10-Q: Darling Ingredients Reports Q2 Loss Amid Biofuel Headwinds

Darling Ingredients Inc. reported a significant decline in net income and a net loss for the first six months of fiscal 2025, primarily driven by challenges in its Fuel Ingredients segment and the Diamond Green Diesel joint venture.

Summary

• Net income attributable to Darling decreased significantly to $12.7 million for Q2 2025, down from $78.9 million in Q2 2024.
• For the first six months of fiscal 2025, Darling reported a net loss of $13.5 million, a substantial decline from a net income of $160.0 million in the same period of fiscal 2024.
• Basic and diluted earnings per share fell to $0.08 in Q2 2025 from $0.49 in Q2 2024, and resulted in a loss of $0.09 per share for the first six months of 2025 compared to income of $1.00 per share in the prior year.
• Operating income decreased by 48.9% to $75.9 million in Q2 2025 and by 63.5% to $104.3 million for the first six months of 2025.
• Equity in net income from the Diamond Green Diesel (DGD) Joint Venture dropped to $6.0 million in Q2 2025 from $44.2 million in Q2 2024, and resulted in a loss of $24.5 million for the first six months of 2025 compared to income of $122.6 million in the prior year.
• The Fuel Ingredients segment experienced a significant operating loss of $5.0 million for the first six months of 2025, down from an income of $143.4 million in the prior year, primarily due to regulatory changes (Blenders Tax Credit to Producers Tax Credit), tariffs on imported feedstocks, and DGD catalyst turnarounds.
• Total net sales slightly increased to $1.48 billion in Q2 2025 from $1.46 billion in Q2 2024, but slightly decreased to $2.86 billion for the first six months of 2025 from $2.88 billion in the prior year.
• Adjusted EBITDA (Non-GAAP) increased to $206.9 million in Q2 2025 from $196.9 million in Q2 2024, and to $396.6 million for the first six months of 2025 from $362.0 million in the prior year.
• Interest expense decreased by $17.3 million in Q2 2025 and by $22.3 million for the first six months of 2025, primarily due to lower interest paid on revolver borrowings and term debt.
• The company successfully refinanced its debt, entering into a Third Amended and Restated Credit Agreement for $2.9 billion and issuing 750.0 million euros of 4.5% Senior Notes due 2032.
• Working capital increased to $498.5 million with a ratio of 1.50 to 1 as of June 28, 2025, up from $395.9 million and a ratio of 1.38 to 1 at December 28, 2024.
• A non-binding term sheet was signed with Tessenderlo Group NV to form a joint venture, Nextida, combining collagen and gelatin businesses, with Darling holding an 85% stake.

Sentiment

Score: 3

Explanation: The sentiment is negative due to a significant decline in net income and a net loss for the six-month period, primarily driven by substantial underperformance in the Fuel Ingredients segment and the DGD Joint Venture. While Adjusted EBITDA increased and debt was refinanced, the core profitability and the impact of regulatory changes in a key growth area are concerning, outweighing the positives.

Positives

• Total net sales increased in Q2 2025 compared to Q2 2024, reaching $1.48 billion.
• Adjusted EBITDA (Non-GAAP) increased for both the three and six months ended June 28, 2025, indicating improved operational performance before non-cash and financing impacts.
• Interest expense decreased significantly by $17.3 million in Q2 2025 and $22.3 million for the first six months of 2025 due to lower interest rates and reduced debt balances.
• Gross margin percentage increased in the Feed Ingredients segment to 22.9% in Q2 2025 (from 21.0%) and 21.6% for the six months (from 20.9%), driven by higher fat prices and volumes.
• Food Ingredients segment's gross margin percentage increased to 28.1% for the six months ended June 28, 2025 (from 25.3%), partly due to an out-of-period inventory expense adjustment.
• Food Ingredients operating income increased by $5.3 million for the six months ended June 28, 2025.
• Successful refinancing of $2.9 billion in senior secured credit facilities and issuance of 750.0 million euros in 4.5% Senior Notes due 2032, improving debt structure.
• Increased revolving credit facility availability to $1.27 billion as of June 28, 2025.
• Working capital improved to $498.5 million with a ratio of 1.50 to 1, indicating stronger short-term liquidity.
• The DGD Port Arthur Plant completed an upgrade to produce Sustainable Aviation Fuel (SAF) in November 2024, diversifying its renewable fuel offerings.
• A non-binding term sheet was signed to form Nextida, a joint venture combining collagen and gelatin businesses, with Darling holding an 85% stake, signaling strategic growth in Food Ingredients.

Negatives

• Net income attributable to Darling decreased significantly by 84% in Q2 2025 and resulted in a net loss for the first six months of 2025.
• Basic and diluted earnings per share saw a substantial decline, turning into a loss per share for the six-month period.
• Operating income decreased by 48.9% in Q2 2025 and 63.5% for the first six months of 2025, reflecting overall operational challenges.
• Equity in net income from the Diamond Green Diesel (DGD) Joint Venture decreased significantly, resulting in a $24.5 million loss for the first six months of 2025.
• The Fuel Ingredients segment reported an operating loss of $5.0 million for the first six months of 2025, a sharp decline from a $143.4 million income in the prior year, primarily due to regulatory changes (BTC to PTC) and tariffs on imported feedstocks.
• The DGD Joint Venture underwent two catalyst turnarounds in Q1 2025, which lowered total volumes.
• Feed Ingredients operating income decreased by 41.9% in Q2 2025 and 46.2% for the first six months of 2025, primarily due to an increase in contingent consideration liability.
• Food Ingredients operating income decreased by 7.0% in Q2 2025 due to an increase in selling, general and administrative expenses.
• A loss on early retirement of debt of $3.0 million was incurred in Q2 2025 due to debt refinancing.
• Other expense increased significantly in Q2 2025 and for the first six months of 2025, primarily due to settlement losses from the termination of two domestic defined benefit pension plans.
• Raw material volume decreased in both the Feed Ingredients (0.7% in Q2, 1.3% in 6 months) and Fuel Ingredients (6.6% in Q2, 1.0% in 6 months) segments.

Risks

• Existing and unknown future limitations on the ability of direct and indirect subsidiaries to make cash flow available to the company 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 for livestock and selling prices for products.
• Reductions in raw material volumes due to weak margins in meat production, reduced consumer demand, government regulations affecting animal production, or reduced volume from food service establishments.
• Reduced demand for animal feed.
• Reduced finished product prices, including fats, used cooking oil, protein, or collagen.
• Adverse changes to government policies globally relating to renewable fuels and greenhouse gas (GHG) emissions, including renewable fuel standards, low carbon fuel standards, mandates, and tax credits (e.g., CFPC), or loss/diminishment of such credits.
• Climate-related adverse results, including impacts on climate goals, targets, or commitments.
• Possible product recall due to unauthorized adulterations or products not meeting specifications/standards.
• Outbreaks of diseases associated with animal origin (e.g., H1N1, Bird Flu, SARS, BSE, PED, ASF).
• Occurrence of pandemics, epidemics, or disease outbreaks (e.g., COVID-19).
• Unanticipated costs or raw material volume reductions due to compliance with existing or unforeseen new U.S. or foreign regulations.
• Risks associated with the DGD Joint Venture, including unanticipated operating disruptions and a decline in product margins.
• Risks and uncertainties related to international sales and operations, including imposition of tariffs, quotas, trade barriers, and other trade protections by foreign countries.
• Tax changes, such as global minimum tax measures, or issues related to administration, guidance, and/or regulations associated with biofuel policies.
• Difficulties or significant disruption (including cyber-attack) in information systems, networks, or data integrity.
• Possible third-party claims of intellectual property infringement.
• Increased contributions to pension and benefit plans, including multiemployer and employer-sponsored defined benefit pension plans, potentially due to legislation, regulation, or a U.S. mass withdrawal event.
• Bad debt write-offs.
• Loss of or failure to obtain necessary permits and registrations.
• Continued or escalated conflicts in the Middle East, North Korea, Ukraine (Russia-Ukraine war), or elsewhere.
• Uncertainty regarding the U.K.'s exit from the European Union.
• Uncertainty regarding administration changes in the U.S. or globally, impacting trade, tariffs, and/or company policies.
• Unfavorable export or import markets.
• Withdrawal liabilities on two multiemployer pension plans could be material.
• The ultimate liability for investigatory and remedial costs related to the Lower Passaic River area cannot be determined, though the company believes a material effect on financial position is remote.

Future Outlook

The company expects to incur approximately $266 million in additional capital expenditures for the remainder of fiscal 2025, including compliance, replacement, and expansion projects, which it intends to finance using cash flows from operations. The share repurchase program has approximately $460.3 million remaining and runs through August 13, 2026. The company is currently assessing the impact of the newly enacted One Big Beautiful Bill Act (OBBBA) on its financial statements, particularly regarding the extension of the Clean Fuels Production Credit (CFPC) and new feedstock requirements. Management believes current cash flows, 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, but acknowledges numerous unpredictable factors could adversely impact liquidity.

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 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 Combined Adjusted EBITDA is useful in evaluating the company's operating performance compared to that of other companies in its industry because the calculation 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 the company's reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available.
• Management believes the likelihood is remote that any additional liability from pending lawsuits and claims not covered by insurance would have a material effect on the company's financial position, results of operations, or cash flows.
• 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.

Industry Context

The renewable fuel industry is experiencing significant regulatory changes, including the transition from the Blenders Tax Credit (BTC) to the Producers Tax Credit (PTC) in the United States, and the imposition of tariffs on imported feedstocks. These changes have led to a reduction in incentives and decreased margins for renewable fuels. Market mechanisms like Renewable Identification Numbers (RINs) and Low Carbon Fuel Standard (LCFS) programs have been slow to react, failing to offset the decrease in value from the BTC to PTC transition. The company's Fuel Ingredients segment and its DGD Joint Venture are directly impacted by these shifts, as well as by global energy prices for oil, electricity, and natural gas, and governmental subsidies. The company's traditional rendering business (Feed Ingredients) is influenced by prices for agricultural-based alternative ingredients like corn oil, soybean oil, and palm oil, which are subject to volatility. The Food Ingredients segment, particularly collagen and natural casings, competes with plant-based and synthetic alternatives.

Comparison to Industry Standards

• The company's DGD Joint Venture, with a combined renewable fuel production capacity of approximately 1.2 billion gallons per year, is a significant player in the renewable diesel and SAF market, utilizing the Ecofining Process licensed from UOP LLC and a pretreatment process from Desmet Ballestra Group.
• The transition from the Blenders Tax Credit (BTC) to the Producers Tax Credit (PTC) in the U.S. and tariffs on imported feedstocks have created a challenging regulatory environment for renewable fuel producers, impacting margins and incentives across the industry.
• The slow reaction of market mechanisms like Renewable Identification Numbers (RINs) and state Low Carbon Fuel Standard (LCFS) programs to counterbalance these regulatory changes is a broader industry issue affecting renewable fuel producers.
• The company's Feed Ingredients segment's raw material procurement methodology, where costs are generally indexed to finished goods selling prices, aims to establish a relatively stable gross margin, a common strategy in commodity-influenced businesses.
• The Food Ingredients segment's longer processing time (30-60 days) for collagen and casings, compared to Feed Ingredients, makes its gross margin more susceptible to finished goods price movements from raw material procurement to sale, a typical characteristic for products with longer production cycles.

Corporate Governance

Legal Proceedings

• The company is a party to various lawsuits, claims, and loss contingencies arising in the ordinary course of business, including worker's compensation, auto, general liability, regulatory assertions (labor, employment, safety, environmental), and other litigation.
• The company has established loss reserves of approximately $99.3 million as of June 28, 2025, for insurance, regulatory, governmental, environmental, and litigation matters.
• Regarding the Lower Passaic River Area Superfund Site, the company received a cash out settlement offer of $0.6 million from the EPA in November 2019 for liabilities relating to the lower 8.3 miles, which became effective on April 16, 2021.
• In October 2022, the company paid $0.3 million into escrow to settle liabilities for the upper nine miles of the Lower Passaic River, subject to EPA administrative approval and court approval (court granted issuance in December 2024, but decision appealed).
• Occidental Chemical Corporation (OCC) filed a complaint in June 2018 against over 100 companies, including Darling, seeking cost recovery or contribution for Lower Passaic River cleanup costs; Darling asserts it is not responsible and its EPA settlements could preclude certain claims.
• The company believes the likelihood is remote that any additional liability from pending lawsuits and claims not covered by insurance would have a material effect on its financial position, results of operations, or cash flows.

Related Party Transactions

• The company has a Raw Material Agreement with the Diamond Green Diesel (DGD) Joint Venture to supply animal fats and used cooking oil at market prices; DGD is not obligated to purchase.
• Net sales to the DGD Joint Venture were approximately $291.5 million in Q2 2025 (20% of total net sales) and $509.5 million for the first six months of 2025 (18% of total net sales).
• Outstanding receivables due from the DGD Joint Venture were $18.6 million at June 28, 2025.
• The company eliminated approximately $99.1 million of additional sales for the six months ended June 28, 2025, to defer its portion of profit ($22.2 million) on sales relating to inventory assets remaining on DGD's balance sheet.
• The DGD Joint Venture borrowed $200.0 million under the 2023 DGD Loan Agreement in January 2024, including the company's $100.0 million commitment, which was repaid in March 2024.
• The company received approximately $129.5 million in dividend distributions from the DGD Joint Venture for the six months ended June 28, 2025.
• The company made capital contributions of approximately $40.2 million to the DGD Joint Venture for the six months ended June 28, 2025, and an additional $57.0 million on June 30, 2025.
• The company and Valero guarantee their proportionate share (up to $50 million each) of DGD's obligations under the IMTT Terminaling Agreements.
• The company and Valero guarantee their proportionate share (up to $160 million each) of DGD's obligations under the GTL Terminaling Agreements.

Stakeholder Impact

• Shareholders: Experienced a significant decline in net income and a net loss for the six-month period, leading to a substantial decrease in basic and diluted earnings per share. The share repurchase program offers some potential for value return.
• Employees: The company incurred settlement losses from the termination of two domestic defined benefit pension plans, impacting some employees' retirement benefits. Stock-based compensation is part of employee incentives.
• Customers: The company continues to provide a wide range of ingredients and customized specialty solutions across pharmaceutical, food, pet food, feed, industrial, fuel, bioenergy, and fertilizer industries. Strategic acquisitions and joint ventures aim to enhance product offerings and capacity.
• Suppliers: Raw material volumes processed by the company's segments saw slight decreases, which could impact suppliers of animal by-products, used cooking oil, and other feedstocks. Tariffs on imported feedstocks also affect the supply chain.
• Creditors: The company remains highly leveraged but is in compliance with all financial covenants under its Amended Credit Agreement and Senior Notes. Successful debt refinancing improves the debt maturity profile and interest expense.

Next Steps

• The company expects to incur approximately $266 million in additional capital expenditures for the remainder of fiscal 2025, focusing on compliance, replacement, and expansion projects.
• The company will continue to evaluate the nature and extent of the impact of tariffs on its business and consolidated results of operations and actions to minimize their impact.
• The company will continue to monitor existing and proposed laws and regulations related to climate change in the jurisdictions where it operates and consider actions to mitigate unfavorable impacts.
• The company is currently assessing the impact of the One Big Beautiful Bill Act (OBBBA) on its financial statements, particularly regarding the Clean Fuels Production Credit (CFPC).
• The formation of the Nextida joint venture (combining collagen and gelatin businesses) is subject to customary due diligence, negotiation of definitive transaction documents, satisfaction of customary closing conditions, and regulatory approvals.

Key Dates

Recommendation

The significant decline in net income and a shift to a net loss for the six-month period, coupled with the substantial underperformance of the Fuel Ingredients segment and the DGD Joint Venture, are major concerns. These issues stem from adverse regulatory changes (transition from Blenders Tax Credit to Producers Tax Credit) and operational disruptions (DGD catalyst turnarounds), indicating fundamental challenges in a key growth area. While the company successfully refinanced its debt and maintains liquidity, the core profitability has deteriorated substantially. The increase in Adjusted EBITDA is not sufficient to offset the severe decline in GAAP net income and EPS, suggesting that underlying business conditions are worsening. Given the uncertainty in the renewable fuels regulatory environment and the direct negative impact on a significant portion of the business, a seasoned investor would likely view this as a signal to reduce exposure.

Keywords

Renewable Diesel, Sustainable Aviation Fuel, Biofuels, Rendering, Animal By-products, Used Cooking Oil, Collagen, Gelatin, Food Ingredients, Feed Ingredients, Fuel Ingredients, SEC Filing, 10-Q, Diamond Green Diesel, Commodity Prices, Tax Credits, ESG, Debt Refinancing, Joint Venture