214-746-7864
mary.korby@weil.com
March
3, 2010
VIA EDGAR CORRESPONDENCE,
FACSIMILE AND FEDERAL EXPRESS
Ms. Sandy
Eisen
Division
of Corporate Finance
United
States Securities and Exchange Commission
Mail Stop
4628
100 F
Street, N.E.
Washington,
DC 20549-4628
Re:
Darling International Inc.
Form 10-K for Fiscal Year Ended January
3, 2009
Filed March 4, 2009
Form 10-Q for the Fiscal Quarter Ended
October 3, 2009
Filed November 12, 2009
Response letter dated December 1,
2009
File No. 1-13323
Dear Ms.
Eisen:
On behalf of Darling International Inc., a Delaware corporation
(the “Company”), we are
submitting the following responses to the Staff’s comments made in its letter of
February 5, 2010 (the “Comment Letter”)
addressed to the Company in connection with the Company’s Form 10-K filed on
March 4, 2009 (the “2008 Form 10-K”), the
Company’s Form 10-Q filed on November 12, 2009 (the “Form 10-Q”), and the
Company’s response letter dated December 1, 2009 (the “First Response
Letter”). Where applicable, we have incorporated revisions in
response to the Staff’s comments (the “Revisions”) into the
Company’s Form 10-K for the fiscal year ended January 2, 2010, filed on March 3,
2010 (the “2009
Form 10-K”). We are providing an annotated version of the 2009
Form 10-K to the Staff on a supplemental basis, which we hope will be helpful in
connection with the Staff’s review of the Revisions.
For
convenience, the Staff’s comments have been reproduced in bold text in this
letter with the Company’s responses thereto below each corresponding
comment.
Form 10-K for the Fiscal
Year Ended January 3, 2009
Financial
Statements
General
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1.
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Disclose total
revenues for each period discussed, by product, for each of your
three primary products: MBM, BFT and YG, here and in your
MD&A. Please note such disclosure is required in your
footnotes regarding segment information under ASC Topic
280-10-50-40.
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ASC Topic
280-10-50-40 states, “a public entity shall report the revenues from external
customers for each product and service or each group of similar products and
services unless it is impracticable to do so. The amounts of revenues
reported shall be based on the financial information used to produce the public
entity’s general-purpose financial statements.”
In
accordance with ASC Topic 280-10-50-40, the Company has disclosed total revenues
for each group of similar products in footnote 18 of the 2008 Form 10-K and the
2009 Form 10-K. Rendering trade revenue of $585,108 consists mainly
of sales of MBM and BFT. Restaurant Services trade revenue of
$222,384 consists mainly of sales of YG. The Company has expanded its
segment reporting disclosure in the Management’s Discussion and Analysis of
Financial Condition and Results of Operation (“MD&A”) section
and footnote 18 of the 2009 Form 10-K to include a description of products sold
in each segment.
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2.
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Tell us why you do
not explain in your filing the
impact of transportation costs on your business. We note
that you discuss energy costs for factory operations and collections, but
not for shipping your products. We also note that you have not
included information about shipping costs in the significant accounting
policies in your financial
statements, nor have you disclosed these costs in your footnotes, as would
normally be required by ASC Topic
605-45-50.
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In
accordance with ASC Topic 605-45-50, if amounts are material to the Company, the
Company would be required to disclose their policy, as well as the amount of
such costs. As is noted in paragraph 7(a) of the annotated 2009
Form 10-K, the majority of the Company’s sales are FOB Plant and customers incur
the cost to transport purchased products from the Company’s
plants. Transportation costs related to shipping products are not
material to the results of the Company’s operations. Since these
costs are not material to the results of the Company’s operations, the Company
has not included information about shipping costs in its significant accounting
policies footnote to the consolidated financial statements.
Note 6 — Goodwill, page
57
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3.
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We note your
response to prior comment number 8 in our
letter dated November 2, 2009. Please tell us how you
considered the guidance in EITF Topic D-101, which states that components
that relate to different operating segments may not be combined into a
single reporting unit. We note at the end of your response that
the impairment charge recorded for the fiscal year ended January 3, 2009,
related to a single reporting unit, and that this reporting unit is a
component (i.e., plant) that operates in both segments. This
statement appears to contradict the guidance of EITF D-101. It
appears to us the portion of a combined plant that operates in the
restaurant services segment must be identified separately from the portion
of a plant that operates in the rendering segment and assigned to
different components based on the available discrete financial
information. Your analysis for goodwill impairment under SFAS
142 would apply to the allocation of goodwill to each separate component,
which do not include assets from both segments. If your
evaluation has not complied with this guidance in the past, please tell us
whether the impact of complying would have resulted in a materially
different outcome during the three years
presented.
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EITF
Topic D-101 states that components that share similar economic characteristics
but relate to different operating segments may not be combined into a single
reporting unit. EITF Topic D-101 also states that determining whether
a component of an operating segment is a reporting unit is a matter of judgment
based on an entity’s individual facts and circumstances. As stated in
the First Response Letter, the Company manages its business in a “matrix” form
whereby the Chief Operating Decision Maker regularly reviews the operating
results by plant and also the operating results by products and services offered
at each plant. Thus, the Company has defined its two operating and
reportable segments based on products and services (Rendering and Restaurant
Services) under the requirements of paragraph 15 of SFAS 131. As
noted in Item 2 in the 2008 Form 10-K and the 2009 Form 10-K, certain plants
operate in both segments.
The
impairment charge recorded for fiscal year ended January 3, 2009, related to a
plant that performs services and offers products in both operating
segments. The plant reports discrete financial information of each
operating segment at that location.
The
Company had divided its operations into reporting units using the plants as
components in its testing for goodwill impairment, based on the assumption that
results of testing by entire plants would not be materially different from
results of testing after separating the plant into the two segments in
accordance with EITF Topic D-101. Based on this assumption, the
Company tested for impairment of goodwill at reporting units based on
geography/plants at January 3, 2009, and allocated the resulting impairment
charge to the operating segments. In response to your comment above,
the Company has separately identified the portion of each combined plant that
operates in the Restaurant Services segment from the portion of the combined
plant that operates in the Rendering segment in the 2009 Form 10-K and has
revised its reporting units accordingly.
Based on
the revised reporting units, the Company has subsequently re-performed its test
for impairment of goodwill at January 3, 2009, based on products and services
(separately identifying the portion of the plant that operates in the Restaurant
Services segment from the portion of the plant that operates in the Rendering
segment) and has determined that the total impairment charge does not change and
there is not a material difference between the outcomes of the test under either
approach to determining reporting units in relation to the allocation of the
impairment charge between segments. Additionally, the
Company analyzed its testing of impairment for fiscal 2007 and 2006 utilizing
the revised reporting units, noting that its conclusion that no impairment of
goodwill existed is consistent with the original testing for both of these
years.
The
Company will continue to utilize its revised reporting units in its testing for
impairment of goodwill as it has done in the 2009 Form
10-K. Additionally, the Company will revise its future filings to
remove the references to the 2008 impairment at a single reporting unit as it
has done in the 2009 Form 10-K.
Form 10-Q for the Fiscal
Quarter Ended October 3, 2009
Management's Discussion and
Analysis
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4.
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We note your
response to prior comment number 2 in our
letter dated November 2, 2009, and are unable to agree with substantial
portions of your response. We do not believe that your
current disclosure satisfies the requirements of Regulation S-K, Item 303,
and related guidance. We have considered your response
carefully and believe that while additional transparency is required, this
may be achieved without disclosing information that might result in
substantial competitive harm to
you.
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We
also note you have asserted that certain information is not
required because it is not material to an investor's overall understanding of
the company, its business and its results of operations. To the
extent you believe that information we have requested below is not material,
please quantify this information in your response to demonstrate
materiality.
We
believe you should enhance MD&A discussion in
future filings as follows.
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a.
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Expand
the disclosure in the last paragraph of page 25 (and on page 29) of your
Form 10-Q to address all of the material reasons for period-over-period
changes in your revenues, by product. For example, you state
that revenues decreased in the third quarter of 2009 partially due to
price decreases of MBM and BFT. However, you then discuss sales
volume decreases and other factors only for the rendering segment as a
whole, where it appears that these changes should be discussed by
product. Similar information should be provided for the
restaurant segment, as it appears that the change in YG volumes was a
relevant factor in restaurant segment sales declines, but may not have
been the only other factor in addition to price
decreases.
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The Company has improved
its disclosure related to revenues in the 2009 Form 10-K as you have
suggested. For the Staff’s convenience, the Company has
provided on a supplemental basis pages from the 2009 Form 10-K annotated to
demonstrate the revised disclosure. Note that pages 28 and 29 and
pages 34 and 35 of the 2009 Form 10-K include a detailed analysis of the
material factors that contributed to any period-over-period changes in the
Company’s revenues, including, where appropriate, analysis on a segment and
product basis. In connection with any product-specific analysis,
please note that MBM and BFT are derived from the same raw material, are two end
products of the same process, and, although the relative proportions of MBM and
BFT produced from the Company’s raw material remain relatively constant, the
proportion of each product produced from such raw material is dependent upon the
chemical composition (including, but not limited to, protein, fat and moisture
content) of the raw material. The proportion of MBM and BFT produced
from raw material used in the Rendering Segment can vary from one production run
to another and from one production location to another, but will not vary
materially. Consequently, any period-over-period changes to factors
affecting the volume and composition of the Company’s raw material will affect
MBM and BFT substantially similarly. In addition, the rendering
process that results in the production of MBM and BFT does not provide the
Company with the ability to alter the relative proportion of MBM and BFT
produced in any meaningful way. The revised disclosure now includes a
quantitative and qualitative analysis related to period-over-period changes in
revenues derived from the Company’s production of MBM and BFT and a separate
quantitative and qualitative analysis of the various factors impacting revenues
derived from YG. Of course, such disclosure will be modified in
future filings as appropriate to conform to the underlying facts for the
period(s) relevant to each future filing.
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b.
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We
note again that you list six key indicators of performance near the top of
page 24, but we do not believe that you include an adequate analysis of
these indicators for the periods presented. Please add a
discussion of each indicator relative to the period results, to include
both quantifying information as well as a qualitative discussion, or
explain to us where such information is already included in your
filing.
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The
Company has improved its disclosure in the 2009 Form 10-K related to the
analysis of the six key indicators of performance on pages 26 through 28 and
pages 32 through 33 (the “Key Indicators”) by
adding additional quantitative and qualitative disclosure in the MD&A
section. For the Staff’s
convenience, the Company has provided on a supplemental basis pages from the
2009 Form 10-K annotated to demonstrate the revised disclosure. Of
course, such disclosure will be modified in future filings as appropriate to
conform to the underlying facts for the period(s) relevant to each future
filing. Please note that all six Key Indicators are separately
analyzed in the marked disclosure as follows:
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Finished Product Commodity
Prices. Analysis of this Key Indicator is included in
paragraphs 26(a), 28(b), 29(b), 32(a), 34(a) and 35(b) of the annotated
2009 Form 10-K.
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·
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Raw Material
Volume. Analysis of this Key Indicator is included in
paragraphs 27(a), 28(c), 29(c), 30(c), 31(a), 33(a), 34(b) and 35(c)
of the annotated 2009 Form 10-K.
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·
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Production Volume and Related
Yield of Finished Product. Analysis of this Key
Indicator is included in paragraphs 27(b), 28(c), 29(a), 29(c), 29(d),
33(b), 34(b), 35(a), 35(c) and 35(d) of the annotated 2009 Form
10-K.
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Energy Prices for Natural Gas
Quoted on the NYMEX Index and Diesel Fuel. Analysis of
this Key Indicator is included in paragraphs 27(c), 30(a), 31(b), 33(c),
36(a) and 36(c) of the annotated 2009 Form
10-K.
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Collection Fees and Collection
Operating Expense. Analysis of this Key Indicator is
included in paragraphs 27(d), 30(a), 30(b), 31(b), 31(c), 33(d), 36(a),
36(b), 36(c) and 36(d) of the annotated 2009 Form
10-K.
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Factory Operating
Expense. Analysis of this Key Indicator is included in
paragraphs 28(a), 30(a), 31(b), 33(e), 36(a) and 36(c) of the annotated
2009 Form 10-K.
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c.
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We
note again your presentation of the Jacobsen index. Please add
a discussion that compares the trends in the index to the trends of your
own average sales prices. In situations where the trends in the
index and your sales prices do not move in concert, we would expect a
detailed explanation to address this fact as well as a discussion of the
reasons for conflicting movement.
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In
response to your comment above, the Company has revised its disclosure related
to the presentation of the Jacobson index in paragraphs 26(a) and 32(a) of the
annotated 2009 Form 10-K. In connection with such revised disclosure,
please note that the Jacobson index is but one of many tools used by management
to monitor the performance of the business of the Company, does not provide
forward or future period pricing, and is not considered to be indicative of
future prices or trends. The Company has disclosed, and will continue
to disclose, that although the Company’s prices generally move in concert with
reported Jacobsen prices, the Company’s actual prices for its finished products
may vary significantly from the Jacobsen index because of delivery timing
differences and because the Company’s finished products are delivered to
multiple locations in different geographic regions. Of course, such
disclosure will be modified in future filings as appropriate to conform to the
underlying facts for the period(s) relevant to each future filing.
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d.
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Please
add discussion in your MD&A regarding your mix of raw materials
relative to the mix of MBM, BFT and YG sold in each period
presented. For example, discuss the availability of bones, fat
and offal, and whether the ratios of these available materials
change. Also discuss how that mix impacts the quantities of
MBM, EFT and YG produced and sold and whether you are able to increase the
production of one finished product, based upon demand, independent of the
other. Your disclosures should explain to the reader your
ability to adjust or control the mix of finished products as the mix of
raw materials changes.
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As noted
(i) in the Company’s response to Question 4.a. above, and (ii) in
paragraphs 27(b), 28(c), 29(c), 33(b), 34(b), and 35(c) of the annotated
2009 Form 10-K, MBM and BFT are derived from the same raw material, are two
separate end products of the same process, and the proportion of each produced
from such raw material is dependent upon the chemical composition (including,
but not limited to, protein, fat and moisture content) of such raw
material. The proportion of MBM and BFT produced from raw material
used in the Rendering Segment can vary from one production run to another and
from one production location to another, but will not vary
materially. YG is produced solely from (i) raw material used in the
Restaurant Segment and (ii) a small portion of the raw material in the Rendering
Segment that is downgraded from BFT to YG because it does not meet customer
specifications for BFT. In the case of each of MGM, BFT and YG, while
the Company strives to produce the highest quality product possible, the primary
indicator of the mix of finished products is the chemical composition of the raw
material. As explained above, since MBM and BFT are two separate end
products of the same process, the Company cannot meaningfully adjust or alter
the relative proportion of MBM and BFT produced from raw material used by the
Rendering Segment. YG is principally the end product of the
refining process used by the Restaurant Services Segment. Although
some YG may result from the downgrading of BFT for failure to meet a customer’s
product specifications, the preponderance of the raw material used in producing
YG comes from grease collected from the Company’s restaurant
customers.
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e.
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Expand
your discussions to explain further, and by product, why volumes are
down. For example, you state that volumes are down due to a
lower number of packer and processor slaughters. Explain why
these slaughters are down and the factors that impact raw material
availability. Explain whether demand for your products is also
down and, if so, whether you anticipate additional raw materials will be
available if the demand for your products
increases.
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In
response to your comment above, the Company has revised its disclosure related
to raw material volumes in paragraphs 27(a), 28(c), 29(c), 30(c), 31(a), 33(a),
34(b) and 35(c) of the annotated 2009 Form 10-K. In connection with
such revised disclosure, please note that production cutbacks from integrated
packers/processors and closures of mid-sized packer operations as a result of
difficult economic conditions resulted in lower Rendering Segment raw material
available to process. Such difficult economic conditions resulted in
lower Restaurant Segment raw material available to process as
well. With respect to demand for the Company’s products, as noted in
paragraph 24(a) of the annotated 2009 Form 10-K, all of the Company’s finished
products are commodities and are priced relative to competing commodities such
as corn, soybean oil, and soybean meal, which are quoted and traded daily on
various exchanges. As explained in paragraph 24(a) of the annotated
2009 Form 10-K, demand for the Company’s products is directly related to supply
and demand of competing commodities as to nutritional and industry value to the
ultimate customers of the product. As such, prices for the Company’s
products are subject to significant volatility.
As
explained above and in the 2009 Form 10-K, the Company’s products are
commodities and prices/demand for its products respond principally to national
and international demand for the protein and fat components of animal
feed. Substitutes for our products include corn, soybean meal and
soybean oil. Unexpected price increases or declines for the Company’s products
can occur when significant, wide-spread crop events (such as extended draught or
flooding) cause a meaningful oversupply or undersupply of competing agricultural
products without altering underlying demand. However, generally
speaking, when worldwide demand for livestock feed contracts, prices for the
Company’s products decline, and there is generally a corresponding decline in
demand. Demand can also be negatively impacted by import restrictions
imposed by regulatory bodies concerned about conditions such as BSE (discussed
in paragraph 25(a) of the annotated 2009 Form 10-K). If there is
economic recovery or expansion in the U.S. or in other industrialized areas of
the world where consumers spend disposable income on meat products, and/or if
regulatory bodies (particularly in Asia) lift or favorably modify existing
restrictions on importing U.S. beef, the Company would expect that more cattle,
hogs and poultry would be put on feed, increasing demand for the Company’s
product. However, the end result of the chain created by more animals
being fed for eventual human consumption would be increased operations of the
Company’s historical suppliers, such as butcher shops, grocery stores and
independent beef, pork and poultry processors, thus generating more scraps, bone
and offal, thereby generating more raw material to meet increasing
demand.
Certifications
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5.
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We
note that your certifications filed as Exhibits 31.1 and 31.2 are both
dated August 13, 2009, and that your certification filed as Exhibit 32 is
dated July 13, 2009, for both signatures, and that it refers to the Form
10-Q for the quarter ended July 4, 2009. Please amend your
filing to correct these exhibits.
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The
Company has amended its filing to correct these exhibits. The
execution versions of Exhibits 31.1, 31.2 and 32 contained in the Company’s
records include the correct date of November 12, 2009; however, in preparing the
EDGAR submission of such exhibits, incorrect dates were inadvertently
included. The Company has provided on a supplemental basis a
photocopy of (i) the executed versions of these exhibits reflecting the
correct dates and (ii) the executed versions of the certifications filed
with the Company’s Form 10-Q/A, filed on the date hereof, which were furnished
in order to provide certifications of the date of the filing of the Form
10-Q/A.
Should
you have any questions regarding the foregoing or the Revisions, please contact
the undersigned at (214) 746-7864.
Very
truly yours,
/s/
Mary R. Korby
Mary R. Korby