Omega Protein Corporation
OMEGA PROTEIN CORP (Form: 10-Q, Received: 11/08/2011 16:09:41)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

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: 001-14003

 

 

OMEGA PROTEIN CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

State of Nevada   76-0562134

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2105 City West Blvd., Suite 500  
Houston, Texas   77042-2838
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (713) 623-0060

 

 

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, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Small reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes   ¨    No   x .

Number of shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, on November 3, 2011: 19,378,851.

 

 

 


Table of Contents

OMEGA PROTEIN CORPORATION

TABLE OF CONTENTS

 

PART I.   FINANCIAL INFORMATION       
Item 1.   Financial Statements and Notes   
  Unaudited Condensed Consolidated Balance Sheet as of September 30, 2011 and December 31, 2010      3   
 

Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the three months and nine months ended September 30, 2011 and 2010

     4   
 

Unaudited Condensed Consolidated Statement of Cash Flows for the nine months ended September  30, 2011 and 2010

     5   
  Notes to Unaudited Condensed Consolidated Financial Statements      6   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      25   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      37   
Item 4.   Controls and Procedures      37   
PART II.   OTHER INFORMATION   
Item 1.   Legal Proceedings      38   
Item 1A.   Risk Factors      38   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      39   
Item 3.   Defaults Upon Senior Securities      39   
Item 4.   Removed and Reserved      39   
Item 5.   Other Information      39   
Item 6.   Exhibits      39   
Signatures      41   

 

2


Table of Contents

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements and Notes

 

     September 30,
2011
    December 31,
2010
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 51,020      $ 19,784   

Receivables, net

     27,393        11,492   

Inventories

     82,767        74,692   

Deferred tax asset, net

     394        1,673   

Prepaid expenses and other current assets

     4,723        3,641   
  

 

 

   

 

 

 

Total current assets

     166,297        111,282   

Other assets, net

     6,454        3,051   

Energy swap asset, net of current portion

     —          23   

Property, plant and equipment, net

     117,722        111,726   

Goodwill and other intangible assets, net

     12,799        10,702   
  

 

 

   

 

 

 

Total assets

   $ 303,272      $ 236,784   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Current maturities of long-term debt

   $ 2,992      $ 2,994   

Current portion of capital lease obligation

     496        439   

Accounts payable

     3,270        2,776   

Accrued liabilities

     47,496        21,360   
  

 

 

   

 

 

 

Total current liabilities

     54,254        27,569   

Long-term debt, net of current maturities

     28,071        30,307   

Capital lease obligation, net of current portion

     407        820   

Interest rate swap liability, net of current portion

     —          98   

Deferred tax liability, net

     15,548        12,209   

Pension liabilities, net

     6,721        8,254   

Energy swap liability, net of current portion

     123        —     
  

 

 

   

 

 

 

Total liabilities

     105,124        79,257   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value; 10,000,000 authorized shares; none issued

     —          —     

Common Stock, $0.01 par value; 80,000,000 authorized shares; 19,378,851 and 18,827,278 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively

     194        188   

Capital in excess of par value

     124,144        116,950   

Retained earnings

     81,666        48,072   

Accumulated other comprehensive loss

     (7,856     (7,683
  

 

 

   

 

 

 

Total stockholders’ equity

     198,148        157,527   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 303,272      $ 236,784   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

3


Table of Contents

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share amounts)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2011     2010     2011     2010  

Revenues

   $ 71,741      $ 56,014      $ 172,373      $ 124,571   

Cost of sales

     58,315        40,742        128,511        94,461   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     13,426        15,272        43,862        30,110   

Selling, general, and administrative expense

     5,613        3,603        15,231        10,825   

Research and development expense

     466        415        1,450        1,349   

Proceeds/gains resulting from Gulf of Mexico oil spill disaster

     —          (587     (26,177     —     

Other proceeds/gains resulting from natural disaster, net—2008 storms

     —          —          —          (234

Other proceeds/gains resulting from natural disaster, net—2005 storms

     —          —          (787     —     

Loss (gain) on disposal of assets

     199        (15     649        253   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     7,148        11,856        53,496        17,917   

Interest income

     6        22        34        28   

Interest expense

     (496     (676     (1,638     (1,934

Other expense, net

     (50     (143     (164     (321
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     6,608        11,059        51,728        15,690   

Provision for income taxes

     1,873        4,089        18,134        5,758   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     4,735        6,970        33,594        9,932   

Other comprehensive income (loss):

        

Energy swap adjustment, net of tax (benefit) expense of ($864), $79, ($395) and ($254), respectively

     (1,605     153        (756     (493

Pension benefits adjustment, net of tax expense of $105, $98, $123 and $293, respectively

     194        190        583        568   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 3,324      $ 7,313      $ 33,421      $ 10,007   
  

 

 

   

 

 

   

 

 

   

 

 

 
        

Basic earnings per share

   $ 0.24      $ 0.37      $ 1.75      $ 0.53   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

     19,374        18,819        19,200        18,792   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.24      $ 0.37      $ 1.69      $ 0.53   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares and potential common share equivalents outstanding

     20,073        18,929        19,931        18,852   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

4


Table of Contents

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

 

     Nine Months  Ended
September 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 33,594      $ 9,932   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     12,072        11,003   

Other proceeds/gains resulting from natural disaster, net—2008 storms

     —          (234

Other proceeds/gains resulting from natural disaster, net—2005 storms

     (787     —     

Loss on disposal of assets

     649        253   

Provisions for losses on receivables

     36        36   

Share based compensation

     2,408        1,216   

Deferred income taxes

     4,703        5,596   

Changes in assets and liabilities:

    

Receivables

     (14,557     (6,323

Inventories

     (8,075     (7,069

Prepaid expenses and other current assets

     (2,088     (1,093

Other assets

     (4,524     (590

Accounts payable

     252        (1,365

Accrued liabilities

     28,124        8,902   

Pension liability, net

     (639     (732
  

 

 

   

 

 

 

Net cash provided by operating activities

     51,168        19,532   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from insurance companies and grants, hurricanes

     —          234   

Proceeds from disposition of assets

     2,232        50   

Acquisition of InCon, net of cash acquired

     (9,028     —     

Acquisition of Cyvex, net of cash acquired

     (2,086     —     

Capital expenditures

     (13,248     (10,662
  

 

 

   

 

 

 

Net cash used in investing activities

     (22,130     (10,378
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Principal payments of long-term debt

     (2,238     (1,951

Principal payments of capital lease obligation

     (356     (279

Proceeds from long term debt

     —          10,000   

Proceeds from stock options exercised

     2,879        307   

Excess tax benefit of stock options exercised

     1,913        47   
  

 

 

   

 

 

 

Net cash provided by financing Activities

     2,198        8,124   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     31,236        17,278   

Cash and cash equivalents at beginning of year

     19,784        2,177   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 51,020      $ 19,455   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

5


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENS ED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES SUMMARY OF OPERATIONS AND BASIS OF PRESENTATION

Business Description

Omega Protein Corporation (the “Company”) operates through four primary subsidiaries: Omega Protein, Inc., Omega Shipyard, Inc., Cyvex Nutrition, Inc. and InCon Processing, L.L.C. Omega Protein, Inc. (“Omega Protein”), which is the Company’s principal operating subsidiary, operates in the menhaden harvesting and processing business and is the successor to a business conducted since 1913. Omega Shipyard, Inc. (“Omega Shipyard”) owns and operates a drydock facility in Moss Point, Mississippi. Cyvex Nutrition, Inc. (“Cyvex”), founded in 1984 and acquired by the Company on December 16, 2010, is located in Irvine, California and is an ingredient supplier in the nutraceutical industry. InCon Processing, L.L.C. (“InCon”), acquired by the Company on September 9, 2011, is located in Batavia, Illinois and is a specialty toll processor that utilizes molecular distillation technology to concentrate a variety of compound products, including Omega-3 fish oils. The Company also has a number of other immaterial direct and indirect subsidiaries.

Omega Protein Corporation is a nutritional ingredient company and the nation’s leading vertically integrated producer of Omega-3 fish oil and specialty fish meal products. Omega Protein produces and markets a variety of products produced from menhaden (a herring-like species of fish found in commercial quantities in the U.S. coastal waters of the Atlantic Ocean and Gulf of Mexico), including regular grade and value-added specialty fish meals, crude and refined fish oils and fish solubles. Omega Protein’s fish meal products are primarily used as a protein ingredient in animal feed for swine, aquaculture and household pets. Fish oil is utilized for animal and aquaculture feeds, industrial applications, as well as for additives to human food products and dietary supplements. Omega Protein’s fish solubles are sold primarily to livestock feed manufacturers, aquaculture feed manufacturers and for use as an organic fertilizer.

Omega Shipyard’s drydock facility is used to provide shoreside maintenance for Omega Protein’s fishing fleet and, subject to outside demand and excess capacity, occasionally for third-party vessels.

Cyvex is a premium, science-based nutraceutical supplier to dietary supplement manufacturers that focus on human health and wellness.

InCon is a specialty toll processor that designs, pilots, synthesizes and purifies specialty chemical compounds, utilizing molecular distillation technology to concentrate a variety of compound products, including Omega-3 fish oils.

Basis of Presentation

These interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally provided have been omitted. The interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

In the opinion of management the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s consolidated financial position as of September 30, 2011, and the results of its operations for the three and nine month periods ended September 30, 2011 and 2010 and its cash flows for the nine month periods ended September 30, 2011 and 2010. Operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

Consolidation

The consolidated financial statements include the accounts of Omega Protein Corporation and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Financial Statement Preparation

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Company’s financial statements and the accompanying notes and the reported amounts of revenues and expenses during the reporting period. Actual amounts, when available, could differ from those estimates and those differences could have a material affect on the financial statements.

 

6


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

Acquisition of InCon Processing

On September 9, 2011, the Company acquired all of the outstanding equity of InCon Processing, L.L.C., (“InCon”), a Delaware limited liability company, in a cash transaction pursuant to the terms of an equity purchase agreement. The Company believes that the acquisition of InCon’s concentration technology will allow Omega Protein to provide its customers with an enhanced range of Omega-3 fish oils in concentrated forms such as ethyl esters and triglycerides.

As consideration for the acquisition of InCon, the Company paid cash of $8.7 million, utilizing cash on hand, plus an additional $0.7 million representing InCon’s estimated working capital on the closing date. As part of the equity purchase agreement, the sellers may earn additional amounts based on the annual earnings before interest, taxes, depreciation, and amortization, of InCon’s toll processing and specialty product business during calendar years 2012 through 2016. The transaction has been accounted for using the acquisition method of accounting which requires, among other things, that most assets acquired and liabilities assumed from acquisitions be recognized at their fair values as of the acquisition date. See Note 2—Acquisition of InCon Processing, L.L.C.

Gulf of Mexico Oil Spill Disaster

In 2010, the Company accounted for $18.7 million in emergency payments received from the Gulf Coast Claims Facility (“GCCF”) during September and October related to damages incurred from the Gulf of Mexico oil spill disaster in its inventory and cost of sales. The payments partially reduced cost of sales by 6.0%, or $8.2 million, and $7.1%, or $7.2 million, for the nine months ended September 30, 2011 and 2010, respectively. With the recognition of these amounts, the Company has completed recognizing the $18.7 million in payments applied to its inventory cost pool as a result of the 2010 Gulf of Mexico oil spill disaster.

In April 2011, the Company agreed to a final settlement of all of its claims for costs and damages incurred as a result of the oil spill caused by the Deepwater Horizon explosion on April 20, 2010. As a result of the settlement, on April 18, 2011 the Company received a final payment of $26.2 million, net of fees and expenses, from the GCCF. The amount was recognized as “Proceeds/gains resulting from Gulf of Mexico oil spill disaster” in the Company’s Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for nine months ended September 30, 2011.

In total, the Company received payments of $44.8 million, net of fees and expenses, from the GCCF in 2010 and 2011. As a part of the final settlement, the Company released and waived all current and future claims against BP and all other potentially responsible parties with regard to the oil spill.

For additional information, see Note 3—Gulf of Mexico Oil Spill Disaster.

Inventories

During the off-seasons, in connection with the upcoming fishing seasons, Omega Protein incurs costs (e.g., plant and vessel related labor, utilities, rent, repairs, and depreciation) that are directly related to Omega Protein’s infrastructure. These costs accumulate in inventory and are applied as elements of the cost of production of Omega Protein’s products throughout the fishing season ratably based on monthly units of production and the expected total units of production for the season.

Any costs incurred during abnormal downtime related to activity at Omega Protein’s plants are charged to expense as incurred.

Insurance

There have been no material insurance policy changes from those previously disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2010.

Interest Rate Swap Agreements

The Company does not enter into financial instruments for trading or speculative purposes. The Company entered into interest rate swap agreements to manage its cash flow exposure to interest rate changes with notional amounts as indicated below that are scheduled to mature through March 2012. As originally established, the swaps effectively converted all the Company’s variable rate debt under the term loan under its bank credit facility to a fixed rate, without exchanging the notional principal amounts. Prior to September 30, 2009, these agreements were designated as a cash flow hedge and reflected at fair value in the Company’s Unaudited Condensed Consolidated Balance Sheet as a component of total liabilities, and the related gains or losses were deferred in stockholders’ equity as a component of accumulated other comprehensive loss.

 

7


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

Interest rate swap balances at September, 30, 2011:

 

Date of Contract

   Original
Notional
Amount
     Notional Amounts as  of
September 30, 2011
     Contracted
Interest Rate
    Total Liability as  of
September 30, 2011
 

April 4, 2007

   $ 19,950,000       $ 7,481,300         5.16   $ 162,800   

February 7, 2008

     10,237,500         3,937,500         3.36     52,900   

March 19, 2008

     4,436,250         1,706,200         2.96     19,800   
     

 

 

      

 

 

 
      $ 13,125,000         $ 235,500   

Interest rate swap balances at December 31, 2010:

 

Date of Contract

   Original
Notional
Amount
     Notional Amounts as  of
December 31, 2010
     Contracted
Interest Rate
    Total Liability as of
December  31, 2010
 

April 4, 2007

   $ 19,950,000       $ 10,474,000         5.16   $ 498,300   

February 7, 2008

     10,237,500         5,512,000         3.36     161,800   

March 19, 2008

     4,436,250         2,389,000         2.96     60,400   
     

 

 

      

 

 

 
      $ 18,375,000         $ 720,500   

On September 24, 2009, the Company paid $16.6 million of the borrowings outstanding under the term loan under its prior senior credit facility using the Company’s existing cash balances. Additionally, on October 21, 2009, the Company entered into a Loan Agreement with Wells Fargo Bank N.A. which replaced its prior senior credit facility. The details are described more fully in Note 9 to the consolidated financial statements of the Company’s Form 10-K for the fiscal year ended December 31, 2010. As a consequence of the debt prepayment and refinancing, the Company determined that the forecasted interest payments associated with the interest rate swaps would not occur. As a result, hedge accounting relating to the interest rate swaps was discontinued and all amounts previously recognized in accumulated other comprehensive loss were reclassified to earnings during 2009. The total interest (income) expense associated with the interest rate swap transactions for the three and nine months ended September 30, 2011 and 2010 was ($3,400), $109,400, $24,700 and $383,800, respectively. The interest rate swap agreements remained outstanding as of September 30, 2011.

As of September 30, 2011 and December 31, 2010, the Company has recorded a long-term liability of $0 and $98,000, respectively, net of the current portion in accrued liabilities of $235,500 and $622,500, respectively, to recognize the fair value of interest rate derivatives.

Energy Swap Agreements

The Company does not enter into financial instruments for trading or speculative purposes. During 2011, 2010 and 2009, Omega Protein entered into energy swap agreements to manage its cash flow exposure related to the volatility of natural gas, diesel and Bunker C energy prices for its fishmeal and fish oil production operations. The swaps effectively fix pricing for the quantities listed below during the consumption periods.

Energy swap balances at September 30, 2011:

 

Energy Swap

  

Consumption Period

   Quantity    Price
Per
Unit
     Energy Swap
Asset (Liability)

as of
September 30, 2011
    Deferred Tax
Asset (Liability)

as of
September 30, 2011
 

Diesel— NYMEX Heating Oil Swaps

   Oct—Nov, 2011    489,500
Gallons
   $ 2.44       $ 167,700      $ (58,700

Natural Gas—NYMEX Natural Gas Swaps

   Oct, 2011    52,500
MMBTUs
   $ 5.01         (65,900     23,100   

Bunker C— No.6 0.3% NY-Platts Swaps and No.6 1.0% NY—Platts Swaps

   Oct— Nov, 2011    504,000
Gallons
   $ 1.98         208,900        (73,100

Diesel— NYMEX Heating Oil Swaps

   May—Nov, 2012    1,810,000
Gallons
   $ 2.87         (362,700     126,900   

 

8


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

Natural Gas— NYMEX Natural Gas Swaps

   April—Oct, 2012    308,000
MMBTUs
   $ 4.90         (211,600     74,100   

Bunker C—No.6 1.0% NY-Platts Swaps

   Jun—Nov, 2012    1,045,800
Gallons
   $ 2.31         (94,400     33,000   

Natural Gas—NYMEX Natural Gas Swaps

   April—Oct, 2013    104,000
MMBTUs
   $ 5.00         (27,600     9,700   
           

 

 

   

 

 

 
              $ (385,600)      $ 135,000   
           

 

 

   

 

 

 

Energy swap balances at December 31, 2010:

 

Energy Swap

  

Consumption Period

   Quantity    Price
Per Unit
     Energy Swap
Asset (Liability)

as of
December 31,
2010
    Deferred Tax
Asset (Liability)

as of
December 31,
2010
 

Diesel— NYMEX Heating Oil Swap

   May—Nov, 2011    1,714,000
Gallons
   $ 2.12       $ 776,200      $ (263,900

Natural Gas— NYMEX Natural Gas Swap

   April—Oct, 2011    336,000
MMBTUs
   $ 5.24         (239,800     81,500   

Bunker C—No.6 0.3% NY-Platts Swap

   May—Nov, 2011    672,000
Gallons
   $ 1.77         206,500        (70,200

Diesel—NYMEX Heating Oil Swap

   May—Nov, 2012    648,000
Gallons
   $ 2.50         57,400        (19,500

Natural Gas—NYMEX Natural Gas Swap

   April—Oct, 2012    101,000
MMBTUs
   $ 5.30         (36,000     12,200   

Bunker C—No.6 1.0% NY-Platts Swap

   Jun—Nov, 2012    378,000
Gallons
   $ 2.00         1,300        (400
           

 

 

   

 

 

 
            $ 765,600      $ (260,300
           

 

 

   

 

 

 

As of September 30, 2011 and December 31, 2010, Omega Protein has recorded a long-term (liability) asset of ($123,100) and $22,600, respectively, net of the current portion included in (accrued liabilities) prepaid expenses and other current assets of ($262,500) and $743,000, respectively, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax asset (liability) of $135,000 and ($260,300), respectively, associated therewith. The effective portion of the change in fair value from inception to September 30, 2011 is recorded in “accumulated other comprehensive loss” in the Company’s consolidated financial statements. The following table illustrates the changes recorded, net of tax, in accumulated other comprehensive loss resulting from the energy swap agreements (in thousands).

 

     Three Months Ended
September  30,
     Nine Months Ended
September  30,
 
     2011     2010      2011     2010  

Beginning balance

   $ 1,354      $ 123       $ 505      $ 769   

Net (gain) loss, net of tax, reclassified to unallocated inventory cost pool

     (768     103         (1,266     260   

Net change associated with current period swap transactions, net of tax

     (837     50         510        (753
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

   $ (251   $ 276       $ (251   $ 276   
  

 

 

   

 

 

    

 

 

   

 

 

 

The $0.3 million reported in accumulated other comprehensive loss as of September 30, 2011 will be reclassified to the unallocated inventory cost pool in the period when the energy consumption takes place. The amount to be reclassified, net of taxes, during the next 12 months is expected to be approximately $0.2 million.

If, at any time, the swaps are determined to be ineffective, in whole or in part, due to changes in the Company’s energy usage or underlying hedge agreements or assumptions, the fair value of the portion of the energy swaps determined to be ineffective will be recognized as a gain or loss in cost of sales for the applicable period. See Note 18—Fair Value Disclosures for additional information.

 

9


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

Accumulated Comprehensive Loss

The components of accumulated other comprehensive loss included in stockholders’ equity are as follows:

 

     September 30,
2011
    December 31,
2010
 
     (in thousands)  

Fair Value of Energy Swaps, net of tax (benefit) provision of ($135) as of September 30, 2011 and $260 as of December 31, 2010

   $ (251   $ 505   

Pension Benefits Adjustments, net of tax benefit of $4,095 as of September 30, 2011 and $4,218 as of December 31, 2010

     (7,605     (8,188
  

 

 

   

 

 

 

Accumulated other comprehensive loss

   $ (7,856   $ (7,683
  

 

 

   

 

 

 

Goodwill and Other Intangible Assets

The Company does not amortize goodwill or indefinite-lived intangible assets but performs tests for impairment annually, or when indications of potential impairment exist, utilizing a fair value approach at the reporting unit level. The Company determines fair value using widely accepted valuation techniques, including the income approach which estimates the fair value of its reporting units based on the future discounted cash flows, and the market approach which estimates the fair value of its reporting units based on comparable market prices. In testing for a potential impairment of goodwill, the Company estimates the fair value of its reporting units to which goodwill relates and compares it to the carrying value (book value) of the assets and liabilities related to those businesses.

The Company amortizes other intangible assets with determinable lives over their estimated useful lives. The Company records an impairment charge on these assets when it determines that their carrying value may not be recoverable. The carrying value is not recoverable if it exceeds the undiscounted future cash flows resulting from the use of the asset and its eventual disposition. When there is existence of one or more indicators of impairment, the Company measures any impairment of intangible assets based on a projected discounted cash flow method using a discount rate determined by the Company’s management to be commensurate with the risk inherent in its business model. The Company’s estimates of future cash flows attributable to its other intangible assets require significant judgment based on the Company’s historical and anticipated results and are subject to many factors. See Note 10—Goodwill and Other Intangible Assets, for more information about goodwill and other intangible assets.

Recently Issued Accounting Standards

On September 15, 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. The revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities the option of performing a qualitative assessment to determine whether further impairment testing is necessary. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt even if its annual test date is before the issuance of the final standard, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. The Company is evaluating the impact, if any, the adoption will have on its consolidated financial statements.

On June 16, 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. An entity may present items of net income and other comprehensive income in one continuous statement, or in two separate, but consecutive statements. The change is intended to enhance comparability between entities that report under U.S. GAAP and those that report under International Financial Reporting Standards (IFRS), and to provide a more consistent method of presenting non-owner transactions that affect an entity’s equity. The guidance is effective as of the beginning of a fiscal year that begins after December 15, 2011, which corresponds to the Company’s first fiscal quarter beginning January 1, 2012. The Company currently reports other comprehensive income with net income in one statement. On October 21, 2011, the FASB decided to propose a deferral of that portion of the standard that would have required reclassifications of other comprehensive income on the face of the income statement. The Company is evaluating the impact, if any, the adoption will have on its consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04 regarding fair value measurements and disclosures. This new guidance clarifies the application of existing fair value measurement guidance and revises certain measurement and disclosure requirements to achieve convergence with IFRS. This guidance is effective for the first interim or annual period beginning after December 15, 2011, which corresponds to the Company’s first fiscal quarter beginning January 1, 2012. The Company is evaluating the impact, if any, the adoption will have on its consolidated financial statements.

 

10


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

Stock-Based Compensation

Stock Options

The Company has a stock-based compensation plan, which is described in more detail in Note 14 to the consolidated financial statements of the Company’s Form 10-K for the fiscal year ended December 31, 2010. The Company has issued non-qualified stock options under its stock incentive plans. The options generally vest in equal installments over three years and expire in ten years. Non-vested options are generally forfeited upon termination of employment.

Net income for the three and nine months ended September 30, 2011 and 2010 includes $0.9 million, $0.5 million, $2.4 million, and $1.2 million ($0.6 million, $0.3 million, $1.6 million and $0.8 million after-tax), respectively, of stock-based compensation costs related to stock options which are primarily included in selling, general and administrative expenses in the unaudited condensed consolidated statement of operations. As of September 30, 2011, there was $4.6 million ($3.0 million after-tax) of total unrecognized compensation costs related to non-vested stock options that is expected to be recognized over a weighted-average period of 1.9 years, of which $0.8 million ($0.5 million after-tax) of total stock option compensation is expected to be recognized during the remainder of fiscal year 2011.

Restricted Stock

The Company has also issued shares of restricted stock under its 2006 Incentive Plan. Holders of shares of restricted stock are entitled to all rights of a stockholder of the Company with respect to the restricted stock, including the right to vote the shares and receive any dividends or other distributions. The shares are considered issued and outstanding on the date granted and are included in the basic earnings per share calculation.

In July 2011, the Company issued 15,698 shares of common stock to a new executive officer pursuant to a restricted stock agreement. Expenses related to the Company’s restricted stock grants are reflected in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations and amounted to $17,000 for the three and nine months ended September 30, 2011. As of September 30, 2011, there was $183,000 ($119,000 after-tax) of remaining future restricted stock expense to be recognized over a period of 2.75 years, of which $17,000 ($11,000 after-tax) is expected to be recognized during the remainder of fiscal year 2011.

NOTE 2. ACQUISITION OF INCON PROCESSING, L.L.C.

A. Description of the Transaction

On September 9, 2011, the Company acquired all of the outstanding equity of InCon Processing, L.L.C., a Delaware limited liability company, in a cash transaction pursuant to the terms of an equity purchase agreement. The equity of InCon was indirectly held by four individuals (the “Sellers”), three of whom will continue to be employed by InCon and will manage InCon’s business. InCon is now a wholly owned subsidiary of the Company. InCon is a specialty toll processor that designs, pilots, synthesizes and purifies specialty chemical compounds, utilizing molecular distillation technology to concentrate a variety of compound products, including Omega-3 fish oils.

B. Recording of Assets Acquired and Liabilities Assumed

At closing, the Company paid an aggregate cash purchase price for the equity of InCon of $8.7 million, utilizing cash on hand, and also paid $0.7 million representing InCon’s estimated working capital on the closing date. The working capital portion of the purchase price is subject to a post-closing adjustment to account for differences between estimated working capital and actual working capital of InCon as of the closing date.

The sellers, the majority of which were retained as employees after the acquisition, may earn additional amounts based on the annual earnings before interest, taxes, depreciation, and amortization (“EBITDA”) of InCon’s toll processing and specialty product business during calendar years 2012 through 2016. The annual earn-out payments are determined based on a percentage of InCon’s EBITDA which percentage ranges from five percent (5%) of the first $3.0 million of EBITDA to thirty percent (30%) of EBITDA in excess of $12.0 million.

The annual earn-out payments, if any, will be estimated on a quarterly basis and paid subsequent to year end. The Company will record the estimated contractual obligation as compensation expense during each year as it is deemed probable that such amount will be payable. In addition, the earn-out payments are subject to certain reductions associated with future InCon capital expenditures and forfeitures based on termination of employment.

 

11


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

The Company incurred approximately $0.1 million in pretax transaction costs directly related to the acquisition that were expensed and included in selling, general and administrative expenses in the Unaudited Consolidated Statement of Operations for the three and nine months ended September 30, 2011. The acquisition costs consisted primarily of legal, advisory, valuation, and other consulting fees. The transaction has been accounted for using the acquisition method of accounting which requires, among other things, that most assets acquired and liabilities assumed from acquisitions be recognized at their fair values as of the acquisition date. Any excess of the purchase price over the fair values of the net assets acquired are recorded as goodwill. The following table summarizes the fair values of the InCon assets and acquired liabilities assumed based on the total consideration at acquisition of $9.4 million.

 

     Amounts
recognized as  of
acquisition date
 
     (in thousands)  

Working capital (a)

   $ 714   

Property, plant, and equipment, net

     6,400   

Identifiable intangible assets (b)

     1,341   
  

 

 

 

Total identifiable net assets

     8,455   

Goodwill

     936   
  

 

 

 

Total consideration

   $ 9,391   
  

 

 

 

 

(a) Includes cash and cash equivalents, accounts receivable, and accounts payable.
(b) See Note 10—Goodwill and other intangible assets for weighted average lives.

As of the acquisition date, the fair value of accounts receivable approximated book value acquired. The gross contractual amount receivable was $567,000, of which a $33,000 allowance for doubtful accounts was recorded.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of InCon includes the following:

 

   

the expected synergies and other benefits that we believe will result from combining the operations of InCon with the operations of Omega Protein and Cyvex,

 

   

any intangible assets that do not qualify for separate recognition,

 

   

the value of the going-concern element of InCon’s existing business (the higher rate of return on the assembled collection of net assets versus if Omega had acquired all of the net assets separately).

The Company does not amortize goodwill or indefinite-lived intangible assets but performs tests for impairment annually, or when indications of potential impairment exist, utilizing a fair value approach at the reporting unit level. See Note 10—Goodwill and Other Intangible Assets, for more information about goodwill and other intangible assets.

InCon’s results of operations are included in the Company’s Unaudited Condensed Consolidated Statement of Operations beginning on September 9, 2011. Revenues generated by InCon included in the Unaudited Condensed Consolidated Statement of Operations from September 9, 2011 through September 30, 2011 were approximately $0.2 million. Net loss for the same period was approximately $0.1 million.

C. Unaudited Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of the Company and InCon on a pro forma basis, as though the companies had been combined as of the beginning of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had actually taken place at the beginning of the period presented and is not intended to be a projection of future results or trends.

 

12


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

     Revenue      Net Income (loss)  
     (in thousands)  

InCon from 09/09/2011—09/30/2011

   $  181       $ (110

2011 supplemental pro forma from July 1, 2011—September 30, 2011

   $ 72,682       $ 4,686   

2011 supplemental pro forma from January 1, 2011—September 30, 2011

   $ 175,794       $ 33,529   

2010 supplemental pro forma from July 1, 2010—September 30, 2010

   $ 56,810       $ 6,782   

2010 supplemental pro forma from January 1, 2010—September 30, 2010

   $ 127,536       $ 9,541   

NOTE 3. GULF OF MEXICO OIL SPILL DISASTER

As a result of the oil spill caused by the Deepwater Horizon oil rig explosion in the Gulf of Mexico in April 2010 and the subsequent temporary and intermittent closures of certain commercial and recreational fishing grounds by the Louisiana Department of Fisheries and Wildlife, the Mississippi Department of Marine Resources and the National Oceanic and Atmospheric Administration (“NOAA”), Omega Protein’s total fish catch for 2010 was materially impacted. In addition, Omega Protein incurred costs associated with the temporary re-deployment of many of its Gulf of Mexico fishing vessels, costs to purchase fish meal from third party vendors to offset lost production, and increased costs per unit of production resulting from intermittent plant closures.

During 2010, Omega Protein filed a claim for damages with BP and also met with BP’s third party claims adjuster. On August 23, 2010, the claims process for BP was moved to the GCCF, a claims facility tasked with claims administration and payment distribution for those businesses and individuals that suffered damages and incurred other costs related to the oil spill.

On September 2 and October 19, 2010, Omega Protein received its first and second emergency payments from the GCCF of $7.3 million and $11.4 million, respectively. These payments were utilized in the following manner: 1) $0.6 million of the payments to offset previously recognized losses as of June 30, 2010 related to costs that were not able to be allocated to production as a result of intermittent plant closures, with the remainder used 2) to offset costs Omega Protein incurred to purchase 6,315 tons of fish meal which partially offset lost production, and 3) to offset the high costs per unit of production Omega Protein incurred during the 2010 fishing season in the Gulf of Mexico as a result of the closure of its fishing grounds.

The majority of the first and second emergency payments were credited to the 2010 unallocated inventory cost pool (including off-season costs). Because both of these payments were included in the cost per unit of production calculation for the 2010 fishing season, cost of sales was partially reduced by 6.0%, or $8.2 million, and 7.1%, or $7.2 million, for the nine months ended September 30, 2011 and 2010, respectively. With the recognition of these amounts, the Company completed recognizing the $18.7 million in payments applied to its inventory cost pool as a result of the 2010 Gulf of Mexico oil spill disaster.

The Gulf of Mexico oil spill disaster directly affected Omega Protein by decreasing its fish catch due to the closure of state and federal fishing grounds and increased the cost of its normal fishing effort due to the repositioning and staging of its fleet at other locations. The decrease in fish catch reduced Omega Protein’s volume of inventory available to sell which reduced its sales volumes and revenues for the third and fourth quarters of 2010. The decrease in fish catch and additional costs incurred related to Omega Protein’s 2010 standard cost were partially offset by the receipt of two GCCF emergency payments, as described above.

In April 2011, the Company agreed to a final settlement of all of its claims for costs and damages incurred as a result of the oil spill caused by the Deepwater Horizon explosion. As a result of the settlement, on April 18, 2011 the Company received a final payment of $26.2 million, net of fees and expenses, from the GCCF. The amount was recognized as “Proceeds/gains resulting from Gulf of Mexico oil spill disaster” in the Company’s Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the nine months ended September 30, 2011.

In total, the Company received payments of $44.8 million, net of fees and expenses, from the GCCF, including the 2010 emergency payments described above. As a part of the final settlement, the Company released and waived all current and future claims against BP and all other potentially responsible parties with regard to the oil spill. Omega Protein cannot predict what effect the oil spill will have on future years’ fish catch or customer perceptions about its products.

NOTE 4. ACQUISITION OF CYVEX NUTRITION, INC.

A. Description of the Transaction

On December 16, 2010, the Company acquired 100% of the outstanding common stock of Cyvex Nutrition, Inc. (“Cyvex”), a California corporation, in a cash transaction pursuant to the terms of a Stock Purchase Agreement with the founder and sole shareholder of Cyvex. Cyvex now is a wholly owned subsidiary of the Company. Cyvex is a premium, science-based nutraceutical supplier to dietary supplement manufacturers that focus on human health and wellness.

 

13


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

Cyvex’s revenues and net incomes for the three and nine month periods ending September 30, 2011 are presented in the following table.

 

      

Revenue

     Net income  
     (in thousands)  

July 1, 2011—September 30, 2011

   $  3,312       $ 558   

January 1, 2011—September 30, 2011

   $ 9,838       $ 1,197   

As total consideration for the acquisition of Cyvex, the Company paid cash of $13.1 million, utilizing cash on hand, with no contingent consideration. This amount includes final post-closing cash payments of $2.1 million made to Cyvex’s former owner during the first quarter of 2011. The $2.1 million was included in accrued liabilities at December 31, 2010. See Note 10— Goodwill and other intangible assets.

B. Unaudited Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of the Company and Cyvex on a pro forma basis, as though the companies had been combined as of the beginning of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had actually taken place at the beginning of the period presented and is not intended to be a projection of future results or trends.

 

      

Revenue

     Net income  
     (in thousands)  

2010 supplemental pro forma from July 1, 2010—September 30, 2010

   $ 58,786       $ 7,242   

2010 supplemental pro forma from January 1, 2010—September 30, 2010

   $ 133,586       $ 10,879   

NOTE 5. RECEIVABLES, NET

Receivables as of September 30, 2011 and December 31, 2010 are summarized as follows:

 

     September 30,
2011
    December 31,
2010
 
     (in thousands)  

Trade

   $ 20,708      $ 10,739   

Insurance

     5,760        18   

State income tax

     660        785   

Energy swap settlements

     445        —     

Other

     93        154   
  

 

 

   

 

 

 

Total receivables

     27,666        11,696   

Less: allowance for doubtful accounts

     (273     (204
  

 

 

   

 

 

 

Receivables, net

   $ 27,393      $ 11,492   
  

 

 

   

 

 

 

As of September 30, 2011, the current insurance receivable includes approximately $4.8 million related to the salvage costs and other related claims incurred by the Company associated with the sinking of the Sandy Point in May 2011. Other receivables include approximately $60,000 in post-closing working capital adjustments resulting from the September 9, 2011 acquisition of InCon.

 

14


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

NOTE 6. INVENTORY

The major classes of inventory as of September 30, 2011 and December 31, 2010 are summarized as follows:

 

      

September 30,

2011

     December 31,
2010
 
     (in thousands)  

Fish meal

   $ 53,433       $ 43,945   

Fish oil

     15,002         13,159   

Fish solubles

     2,079         947   

Nutraceutical products

     1,594         1,535   

Unallocated inventory cost pool (including off-season costs)

     391         7,368   

Other materials and supplies

     10,268         7,738   
  

 

 

    

 

 

 

Total inventory

   $ 82,767       $ 74,692   
  

 

 

    

 

 

 

Inventory at September 30, 2011 and December 31, 2010 is stated at the lower of cost or market. The elements of the September 30, 2011 unallocated inventory cost pool include Omega Protein’s plant and vessel related labor, utilities, rent, repairs and depreciation, to be allocated to inventories produced through the 2011 fishing season.

As a result of the oil spill caused by the Deepwater Horizon oil rig explosion in the Gulf of Mexico in April 2010 and the subsequent temporary and intermittent closures of certain commercial and recreational fishing grounds by the Louisiana Department of Fisheries and Wildlife, the Mississippi Department of Marine Resources and the National Oceanic and Atmospheric Administration (“NOAA”), Omega Protein’s fish processing was temporarily interrupted at its three Gulf Coast facilities. As a result of this interruption, intermittent fishing grounds and facilities closures and the oil spill’s estimated impact on Omega Protein’s 2010 Gulf of Mexico fishing season, Omega Protein filed a claim for damages with BP and, subsequently, with the GCCF, a claims facility tasked with claims administration and payment distribution for those businesses and individuals that suffered damages and incurred other costs related to the oil spill. The majority of the first and second emergency payments of $7.3 million and $11.4 million, respectively, received from the GCCF were credited to the 2010 unallocated inventory cost pool to offset the cost to purchase 6,315 tons of fishmeal to satisfy forward sales contracts and to offset the high cost per unit of production Omega Protein incurred during the 2010 fishing season in the Gulf of Mexico as a result of the closure of its fishing grounds. With the recognition of these amounts, the Company has completed recognizing the $18.7 million in payments applied to its inventory cost pool as a result of the 2010 Gulf of Mexico oil spill disaster.

NOTE 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets as of September 30, 2011 and December 31, 2010 are summarized below:

 

0000000000 0000000000
     September 30,
2011
     December 31,
2010
 
     (in thousands)  

Prepaid insurance

   $ 2,388       $ 1,535   

Energy swap asset

     —           743   

Selling expenses

     1,828         771   

Guarantee fees

     9         24   

Leases

     115         94   

Other prepaids and expenses

     383         474   
  

 

 

    

 

 

 

Total other assets, net

   $ 4,723       $ 3,641   
  

 

 

    

 

 

 

Amounts included in prepaid expenses and other current assets consist primarily of prepaid operating expenses including insurance, rents, and selling expenses. Energy swap assets are valued at each reporting date at their fair market value (see Note 18 – Fair Value Disclosures for additional information). Prepaid selling expenses are expensed in those periods in which the related revenue is recognized.

NOTE 8. OTHER ASSETS

Other assets as of September 30, 2011 and December 31, 2010 are summarized as follows:

 

0000000000 0000000000
     September 30,
2011
     December 31,
2010
 
     (in thousands)  

Fish nets, net of accumulated amortization of $867 and $1,112

   $ 1,596       $ 1,281   

Insurance receivable, net of allowance for doubtful accounts

     4,338         1,171   

Title XI debt issuance costs

     340         316   

Other debt issuance costs

     140         244   

Deposits and other

     40         39   
  

 

 

    

 

 

 

Total other assets, net

   $ 6,454       $ 3,051   
  

 

 

    

 

 

 

 

15


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

As of September 30, 2011 and December 31, 2010, the long-term insurance receivable of $4.3 million and $1.2 million, respectively, primarily relates to Jones Act claims for employees aboard its vessels. This estimated amount is recorded gross of estimated claims which may be due to claimants and is included in accrued insurance liabilities.

Amortization expense for fishing nets amounted to approximately $0.3 million, $0.3 million, $0.9 million and $0.9 million for the three and nine months ended September 30, 2011 and 2010.

As of September 30, 2011 and December 31, 2010, the allowance for doubtful insurance receivable accounts was $0 million and $0.2 million, respectively.

NOTE 9. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of September 30, 2011 and December 31, 2010 are summarized as follows:

 

     September 30,
2011
    December 31,
2010
 
     (in thousands)  

Land

   $ 7,690      $ 7,690   

Plant assets

     136,580        128,904   

Fishing vessels

     96,029        101,201   

Furniture and fixtures

     6,538        6,360   

Construction in progress

     9,938        3,294   
  

 

 

   

 

 

 

Total property and equipment

     256,775        247,449   

Less: accumulated depreciation

     (139,053     (135,723
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 117,722      $ 111,726   
  

 

 

   

 

 

 

Depreciation expense for the three and nine months ended September 30, 2011 and 2010 was $3.6 million, $3.5 million, $10.8 million and $10.0 million, respectively.

The Company capitalizes interest as part of the acquisition cost of a qualifying asset. Interest is capitalized only during the period of time required to complete and prepare the asset for its intended use. For the three and nine month periods ended September 30, 2011 and 2010, the Company capitalized interest of approximately $75,700, $56,800, $127,600 and $140,800 respectively.

NOTE 10. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The following table summarizes the changes in the carrying amount of goodwill resulting from the Company’s acquisitions (in thousands):

 

00000000 00000000 00000000
     Cyvex      InCon      Total  

January 1, 2011

   $ 6,916       $ —         $ 6,916   

Acquisition—additional costs (1)

     50         —           50   

Acquisition (2)

     —           936         936   
  

 

 

    

 

 

    

 

 

 

September 30, 2011

   $ 6,966       $ 936       $ 7,902   
  

 

 

    

 

 

    

 

 

 

 

(1) On December 16, 2010, the Company acquired Cyvex Nutrition, Inc., and the allocation of the purchase price over the fair value of the tangible and intangible assets acquired resulted in $6.9 million of goodwill. During the nine month period ended September 30, 2011, a final post-closing payment was made to account for differences between estimated and actual working capital of Cyvex as of the closing date. The final payment included an adjustment of $50,000 to the base purchase price that was recorded as additional goodwill.
(2) On September 9, 2011, the Company acquired InCon Processing, L.L.C., and the allocation of the purchase price over the fair value of the tangible and intangible assets acquired resulted in $0.9 million of goodwill.

 

 

16


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

InCon Intangibles

The intangible assets, other than goodwill as described above, acquired in the InCon acquisition were as follows (in thousands, except for weighted-average life):

 

000000000 000000000
     September 30,
2011
     Weighted
Average
Life
 

Carrying value of intangible assets subject to amortization:

     

Customer relationships, net

   $ 175         10   
  

 

 

    

Total intangible assets subject to amortization, net

   $ 175      

Indefinite life intangible assets—tradenames, trade secrets

     1,166      
  

 

 

    

Total intangible assets

   $ 1,341      
  

 

 

    

Amortization expense of InCon’s intangible assets for the three and nine month periods ended September 30, 2011 was $0. Estimated future amortization expense related to intangible assets is as follows (in thousands):

 

00000

Remainder of 2011

   $ 4   

2012

     18   

2013

     18   

2014

     18   

2015

     18   

Thereafter

     99   
  

 

 

 

Total estimated future amortization expense

   $ 175   
  

 

 

 

Cyvex Intangibles

The intangible assets, other than goodwill as described above, acquired in the Cyvex acquisition were as follows (in thousands, except for weighted-average life):

 

0000000000 0000000000 0000000000
     September 30,
2011
     December 31,
2010
     Weighted
Average
Life
 

Carrying value of intangible assets subject to amortization:

        

Customer relationships, net

   $ 2,840       $ 3,070         10   
  

 

 

    

 

 

    

Total intangible assets subject to amortization, net

   $ 2,840       $ 3,070      

Indefinite life intangible assets—tradenames

     716         716      
  

 

 

    

 

 

    

Total intangible assets

   $ 3,556       $ 3,786      
  

 

 

    

 

 

    

Amortization expense of Cyvex’s intangible assets for the three and nine month periods ended September 30, 2011 was $77,000 and $230,000, respectively. Estimated future amortization expense related to intangible assets is as follows (in thousands):

 

00000000

Remainder of 2011

   $ 77   

2012

     307   

2013

     307   

2014

     307   

2015

     307   

Thereafter

     1,535   
  

 

 

 

Total estimated future amortization expense

   $ 2,840   
  

 

 

 

 

17


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

NOTE 11. NOTES PAYABLE AND LONG-TERM DEBT

At September 30, 2011 and December 31, 2010, the Company’s long-term debt consisted of the following:

 

     September 30,
2011
    December 31,
2010
 
     (in thousands)  

U.S. government guaranteed obligations (Title XI loans) collateralized by a first lien on certain vessels and certain plant assets:

    

Amounts due in installments through 2025, interest from 5.7% to 7.6%

   $ 30,940      $ 33,147   

Amounts due in installments through 2014, interest at Eurodollar rates plus 0.5% (0.7% at September 30, 2011 and December 31, 2010)

     123        154   
  

 

 

   

 

 

 

Total debt

     31,063        33,301   

Less current maturities

     (2,992     (2,994
  

 

 

   

 

 

 

Long-term debt

   $ 28,071      $ 30,307   
  

 

 

   

 

 

 

The Title XI loans are secured by liens on certain of the Company’s fishing vessels and mortgages on the Company’s Reedville, Virginia and Abbeville, Louisiana plants.

On June 20, 2011, pursuant to the Title XI program, the United States Department of Commerce Fisheries Finance Program (the “FFP”) approved a third financing application made by the Company in the amount of $10.0 million (the “Third Approval Letter”). To date, the Company has not submitted any financing requests under the Third Approval Letter.

As of September 30, 2011 and December 31, 2010, the Company had no amounts outstanding under the $35 million revolving credit facility with Wells Fargo Bank, N.A. and approximately $3.4 million in letters of credit issued primarily in support of worker’s compensation insurance programs. The Company has no off-balance sheet arrangements other than normal operating leases and standby letters of credit. Additionally, as of September 30, 2011, the Company was in compliance with all covenants under its bank loan agreement.

NOTE 12. CAPITAL LEASE OBLIGATION

On May 29, 2008 and July 10, 2008, the Company entered into capital lease agreements to lease barges for a period of 5 years. Following is a summary of future minimum payments under the capitalized lease agreements (in thousands):

 

Remainder of 2011

   $ 142   

2012

     580   

2013

     277   
  

 

 

 

Total minimum lease payments

     999   

Less amount representing interest

     (96
  

 

 

 

Present value of minimum payments

     903   

Less current portion of capital lease obligation

     (496
  

 

 

 

Long-term capital lease obligation

   $ 407   
  

 

 

 

As of September 30, 2011 and December 31, 2010, assets recorded under capital lease obligations are included in property, plant and equipment, net as follows (in thousands):

 

000000000 000000000
     September 30,
2011
    December 31,
2010
 

Fishing vessels and marine equipment, at cost

   $ 2,076      $ 2,076   

Less accumulated depreciation

     (1,367     (1,056
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 709      $ 1,020   
  

 

 

   

 

 

 

 

18


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

NOTE 13. ACCRUED LIABILITIES

Accrued liabilities as of September 30, 2011 and December 31, 2010 are summarized as follows:

 

     September 30,
2011
     December 31,
2010
 
     (in thousands)  

Insurance

   $ 8,413       $ 8,246   

Salary and benefits

     16,814         3,911   

Trade creditors

     5,179         2,730   

Federal income tax

     5,029         —     

Taxes, other than federal income tax

     1,377         73   

Deferred revenue

     9,932         3,357   

Amounts due relating to Cyvex acquisition

     —           2,036   

Fair market value of energy swaps, current portion

     263         —     

Fair market value of interest rate swap, current portion

     235         623   

Accrued interest

     253         262   

Other

     1         122   
  

 

 

    

 

 

 

Total accrued liabilities

   $  47,496       $  21,360   
  

 

 

    

 

 

 

As of September 30, 2011 and December 31, 2010, deferred revenue was $9.9 million and $3.4 million, respectively, representing payments received from international customers related to revenues which were not recognized until the subsequent period due to revenue recognition criteria.

NOTE 14. COMMITMENTS AND CONTINGENCIES

InCon Contingency

On September 9, 2011, the Company acquired all of the outstanding equity of InCon Processing, L.L.C., (“InCon”), a Delaware limited liability company, in a cash transaction pursuant to the terms of an equity purchase agreement. The equity of InCon was indirectly held by four individuals (the “Sellers”), three of whom will continue to be employed by InCon and will manage InCon’s business. InCon is now a wholly owned subsidiary of the Company.

In addition to the acquisition date cash purchase price, the sellers may also earn additional amounts based on the annual earnings before interest, taxes, depreciation, and amortization (“EBITDA”) of InCon’s toll processing and specialty product business during calendar years 2012 through 2016. The annual earn-out payments are determined based on a percentage of InCon’s EBITDA which percentage ranges from five percent (5%) of the first $3.0 million of EBITDA to thirty percent (30%) of EBITDA in excess of $12.0 million.

The annual earn-out payments, if any, will be estimated on a quarterly basis and paid subsequent to year end. The Company will record the estimated contractual obligation as compensation expense during each year as it is deemed probable that such amount will be payable. In addition, the earn-out payments are subject to certain reductions associated with future InCon capital expenditures and forfeitures based on termination of employment.

Legal Contingencies

On May 18, 2011, the Company’s fishing vessel, F/V Sandy Point, was involved in a collision with a commercial cargo vessel, Eurus London. As a result of the collision, the Company’s vessel sank and three Company crew members died. The Company has filed a limitation action under maritime law to limit its potential liability for the incident to $50,000, the value of the sunken vessel, in the U.S. District Court for the Southern District of Mississippi. Representatives of the three deceased crewmembers have filed lawsuits against the Company alleging damages under various theories of liability. Any claims arising from the incident will be covered by the Company’s insurance program, subject to customary deductibles, which are not expected to have a material adverse effect on the Company’s business, financial results or results of operations.

In conjunction with the sinking of the vessel, the Company initially recorded an insurance receivable of approximately $4.0 million related primarily to costs expended salvaging the sunken vessel from the Mississippi ship channel and a receivable of $1.8 million related to the net insurance value of the vessel. The $1.8 million receivable related to the vessel value was received in August, 2011. The remaining insurance receivable increased to approximately $4.8 million as of September 30, 2011 primarily due to additional salvaging costs and related claims.

In March 2010, the Company was named as one of the defendants in a lawsuit filed in the Superior Court of the State of California, County of San Francisco, by Chris Manthey, Benson Chiles and Mateel Environmental Justice Foundation (the “Proposition 65 Matter”). The other defendants in the lawsuit are CVS Pharmacy, Inc., General Nutrition Corporation, New Health Group, Inc., Pharmavite LLC, Rite Aid Corporation, Solgar, Inc., and Twinlab Corporation. The plaintiffs allege that fish oil dietary supplements produced by the

 

19


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

defendants do not have adequate warnings regarding possible exposure to polychlorinated biphenyls (PCBs) as required by Proposition 65 under California law, and request that the court grant injunctive relief and award monetary civil penalties. The Company’s total fish oil supplement sales in the State of California since inception have been approximately $6,200. The Company believes that its products comply fully with federal law promulgated by the U.S. Food & Drug Administration, standards of the European Commission and state law, including California, and intends to vigorously defend the lawsuit. The Company does not believe that the resolution of this lawsuit will have a material adverse effect on the Company’s results of operations, cash flows or financial position. As of September 30, 2011, the Company had a $0.1 million accrual related to this matter.

Regulatory Matters

The Company is subject to various possible claims and lawsuits regarding environmental matters. Management believes that costs, if any, related to these matters will not have a material adverse effect on the results of operations, cash flows or financial position of the Company.

In April 2010, the Company received a request for information pursuant to Section 308 of the Federal Water Pollution Control Act (Clean Water Act) from Region 3 of the United States Environmental Protection Agency (the “EPA”) concerning the Company’s wastewater practices used in its fishing operations at its Reedville, Virginia facility. The Company has responded to the request. The Company believes it has been in compliance with all applicable laws with regard to wastewater practices. The Company cannot predict the outcome of the EPA’s review.

In February 2011, the United States Coast Guard conducted an inspection of the vessels at the Company’s Reedville, Virginia facility regarding the Company’s vessel bilge water disposal practices. Based on the results of this inspection and subsequent correspondence and discussions with the Coast Guard, the Company conducted a full survey of its Reedville, Virginia fishing fleet to determine compliance with applicable laws and regulations. The survey has been submitted to the Coast Guard. Based on the Company’s findings and discussions with the Coast Guard, two of the Company’s Reedville based fishing vessels were temporarily delayed from fishing at the early May 2011 commencement of the Atlantic fishing season. Following the completion of necessary improvements and repairs and passing Coast Guard inspections, both of these vessels returned to full operations after the beginning of the fishing season. The delay did not materially impact its Atlantic fishing operations. The Company spent approximately $3.0 million to make improvements and repairs to the Reedville fleet.

NOTE 15. RECONCILIATION OF BASIC AND DILUTED PER SHARE DATA (in thousands except per share data)

 

     Earnings
(Numerator)
     Shares
(Denominator)
     Per Share
Data
 

Three Months Ended September 30, 2011

        

Net earnings

   $ 4,735         —        
  

 

 

    

 

 

    

Basic earnings per common share:

        

Earnings available to common shareholders

   $ 4,735         19,374       $ 0.24   
        

 

 

 

Effect of dilutive securities:

        

Stock options assumed exercised

     —           699      
  

 

 

    

 

 

    

Diluted earnings per common share:

        

Earnings available to common shareholders plus stock options assumed exercised

   $ 4,735         20,073       $ 0.24   
  

 

 

    

 

 

    

 

 

 

 

     Earnings
(Numerator)
     Shares
(Denominator)
     Per Share
Data
 

Three Months Ended September 30, 2010

        

Net Earnings

   $ 6,970         —        
  

 

 

    

 

 

    

Basic earnings per common share:

        

Earnings available to common shareholders

   $ 6,970         18,819       $ 0.37   
        

 

 

 

Effect of dilutive securities:

        

Stock options assumed exercised

     —           110      
  

 

 

    

 

 

    

Diluted earnings per common share:

        

Earnings available to common shareholders plus stock options assumed exercised

   $ 6,970         18,929       $ 0.37   
  

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

     Earnings
(Numerator)
     Shares
(Denominator)
     Per Share
Data
 

Nine Months Ended September 30, 2011

        

Net earnings

   $ 33,594         —        
  

 

 

    

 

 

    

Basic earnings per common share:

        

Earnings available to common shareholders

   $ 33,594         19,200       $ 1.75   
        

 

 

 

Effect of dilutive securities:

        

Stock options assumed exercised

     —           731      
  

 

 

    

 

 

    

Diluted earnings per common share:

        

Earnings available to common shareholders plus stock options assumed exercised

   $ 33,594         19,931       $ 1.69   
  

 

 

    

 

 

    

 

 

 

 

     Earnings
(Numerator)
     Shares
(Denominator)
     Per Share
Data
 

Nine Months Ended September 30, 2010

        

Net earnings

   $ 9,932         —        
  

 

 

    

 

 

    

Basic earnings per common share:

        

Earnings available to common shareholders

   $ 9,932         18,792       $ 0.53   
        

 

 

 

Effect of dilutive securities:

        

Stock options assumed exercised

     —           60      
  

 

 

    

 

 

    

Diluted earnings per common share:

        

Earnings available to common shareholders plus stock options assumed exercised

   $ 9,932         18,852       $ 0.53   
  

 

 

    

 

 

    

 

 

 

Options to purchase 135,000 shares of common stock at exercise prices ranging from $13.41 to $14.69 per share were outstanding during the three and nine months ended September 30, 2011 but were not included in the computation of diluted earnings per share because the adjusted exercise prices of the options based upon the assumed proceeds were greater than the average market price of the shares during that period.

Options to purchase 1,405,702 and 1,465,702 shares of common stock at exercise prices ranging from $4.19 to $15.88 per share were outstanding during the three and nine months ended September 30, 2010, respectively, but were not included in the computation of diluted earnings per share because the adjusted exercise prices of the options based upon the assumed proceeds were greater than the average market price of the shares during that period.

 

21


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

NOTE 16. COMPONENTS OF NET PERIODIC BENEFIT COST

 

0000000000 0000000000 0000000000 0000000000
     Three Months Ended
September  30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  
     (in thousands)     (in thousands)  

Service cost

   $ —        $ —        $ —        $ —     

Interest cost

     319        340        957        1,019   

Expected return on plan assets

     (315     (285     (945     (855

Amortization of prior service costs

     —          —          —          —     

Amortization of net loss

     294        287        882        861   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $  298      $  342      $ 894      $ 1,025   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the nine months ended September 30, 2011 and 2010, the Company contributed approximately $1.5 million and $1.5 million, respectively, to the Company’s pension plan. The Company expects to make contributions of $0.4 million to the pension plan during the remainder of 2011.

NOTE 17. HURRICANE LOSSES, INSURANCE RECOVERIES AND OTHER PROCEEDS

2008 Hurricane Activity

During the nine months ended September 30, 2010, Omega Protein received a grant of $0.2 million from the State of Louisiana Hurricane Gustav and Ike Fisheries Recovery Program. The grant provided assistance for commercial fishing owners impacted by Hurricanes Gustav and Ike in 2008. The grant proceeds were recognized as “Other proceeds/gains resulting from natural disaster, net —2008 storms” in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income. No similar grants were received during the nine months ended September 30, 2011.

2005 Hurricane Activity

On August 31, 2007, the Company filed a lawsuit in the District Court of Harris, Texas 295th Judicial District, against its prior insurance broker, Aon Risk Services of Texas, who procured the Company’s property insurance policies for the 2005/2006 policy year, which were the subject of prior litigation as a result of claims relating to Hurricanes Rita and Katrina. In June 2011, all outstanding claims related to the lawsuit were settled and the Company recorded $0.8 million, net of fees and expenses, as “Other proceeds/gains resulting from natural disaster, net—2005 storms” in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the nine months ended September 30, 2011. As a part of the final settlement, the Company released and waived all claims against Aon for all matters addressed in the litigation.

NOTE 18. FAIR VALUE DISCLOSURES

The following disclosures of the estimated fair value of financial instruments are made in accordance with the requirements of FASB ASC 825-10-50, Disclosure About Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies and are described in the following paragraphs.

Fair value estimates are subject to certain inherent limitations. Estimates of fair value are made at a specific point in time, based on relevant market information and information about the financial instrument. The estimated fair values of financial instruments presented below are not necessarily indicative of amounts the Company might realize in actual market transactions. Estimates of fair value are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The carrying amounts of cash and cash equivalents, accounts receivables, accounts payable, and accrued expenses approximate fair value because of the short maturity of these items. For non-financial assets, such as goodwill, carrying values are compared to fair value on an annual basis as required by impairment standards and the carrying value is reduced when determined necessary as a result of impairment testing. At September 30, 2011, the Company had no borrowings under its bank credit facility except for $3.4 million in letters of credit support obligations.

The carrying values and respective fair market values of the Company’s long-term debt are presented below (in thousands). The fair value of the Company’s long-term debt is estimated based on the quoted market prices available to the Company for issuance of similar debt with similar terms at September 30, 2011 and December 31, 2010.

 

     September 30,
2011
     December 31,
2010
 

Long-term Debt:

     

Carrying Value

   $ 31,063       $ 33,301   

Estimated Fair Market Value

   $ 34,200       $ 34,631   

 

22


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2011 and December 31, 2010. As required by FASB ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

 

     September 30, 2011  
     Fair Value Measurements Using     Assets
(Liabilities)  at
Fair Value
 
     Level 1      Level 2     Level 3    

Liabilities (in thousands)

         

Energy swap liability

   $ —         $ (386 )   $ —        $ (386

Interest rate swap liability

     —           —          (235     (235
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Liabilities

   $ —         $ (386 )   $ (235   $ (621
  

 

 

    

 

 

   

 

 

   

 

 

 

 

     December 31, 2010  
     Fair Value Measurements Using     Assets
(Liabilities) at
Fair Value
 
     Level 1      Level 2      Level 3    

Assets (Liabilities) (in thousands)

          

Energy swap asset

   $ —         $ 766      $ —        $ 766   

Interest rate swap liability

     —           —           (721     (721
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets (Liabilities)

   $ —         $ 766      $ (721   $ 45   
  

 

 

    

 

 

    

 

 

   

 

 

 

The determination of the fair values above incorporates various factors required under FASB ASC 820-10. These factors include not only the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits, letters of credit and priority interests), but also the impact of the Company’s nonperformance risk on its liabilities.

The fair value of the interest rate swap liability is determined using an income valuation model based on the present value of expected future cash flows as determined by comparing the Company’s rate to the Euro-dollar futures curve. This model includes inputs or significant value drivers which might not be observable in or corroborated by the market. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3.

The fair value of the diesel, Bunker C, and natural gas energy swaps is derived from the underlying market price of similar instruments at a specific valuation date. The underlying market price for the diesel and natural gas swaps is based upon the NYMEX Futures Curve. The underlying market price for the Bunker C swaps is based upon the Platts Forward Curves HP 0.3% and 1.0% for 2011 and the Platts Forward Curve HP 1.0% for 2012. These methods rely upon quoted prices for similar instruments in active markets. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 2.

 

23


Table of Contents

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

The following table provides a reconciliation of all assets and (liabilities) measured at fair value on a recurring basis which use Level 3 or significant unobservable inputs or significant value drivers for the three and nine months ended September 30, 2011 and 2010 (in thousands). There have been no transfers between the hierarchy levels for the periods presented.

 

     Fair Value Measurements Using Significant
Unobservable Inputs (Level 3 Inputs)
 
     Three Months Ended
September  30,
    Nine Months Ended
September  30,
 
     2011     2010     2011     2010  

Beginning liability balance

   $ (394   $ (1,025   $ (721   $ (1,251

Net gain (loss) reclassified into interest expense related to interest rate swap transactions unrealized

     3        (109     (25     (384

Net change associated with current period interest rate swap transactions realized

     156        212        511        713   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending liability balance

   $ (235   $ (922   $ (235   $ (922
  

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

OMEGA PROTEIN CORPORATION

 

It em 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s MD&A and Risk Factors contained in the Form 10-K for the fiscal year ended December 31, 2010 (the “2010 Form 10-K”), and in conjunction with the consolidated financial statements included in this report and in the 2010 Form 10-K.

Forward-looking statements in this Form 10-Q, future filings by the Company with the Securities and Exchange Commission (the “Commission”), the Company’s press releases and oral statements by authorized officers of the Company are intended to be subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainty. The Company believes that forward-looking statements made by it are based on reasonable expectations; however, no assurances can be given that actual results will not differ materially from those contained in such forward-looking statements. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include the words “estimate,” “project,” “anticipate,” “expect,” “predict,” “assume,” “believe,” “could,” “would,” “hope,” “may,” or similar expressions.

General

Omega Protein Corporation is a nutritional ingredient company and the nation’s leading vertically integrated producer of Omega-3 fish oil and specialty fish meal products. As used herein, the term the “Company” refers to Omega Protein Corporation and its consolidated subsidiaries, as applicable. The Company’s principal executive offices are located at 2105 City West Boulevard, Suite 500, Houston, Texas 77042-2838 (Telephone: (713) 623-0060).

The Company operates through four primary subsidiaries: Omega Protein, Inc., Omega Shipyard, Inc., Cyvex Nutrition, Inc. and InCon Processing, L.L.C. Omega Protein, Inc. (“Omega Protein”), the Company’s principal operating subsidiary, operates in the menhaden processing business and is the successor to a business conducted since 1913. Omega Shipyard, Inc. (“Omega Shipyard”) owns a drydock facility in Moss Point, Mississippi that is used to provide shoreside maintenance for Omega Protein’s fishing fleet and, subject to outside demand and excess capacity, occasionally for third-party vessels. Cyvex Nutrition, Inc. (“Cyvex”), founded in 1984 and acquired by the Company on December 16, 2010, is located in Irvine, California and participates in the nutraceutical industry as an ingredient provider. InCon Processing, L.L.C. (“InCon”), acquired by the Company on September 9, 2011, is located in Batavia, Illinois and is a specialty toll processor that utilizes molecular distillation technology to concentrate a variety of compound products, including Omega-3 fish oils. Revenues from Omega Shipyard, for third-party vessel work, and InCon were not material during the first nine months of 2011. The Company also has a number of other immaterial direct and indirect subsidiaries.

Omega Protein produces and sells a variety of protein and oil products derived from menhaden, a species of wild herring-like fish found along the Gulf of Mexico and Atlantic coasts. The fish are not genetically modified or enhanced. Omega Protein markets several grades of fish meal, as well as fish oil and fish solubles. Omega Protein’s fish meal products are primarily used as a protein ingredient in animal feed for swine, aquaculture and household pets. Fish oil is used for animal and aquaculture feeds, industrial applications, additives to human food products and as dietary supplements. Omega Protein’s fish solubles are sold primarily to bait manufacturers, aquaculture feed manufacturers and for use as an organic fertilizer.

All of Omega Protein’s products contain healthy long-chain Omega-3 fatty acids. Omega-3 fatty acids are commonly referred to as “essential fatty acids” because human and animal bodies do not produce them. Instead, essential fatty acids must be obtained from outside sources, such as food or special supplements. Long-chain Omega-3s are also commonly referred to as a “good fat” for their health benefits, as opposed to “bad fats” that create or aggravate health conditions through long-term consumption. Scientific research suggests that long-chain Omega-3s as part of a balanced diet may provide significant benefits for health issues such as cardiovascular disease, inflammatory conditions and other ailments.

Under its production process, Omega Protein produces OmegaPure ® , a taste-free, odorless refined fish oil which is the only marine source of long-chain Omega-3s directly affirmed (as opposed to self affirmed) by the U.S. Food and Drug Administration (“FDA”) as a food ingredient that is Generally Recognized as Safe (“GRAS”). Omega Protein also produces OmegaActiv ™, a concentrated form of OmegaPure ® which is marketed as a dietary supplement.

Omega Protein operates four menhaden processing plants: two in Louisiana, one in Mississippi and one in Virginia. It also operates a Health and Science Center in Reedville, Virginia, which provides 100-metric tons per day fish oil processing capacity for the Company’s food, industrial and feed grade oils. Omega Protein’s technical center in Houston, Texas, the Omega Protein Technology and Innovation Center, has food science application labs as well as analytical, sensory, lipids research and pilot plant capabilities.

 

25


Table of Contents

OMEGA PROTEIN CORPORATION

 

On December 16, 2010, the Company acquired Cyvex, a dietary supplement ingredient supplier based in Irvine, California. Cyvex is a premium, science-based nutraceutical supplier to dietary supplement manufacturers that focus on human health and wellness. The Company believes that the acquisition of Cyvex will expand its presence in the human health and wellness market and will provide access to supplement manufacturers who purchase a variety of ingredients, including fish oil. Prior to the acquisition, Cyvex’s unaudited revenues for 2010 were approximately $11.3 million.

On September 9, 2011, the Company acquired InCon, a specialty toll processor that designs, pilots, synthesizes and purifies specialty chemical compounds, utilizing molecular distillation technology to concentrate a variety of compound products, including Omega-3 fish oils. The Company believes that the acquisition of InCon’s concentration technology will allow Omega Protein to provide its customers with an enhanced range of Omega-3 fish oils in concentrated forms such as ethyl esters and triglycerides. The concentrated fish oils manufactured by InCon will be marketed and sold under the Company’s OmegaActiv™ brand by Cyvex.

Company Overview

     Menhaden Fishing

2011 Fishing Information.  At September 30, 2011, Omega Protein owned a fleet of 45 fishing vessels and 34 spotter aircraft for use in its fishing operations and also leased additional aircraft where necessary to facilitate operations. During the 2011 fishing season in the Gulf of Mexico, which runs from mid-April through October, Omega Protein operates 28 fishing and carry vessels and 28 spotter aircraft. The fishing area in the Gulf is generally located along the Gulf Coast, with a concentration off the Louisiana and Mississippi coasts. The fishing season along the Atlantic coast began in early May and usually extends into December. Omega Protein is operating 9 fishing vessels and 7 spotter aircraft along the Mid-Atlantic coast, concentrated primarily in and around Virginia and North Carolina. The remaining fleet of fishing vessels and spotter aircraft are not routinely operated during the fishing season and are back-up to the active fleet, used for other transportation purposes, inactive or in the process of refurbishment in the Company’s shipyard. Historical fish catch and production results at the end of the third quarter for the past five years are as follows:

 

     2011      2010      2009      2008      2007  

Fish Catch in Tons as of September 30,

     514,527         367,650         417,712         388,935         475,566   

Fish meal, oil and solubles production in tons (excludes refined)

     176,699         129,803         159,227         156,077         179,449   

The Company cautions that, because of the volatility of fish catch generally, partial year catch numbers are not indicative of results that may be expected for a full year. In addition, fish oil yields, which affect inventory costs and volumes available for sale, fluctuate from year to year and month to month. The Company’s 2011 oil yield results were the poorest in its recent history. For illustrative purposes, the Company’s oil yields for the 2011 fishing season through September 30, 2011 were lower by 19.2% compared to those in the same period in the 2010 fishing season and were lower by 30.6% compared to the Company’s 5 year oil yield average. The Company believes that the biological causes of lower fish oil yields generally relate to fish diet, weather and water temperature but such cause are not generally well understood. The impact of these poor oil yields has resulted in significantly higher per unit inventory cost and fewer volumes available for future sale. These higher unit costs and fewer volumes available for sale have adversely impacted financial results for the third quarter of 2011 and could be expected to adversely affect financial results through the second quarter of 2012.

As previously disclosed, Omega Protein has designed a single catamaran-style test vessel which, if successful, might be able to replace Omega Protein’s traditional two purse boat fishing method. Omega Protein had tested this prototype catamaran vessel during the 2010 and 2011 fishing seasons. Based on its test results to date and its other vessel manpower requirements, Omega Protein has suspended testing of the catamaran test vessel for the balance of the 2011 fishing season. The Company intends to evaluate at a later date whether to continue to test this catamaran prototype, or create and test a new re-configured catamaran design based on its experience to date.

Sales Contracts. Omega Protein sells a sizeable portion of its products on a forward contract basis of up to twelve months with the balance sold on a spot basis through purchase orders. Due to the 2010 Gulf of Mexico oil spill disaster, Omega Protein purchased additional fish meal from a third party to supplement its production and received reimbursement from BP through the GCCF for additional costs associated with this purchase. Historically, fish meal and fish oil sold on a forward contract basis has fluctuated from year-to-year based upon perceived market availability and forward price expectations. As of September 30, 2011, Omega Protein had either sold or sold forward on a contract basis approximately 160,300 tons of fish meal, 48,400 tons of fish oil and 7,700 tons of fish solubles for 2011.

Omega Protein’s annual revenues are highly dependent on pricing, annual fish catch, production yields and inventories and, in addition, inventory is generally carried over from one year to the next year. Omega Protein determines the level of inventory to be carried over based on existing contracts, prevailing market prices of the products and anticipated customer usage and demand during the off-season. Thus, production volume does not necessarily correlate with sales volume in the same year and sales volumes will fluctuate from quarter-to-quarter. Omega Protein’s fish meal products have a useable life of approximately one year from date of production. Practically, however, Omega Protein attempts to empty its warehouses of the previous season’s products by the second or third month of the new fishing season. Omega Protein’s crude fish oil products do not lose efficacy unless exposed to oxygen and, therefore, their storage life typically is longer than that of fish meal.

 

26


Table of Contents

OMEGA PROTEIN CORPORATION

 

Revenues Composition. The following tables set forth Omega Protein’s revenues by product (in millions) and the approximate percentage of total revenues represented thereby, for the indicated periods:

 

     Three Months Ended September 30,  
     2011     2010  
     Revenues      Percent     Revenues      Percent  

Fish Meal

          

Regular Grade

   $ 4.8         6.7   $ 7.6         13.6

Special Select

     32.9         45.9        28.0         49.8   

Sea-Lac

     7.2         10.0        5.3         9.5   

Fish Oil

          

Crude Oil

     18.5         25.8        10.3         18.6   

Refined Oil

     3.2         4.5        3.6         6.4   

Other Nutritional Ingredients

     3.3         4.6        —           —     

Fish Solubles and Other

     1.8         2.5        1.2         2.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 71.7         100.0   $ 56.0         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Nine Months Ended September 30,  
     2011     2010  
     Revenues      Percent     Revenues      Percent  

Fish Meal

          

Regular Grade

   $ 16.8         9.7   $ 20.0         16.1

Special Select

     84.2         48.9        55.7         44.7   

Sea-Lac

     13.0         7.5        10.1         8.1   

Fish Oil

          

Crude Oil

     32.9         19.1        24.2         19.4   

Refined Oil

     11.4         6.6        10.1         8.1   

Other Nutritional Ingredients

     9.8         5.7        —           —     

Fish Solubles and Other

     4.3         2.5        4.5         3.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 172.4         100.0   $ 124.6         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The following tables set forth Omega Protein’s revenues by geography (in millions) and the approximate percentage of total revenues represented thereby, for the indicated periods:

 

     Three Months Ended September 30,  
     2011     2010  
     Revenues      Percent     Revenues      Percent  

Domestic Revenues

   $ 20.5         28.6   $ 22.1         39.5

Export Revenues

     51.2         71.4        33.9         60.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 71.7         100.0   $ 56.0         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Nine Months Ended September 30,  
     2011     2010  
     Revenues      Percent     Revenues      Percent  

Domestic Revenues

   $ 62.4         36.2   $ 64.2         51.5

Export Revenues

     110.0         63.8        60.4         48.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 172.4         100.0   $ 124.6         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

27


Table of Contents

OMEGA PROTEIN CORPORATION

 

Customers and Marketing.  Most of Omega Protein’s marine protein products are sold directly to approximately 320 customers by Omega Protein’s agriproducts sales department, while a smaller amount is sold through independent sales agents. Not including Cyvex or InCon, Omega Protein’s finished product inventory was $70.5 million as of September 30, 2011 versus $58.1 million as of December 31, 2010.

A number of countries in which Omega Protein currently sells products impose various tariffs and duties, none of which have a significant impact on Omega Protein’s foreign sales. Certain of these duties have been reduced in recent years for certain countries under the North American Free Trade Agreement and the Uruguay Round Agreement of the General Agreement on Tariffs and Trade. In all cases, Omega Protein’s products are shipped to its customers either by FOB shipping point or CIF terms, and therefore, the customer is responsible for any tariffs, duties or other levies imposed on Omega Protein’s products sold into these markets.

During the off season, Omega Protein fills purchase orders from the inventory it has accumulated during the fishing season or in some cases, by re-selling meal and oil purchased from other suppliers. Throughout the entire year, prices are often significantly influenced by supply and demand in world markets for competing products, primarily other global sources of fish meal and oil, and also soybean meal for its fish meal products, and vegetable oils for its fish oil products when used as an alternative.

Purchases and Sales of Third-Party Meal and Oils . Omega Protein has from time to time purchased fish meal and fish oil from other domestic and international manufacturers. These purchase and resale transactions have supplemented Omega Protein’s base manufacturing and sales business.

Occasionally Omega Protein’s fish catch and resultant product inventories are reduced, primarily due to adverse weather conditions, and Omega Protein further expands its purchase and resale of other fish meals and oils (primarily Panamanian, Peruvian and Mexican fish meal and U.S. menhaden fish meal and oil). Although operating margins from these activities are less than the margins typically generated from Omega Protein’s base domestic production, these operations provide Omega Protein with a source of fish meal and oil to sell into other markets, some of which Omega Protein has not historically had a presence. Omega Protein did not purchase any fish meal or fish oil during 2008. During 2009, Omega Protein purchased approximately 11,000 tons of menhaden fish meal, or approximately 7.6% of fish meal sales volumes for 2009. During 2010, due to the Gulf of Mexico oil spill disaster, Omega Protein purchased 6,315 tons of fish meal, or 6.2% of its fish meal sales volumes for 2010. During the first nine months of 2011 the Company did not purchase any fish meal or fish oil.

Competition.  Omega Protein competes with a smaller domestic privately-owned menhaden fishing company and with international marine protein and oil producers, including Mexican sardine processors and South American anchovy and mackerel processors. In addition, but to a lesser extent, the Company’s marine protein and oil business is also subject to significant competition from producers of vegetable and other animal protein products and oil products such as Archer Daniels Midland and Cargill. Many of these competitors have significantly greater financial resources and more extensive and diversified operations than those of the Company.

Omega Protein competes on price, quality and performance characteristics of its products, such as protein level and amino acid profile in the case of fish meal. The principal competition for Omega Protein’s fish meal and fish solubles is from other global production of marine proteins as well as other protein sources such as soybean meal and other vegetable or animal protein products. Other globally produced fish oils provide the primary market competition for Omega Protein’s fish oil, as well as soybean and rapeseed oil. Omega Protein believes, however, that these other non-marine sources are not complete substitutes because fish meal and fish oil offer nutritional values not contained in such other sources.

Fish meal prices have historically borne a relationship to prevailing soybean meal prices (more weakly correlated in recent years), while prices for fish oil are generally influenced by prices for vegetable oils, such as rapeseed, soybean and palm oils. Thus, the prices for Omega Protein’s products are established by worldwide supply and demand relationships over which Omega Protein has no control and tend to fluctuate significantly over the course of a year and from year to year.

Regulation.  Omega Protein’s operations are subject to federal, state and local laws and regulations relating to the locations and periods in which fishing may be conducted as well as environmental and safety matters. At the state and local level, certain state and local government agencies have enacted legislation or regulations which prohibit, restrict or regulate menhaden fishing within their jurisdictional waters.

Omega Protein’s menhaden fishing operations are also subject to regulation by two interstate compact commissions created by federal law: the Atlantic States Marine Fisheries Commission (“ASMFC”) which consists of 15 states along the Atlantic Coast, and the Gulf States Marine Fisheries Commission which consists of 5 states along the Gulf of Mexico. The ASMFC manages the menhaden fishery throughout the stock’s coast-wide range. In 2005, the ASMFC recommended precautionary restrictions on the Chesapeake Bay menhaden harvest, despite its finding that menhaden were not overfished and that overfishing was not occurring on a coast wide basis, in order to determine whether localized depletion was occurring in Chesapeake Bay.

 

28


Table of Contents

OMEGA PROTEIN CORPORATION

 

In February 2007, the Commonwealth of Virginia declined to adopt an ASMFC recommended plan but instead adopted its own restrictions whereby Omega Protein’s Chesapeake Bay menhaden harvest was capped for a five year period at a five-year average (2001 to 2005) of 109,020 metric tons per year. The Virginia restrictions also allow for a credit whereby any under-harvest in a particular year below the 109,020 metric ton cap would be added to increase the cap for the following year, up to a maximum of 122,740 metric tons per year. The Company supported Virginia’s proposal and voluntarily complied with its limitations in 2006 and subsequently thereafter after the cap was formally in place. The cap had no effect on Omega Protein’s Chesapeake Bay harvests in 2007, 2008, 2009 or 2010 and is not expected to have any material adverse effect on its Chesapeake Bay harvest in 2011. As a result of the underharvest in 2010, the 2011 Chesapeake Bay catch limit was 122,740 metric tons.

The Company supports the ASMFC’s goal of maintaining a healthy population of menhaden and the current research program designed to answer ecological questions regarding menhaden in the Chesapeake Bay and coast-wide. The Chesapeake Bay cap was established as a precautionary measure while research is conducted to address, among other things, the question whether the menhaden harvest in the Bay could cause what is being termed “localized depletion” of menhaden there. No evidence of such localized depletion has been produced.

Because the research regarding menhaden is on-going, in 2009 the ASMFC and Virginia approved an extension of the existing Chesapeake Bay cap for an additional three years to 2013. Even though no evidence of localized depletion has been produced, the Company continues to support the Chesapeake Bay cap as a way to maintain the status quo while research on these matters continues.

The most recent stock assessment for the Atlantic menhaden was completed in 2010 using data collected through 2008. According to federal and ASMFC technical experts, the assessment found that the Atlantic menhaden stock had undergone slight overfishing in one year, 2008; however, the population is not considered overfished, meaning that the stock abundance remains at or near target levels, above levels of concern, and can produce enough eggs to replace itself. The assessment indicated that the population was subject to slight overfishing in 2008 by an estimated four-tenths of one percent. Multiple runs of the stock assessment model revealed that there was a 53% probability that overfishing had occurred and a 47% probability that overfishing had not occurred.

In March 2011, the ASMFC initiated a review regulatory process which if enacted would: (1) require annual updates on menhaden recruits, or the numbers of fish in their first year of life, currently reviewed only every three years; (2) begin a process of developing management reference points for identifying the relative status of the stock using broad ecosystem indicators, and (3) establish interim management targets and consider regulatory tools to assist managers in achieving these targets. The interim management reference point target will be based on achieving a rate of fishing that should result in 15% of the spawning potential the Atlantic menhaden stock would have if such stock were unfished. By comparison, in 2008, the estimate of this so-called “spawning potential ratio” was estimated to be 8%; however, those numbers have not been estimated for 2009, 2010, or 2011. The Company expects that such reassessment will not occur until the next stock assessment in 2012. These percentages do not necessarily translate into a corresponding percentage reduction in fish catch.

In August 2011, the ASMFC initiated a rulemaking process to establish the new management targets and set a new reference point, or baseline, for determining when the Atlantic menhaden stock is undergoing overfishing. It is also soliciting input on potential fishery management tools that can be used to manage the fishery to a recommended catch level. Public hearings have been held and a final decision on the new reference point and management target is expected to be made when the ASMFC meets on November 9, 2011. At this meeting, a decision will also be made as to whether to initiate a new rulemaking to develop a system of management for the fishery that could include quotas, limitations on the number of days fished annually, a shortened season, no action, or other measures.

The Company is unable to predict whether any management measures might be necessary for the 2012 fishing season or beyond. Because the process of developing a management program will take time and involve further public hearings, the Company does not expect any new constraints to be placed upon the fishery in 2012. Revised scientific information on the status of the stock should be available in 2012. It is possible that this information will influence the types of measures or extent of allowable fishing under a new management system, if adopted. The Company expects, based on management of other fisheries by the ASMFC, that the total amount of allowable menhaden harvest will vary proportionally with the estimated size of the menhaden population.

It is possible that this ASMFC regulatory process could have a material adverse effect on the Company’s business, financial results and results of operations.

 

29


Table of Contents

OMEGA PROTEIN CORPORATION

 

Dietary Supplement Ingredients

On December 16, 2010, the Company acquired Cyvex Nutrition, Inc., a dietary supplement ingredient supplier based in Irvine, California. Cyvex is a premium, science-based nutraceutical supplier to dietary supplement manufacturers that focus on human health and wellness. Prior to acquisition, Cyvex’s unaudited revenues for 2010 were approximately $11.3 million.

The FDA defines a dietary supplement to be a product taken by mouth that contains a dietary ingredient intended to supplement the diet. Dietary ingredients may include vitamins, minerals, herbs or other botanicals, amino acids, and substances such as enzymes, organ tissues, glandulars, and metabolites. Dietary supplement ingredients can also be in the form of extracts or concentrates. Dietary supplements may be manufactured and sold in many forms, such as tablets, capsules, softgels, gelcaps, liquids, or powders. Cyvex markets and sells an extensive list of nutraceutical ingredients derived from fruit, krill, vegetables, botanicals and fish.

Cyvex markets its proprietary brands of dietary supplement ingredients through an integrated marketing program that includes internet, print, public relations and direct sales to companies manufacturing dietary supplements in all their forms (i.e. capsules, tablets and softgels). Cyvex also directs and participates in clinical research studies, often in collaboration with scientists and research institutions, to validate the benefits or a product and provide scientific support for product claims and marketing initiatives.

On September 9, 2011, the Company acquired InCon, a specialty toll processor that designs, pilots, synthesizes and purifies specialty chemical compounds, utilizing molecular distillation technology to concentrate a variety of compound products, including Omega-3 fish oils. The Company believes that the acquisition of InCon’s concentration technology will allow Omega Protein to provide its customers with an enhanced range of Omega-3 fish oils in concentrated forms such as ethyl esters and triglycerides. The concentrated fish oils manufactured by InCon will be marketed and sold under the Company’s OmegaActiv™ brand by Cyvex.

More information concerning Cyvex’s products, markets, competition, and regulation may be found in the “Business” section of the Company’s Form 10-K for the fiscal year ended December 31, 2010.

Critical Accounting Policies and Estimates

The methods, estimates and judgments used in applying the Company’s critical accounting policies have a significant impact on the results reported in the Consolidated Financial Statements. The SEC has defined the critical accounting policies as the ones that are most important to the portrayal of the Company’s financial condition and operating results, and requires the Company to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are highly uncertain at the time of estimation. Based on this definition, the Company’s most critical policies include: valuation of inventory (Notes 1 and 5 in the Company’s Form 10-K for the fiscal year ended December 31, 2010 (the “2010 Form 10-K”)), valuation of losses related to Jones Act and worker’s compensation insurance claims (Note 1 in the Company’s 2010 Form 10-K), valuation of income and deferred taxes (Notes 1 and 12 in the Company’s 2010 Form 10-K) and the valuation of pension plan obligations (Notes 1 and 14 in the Company’s 2010 Form 10-K).

Specifically with respect to inventory, Omega Protein’s per unit cost of production is estimated prior to the beginning of each fishing season based on total estimated fishing costs (including off-season costs) divided by estimated total units of production. Omega Protein adjusts the cost of sales, unallocated inventory cost pool and inventory balances at the end of the second, third and fourth quarters based on revised estimates of total units of production to total inventoriable costs. For the most part, Omega Protein begins selling its current season’s production during the third quarter and sells that production until the second quarter of the following year. From 2006 to 2009, the average cost per unit of production estimate increased 3% from the third quarter to the fourth quarter of each respective year. During 2010, as a result of the larger than anticipated production in the fourth quarter, cost per unit of production for the 2010 fourth quarter decreased 9% as compared to the 2010 third quarter.

The Company also has other key accounting policies and accounting estimates relating to the allowance of doubtful accounts (Note 1 in the Company’s 2010 Form 10-K), goodwill and other intangible assets (Notes 1 and 8 in the Company’s 2010 Form 10-K), valuation of shares-based compensation (Note 14 in the Company’s 2010 Form 10-K) and interest rate and energy swap valuations (Notes 1 and 18 in the Company’s 2010 Form 10-K). The Company believes that these key accounting policies and accounting estimates either do not generally require us to make estimates and judgments that are as difficult or as subjective as its critical accounting policies, or it is less likely that they would have a material impact on our reported results of operations for a given period.

For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies.

 

30


Table of Contents

OMEGA PROTEIN CORPORATION

 

Results of Operations

The following table sets forth as a percentage of revenues, certain items of the Company’s results of operations for each of the indicated periods.

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2011     2010     2011     2010  

Revenues

     100.0     100.0     100.0     100.0

Cost of sales

     81.3        72.7        74.6        75.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     18.7        27.3        25.4        24.2   

Selling, general and administrative expense

     7.8        6.3        8.8        8.6   

Research and development expense

     0.6        0.9        0.8        1.2   

Proceeds/gains resulting from Gulf of

Mexico oil spill disaster

     —          (1.1     (15.2     —     

Other proceeds/gains resulting from natural disaster, net—2008 storms

     —          —          —          (0.2

Other proceeds/gains resulting from natural disaster, net—2005 storms

     —          —          (0.5     —     

Loss (gain) on disposal of assets

     0.3        —          0.5        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     10.0        21.2        31.0        14.4   

Interest income

     —          —          —          —     

Interest expense

     (0.7     (1.2     (0.9     (1.6

Other expense, net

     (0.1     (0.3     (0.1     (0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     9.2        19.7        30.0        12.6   

Provision for income taxes

     2.6        7.3        10.5        4.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     6.6     12.4     19.5     8.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Interim Results for the Third Quarters ended September 30, 2011 and September 30, 2010

Revenues . Revenues increased $15.7 million, or 28.1%, from $56.0 million for the three months ended September 30, 2010 to $71.7 million for the three months ended September 30, 2011. The increase in revenues was primarily due to higher sales volumes of 43.1% for the Company’s fish meal and higher sales prices and volumes of 11.6% and 39.5%, respectively, for the Company’s fish oil, partially offset by decreased sales prices of 23.2% for the Company’s fish meal. Considering fish meal, fish oil and fish solubles sales activities in total, the Company experienced an $8.3 million decrease in revenues due to the decrease in sales prices and a $20.6 million increase in revenue caused by increased sales volumes, when comparing the three months ended September 30, 2011 to the three months ended September 30, 2010. The increase in fish meal sales and fish oil volumes in the third quarter of 2011 is primarily due to the quantity of inventory available for sale as well as export demand. The increase in fish oil sales prices is due to increased export demand primarily from the aquaculture industry as well as a general increase in global commodity pricing for fats and oils. The decrease in fish meal sales prices in the third quarter of 2011 is primarily due to an increased global supply of fish meal available for sale, particularly from South America. Additionally, Cyvex, acquired by the Company in December 2010, contributed $3.3 million of revenue to the quarter ended September 30, 2011.

Cost of sales . Cost of sales, including depreciation and amortization, for the quarter ended September 30, 2011 was $58.3 million, a $17.6 million increase, or 43.1%, as compared to the quarter ended September 30, 2010. Cost of sales as a percentage of revenues was 81.3% for the quarter ended September 30, 2011 as compared to 72.7% for the quarter ended September 30, 2010. The increase in cost of sales as a percentage of revenue was primarily the result of decreased fish meal sales prices as discussed above, partially offset by increased fish oil sales prices realized in the third quarter of 2011 as compared to the third quarter of 2010. Additionally, cost per unit of production was consistent during the two periods despite the increased fish catch during the quarter ended September 30, 2011. The benefit of increased fish catch on cost per unit of production was offset by decreased fish oil yields. Cyvex’s cost of sales for the quarter ended September 30, 2011 was $1.7 million.

Gross profit . Gross profit decreased $1.9 million, or 12.1%, from $15.3 million for the quarter ended September 30, 2010 to $13.4 million for the quarter ended September 30, 2011. Gross profit as a percentage of revenue was 18.7% for the quarter ended September 30, 2011 as compared to 27.3% for the quarter ended September 30, 2010. The decrease in gross profit as a percentage of revenue was primarily due to the decrease in fish meal sales prices experienced in the third quarter of 2011 as compared to the third quarter of 2010, as discussed above. Cyvex’s gross profit as a percentage of revenue was 48.2% for the quarter ended September 30, 2011.

Selling, general and administrative expenses . Selling, general and administrative expenses increased $2.0 million, or 55.8%, from $3.6 million for the quarter ended September 30, 2010 to $5.6 million for the quarter ended September 30, 2011. The increase in selling, general and administrative expenses is primarily due to the addition of Cyvex’s related expenses of $0.8 million and increased employee compensation related costs including, but not limited to, stock option and restricted stock compensation expense of $0.5 million.

 

31


Table of Contents

OMEGA PROTEIN CORPORATION

 

Research and development expenses . Research and development expenses were $0.5 million and $0.4 million for the three months ended September 30, 2011 and 2010, respectively.

Proceeds/gains resulting from Gulf of Mexico oil spill disaster . During the quarter ended September 30, 2010, the Company received its first emergency payment from the Gulf Coast Claims Facility of $7.3 million of which $0.6 million offset the loss recognized for the quarter ended June 30, 2010, prior to the receipt of any funds, and the remainder was recognized in the unallocated inventory cost pool. No such amount was recognized during the quarter ended September 30, 2011.

Loss (gain) on disposal of assets . The Company recorded a net loss on disposal of assets of $0.2 million for the three months ended September 30, 2011 primarily related to the disposal of two fishing vessels. For the three months ended September 30, 2010, the Company recorded a gain on disposal of assets of $15,000 relating to the disposal of miscellaneous plant assets in the ordinary course of business.

Operating income.  The Company’s operating income decreased $4.8 million from $11.9 million for the quarter ended September 30, 2010 to $7.1 million for the quarter ended September 30, 2011. As a percentage of revenues, operating income decreased from 21.2% for the quarter ended September 30, 2010 to 10.0% for the quarter ended September 30, 2011.

Interest income . Interest income decreased by $16,000 from $22,000 for the three months ended September 30, 2010 to $6,000 for the three months ended September 30, 2011. The decrease was primarily due to the decreased interest rate upon which interest is earned during the quarter ended September 30, 2011 as compared to the quarter ended September 30, 2010.

Interest expense . Interest expense was $0.5 million and $0.7 million for the quarters ended September 30, 2011 and 2010, respectively. The decrease in interest expense primarily relates to a smaller interest rate swap adjustment for the quarter ended September 30, 2011 as compared to the quarter ended September 30, 2010.

Other expense, net . Other expense, net was $0.1 million for the quarters ended September 30, 2011 and 2010.

Provision for income taxes.  The Company recorded a $1.9 million provision for income taxes for the quarter ended September 30, 2011 representing an effective tax rate of 28.3% for income taxes compared to 37.0% for the quarter ended September 30, 2010. The decrease in the effective tax rate is primarily a result of the impact of certain nondeductible items and the increased level of expected book income. The Company believes that it is more probable than not that the recorded estimated deferred tax asset benefits and state operating loss carry-forwards will be realized except for the amount for which a valuation allowance has been provided. The statutory tax rate of 35% and 34% for U.S. federal taxes was in effect for the three month periods ended September 30, 2011 and 2010, respectively.

Interim Results for the Nine Months ended September 30, 2011 and September 30, 2010

Revenues . Revenues increased $47.8 million, or 38.4%, from $124.6 million for the nine months ended September 30, 2010 to $172.4 million for the nine months ended September 30, 2011. The increase in revenues was primarily due to higher sales volumes of 49.1% for the Company’s fish meal and higher sales prices and volumes of 28.2% and 1.0%, respectively, for the Company’s fish oil, partially offset by decreased sales prices of 11.0% for the Company’s fish meal. Considering fish meal, fish oil and fish solubles sales activities in total, the Company experienced a $1.6 million decrease in revenues due to the decrease in sales prices and a $39.1 million increase in revenue caused by increased sales volumes, when comparing the nine months ended September 30, 2011 to the nine months ended September 30, 2010. The increase in fish meal sales volumes in the first nine months of 2011 is primarily due to the quantity of inventory available for sale as well as export demand. The increase in fish oil sales prices in the first nine months of 2011 is due to increased export demand primarily from the aquaculture industry as well as a general increase in commodity pricing for fats and oils. The decrease in fish meal sales prices for the first nine months of 2011 is primarily due to an increased global supply of fish meal available for sale, particularly from South America. Additionally, Cyvex, acquired by the Company in December 2010, contributed $9.8 million and Omega Shipyard, Inc. contributed $0.3 million of revenue for the nine months ended September 30, 2011.

Cost of sales . Cost of sales, including depreciation and amortization, for the nine months ended September 30, 2011 was $128.5 million, a $34.1 million increase, or 36.0%, as compared to the nine months ended September 30, 2010. Cost of sales as a percentage of revenues was 74.6% for the nine months ended September 30, 2011 as compared to 75.8% for the nine months ended September 30, 2010. The decrease in cost of sales as a percentage of revenue was primarily due to the increase in fish oil sales prices realized in the first nine months of 2011 as compared to the first nine months of 2010 partially offset by the decrease in fish meal

 

32


Table of Contents

OMEGA PROTEIN CORPORATION

 

sales prices over the same period as discussed above. Additionally, cost per unit of production was consistent during the two periods despite the increased fish catch during the nine months ended September 30, 2011. The benefit of increased fish catch on cost per unit of production was offset by decreased fish oil yields. Cyvex’s cost of sales for the nine months ended September 30, 2011 was $5.9 million and Omega Shipyard, Inc.’s cost of sales was $0.3 million.

Gross profit . Gross profit increased $13.8 million, or 45.7% from $30.1 million for the nine months ended September 30, 2010 to $43.9 million for the nine months ended September 30, 2011. Gross profit as a percentage of revenue was 25.4% for the nine months ended September 30, 2011 as compared to 24.2% for the nine months ended September 30, 2010. The increase in gross profit as a percentage of revenue was primarily due to the increase in fish oil sales prices experienced in the first nine months of 2011 as compared to the first nine months of 2010, as discussed above, offset by the decrease in fish meal sales prices. Cyvex’s gross profit as a percentage of revenue was 39.9% for the first nine months of 2011. Cyvex’s gross profit percentage was negatively impacted during the first nine months of 2011 by the one time inventory write-up to fair value that was made in conjunction with Cyvex being acquired by the Company in December 2010.

Selling, general and administrative expenses . Selling, general and administrative expenses increased $4.4 million, or 40.7%, from $10.8 million for the nine months ended September 30, 2010 to $15.2 million for the nine months ended September 30, 2011. The increase in selling, general and administrative expenses is primarily due to the addition of Cyvex’s related expenses of $2.1 million and increased employee compensation related costs including, but not limited to, stock option and restricted stock compensation expense of $1.2 million. In addition, the Company accrued a reserve during the nine months ended September 30, 2011 of approximately $0.4 million relating to the Proposition 65 Matter. See Part II Other Information—Item 1 Legal Proceedings.

Research and development expenses . Research and development expenses were $1.4 million and $1.3 million for the nine months ended September 30, 2011 and 2010, respectively.

Proceeds/gains resulting from Gulf of Mexico oil spill disaster . During the nine months ended September 30, 2011, the Company received $26.2 million, net of fees and expenses, from the GCCF in connection with the final settlement of the Company’s claims related to the impacts of the 2010 Gulf of Mexico oil spill disaster. No such amount was recognized during the nine months ended September 30, 2010.

Other proceeds/gains resulting from natural disaster, net—2008 storms. For the nine months ended September 30, 2010, the Company recognized a gain of $0.2 million related to a grant from the State of Louisiana Hurricane Gustav and Ike Fisheries Recovery Program. No such amount was recognized during the nine months ended September 30, 2011.

Other proceeds/gains resulting from natural disaster, net—2005 storms. For the nine months ended September 30, 2011, the Company recognized a gain of $0.8 million, net of fees and expenses, in connection with the final settlement of the Company’s claims against its prior insurance broker stemming from the hurricanes affecting the Company in 2005. No such amount was recognized during the nine months ended September 30, 2010.

Loss (gain) on disposal of assets . The Company recorded a net loss on disposal of assets of $0.6 million for the nine months ended September 30, 2011 primarily related to the disposal of four fishing vessels, partially offset by insurance proceeds related to the disposal of one of the vessels. For the nine months ended September 30, 2010, the Company recorded a loss on disposal of assets of $0.3 million relating to the decommissioning of two fishing vessels which were sold as scrap.

Operating income.  The Company’s operating income increased $35.6 million from $17.9 million for the nine months ended September 30, 2010 to $53.5 million for the nine months ended September 30, 2011. As a percentage of revenues, operating income increased from 14.4% for the nine months ended September 30, 2010 to 31.0% for the nine months ended September 30, 2011. Excluding the above mentioned GCCF final settlement of $26.2 million from operating income for the nine months ended September 30, 2011 would have resulted in $27.3 million of operating income or 15.8% as a percentage of revenues.

Interest income . Interest income increased by $6,000 from $28,000 for the nine months ended September 30, 2010 to $34,000 for the nine months ended September 30, 2011. The increase was primarily due to the increased cash balance upon which interest is earned during the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010.

Interest expense . Interest expense decreased $0.3 million from $1.9 million for the nine months ended September 30, 2010 to $1.6 million for the nine months ended September 30, 2011. The decrease for the nine months ended September 30, 2011 was primarily attributable to the reduction in interest expense related to interest rate swaps.

Other expense, net . Other expense, net was $0.2 million and $0.3 million for the nine months ended September 30, 2011 and 2010, respectively.

 

33


Table of Contents

OMEGA PROTEIN CORPORATION

 

Provision for income taxes.  The Company recorded an $18.1 million provision for income taxes for the nine months ended September 30, 2011 representing an effective tax rate of 35.1% for income taxes compared to 36.7% for the nine months ended September 30, 2010. The Company believes that it is more probable than not that the recorded estimated deferred tax asset benefits and state operating loss carry-forwards will be realized except for the amount for which a valuation allowance has been provided. The statutory tax rate of 35% and 34% for U.S. federal taxes was in effect for the nine month periods ended September 30, 2011 and 2010, respectively.

Seasonal and Quarterly Results

The Company’s menhaden harvesting and processing business is seasonal in nature. The Company generally has higher sales during the menhaden harvesting season (which includes the second and third quarter of each year) due to increased product availability, but prices during the fishing season tend to be lower than during the off-season. Additionally, due to differences in gross profit margins for the Company’s various products, any variation in the mix of product sales between quarters may result in significant variations of total gross profit margins. As a result, the Company’s quarterly operating results have fluctuated in the past and may fluctuate in the future. In addition, from time to time the Company defers sales of inventory based on worldwide prices for competing products that affect prices for the Company’s products which may affect comparable period comparisons.

Liquidity and Capital Resources

Historically, the Company’s primary sources of liquidity and capital resources have been cash flows from operations, bank credit facilities and term loans from various lenders provided pursuant to the U.S. Maritime Administration’s Fisheries Finance Program (“FFP”), which is offered through National Marine Fisheries Services (“NMFS”) under Title XI of the Marine Act of 1936 (“Title XI”). These sources of cash flows have been used for operations, capital expenditures, payment of long-term debt, the acquisitions of Cyvex and InCon, purchases of fish meal and fish oil and the purchase and retirement of shares of the Company’s common stock in 2006.

At September 30, 2011, the Company had an unrestricted cash balance of $51.0 million, an increase of $31.2 million from December 31, 2010. This increase was primarily due to the sale of inventory, the final settlement of the Company’s claims relating to damages resulting from the Gulf of Mexico oil spill disaster with the GCCF and proceeds from the exercise of stock options and was partially offset by spending related to the 2011 fishing season, capital spending, debt payments, the acquisition of InCon Processing and final payments related to the acquisition of Cyvex. Omega Protein’s annual revenues and its resulting liquidity are highly dependent on annual fish catch, production yields, selling prices for its products and inventories available for sale. Omega Protein’s average selling prices for its products for the nine months ended September 30, 2011 were 2.1% lower than its average selling prices for the year ended December 31, 2010. Additionally, Omega Protein experienced a 4.2% higher per unit cost of sales during the nine months ended September 30, 2011 as compared to the year ended December 31, 2010.

The aggregate amount of the Company’s outstanding indebtedness at September 30, 2011 was approximately $31.1 million compared to approximately $33.3 million at December 31, 2010. The Company has a moderately leveraged financial structure which could limit its financial flexibility. In particular, the Company will be required to use a portion of its cash flows to pay principal and interest on its debt, which will reduce the amount of money the Company has for operations, capital expenditures, expansion, acquisitions or general corporate or other business activities. In addition, the covenants contained in the Company’s debt agreements limit its ability to borrow money in the future for acquisitions, capital expenditures or to meet the Company’s operating expenses or other general corporate obligations. See “Risk Factors—The Company has a moderate amount of indebtedness, which may adversely affect its ability to operate its business, remain in compliance with debt covenants and make payments on its debt” in the Company’s 2010 Form 10-K.

The Company has or had contracted through energy swap derivatives or has stop losses for approximately 80%, 45% and 3% of its budgeted 2011, 2012 and 2013 energy use, respectively.

Source of Capital: Operations

Net cash flow provided by operating activities increased from approximately $19.5 million for the nine months ended September 30, 2010 to $51.2 million for the nine months ended September 30, 2011. The increase in operating cash flow is primarily attributable to increased revenue associated with increased sales volumes of 29% of the Company’s inventory and the $26.2 million in proceeds related to the final settlement with the GCCF for its claims for costs and damages incurred as a result of the 2010 Gulf of Mexico oil spill disaster.

 

34


Table of Contents

OMEGA PROTEIN CORPORATION

 

Source of Capital: Debt

Net financing activities provided cash of $2.2 million and $8.1 million during the nine month periods ended September 30, 2011 and 2010, respectively. The nine month period ended September 30, 2011 included $4.8 million in proceeds and tax effects received from stock options exercised partially offset by $2.6 million in debt and capital lease principal payments. The nine month period ended September 30, 2010 included $10.0 million in proceeds from a Title XI term loan, $2.2 million in debt and capital lease principal payments and $0.4 million in proceeds and tax effects received from stock options exercised.

On December 1, 2005, pursuant to the Title XI program, the United States Department of Commerce Fisheries Finance Program (the “FFP”) approved a second financing application made by the Company in the amount of $16.4 million (the “Second Approval Letter”). In May 2006, the Company submitted a $6.3 million financing request under the Second Approval Letter. The Company closed on the $6.3 million FFP loan in the first quarter of 2007. In September 2009, the Company submitted a $10.0 million financing request under the remaining Second Approval Letter. The Company closed on the $10.0 million financing request on June 1, 2010. On June 20, 2011, the FFP approved a third financing application made by the Company in the amount of $10.0 million (the “Third Approval Letter”). To date, the Company has not submitted any financing requests under the Third Approval Letter. As of September 30, 2011, the Company had approximately $31.1 million of borrowings outstanding under Title XI and was in compliance with all of the covenants contained therein.

On October 21, 2009, the Company entered into a Loan Agreement with Wells Fargo Bank N.A. (“the Loan Agreement”) which replaced the Company’s prior senior credit facility. The Loan Agreement with Wells Fargo Bank provides the Company with a senior secured credit facility consisting of a 3-year revolving credit facility of up to $35 million, including a $7.5 million sub-limit for the issuance of standby letters of credit, and is secured by substantially all of the Company’s assets except for those already pledged in connection with existing federal Fisheries Finance Program loans. The Loan Agreement replaced the Company’s prior senior credit facility, under which, just prior to closing, $11.4 million was outstanding under a term loan and $2.8 million was outstanding under letters of credit. In connection with the closing of the Loan Agreement, the Company repaid the term loan at closing and the letters of credit were transferred to Wells Fargo Bank.

As of September 30, 2011, the Company had no amounts outstanding under the Loan Agreement and approximately $3.4 million in letters of credit issued primarily in support of worker’s compensation insurance programs. The Company has no off-balance sheet arrangements other than normal operating leases and standby letters of credit.

The Loan Agreement bears interest at LIBOR plus an applicable margin and requires the Company to comply with various affirmative and negative covenants affecting its business and operations including the following financial covenants:

 

   

The Company is required to maintain on a consolidated basis a ratio of Total Liabilities (as defined in the Loan Agreement) excluding the non-current portion of Subordinated Liabilities (as defined in the Loan Agreement) to Tangible Net Worth (as defined in the Loan Agreement) not exceeding 1.00 to 1.00.

 

   

The Company is required to maintain on a consolidated basis Tangible Net Worth equal to at least the sum of the following: (a) $130,000,000, plus (b) 50% of net income (if positive, with no deduction for losses) earned in each quarterly accounting period commencing after December 31, 2009, plus (c) 100% of the net proceeds from any Equity Interests (as defined in the Loan Agreement) issued after the date of the Loan Agreement, plus (d) 100% of any increase in stockholders’ equity resulting from the conversion of debt securities to equity interests after the closing date.

 

   

The Company is required to maintain on a consolidated basis an Asset Coverage Ratio (as defined in the Loan Agreement) of at least 2.50 to 1.00.

 

   

The Company (a) may not incur on a consolidated basis a net loss before taxes and extraordinary items in any two consecutive quarterly accounting periods, commencing with the fiscal quarter ending September 30, 2010, and (b) may not incur on a consolidated basis a net loss before taxes and extraordinary items for any annual accounting period, commencing with the fiscal year ending December 31, 2010.

As of September 30, 2011, the Company was in compliance with all covenants under the Loan Agreement and expects to be in compliance for the remainder of 2011. For a more detailed description of the Loan Agreement, see the Company’s report on Form 8-K filed with the SEC on October 23, 2009.

 

35


Table of Contents

OMEGA PROTEIN CORPORATION

 

Use of Capital: Operations

Net investing activities used cash of $22.1 million and $10.4 million for the nine month periods ended September 30, 2011 and 2010, respectively. The Company’s investing activities consist mainly of acquisition costs and capital expenditures for equipment purchases, replacements, vessel refurbishments, and fish oil refining processes. The Company made capital expenditures of approximately $13.2 million and $10.7 million, for the nine month periods ended September 30, 2011 and 2010, respectively. The Company anticipates making an additional $8 million to $12 million in capital expenditures during the remainder of 2011 primarily for the construction and refurbishment of vessels and plant assets and for the repair of certain equipment. Investing activities for the nine month period ended September 30, 2011 also includes $9.0 million, net of cash received, for the acquisition of InCon in September 2011, $2.1 million of final closing payments related to the Cyvex acquisition which took place in December 2010 and $2.2 million in proceeds for the disposition of assets.

Use of Capital: Acquisitions

The Company from time to time considers potential transactions including, but not limited to, enhancement of physical facilities to improve production capabilities, the acquisition of other businesses and the repurchase of the Company’s common stock. Certain of the potential transactions reviewed by the Company would, if completed, result in its entering new lines of business (generally including certain businesses to which the Company sells its products such as pet food manufacturers, aquaculture feed manufacturers, fertilizer companies and organic foods manufacturers and distributors), although historically, reviewed opportunities have been generally related in some manner to the Company’s existing operations or which would have added new protein products to the Company’s product lines. Depending on the size of the acquisition, the Company would expect to finance the transaction using internally generated cash flows and its current credit agreements, or, if necessary, equity or debt financings. The Company cannot assure that such financings will be available on acceptable terms, if at all.

On December 16, 2010, the Company completed the acquisition of 100% of the outstanding common stock of Cyvex in a cash transaction pursuant to the terms of a Stock Purchase Agreement with the founder and sole shareholder of Cyvex. Cyvex now is a wholly owned subsidiary of the Company and is included in the Company’s consolidated financial statements.

On September 9, 2011, the Company acquired all of the outstanding equity of InCon Processing in a cash transaction pursuant to the terms of an equity purchase agreement. InCon is now a wholly owned subsidiary of the Company and is included in the Company’s consolidated financial statements.

Use of Capital: Contractual Obligations

The following tables aggregate information about the Company’s contractual cash obligations and other commercial commitments (in thousands) as of September 30, 2011:

 

     Payments Due by Period  

Contractual Cash Obligations

   Total      Less than
1 year
     1 to 3
years
     4 to 5
years
     After 5
years
 

Long-term debt

   $ 31,063       $ 2,992       $ 6,154       $ 5,531       $ 16,386   

Capital lease obligation

     903         496         407         —           —     

Interest on long-term debt and capital lease obligation

     11,094         1,992         3,222         2,431         3,449   

Operating lease obligations

     6,542         2,037         3,543         886         76   

Pension Funding

     10,760         1,948         4,261         2,976         1,575   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Cash Obligations

   $ 60,362       $ 9,465       $ 17,587       $ 11,824       $ 21,486   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company believes that the existing cash, cash equivalents, cash flow from operations and funds available through the Loan Agreement and/or Title XI indebtedness described above will be sufficient to meet its working capital and capital expenditure requirements through the next twelve months.

There have been no significant changes to the Company’s contractual cash obligations during the quarterly period ending September 30, 2011.

 

36


Table of Contents

OMEGA PROTEIN CORPORATION

 

Available Information

The Company files annual, quarterly and current reports and other information with the SEC. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed under the Securities and Exchange Act of 1934 (“Exchange Act”), as well as Section 16 filings by officers and directors, are available free of charge at the Company’s website at www.omegaproteininc.com or at the SEC’s website at www.sec.gov and are posted as soon as reasonably practicable after they are filed with the SEC. The Company will provide a copy of these documents to stockholders upon request. Information on the Company’s website or any other website is not incorporated by reference into this report and does not constitute part of this report.

In addition, the public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F. Street, NE., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

The Company’s Corporate Governance Guidelines, Code of Business Conduct and Ethics, Code of Ethics for Financial Professionals, as well as the Charters for the Board’s Audit Committee, Compensation Committee, Corporate Governance and Nominating Committee and Scientific Committee, are available at the Company’s website. These Guidelines, Codes and Charters are not incorporated by reference into this report and do not constitute part of this report. The Company will provide a copy of these documents to stockholders upon request.

 

It em 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk associated with natural gas, diesel and Bunker C fuel prices. To partially mitigate this risk, the Company has forward purchased a portion of its expected natural gas, diesel and Bunker C usage for 2011, 2012 and 2013. The Company is currently exposed to market risk associated with increases in natural gas, diesel and Bunker C prices related to the portion not covered by swaps for 2011, 2012 and 2013.

Although the Company sells products in foreign countries, all of the Company’s revenues are billed and paid for in US dollars. As a result, management does not believe that the Company is exposed to any significant foreign country currency exchange risk, and the Company does not utilize market risk sensitive instruments to manage its exposure to this risk.

There have been no significant changes to the Company’s exposure to market risk since the Company’s most recent Form 10-K.

 

It em 4. Controls and Procedures.

 

  (a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation of the effectiveness of its “disclosure controls and procedures,” as that phrase is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. The evaluation was carried out under the supervision and with the participation of management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).

Based on and as of the date of that evaluation, the Company’s CEO and CFO have concluded that (i) the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, and (ii) that the Company’s disclosure controls and procedures are effective.

Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclose material information otherwise required to be set forth in the Company’s periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.

 

  (b) Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

37


Table of Contents

OMEGA PROTEIN CORPORATION

 

P ART II. OTHER INFORMATION

 

I tem 1. Legal Proceedings

The Company is defending various claims and litigation arising from operations which arise in the ordinary course of the Company’s business. In the opinion of management, any losses resulting from these matters will not have a material adverse affect on the Company’s results of operations, cash flows or financial position.

In March 2010, the Company was named as one of the defendants in a lawsuit filed in the Superior Court of the State of California, County of San Francisco, by Chris Manthey, Benson Chiles and Mateel Environmental Justice Foundation (the “Proposition 65 Matter”). The other defendants in the lawsuit are CVS Pharmacy, Inc., General Nutrition Corporation, New Health Group, Inc., Pharmavite LLC, Rite Aid Corporation, Solgar, Inc., and Twinlab Corporation. The plaintiffs allege that fish oil dietary supplements produced by the defendants do not have adequate warnings regarding possible exposure to polychlorinated biphenyls (PCBs) as required by Proposition 65 under California law, and request that the court grant injunctive relief and award monetary civil penalties. The Company’s total fish oil supplement sales in the State of California since inception have been approximately $6,200. The Company believes that its products comply fully with federal law promulgated by the U.S. Food & Drug Administration, standards of the European Commission and state law, including California, and intends to vigorously defend the lawsuit. The Company does not believe that the resolution of this lawsuit will have a material adverse effect on the Company’s results of operations, cash flows or financial position. As of September 30, 2011, the Company had a $0.1 million accrual related to this matter.

In April 2010, the Company received a request for information pursuant to Section 308 of the Federal Water Pollution Control Act (Clean Water Act) from Region 3 of the United States Environmental Protection Agency (the “EPA”) concerning the Company’s wastewater practices for its fishing operations at its Reedville, Virginia facility. The Company has responded to the request. In September, 2011, the EPA conducted an inspection of the Company’s Reedville facility in connection with its review. The Company believes it has been in compliance with all applicable laws with regard to wastewater practices. The Company cannot predict the outcome of the EPA’s review.

In February 2011, the United States Coast Guard conducted an inspection of the vessels at the Company’s Reedville, Virginia facility regarding the Company’s vessel bilge water disposal practices. Based on the results of this inspection and subsequent correspondence and discussions with the Coast Guard, the Company conducted a full survey of its Reedville, Virginia fishing fleet to determine compliance with applicable laws and regulations. The survey has been submitted to the Coast Guard. Based on the Company’s findings and discussions with the Coast Guard, two of the Company’s Reedville based fishing vessels were temporarily delayed from fishing at the early May 2011 commencement of the Atlantic fishing season. Following the completion of necessary improvements and repairs and passing Coast Guard inspections, both of these vessels returned to full operations after the beginning of the fishing season. The delay did not materially impact its Atlantic fishing operations. The Company spent approximately $3.0 million to make improvements and repairs to the Reedville fleet.

 

Ite m 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2010 except as follows.

In connection with its $44.8 million settlement with BP and the other Deepwater Horizon defendants, Omega Protein has waived any future potential claims against these defendants for any future damages that might manifest themselves from the Deepwater Horizon oil spill . These potential claims could include: (1) the effect of the oil spill on the Company’s business operations and fish-catch, both short-term and long-term, (2) the effect of government intervention in connection with the oil spill, including without limitation, any restrictions that may be imposed on fishing, navigation and access to the Company’s facilities or restrictions on the sale of marine proteins produced from the Gulf of Mexico, (3) the effect of the oil spill, short-term and long-term, on the menhaden fishery or ecosystem supporting that fishery, and (4) customer perceptions about marine products from the Gulf of Mexico or the United States due to concerns about contamination or availability. In the event that one of these potential claims manifests itself and has a material adverse effect on the Company’s business, financial results and results of operations, the Company would have no further right of recovery.

A finding by the ASMFC that overfishing occurred in the Atlantic menhaden fishery in 2008 may result in additional restrictions on Omega Protein’s menhaden harvest, which could have a material adverse effect on the Company’s business, financial condition or results of operations. The Atlantic State Marine Fisheries Commission (“ASMFC”) manages the menhaden fishery throughout the stock’s Atlantic coast-wide range. The most recent stock assessment for the Atlantic menhaden was completed in 2010 using data collected through 2008. According to federal and ASMFC technical experts, the assessment found that the Atlantic menhaden stock had undergone slight overfishing in one year, 2008; however, the population is not considered overfished, meaning

 

38


Table of Contents

OMEGA PROTEIN CORPORATION

 

that the stock abundance remains at or near target levels, above levels of concern, and can produce enough eggs to replace itself. The report indicates that the population was subject to slight overfishing in 2008 by an estimated four-tenths of one percent. Multiple runs of the stock assessment model revealed that there was a 53% probability that overfishing had occurred and a 47% probability that overfishing had not occurred

In March 2011, the ASMFC initiated a review regulatory process which if enacted would: (1) require annual updates on menhaden recruits, or the numbers of fish in their first year of life, currently reviewed only every three years; (2) begin a process of developing management reference points for identifying the relative status of the stock using broad ecosystem indicators, and (3) establish interim management targets and consider regulatory tools to assist managers in achieving these targets. The interim management reference point target will be based on achieving a rate of fishing that should result in 15% of the spawning potential the Atlantic menhaden stock would have if such stock were unfished. By comparison, in 2008, the estimate of this so-called “spawning potential ratio” was estimated to be 8%; however, those numbers have not been estimated for 2009, 2010, or 2011. The Company expects that such reassessment will not occur until the next stock assessment in 2012. These percentages do not necessarily translate into a corresponding percentage reduction in fish catch.

In August 2011, the ASMFC initiated a rulemaking process to establish the new management targets and set a new reference point, or baseline, for determining when the Atlantic menhaden stock is undergoing overfishing. It is also soliciting input on potential fishery management tools that can be used to manage the fishery to a recommended catch level. Public hearings have been held and a final decision on the new reference point and management target is expected to be made when the ASMFC meets on November 9, 2011. At this meeting, a decision will also be made as to whether to initiate a new rulemaking to develop a system of management for the fishery that could include quotas, limitations on the number of days fished annually, a shortened season, no action, or other measures.

The Company is unable to predict whether any management measures might be necessary for the 2012 fishing season or beyond. Because the process of developing a management program will take time and involve further public hearings, the Company does not expect any new constraints to be placed upon the fishery in 2012. Revised scientific information on the status of the stock should be available in 2012. It is possible that this information will influence the types of measures or extent of allowable fishing under a new management system, if adopted. The Company expects, based on management of other fisheries by the ASMFC, that the total amount of allowable menhaden harvest will vary proportionally with the estimated size of the menhaden population.

It is possible that this ASMFC regulatory process could have a material adverse effect on the Company’s business, financial results and results of operations.

The Company’s 2011 oil yield results were the poorest in its recent history. For illustrative purposes, the Company’s oil yields for the 2011 fishing season through September 30, 2011 were lower by 19.2% compared to those in the same period in the 2010 fishing season and were lower by 30.6% compared to the Company’s 5 year oil yield average. The Company believes that the biological causes of lower fish oil yields generally relate to fish diet, weather and water temperature but such causes are not generally well understood. The impact of these poor oil yields has resulted in significantly higher per unit inventory costs and fewer volumes available for future sale. These higher unit costs and fewer volumes available for sale have adversely impacted financial results for the third quarter of 2011 and could be expected to adversely affect financial results through the second quarter of 2012.

 

It em 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

 

It em 3. Defaults Upon Senior Securities

None

 

Item 4. Removed and Reserved

 

Item 5. Other Information

None

 

Item 6. Exhibits

 

Exhibit No.

  

Description of Exhibit

10.1    Equity Purchase Agreement, dated as of September 9, 2011, by and among Omega Protein Corporation, InCon Processing, LLC, InCon International, Inc. and the shareholders of InCon International, Inc (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 12, 2011).
31.1    Rule 13a-14(a)/15d-14(a) Certification for Chief Executive Officer.

 

39


Table of Contents

OMEGA PROTEIN CORPORATION

 

Exhibit No.

  

Description of Exhibit

31.2    Rule 13a-14(a)/15d-14(a) Certification for Chief Financial Officer.
32.1    Section 1350 Certification for Chief Executive Officer.
32.2    Section 1350 Certification for Chief Financial Officer.
*101.INS    XBRL Instance Document.
*101.SCH    XBRL Taxonomy Extension Schema Document.
*101.PRE    XBRL Taxonomy Presentation Linkbase Document.
*101.LAB    XBRL Taxonomy Label Linkbase Document.
*101.CAL    XBRL Taxonomy Calculation Linkbase Document.
*101.DEF    XBRL Definition Linkbase Document.

 

 

* Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under those Sections.

 

40


Table of Contents

OMEGA PROTEIN CORPORATION

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   

OMEGA PROTEIN CORPORATION

                    (Registrant)

November 8, 2011     By:       /s/ Bret D. Scholtes
      (Executive Vice President, Chief Financial Officer)

 

41

Exhibit 31.1

CERTIFICATION

 

I, Joseph L. von Rosenberg III, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Omega Protein Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 8, 2011     By:   /s/ Joseph L. von Rosenberg_        
    Name:   Joseph L. von Rosenberg III
    Title:   President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Bret D. Scholtes, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Omega Protein Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 8, 2011     By:   /s/ Bret D. Scholtes
    Name:   Bret D. Scholtes
    Title:  

Executive Vice President and

Chief Financial Officer

Exhibit 32.1

Certification of Form 10-Q for the Quarter ended September 30, 2011, pursuant to Section

906 of the Sarbanes-Oxley Act of 2002

The undersigned Chief Executive Officer of Omega Protein Corporation, certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

   

the Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and

 

   

the information contained in the Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 fairly presents, in all material respects, the financial condition and results of operations of Omega Protein Corporation.

This certification is being furnished solely to comply with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as a part of the Form 10-Q.

A signed original of this written statement required by Section 906 has been provided to Omega Protein Corporation and will be retained by Omega Protein Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

Dated: November 8, 2011

 

/s/ JOSEPH L. VON ROSENBERG, III

Joseph L. von Rosenberg, III

President and Chief Executive Officer

Exhibit 32.2

Certification of Form 10-Q for the Quarter ended September 30, 2011, pursuant to Section

906 of the Sarbanes-Oxley Act of 2002

The undersigned Chief Financial Officer of Omega Protein Corporation, certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

 

the Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and

 

 

the information contained in the Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 fairly presents, in all material respects, the financial condition and results of operations of Omega Protein Corporation.

This certification is being furnished solely to comply with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as a part of the Form 10-Q.

A signed original of this written statement required by Section 906 has been provided to Omega Protein Corporation and will be retained by Omega Protein Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

Dated: November 8, 2011

 

/s/ BRET D. SCHOLTES

Bret D. Scholtes

Executive Vice President and

Chief Financial Officer