Omega Protein Corporation
OMEGA PROTEIN CORP (Form: 10-Q, Received: 11/17/2014 16:20:54)

 

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, 2014

 

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  

 

(I.R.S. Employer  

incorporation or organization)  

 

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 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 ☒ 

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 12, 2014: 21,578,733.

 



 

 
 

 

 

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, 2014 and December 31, 2013       

 3

 

 

 

 

Unaudited Condensed Consolidated Statement of Comprehensive Income  for the three months and nine months ended September 30, 2014 and 2013       

 4

 

 

 

 

Unaudited Condensed Consolidated Statement of Cash Flows for the  nine months ended September 30, 2014 and 2013  

 5

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements      

 6

 

 

 

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

 26

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 43

 

 

 

Item 4. Controls and Procedures  

 43

   
   

PART II. OTHER INFORMATION  

 

 

 

Item 1. Legal Proceeding

 44

 

 

 

Item 1A. Risk Factors

 44

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  

 45

 

 

 

Item 3. Defaults Upon Senior Securities  

 45

 

 

 

Item 4. Mine Safety Disclosures  

 45

 

 

 

Item 5. Other Information  

 45

 

 

 

Item 6. Exhibits  

 46

 

 

 

Signatures

47

   

 
2

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements and Notes

 

 

   

September 30,

2014

   

December 31,

2013

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 1,714     $ 34,059  

Receivables, net

    46,099       21,140  

Inventories

    107,919       94,339  

Deferred tax asset, net

    1,772       1,062  

Prepaid expenses and other current assets

    5,911       3,915  

Total current assets

    163,415       154,515  

Other assets, net

    2,666       5,234  

Property, plant and equipment, net

    165,529       144,113  

Goodwill

    50,658       19,600  

Other intangible assets, net

    21,388       7,932  

Total assets

  $ 403,656     $ 331,394  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

Current liabilities:

               

Current maturities of long-term debt

  $ 14,157     $ 3,112  

Accounts payable

    14,893       5,380  

Accrued liabilities

    38,448       29,145  

Total current liabilities

    67,498       37,637  

Long-term debt, net of current maturities

    40,770       21,130  

Deferred tax liability, net

    23,773       19,351  

Pension liabilities, net

    2,516       4,117  

Other long-term liabilities

    2,414       1,929  

Total liabilities

    136,971       84,164  

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; 21,587,751 and 20,804,189 shares issued and 21,578,733 and 20,804,189 shares outstanding at September 30, 2014 and December 31, 2013, respectively

    208       203  

Capital in excess of par value

    141,153       136,428  

Retained earnings

    132,070       116,807  

Treasury stock, at cost – 9,018 shares

    (119 )      

Accumulated other comprehensive loss

    (6,627 )     (6,208 )

Total stockholders’ equity

    266,685       247,230  

Total liabilities and stockholders’ equity

  $ 403,656     $ 331,394  

 

 

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

   

 
3

 

   

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(In thousands, except per share amounts)

 

             
   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2014

   

2013

   

2014

   

2013

 

Revenues

  $ 70,764     $ 87,620     $ 206,177     $ 178,320  

Cost of sales

    56,586       58,200       151,082       123,520  

Gross profit

    14,178       29,420       55,095       54,800  
                                 

Selling, general, and administrative expense

    10,216       6,930       22,835       19,403  

Research and development expense

    608       650       1,636       1,770  

Impairment of intangible assets

          80             80  

Loss related to plant closure

    1,543             5,482        

Loss (gain) on disposal of assets

    12       (161 )     245       213  

Operating income

    1,799       21,921       24,897       33,334  

Interest income

    4       5       17       15  

Interest expense

    (365 )     (483 )     (747 )     (1,356 )

Gain on foreign currency

    272             272        

Other expense, net

    (39 )     (104 )     (213 )     (285 )

Income before income taxes

    1,671       21,339       24,226       31,708  

Provision for income taxes

    1,012       7,377       8,963       10,911  

Net income

    659       13,962       15,263       20,797  

Other comprehensive income (loss):

                               

Foreign currency translation adjustment net of tax benefit of $243, $0, $243 and $0, respectively

    (449 )           (449 )      

Energy swap adjustment, net of tax (expense) benefit of $204, ($54), $224 and $2, respectively

    (379 )     101       (416 )     (5 )

Pension benefits adjustment, net of tax expense of $80, $135, $240 and $405, respectively

    149       251       446       753  

Comprehensive income (loss)

  $ (20 )   $ 14,314     $ 14,844     $ 21,545  

Basic earnings per share (See Note 14)

  $ 0.03     $ 0.68     $ 0.73     $ 1.03  

Weighted average common shares outstanding

    20,637       20,150       20,474       19,801  

Diluted earnings per share (See Note 14)

  $ 0.03     $ 0.66     $ 0.70     $ 0.99  

Weighted average common shares and potential common share equivalents outstanding

    21,258       20,762       21,122       20,520  

   

 

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

 

 
4

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

 

   

Nine Months Ended

September 30,

 
   

2014

   

2013

 

Cash flows from operating activities:

               

Net income

  $ 15,263     $ 20,797  

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

               

Depreciation and amortization

    16,072       15,627  

Loss on plant closure

    2,055        

Loss (gain) on disposal of assets

    245       213  

Impairment of intangible assets

          80  

Provisions for losses on receivables

    36       36  

Share based compensation

    1,688       1,461  

Deferred income taxes

    (936 )     5,074  

Unrealized (gain) on foreign currency fluctuations, net

    (272 )      

Changes in assets and liabilities:

               

Receivables

    (9,861 )     (604 )

Inventories

    6,331       (22,700 )

Prepaid expenses and other current assets

    (602 )     (1,782 )

Other assets

    1,454       5,409  

Accounts payable

    (1,880 )     938  

Accrued liabilities

    9,030       2,538  

Pension liability, net

    (1,063 )     (622 )

Other long term liabilities

    (21 )     182  

Net cash provided by operating activities

    37,539       26,647  

Cash flows from investing activities:

               

Proceeds from disposition of assets

    257       313  

Acquisition of Wisconsin Specialty Protein, net of cash acquired

          (26,676 )

Acquisition of Bioriginal, net of cash acquired

    (46,388 )      

Land and building purchased in capital lease extinguishment

          (5,005 )

Capital expenditures

    (36,254 )     (18,009 )

Net cash used in investing activities

    (82,385 )     (49,377 )

Cash flows from financing activities:

               

Principal payments of long-term debt

    (14,776 )     (2,316 )

Proceeds from long-term debt

    24,000        

Principal payments of capital lease obligation

          (309 )

Purchase treasury stock at cost

    (119 )      

Proceeds from stock options exercised

    2,245       3,048  

Excess tax benefit of stock options exercised

    1,151       1,147  

Net cash provided by (used in) financing activities

    12,501       1,570  

Net increase (decrease) in cash and cash equivalents

    (32,345 )     (21,160 )

Cash and cash equivalents at beginning of year

    34,059       55,998  

Cash and cash equivalents at end of period

  $ 1,714     $ 34,838  

 

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

 

 
5

 

 

OMEGA PROTEIN CORPORATION    

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1.  

SIGNIFICANT ACCOUNTING POLICIES  

 

SUMMARY OF OPERATIONS AND BASIS OF PRESENTATION  

       

Business Description

 

Omega Protein Corporation (the “Company”) is a nutritional product company that develops, produces and delivers healthy products throughout the world to improve the nutritional integrity of foods, dietary supplements and animal feeds. The Company operates through two industry segments: animal nutrition and human nutrition.

 

The animal nutrition segment is comprised primarily of two subsidiaries: Omega Protein, Inc. (“Omega Protein”) and Omega Shipyard, Inc. (“Omega Shipyard”). Omega Protein, the Company’s principal operating subsidiary, is the successor to a business conducted since 1913. 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 primarily for animal and aquaculture feeds, as well as 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 Protein’s business is seasonal in nature and generally has higher revenues during the third quarter of each fiscal year. A portion of Omega Protein’s production is transferred to the human nutrition segment where it is further processed and sold. Omega Shipyard owns and operates 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.

 

The human nutrition segment, which operates under the names Nutegrity and Bioriginal, has three primary product lines: protein products, specialty oils and essential fatty acids and other nutraceutical ingredients. Nutegrity is comprised primarily of three subsidiaries: Cyvex Nutrition, Inc. (“Cyvex”), InCon Processing, L.L.C. (“InCon”), and Wisconsin Specialty Protein, L.L.C. (“WSP”). Cyvex, acquired by the Company in December 2010, is located in Irvine, California and is an ingredient provider in the nutraceutical industry. InCon, acquired by the Company in September 2011, is located in Batavia, Illinois and is a specialty processor that utilizes molecular distillation technology to concentrate Omega-3 fish oils and, subject to outside demand and excess capacity, a variety of other compound products for third-party tolling customers. WSP, acquired by the Company in February 2013, is a manufacturer and marketer of specialty dairy and other protein products headquartered in Madison, Wisconsin and operates a production facility in Reedsburg, Wisconsin. See Note 3 – Acquisition of Wisconsin Specialty Protein, L.L.C. for additional information related to the Company’s acquisition of WSP.

 

Bioriginal Food & Science Corp. (“Bioriginal”), acquired by the Company in September 2014 and headquartered in Saskatoon, Canada with additional operations in the Netherlands, is a supplier of plant and marine based specialty oils and essential fatty acids to the food and nutraceutical industries. See Note 2 – Acquisition of Bioriginal Food & Science Corp. for additional information related to the Company’s acquisition of Bioriginal.

 

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, 2013. 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, 2014, and the results of its operations for the three month and nine month periods ended September 30, 2014 and 2013 and its cash flows for the nine month periods ended September 30, 2014 and 2013. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

 

 
6

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

   

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 effect on the financial statements.

 

Revenue Recognition

 

The Company derives revenue principally from the sales of a variety of protein and oil products derived from menhaden. In addition and as a result of its acquisitions of Cyvex, InCon, WSP and Bioriginal the Company’s revenues include sales of dietary supplement and food ingredients and products. The Company recognizes revenue for the sale of its products when price is established, collectability is reasonably assured and risk and rewards of ownership of its products and title are transferred to the customer.

 

Shipping and Handling

 

Amounts billed to customers associated with shipping and handling are included in revenues and the related costs are included in cost of sales.

 

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 Omega Protein’s 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.

 

Energy Swap Agreements

 

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

 

                    (in thousands)  

Energy Swap

 

Consumption

Period

 

Quantity

 

Price

Per

Unit

   

Energy Swap

Asset/(Liability)

as of

September 30 ,

2014

   

Deferred Tax

Asset/(Liability)

as of

September 30,

2014

 

Diesel - NYMEX Heating Oil Swap

 

Oct. – Nov., 2014

 

370,515 Gallons

  $ 2.92     $ (101 )   $ 35  

Natural Gas - NYMEX Natural Gas Swap

 

Oct., 2014

 

41,258 MMBTUs

  $ 3.86       11       (4 )

Propane – Natural Gas Liquids Swap

 

Oct. – Nov., 2014

 

190,000 Gallons

  $ 1.09       (9 )     3  

Diesel - NYMEX Heating Oil Swap

 

Apr. – Nov., 2015

 

1,667,116 Gallons

  $ 2.83       (237 )     83  

Natural Gas - NYMEX Natural Gas Swap

 

Apr. – Oct., 2015

 

114,000 MMBTUs

  $ 4.09       (28 )     10  
                    $ (364 )   $ 127  

   

 
7

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

                    (in thousands)   

Energy Swap

 

Consumption

Period

 

Quantity

 

Price

 Per

Unit

   

Energy Swap

Asset/(Liability)

as of

December 31,

 2013

   

Deferred Tax

Asset/(Liability)

as of

December 31,

 2013

 

Diesel - NYMEX Heating Oil Swap

 

Oct. – Nov., 2013

 

998,700 Gallons

  $ 2.88     $ 132     $ (46 )

Natural Gas - NYMEX Natural Gas Swap

 

Apr. – Oct., 2014

 

307,374 MMBTUs

  $ 3.67       143       (50 )
                    $ 275     $ (96 )

 

As of September 30, 2014, Omega Protein has recorded a long-term liability of $0.2 million net of the current portion included in other current liabilities of $0.2 million to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax asset of $0.1 million associated therewith. As of December 31, 2013, Omega Protein has recorded a current asset in prepaid expenses of $0.3 to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax liability of $0.1 million associated therewith. The effective portion of the change in fair value from inception to September 30, 2014 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,

 
   

2014

   

2013

   

2014

   

2013

 

Beginning balance

  $ 142     $ (78 )   $ 179     $ 28  

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

    27       (92 )     (62 )     (108 )

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

    (406 )     193       (354 )     103  

Ending balance

  $ (237 )   $ 23     $ (237 )   $ 23  

 

The $0.2 million reported in accumulated other comprehensive loss as of September 30, 2014 will be reclassified to inventory 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 $0.1 million.

 

The aggregate fair value of derivative instruments in gross asset positions as of September 30, 2014 and December 31, 2013 was $11,000 and $0.3 million. These amounts represent the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted. This exposure could be reduced by up to $0.4 million and $0, respectively, of liabilities included in master netting arrangements with those same counterparties.

 

As of September 30, 2014 (in thousands)

 

Gross

Amounts of

Recognized

Assets

(Liabilities)

   

Gross

Amounts of

Assets

(Liabilities)

Offset

   

Net Amounts

of Assets

(Liabilities)

Presented in

the Balance

Sheet

 

Energy swap derivatives – liability position

  $ 11     $ (375 )   $ (364 )

 

As of December 31, 2013 (in thousands)

 

Gross

Amounts of

Recognized

Assets

(Liabilities)

   

Gross

Amounts of

Assets

(Liabilities)

Offset

   

Net Amounts

of Assets

(Liabilities)

Presented in

the Balance

Sheet

 

Energy swap derivatives – asset position

  $ 275     $ -     $ 275  

 

 
8

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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. For the nine months ended September 30, 2013, the Company included an expense of $0.1 million in cost of sales resulting from transactions associated with the ineffectiveness of diesel energy swaps. See Note 17 – Fair Value Disclosures for additional information.

 

Plant Closure

 

Property, plant and equipment impairments related to the Cameron, Louisiana plant are made in accordance with the impairment of long-lived assets policy. Employee severance related charges have been recognized to the extent that the amount is probable, measurable and no-future service is expected or for those still employed, recognized pro-rata over the remaining service period. Ongoing clean-up and dismantlement costs will be recognized as incurred unless obligated and measureable by a contractual commitment. See Note 4 – Plant Closure for additional information related to the charges incurred.   

 

Acquisitions, Goodwill and Other Intangible Assets

 

 

All of the Company’s goodwill and other intangible assets are the result of acquisitions in the human nutrition segment. This segment is comprised of three reporting units, 1) InCon and Cyvex collectively, 2) WSP and 3) Bioriginal. The Company has recorded goodwill and certain other identifiable intangible assets that are more fully explained in Note 3 – Acquisition of Wisconsin Specialty Protein, L.L.C., Note 2 – Acquisition of Bioriginal Food & Science Corp. and Note 10 – Goodwill and Other Intangible Assets.

 

Accumulated Other Comprehensive Loss

 

The components of accumulated other comprehensive (loss) gain, net of tax, included in stockholders’ equity are as follows:  

              

Changes in Accumulated Other Comprehensive Loss by Component 

For the Nine Months Ended September 30, 2014 (in thousands)

 
   
   

Gains and Losses

On Cash Flow

Hedges

     

Defined Benefit

Pension Items

     

Foreign currency

Translation

adjustment

   

Total

 

Beginning balance December 31, 2013

  $ 179       $ (6,387 )     $     $ (6,208 )

Other comprehensive loss before reclassifications

    (354 )               (449 )     (803 )

Amounts reclassified from accumulated other comprehensive loss

    (62 )

(a)

    446  

(b)

          384  

Net current-period other comprehensive income

    (416 )       446         (449 )     (419 )

Ending balance September 30, 2014

  $ (237 )     $ (5,941 )     $ (449 )   $ (6,627 )

 

Changes in Accumulated Other Comprehensive Loss by Component

For the Nine Months Ended September 30, 2013 (in thousands)

 
   
   

Gains and Losses

On Cash Flow

Hedges

     

Defined Benefit

Pension Items

     

Total

 

Beginning balance December 31, 2012

  $ 28       $ (9,952 )     $ (9,924 )

Other comprehensive loss before reclassifications

    103                 103  

Amounts reclassified from accumulated other comprehensive loss

    (108 )

(a)

    753  

(b)

    645  

Net current-period other comprehensive income

    (5 )       753         748  

Ending balance September 30, 2013

  $ 23       $ (9,199 )     $ (9,176 )

 

 

(a)

This accumulated other comprehensive income component is reclassified to the unallocated inventory cost pool in the period when the energy consumption takes place.

 

(b)

This accumulated other comprehensive income component is included in the computation of net periodic pension costs as amortization of actuarial loss which are explained in more detail in Note 16 to the consolidated financial statements in Item 8 of the Company’s Form 10-K for the fiscal year ended December 31, 2013.

   

 
9

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Recently Issued Accounting Standards

 

In June 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update (ASU) No. 2014-12, Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.   A performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition under Accounting Standards Codification (ASC) 718, Compensation — Stock Compensation . As a result, the target is not reflected in the estimation of the award's grant date fair value. Compensation cost would be recognized over the required service period, if it is probable that the performance condition will be achieved.  The guidance is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. Early adoption is permitted.  The Company does not expect this ASU to have a material impact on its Company’s consolidated results of operations, financial position and related disclosures.

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers .  This ASU amends the existing accounting standards for revenue recognition and is based on the principle that revenue should be recognized to depict the transfer of goods or services to a customer at an amount that reflects the consideration a company expects to receive in exchange for those goods or services.  The Company is required to adopt this ASU on January 1, 2017.  The Company does not expect this ASU to have a material impact on its Company’s consolidated results of operations, financial position and related disclosures.

 

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . This ASU changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity's operations and financial results. The new standard is effective in annual periods beginning on or after December 15, 2014 with early adoption permitted. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The Company’s adoption of FASB ASU No. 2014-08 is not expected to impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists . This ASU amended the Income Taxes Topic of the Accounting Standards Codification to eliminate a diversity in practice for the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses or tax credit carryforwards exist. The amendment requires that the unrecognized tax benefit be presented as a reduction of the deferred tax assets associated with the carryforwards except in certain circumstances when it would be reflected as a liability. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2013. The Company’s adoption of FASB ASU No. 2013-11 effective January 1, 2014 did not have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

Foreign Currency Translations

 

All amounts are expressed in U.S. dollars unless otherwise indicated. The U.S. dollar is the functional currency of Bioriginal’s Canadian-based subsidiaries (“Bioriginal Canada”). Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Revenue and expenses are translated at average rates in effect in the period of the transaction. Foreign exchange gains and losses are included in the unaudited condensed consolidated statement of comprehensive income.

 

 
10

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

The Euro is the functional currency of Bioriginal’s Netherlands-based subsidiaries (“Bioriginal Europe”). The operations of these subsidiaries are considered self-sustaining and their financial statements are translated into U.S. dollars using the current rate method. Under this method, all assets and liabilities are translated to U.S. dollars at exchange rates in effect at the balance sheet date and all revenue and expenses are translated at rates in effect at the time of the transactions. Exchange gains and losses arising from this translation, representing the net unrealized foreign currency translation gain (loss) on the Company's net investment in its self-sustaining subsidiaries, are recorded in the accumulated other comprehensive income (loss) component of shareholders' equity. Adjustments to the accumulated other comprehensive income (loss) account are not recorded in the unaudited condensed consolidated statement of comprehensive income until realized through a reduction in the Company's net investment in such operations.

 

Stock-Based Compensation

 

Stock Options  

 

The Company has a stock-based compensation plan, which is described in more detail in Note 16 to the consolidated financial statements in Item 8 of the Company’s Form 10-K for the fiscal year ended December 31, 2013. The Company has issued non-qualified stock options under its stock incentive plans. The options generally vested in equal installments over three years and expire in ten years.

 

Net income for the three months ended September 30, 2013 includes $0.2 million ($0.1 million after-tax), respectively, of stock-based compensation costs related to stock options. Net income for the nine months ended September 30, 2013 includes $0.5 million ($0.3 million after-tax), respectively, of stock-based compensation costs related to stock options. The stock-based compensation costs related to stock options are recorded primarily in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of September 30, 2014 there was $0 of unrecognized compensation costs related to non-vested stock options that is expected to be recognized during the remainder of fiscal year 2014.

 

Restricted Stock  

 

The Company has issued shares of restricted stock under the 2006 Incentive Plan. Shares of restricted stock generally vest on the third anniversary of the grant date or in equal installments over three years except for shares of restricted stock granted to non-employee directors which vest six months after the grant date. Non-vested shares are generally forfeited upon the termination of employment or service as a director. Holders of shares of restricted stock are entitled to all rights of a stockholder of the Company, including the right to vote the shares and receive any dividends or other distributions. The non-vested shares are considered participating securities and the Company has calculated earnings per share using the two-class method. See Note 14 – Reconciliation of Basic and Diluted Per Share Data.

 

During the nine month periods ended September 30, 2014 and 2013, the Company issued 356,262 and 58,036 shares of restricted stock, respectively, under the 2006 Incentive Plan to employees and non-employee directors. The Company’s compensation expense related to restricted stock, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income, was approximately $0.6 million and $0.4 million ($0.4 million and $0.3 million after tax) for the three months ended September 30, 2014 and 2013, respectively. The Company’s compensation expense related to restricted stock was approximately $1.3 million and $1.0 million ($0.9 million and $0.6 million after tax) for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, there was approximately $5.0 million ($3.2 million after tax) of unrecognized compensation expense related to non-vested restricted stock that is expected to be recognized over a weighted-average period of 1.4 years, of which $0.7 million ($0.5 million after-tax) of compensation expense is expected to be recognized during the remainder of fiscal year 2014.

 

Performance Units  

 

On February 6, 2014, the Company adopted a cash incentive performance unit plan. The value of the units will be determined by reference to the performance of the Company’s common stock during the relevant performance period compared to the performance of the Russell 2000 Index member companies (the “Peer Group”) during that same period. One third of the Performance Units granted will be earned at the end of each calendar year of the performance period and will be valued for the calendar year based on the Total Shareholder Return (“TSR”) of the Company compared to the TSR of the Peer Group. The performance units contain a service provision of approximately 3 years and are liability-classified awards included in other long-term liabilities which are adjusted to fair value on a quarterly basis.

 

 
11

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

The Company’s compensation expense related to performance units was approximately $0.1 million and $0.4 million for the three and nine months ended September 30, 2014, respectively, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of September 30, 2014, there was approximately $1.2 million of unrecognized compensation cost related to performance units that is expected to be recognized over the next 2.25 years, of which $0.1 million of compensation expense is expected to be recognized during the remainder of fiscal year 2014.

 

NOTE 2. ACQUISITION OF BIORIGINAL FOOD & SCIENCE CORP.

 

A. Description of the Transaction

 

On September 5, 2014, the Company acquired all of the issued and outstanding equity of Bioriginal in a stock purchase pursuant to the terms of a Share Purchase Agreement (“Purchase Agreement”). Bioriginal is now a wholly owned subsidiary of the Company.  Bioriginal is a leading supplier of plant and marine based specialty oils and essential fatty acids to the food and nutraceutical industries across North America, Europe and Asia. Bioriginal is included as part of the Company’s human nutrition segment.

 

B. Recording of Assets Acquired and Liabilities Assumed

 

In connection with its acquisition of Bioriginal, the Company paid an aggregate purchase price of $70.5 million, plus an estimated working capital adjustment of $0.7 million, to the sellers as follows: (i) $46.5 million in cash to the sellers, (ii) assumption of approximately $21.5 million of Bioriginal’s indebtedness, and (iii) issuance of 238,377 shares of restricted common stock of the Company valued at approximately $3.2 million (based on a 30-day average closing price) to certain sellers (the “Management Sellers”). The restrictions on the shares will terminate, with certain exceptions, on the third anniversary of the closing date and are subject to the terms and conditions of the Purchase Agreement; see Note - 1 Significant Accounting Policies Summary of Operations and Basis of Presentation for more information on Restricted Stock. The Purchase Agreement also provides for a performance-based earn-out amount of up to a maximum of $ 8.8 million Canadian dollars to be paid in September 2017 to the Management Sellers for achieving or exceeding certain adjusted EBITDA targets for Bioriginal during calendar years 2014 through 2016; see Note 13 Commitments and Contingencies for additional information.

 

The Company incurred approximately $2.7 million in pretax transaction costs directly related to the acquisition that were expensed and included in selling, general and administrative expenses in the consolidated statement of comprehensive income for the nine months ended September 30, 2014. 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 all 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 shows the preliminary allocation of the purchase price:  

 

    (in thousands)  

Cash

  $ 93  

Accounts receivable, net

    15,072  

Inventories

    20,309  

Other current assets, net including prepaid expenses

    1,820  

Property, plant, and equipment, net

    3,026  

Identifiable intangible assets (a)

    14,136  

Liabilities assumed

    (39,249 )

Total identifiable net assets

    15,207  

Goodwill

    31,274  

Total consideration

  $ 46,481  

 

 

(a)

See Note 10 – Goodwill and Other Intangible Assets for weighted average lives.

   

 
12

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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 Bioriginal includes the following:

 

the expected synergies and other benefits that the Company believes may result from combining the operations of Bioriginal with the operations of the Company’s human nutrition segment,

any intangible assets that do not qualify for separate recognition, and

the value of the going-concern element of Bioriginal’s existing business (the higher rate of return on the assembled collection of net assets versus if the Company 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.

 

C. Unaudited Pro Forma Financial Information

 

     The unaudited financial information in the table below summarizes the combined results of operations of the Company and Biorginial on a pro forma basis, as though the companies had been combined as of January 1, 2013. 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 on January 1, 2013 and is not intended to be a projection of future results or trends.                                                                                                                        

                                                                                                                                  

    Revenue     Net income (loss)  
    (in thousands)  

Bioriginal from September 5, 2014 – September 30, 2014

  $ 7,723     $ (281 )

2014 supplemental pro forma from July 1, 2014 – September 30, 2014

  $ 91,842     $ 1,055  

2014 supplemental pro forma from January 1, 2014 – September 30, 2014

  $ 289,174     $ 17,582  

2013 supplemental pro forma from July 1, 2013 – September 30, 2013

  $ 113,519     $ 14,825  

2013 supplemental pro forma from January 1, 2013 – September 30, 2013

  $ 259,509     $ 23,674  

 

 

NOTE 3 . ACQUISITION OF WISCONSIN SPECIALTY PROTEIN, L.L.C.

 

A. Description of the Transaction

 

In February 2013, the Company acquired 100% of the outstanding equity interest of WSP, a Wisconsin limited liability company, in a cash transaction pursuant to the terms of an agreement and plan of merger. WSP is now a wholly owned subsidiary of the Company. WSP produces a variety of value-added whey protein ingredients for the food and nutritional supplement industries, including organic and other specialty protein products, using processes applicable to a variety of nutritional dairy ingredients. WSP is included as part of the Company’s human nutrition segment.

 

B. Recording of Assets Acquired and Liabilities Assumed

 

The Company paid an aggregate cash purchase price for the equity of WSP of $26.5 million plus $0.6 million representing WSP’s excess working capital on the closing date and reimbursable capital expenditures, utilizing cash on hand. 

 

 
13

 

 

The Company incurred approximately $0.8 million in pretax transaction costs directly related to the acquisition that were expensed and included in selling, general and administrative expenses in the consolidated statement of comprehensive income for the year ended December 31, 2013. 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 all 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 shows the allocation of the purchase price.

 

    (in thousands)  

Cash

  $ 403  

Other current assets, net including receivables, prepaid and inventory

    2,515  

Property, plant, and equipment, net

    14,095  

Identifiable intangible assets (a)

    4,448  

Liabilities assumed

    (5,996 )

Total identifiable net assets

    15,465  

Goodwill

    11,614  

Total consideration

  $ 27,079  

 

 

(b)

See Note 10 – Goodwill and Other Intangible Assets for weighted average lives.

 

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 WSP includes the following:

 

the expected synergies and other benefits that the Company believes may result from combining the operations of WSP with the operations of the Company’s human nutrition segment,

any intangible assets that do not qualify for separate recognition, and

the value of the going-concern element of WSP’s existing business (the higher rate of return on the assembled collection of net assets versus if the Company 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.

 

C. Unaudited Pro Forma Financial Information

 

     The unaudited financial information in the table below summarizes the combined results of operations of the Company and WSP on a pro forma basis, as though the companies had been combined as of January 1, 2013. 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 on January 1, 2013 and is not intended to be a projection of future results or trends.                         

   

    Revenue     Net income (loss)  
    (in thousands)  

WSP from February 27, 2013 – September 30, 2013

  $ 6,603     $ (35 )

2013 supplemental pro forma from January 1, 2013 – September 30, 2013

  $ 180,388     $ 20,800  

 

NOTE 4 . PLANT CLOSURE

 

In December 2013, the Company effectively closed its menhaden fish processing plant located in Cameron, Louisiana and re-deployed certain vessels from that facility to the Company’s other Gulf Coast facilities located in Abbeville, Louisiana and Moss Point, Mississippi. In conjunction with the closure, the following charges were incurred in the Company’s consolidated statements of comprehensive income for the three and nine months ended September 30, 2014 and cumulative to date:  

  

   

Three Months

Ended

September 30,

2014

   

Nine Months

Ended

September 30,

2014

   

Cumulative to

 Date

 
    (in thousands)  

Impairment and relocation of property, plant and equipment

  $ 675     $ 2,414     $ 7,210  

Write-off material and supplies inventory

    26       43       140  

Employee severance costs

    100       340       685  

Estimated decommissioning costs

                250  

Other ongoing closure costs not attributable to future production

    742       2,685       3,794  

Total loss related to plant closure

  $ 1,543     $ 5,482     $ 12,079  

 

In addition to the above recognized losses, the Company expects that it may have additional losses related to additional impairment and relocation of property, plant and equipment, ongoing employee severance expenses and ongoing costs not attributable to future production such as clean-up and disassembly.

 

 
14

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 5 . RECEIVABLES, NET

 

R eceivables as of September 30, 2014 and December 31, 2013 are summarized as follows:  

 

   

September

 30, 2014

   

December 31,

2013

 
    (in thousands)  

Trade

  $ 44,282     $ 18,689  

Insurance

    1,728       1,806  

Income tax

    1,259       714  

Other

    135       310  

Total accounts receivable

    47,404       21,519  

Less allowance for doubtful accounts

    (1,305 )     (379 )

Receivables, net

  $ 46,099     $ 21,140  

 

NOTE 6 . INVENTORY

 

The major classes of inventory as of September 30, 2014, December 31, 2013 and September 30, 2013 are summarized as follows:  

 

   

September 30,

 2014

   

December 31,

 2013

   

September 30,

 2013

 
    (in thousands)  

Fish meal

  $ 46,544     $ 30,119     $ 35,130  

Fish oil

    25,458       41,081       40,186  

Fish solubles

    708       2,599       2,777  

Nutraceutical products

    4,141       3,650       4,563  

Bioriginal products

    19,089              

Dairy protein products

    2,072       1,355       1,484  

Unallocated inventory cost pool (including off-season costs)

    242       6,655       (4,062 )

Other materials and supplies

    9,665       8,880       10,203  

Total inventory

  $ 107,919     $ 94,339     $ 90,281  

 

Inventory at September 30, 2014, December 31, 2013 and September 30, 2013 is stated at the lower of cost or market. The elements of September 30, 2014 unallocated inventory cost pool include Omega Protein’s plant and vessel related labor, utilities, rent, repairs and depreciation, which are allocated to inventories produced through the 2014 fishing season.

 

NOTE 7 . PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets as of September 30, 2014 and December 31, 2013 are summarized below:  

     

   

September 30,

2014

   

December 31,

 2013

 
    (in thousands)  

Prepaid insurance

  $ 2,749     $ 2,422  

Selling expenses

    1,236       869  

Fair market value of energy swaps, current portion

    11       275  

Whey process filters

    98       38  

Leases

    228       53  

Other prepaids and expenses

    1,589       258  

Total prepaid expenses and other current assets

  $ 5,911     $ 3,915  

   

 
15

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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 value (see Note 17 – 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, 2014 and December 31, 2013 are summarized as follows:  

               

   

September 30,

2014

   

December 31,

2013

 
    (in thousands)  

Fish nets, net of accumulated amortization of $2,377 and $2,610

  $ 1,420     $ 1,517  

Insurance receivable

    424       3,048  

Title XI debt issuance costs

    249       272  

Other debt issuance costs

    283       299  

Deposits and other

    290       98  

Total other assets, net

  $ 2,666     $ 5,234  

 

Amortization expense for fishing nets amounted to approximately $0.3 million and $0.4 million for the three months ended September 30, 2014 and 2013 and $1.0 million for the nine months ended September 30, 2014 and 2013.

 

As of September 30, 2014 and December 31, 2013, insurance receivables 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.

 

The Company carries insurance for certain losses relating to its fishing vessels and Jones Act liability for employees aboard its vessels (collectively, “Vessel Claims Insurance”). The typical Vessel Claims Insurance policy contains an annual aggregate deductible (“AAD”) for which Omega Protein remains responsible, while the insurance carrier is responsible for all applicable amounts which exceed the AAD. It is Omega Protein’s policy to accrue current amounts due and record amounts paid out on each claim. Once payments exceed the AAD, Omega Protein records an insurance receivable for a given policy year.

 

NOTE 9 . PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment as of September 30, 2014 and December 31, 2013 are summarized as follows:  

                                                                                                                                                                                              

   

September 30,

 2014

   

December 31,

2013

 
    (in thousands)  

Land

  $ 9,087     $ 7,457  

Plant assets

    185,986       159,337  

Fishing vessels

    111,675       101,745  

Furniture and fixtures

    7,655       7,091  

Construction in progress

    14,609       16,846  

Total property and equipment

    329,012       292,476  

Less accumulated depreciation and impairment

    (163,483 )     (148,363 )

Property, plant and equipment, net

  $ 165,529     $ 144,113  

 

 

Depreciation expense for the three months ended September 30, 2014 and 2013 was $5.1 million and $4.8 million, respectively, and $14.4 million and $14.1 million for the nine months ended September 30, 2014 and 2013, 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 months ended September 30, 2014 and 2013, the Company capitalized interest of approximately $0.1 million. For the nine months ended September 30, 2014 and 2013, the Company capitalized interest of approximately $0.5 million and $0.2 million, respectively.

 

 
16

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

In December 2013, the Company closed its Cameron, Louisiana menhaden processing plant and re-deployed some of its harvesting and processing assets to the three remaining menhaden processing plants. As a result of the closure, the Company recognized a cumulative $7.2 million in impairment of its fixed assets that it does not plan to use in future operations. For more information see Note 4 – Plant Closure.

 

NOTE 10 . GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill is measured as the excess of the cost of an acquisition over the sum of the amounts assigned to the fair value of tangible and intangible assets acquired less liabilities assumed.  All of the Company’s goodwill and other intangible assets are the result of acquisitions in the human nutrition segment. 

 

Goodwill is tested annually for impairment of value, and whenever an event occurs or circumstances change that would more likely than not indicate the carrying amount of the asset is impaired. Determining whether an indicator of impairment has occurred during an interim period involves a significant amount of judgment.  During the interim periods, qualitative factors such as deterioration in general economic conditions, changes in the market for an entity’s products or services, declines in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods, among others, are evaluated to determine if a triggering event which would result in a potential impairment has incurred.

 

As of the December 31, 2013, the results of the annual quantitative tests did not result in any impairment of goodwill because the fair values of each of the reporting units exceeded their respective carrying values. Specifically, our two reporting units, InCon/Cyvex and WSP, each had calculated fair values that were 21% in excess of their carrying values.  Additionally, the calculated fair value of InCon’s trade secrets exceeded its carrying value by 5%.  Key assumptions in the fair value calculations include discount rates and future sales volumes, prices and production costs.  It should be noted that these assumptions require speculation and are highly subjective given the early stage and transitional nature of the businesses, and the use of other reasonable, but different, assumptions could produce significantly different fair values and, potentially, impairments.

 

Our annual quantitative tests have assumed increasing cash flows over the next several years, based on anticipated sales growth and improved profitability; through the nine months ended September 30, 2014, the two reporting units have not achieved the assumed results.  If future cash flow expectations decline sufficiently, the estimated fair values would be reduced and could potentially result in a material impairment in a subsequent period.

 

The following table summarizes the changes in the carrying amount of goodwill resulting from the Company’s acquisitions of Biorginal, WSP, Cyvex and InCon (in thousands):

 

   

Bioriginal

   

WSP

   

Cyvex and

Incon

   

Total

 

January 1, 2014

  $       11,614       7,986     $ 19,600  

Acquisitions

    31,274                   31,274  

Foreign currency translation adjustment

    (216 )                 (216 )

September 30, 2014

  $ 31,058       11,614       7,986     $ 50,658  

 

The following table summarizes the Company’s intangible assets (dollars in thousands):

 

 

   

September 30,

2014

   

December 31,

2013

   

Weighted

Average

Life (years)

 

Carrying value of intangible assets subject to amortization:

                       

Customer relationships and non-competes

  $ 16,161     $ 5,930          

Less accumulated amortization

    (1,199 )     (613 )     10  

Total intangible assets subject to amortization, net

  $ 14,962     $ 5,317          

Indefinite life intangible assets – trade names/secrets and other

    6,426       2,615          

Total intangible assets

  $ 21,388     $ 7,932          

 

 
17

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Amortization expense of the Company’s intangible assets for the three months ended September 30, 2014 and 2013 was approximately $0.3 million and for the nine months ended September 30, 2014 and 2013 was approximately $0.6 million. Estimated future amortization expense related to intangible assets is as follows (in thousands):

 

Remainder of 2014

  $ 419  

2015

    1,669  

2016

    1,669  

2017

    1,669  

Thereafter

    9,536  

Total estimated future amortization expense

  $ 14,962  

 

The Company’s goodwill and other intangible assets are more fully explained in Note 11 to the consolidated financial statements in Item 8 of the Company’s Form 10-K for the fiscal year ended December 31, 2013.

 

NOTE 11 . NOTES PAYABLE AND LONG-TERM DEBT

 

At September 30, 2014 and December 31, 2013, the Company's long-term debt consisted of the following:

 

   

September 30,

2014

   

December 31,

2013

 
   

(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 7.0%

  $ 21,761     $ 24,211  

Amounts due in installments through 2014, interest at Eurodollar rates plus 0.5% (0.7% at December 31, 2013)

          31  

Amounts due on Loan Agreement in March 2017, interest at LIBOR plus an applicable rate (1.74% to 1.84% at September 30, 2014)

    17,000        

ING credit facility, interest at EURIBOR plus an applicable rate (2.98% at September 30, 2014)

           

ING Commercial Finance B.V., interest at EURIBOR plus an applicable rate (1.76% at September 30, 2014)

    2,214        

HSBC credit facility, matures March 2019, interest at HSBC prime rate plus an applicable rate (4.5% at September 30, 2014)

    7,558        

HSBC demand loan, amounts due in installments through March 2019, interest at HSBC’s Prime rate plus an applicable rate (currently 6.75%)

    6,394        

Total debt

    54,927       24,242  

Less current maturities

    (14,157 )     (3,112 )

Long-term debt

  $ 40,770     $ 21,130  

 

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

 

In June 2011, pursuant to the Title XI program, the United States Department of Commerce Fisheries Finance Program (the “FFP”) approved a financing application made by the Company in the amount of $10.0 million (the “Approval Letter”) which expires on June 20, 2016. To date, the Company has not borrowed any amounts under the Approval Letter and its ability to do so has been adversely affected by an EPA notice that the Company’s Omega Protein subsidiary is ineligible, as a result of its previous convictions under the Clean Water Act, for receipt of government contracts or benefits in certain cases. See “Risk Factors - If our Omega Protein subsidiary fails to comply with the terms of its probation under a plea agreement entered into in June 2013, we could be subject to criminal prosecution” in the Company’s Form 10-K for the year ended December 31, 2013 for further detail on this EPA notice. As of September 30, 2014, the Company had approximately $21.8 million of borrowings outstanding under Title XI and was in compliance with all of the covenants contained therein.

 

 
18

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

In March 2012, the Company entered into an Amended and Restated Loan Agreement (the “Loan Agreement”) with Wells Fargo Bank, National Association, as administrative agent (the “Agent”) for the lenders (currently Wells Fargo Bank, National Association and JP Morgan Chase Bank, N.A.) (collectively, the “Lenders”) pursuant to which the Lenders agreed to extend credit to the Company in the form of loans (each a “Loan” and collectively, the “Loans”) on a revolving basis of up to $60.0 million (the “Commitment”). In September 2014, the Company and the Lenders amended the Loan Agreement to (i) permit the acquisition by the Company of Bioriginal, (ii) permit certain existing indebtedness of Bioriginal and the related liens, (iii) add certain collateral under the Loan Agreement relating to Bioriginal, and (iv) increase the commitment of the Lenders under the Loan Agreement by $10 million to a total of $70 million. The Loan Agreement also requires the Company to comply with various affirmative and negative covenants affecting the Company’s businesses and operations, including various financial covenants.

 

All Loans and all other obligations outstanding under the Loan Agreement are payable in full on March 21, 2017. As of September 30, 2014 and December 31, 2013, the Company had $17.0 million and $0, respectively, outstanding under the Loan Agreement and approximately $3.5 million in letters of credit. As of September 30, 2014, the Company was in compliance with all financial covenants under the Loan Agreement. The Company has no off-balance sheet arrangements other than normal operating leases and standby letters of credit.

 

The Company’s notes payable and long-term debt are more fully explained in Note 12 to the consolidated financial statements in Item 8 of the Company’s Form 10-K for the fiscal year ended December 31, 2013 and the Company’s Current Report on Form 8-K dated September 5, 2014.

 

On June 6, 2010, Bioriginal Europe entered into a credit facility with ING Bank N.V. which provides borrowings up to 250,000 Euro.  Under the credit facility, interest is paid at 2.97% plus the EURIBOR rate (currently 2.98%) and is secured by Bioriginal Europe’s equipment and a loan to Bioriginal Canada.  The credit facility contains cross default provisions and other covenants.   As of September 30, 2014, $0 was outstanding under this credit facility.

 

On March 31, 2012, Bioriginal Europe entered into a credit facility with ING Commercial Finance B.V. which provides borrowings up to an amount based on accounts receivable and inventory balances, and matures on March 31, 2015.  Advances are repayable on demand and bear interest payable monthly at 1.75% + EURIBOR (currently 1.76%).  The credit facility is secured by accounts receivable and inventory of Bioriginal Europe to a maximum of 85% of accounts receivable and 60% of inventory.   The credit facility contains cross default provisions and other covenants.  As of September 30, 2014, $2.2 million was outstanding under this credit facility.

 

On April 15, 2014, Bioriginal Canada entered into a credit facility with HSBC Bank of Canada (the “Bioriginal Credit Facility”) which provides borrowings up to $20,000,000 Canadian dollars and matures on March 15, 2019, subject to HSBC’s right to terminate the facility in its sole discretion. Under the Bioriginal Credit Facility, Bioriginal Canada has an operating line of credit for which interest is paid at HSBC prime rate plus 1.25% (currently 4.5%) and is secured by Bioriginal Canada’s accounts receivable and inventory to a maximum of $17,000,000 Canadian dollars and is payable on demand. Additionally, there is a separate maximum of $4,200,000 related to letters of credit which pays interest at the same rate as the operating line of credit. At September 30, 2014 Bioriginal has issued $4,200,000 in letters of credit in support of product purchases from a foreign supplier. Generally these letters of credit are insured by Export Development Canada and are not considered to be drawn under this credit facility. As of September 30, 2014, $7.6 million was outstanding under these subsections of the credit facility.

 

Also within the Bioriginal Credit Facility is a cash flow loan which is repayable in monthly installments of $166,700 Canadian dollars plus interest at a rate between HSBC's Prime rate plus 2.25% to 4.25% depending on a quarterly covenant calculation of Funded Debt to EBITDA (currently 6.75%) and is secured by a General Security Agreement. As of September 30, 2014, $6.4 million was outstanding under this subsection of the credit facility.

 

The Bioriginal Credit Facility requires Bioriginal to comply with various affirmative and negative covenants affecting Bioriginal’s businesses and operations. In addition, the Bioriginal Credit Facility requires Bioriginal to comply with the following financial covenants:

 

 

Bioriginal may not permit its ratio of Funded Debt to EBITDA to at any time exceed 3.0 to 1;

 

 

Bioriginal may not permit its Current Ratio at any time to be less than 1.30 to 1;

 

 

Bioriginal may not permit its ratio of Debt Service Coverage to be less than 1.25 to 1 to be tested only at each year end based on audited financial statements of Bioriginal;

   

 
19

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

Bioriginal may not make capital expenditures aggregating in any one year in excess of $500,000 Canadian dollars, which amount shall not be cumulative from year to year;

 

 

Bioriginal may not declare or pay any dividends if the Funded Debt EBITDA is greater than 2.0 to 1

 

NOTE 12. ACCRUED LIABILITIES  

 

Accrued liabilities as of September 30, 2014 and December 31, 2013 are summarized as follows:

 

   

September 30,

2014

   

December 31,

2013

 
   

(in thousands)

 

Insurance

  $ 5,689     $ 7,222  

Reserve for plant closure costs

    542       595  

Salary and benefits

    14,392       9,423  

Trade creditors

    6,136       5,100  

Taxes, other than income tax

    1,480       64  

Income tax

    2,819       4,132  

Deferred revenue

    6,929       2,362  

Accrued interest

    201       200  

Other

    260       47  

Total accrued liabilities

  $ 38,448     $ 29,145  

 

As of September 30, 2014 and December 31, 2013, deferred revenue represents payments primarily received from international customers related to revenues which were not recognized until the subsequent period due to revenue recognition criteria.

 

NOTE 1 3 . COMMITMENTS AND CONTINGENCIES

 

Bioriginal Contingency

 

In September 2014, the Company acquired all of the outstanding equity of Bioriginal pursuant to the terms of a share purchase agreement. A portion of the equity of Bioriginal was indirectly held by the Management Sellers, who continue to be employed by Bioriginal and share in the management of Bioriginal’s business. Bioriginal is now a wholly owned subsidiary of the Company.

 

In addition to the acquisition date cash purchase price and restricted stock, the Management Sellers may also earn additional amounts based on the annual adjusted EBITDA of Bioriginal’s business during each of the calendar years 2014 through 2016. If the adjusted EBITDA meets or exceeds agreed upon targets for the calendar year, the payout ranging from $ 1.7 million Canadian dollars to $ 2.9 million Canadian dollars will be earned, subject to certain forfeitures based on termination of Management Sellers’ employment. The maximum total payment for all three years is $ 8.8 million Canadian dollars .

 

The earn-out payments in Canadian dollars, if any, will be estimated on a quarterly basis and paid in September 2017. 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. For the nine months ended September 30, 2014, the Company recorded a $0.1 million liability related to this provision of the agreement.

 

InCon Contingency

 

In September 2011, the Company acquired all of the outstanding equity of InCon 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”), some of whom continue to be employed by InCon and share in the management of InCon’s business. InCon is now a wholly owned subsidiary of the Company.

 

 
20

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

In addition to the acquisition date cash purchase price, the Sellers may also earn additional amounts based on the annual EBITDA of InCon’s toll processing and specialty product business during calendar years 2012 through 2016. The Company and the Sellers amended the earn-out terms on April 25, 2013 by lowering the earn-out by 35% of the original formula in 2013 and all future years. The annual earn-out provisions (as amended) are determined based on a percentage of InCon’s EBITDA, adjusted for certain product sales and costs, which percentage ranges from 3.25% of the first $3.0 million of EBITDA to 19.5% 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 of a Seller. For the nine months ended September 30, 2014 and year ended December 31, 2013, the Company has not recorded an annual earn-out estimate.

 

Legal Contingencies

 

The Company was named in a lawsuit filed in federal court in the Southern District of Mississippi in connection with the death of an employee at the Company’s Moss Point, Mississippi plant in April 2012. The lawsuit alleges that the Company intentionally caused the employee’s death, a claim that the Company emphatically denies. The Company believes that the claim is covered by the state’s workers compensation statute which provides that worker compensation benefits are the exclusive remedy for a work-related injury or death under these circumstances. The Company filed a motion for summary judgment asking the court to dismiss the claim and in September 2014, the court granted the Company’s motion and dismissed all of the plaintiff’s claims with prejudice. The plaintiff has appealed the dismissal to the Court of Appeals for the Fifth Circuit. The Company intends to contest the appeal vigorously.

 

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.

 

NOTE 1 4 . RECONCILIATION OF BASIC AND DILUTED PER SHARE DATA (in thousands except per share date)

 

Basic earnings per share is calculated by dividing net income allocated to common shares outstanding by the weighted average number of shares of common stock outstanding. Diluted earnings per share assumes the exercise of stock options provided the effect is not anti-dilutive.

 

The Company grants certain incentive compensation awards, including restricted stock, to employees and non-employee directors that are considered to be participating securities. Due to the presence of participating securities, we have calculated our earnings per share using the two-class method.

 

Three Months Ended September 30:

 

2014

   

2013

 

Allocation of earnings:

                               

Net income

  $ 659             $ 13,962          

Income allocated to participating securities

    (19 )             (324 )        

Income allocated to common shares outstanding

  $ 640             $ 13,638          
                                 

Weighted average common shares outstanding

    20,637               20,150          
                                 

Basic earnings per share

            0.03               0.68  
                                 

Stock options assumed exercised

    621               612          

Weighted average diluted common shares and potential common share equivalents outstanding

    21,258               20,762          

Diluted earnings per share

            0.03               0.66  

   

 
21

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Nine Months Ended September 30:

 

2014

   

2013

 

Allocation of earnings:

                               

Net income

  $ 15,263             $ 20,797          

Income allocated to participating securities

    (402 )             (464 )        

Income allocated to common shares outstanding

  $ 14,861             $ 20,333          
                                 

Weighted average common shares outstanding

    20,474               19,801          
                                 

Basic earnings per share

            0.73               1.03  
                                 

Stock options assumed exercised

    648               719          

Weighted average diluted common shares and potential common share equivalents outstanding

    21,122               20,520          

Diluted earnings per share

            0.70               0.99  

 

Options to purchase the following number of shares of common stock (in thousands) were outstanding during the three and nine months ended September 30, 2014 and 2013 but were excluded from 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.

 

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 

2014

   

2013

   

2014

   

2013

 
25       130       125       150  

 

NOTE 1 5 . COMPONENTS OF NET PERIODIC BENEFIT COST

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2014

   

2013

   

2014

   

2013

 
   

(in thousands)

   

(in thousands)

 

Service cost

  $     $     $     $  

Interest cost

    274       248       822       744  

Expected return on plan assets

    (298 )     (253 )     (894 )     (759 )

Amortization of prior service costs

                       

Amortization of net loss

    229       386       687       1,158  

Net periodic pension cost

  $ 205     $ 381     $ 615     $ 1,143  

 

For the nine months ended September 30, 2014 and 2013, the Company contributed approximately $1.5 million and $1.4 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 2014.

 

In 2002, the Board of Directors authorized a plan to freeze the Company’s pension plan in accordance with ERISA rules and regulations so that new employees, after July 31, 2002, are not eligible to participate in the pension plan and further benefits no longer accrue for existing participants.

 

NOTE 16. INDUSTRY SEGMENTS

 

The Company reports in two segments, animal nutrition and human nutrition. These segments are managed separately and information on each segment is provided to the chief operating decision makers as they make decisions about the Company’s overall resource allocation and assess performance.

 

 
22

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

The animal nutrition segment is primarily comprised of the Company’s fishing related assets. These assets produce fish meal, oil and solubles that are sold primarily to animal nutrition customers. A portion of the Company’s fish oil is also partially refined and transferred at cost to the human nutrition segment where it is further refined and concentrated for sale to the human nutrition market. The human nutrition segment is comprised of assets used to produce, procure, market and sell product to human nutrition markets.

 

The tables below present information about reported segments for three months ended September 30, 2014 and 2013 (in thousands). It should be noted that all cash and cash equivalent balances have been included in the identifiable assets of the unallocated segment.

 

September 30, 2014

 

Animal

Nutrition

   

Human

Nutrition ( 1 )

   

Unallocated

   

Total

 

Revenue ( 2 )

  $ 55,123     $ 15,641     $     $ 70,764  

Cost of sales

    40,920       15,666             56,586  

Gross profit

    14,203       (25 )           14,178  

Selling, general and administrative expenses (including research and development)

    540       2,985       7,299       10,824  

Loss related to plant closure

    1,543                   1,543  

Other (gains) and losses

    12                   12  

Operating income (loss)

  $ 12,108     $ (3,010 )   $ (7,299 )   $ 1,799  

Depreciation and amortization

  $ 4,332     $ 1,136     $ 269     $ 5,737  

Identifiable assets

  $ 233,239     $ 167,838     $ 2,579     $ 403,656  

Capital expenditures

  $ 4,179     $ 7,884     $ 923     $ 12,986  

 

 

(1)

Includes revenues and related expenses for Bioriginal from September 5, 2014 through September 30, 2014.

 

 

(2)

Excludes revenue from internal customers of $0.4 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

September 30, 2013

 

Animal

Nutrition

   

Human

Nutrition

   

Unallocated

   

Total

 

Revenue (3)

  $ 79,828     $ 7,792     $     $ 87,620  

Cost of sales

    52,321       5,879             58,200  

Gross profit

    27,507       1,913             29,420  

Selling, general and administrative expenses (including research and development)

    733       1,924       4,923       7,580  

Other (gains) and losses

    (160 )     79             (81 )

Operating income (loss)

  $ 26,934     $ (90 )   $ (4,923 )   $ 21,921  

Depreciation and amortization

  $ 4,531     $ 651     $ 192     $ 5,374  

Identifiable assets

  $ 271,363     $ 54,095     $ 1,323     $ 326,781  

Capital expenditures

  $ 3,960     $ 1,062     $ 90     $ 5,112  

 

 

(3)

Excludes revenue from internal customers of $0.3 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

   

 
23

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

The tables below present information about reported segments for the nine months ended September 30, 2014 and 2013 (in thousands).

 

September 30, 2014

 

Animal

Nutrition

   

Human

Nutrition (4)

   

Unallocated

   

Total

 

Revenue ( 5 )

  $ 175,657     $ 30,520     $     $ 206,177