged with regulatory changes related to biofuel tax credits (BTC to PTC transition) and environmental compliance (Lower Passaic River). Compliance with new ESG reporting requirements will also be a focus.

Next Steps

• The company expects to incur approximately $125 million in additional capital expenditures for the remainder of fiscal 2025 for compliance, replacement, and expansion projects.
• The formation of the joint venture with Tessenderlo Group NV is subject to customary due diligence, negotiation of definitive transaction documents, satisfaction of customary closing conditions, and regulatory approvals.
• Proceeds from the sale of $125.0 million of production tax credits are scheduled to be received in the fourth quarter of 2025 upon satisfaction of certain funding conditions.
• The appeal of the court's decision regarding the Lower Passaic River environmental settlement for the upper nine miles is ongoing.

Key Dates

Recommendation

The filing presents a mixed picture. While the Feed and Food Ingredients segments show healthy growth in sales and operating income, driven by favorable commodity prices and strategic acquisitions, the Fuel Ingredients segment, particularly the DGD Joint Venture, is experiencing significant headwinds. The drastic decline in nine-month net income and EPS, primarily due to regulatory shifts in biofuel tax credits (BTC to PTC transition), tariffs, and operational disruptions at DGD, is a major concern. The company has taken steps to refinance debt and continues its share repurchase program, which are positive for capital structure and shareholder value. However, the uncertainty surrounding the renewable fuel regulatory environment and DGD's operational challenges create substantial risk. A 'hold' recommendation is appropriate as the company navigates these significant challenges, with potential for recovery if the Fuel segment stabilizes and regulatory clarity improves, but also downside risk if these issues persist or worsen. Investors should monitor DGD's performance and the impact of the new tax credit regime closely.

Keywords

Sustainable Ingredients, Renewable Fuels, Bioenergy, Animal By-products, Used Cooking Oil, Collagen, Gelatin, Feed Ingredients, Food Ingredients, Fuel Ingredients, Diamond Green Diesel, DGD Joint Venture, SEC Filing, 10-Q, Financial Results, Commodity Prices, Tax Credits, Clean Fuels Production Credit, Inflation Reduction Act, Corporate Governance, Debt Refinancing, Share Repurchase, Environmental Compliance, Global Operations, Risk Management