Omega Protein Corporation
OMEGA PROTEIN CORP (Form: 10-Q, Received: 05/07/2014 16:12:00)

 

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 March 31, 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 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 ☒ 

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 April 30, 2014: 20,902,111.

 



 
 

 

 

OMEGA PROTEIN CORPORATION

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  

 

 

 

 

Item 1. Financial Statements and Notes

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheet as of March 31, 2014 and December 31, 2013

 

Unaudited Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2014 and 2013

 

Unaudited Condensed Consolidated Statement of Cash Flows for the   three months ended March 31, 2014 and 2013

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

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

21 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk  

34 

 

 

 

Item 4. Controls and Procedures

34

 

 

 

 

 

 

PART II. OTHER INFORMATION  

34

 

 

 

Item 1. Legal Proceedings  

34

 

 

 

Item 1A. Risk Factors 34
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
     
Item 3. Defaults Upon Senior Securities 34
     
Item 4. Mine Safety Disclosures 35
     
Item 5. Other Information 35
     
Item 6. Exhibits 35
     
Signatures 36

 

 
2

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements and Notes

 

 

   

March 31,

2014

     

December 31,

2013

 

ASSETS

                 

Current assets:

                 

Cash and cash equivalents

  $ 41,166       $ 34,059  

Receivables, net

    28,080         21,140  

Inventories

    81,415         94,339  

Deferred tax asset, net

    917         1,062  

Prepaid expenses and other current assets

    2,297         3,915  

Total current assets

    153,875         154,515  

Other assets, net

    4,990         5,234  

Property, plant and equipment, net

    150,602         144,113  

Goodwill

    19,600         19,600  

Other intangible assets, net

    7,764         7,932  

Total assets

  $ 336,831       $ 331,394  
                   

LIABILITIES AND STOCKHOLDERS’ EQUITY

                 

Current liabilities:

                 

Current maturities of long-term debt

  $ 2,538       $ 3,112  

Accounts payable

    4,605         5,380  

Accrued liabilities

    28,254         29,145  

Total current liabilities

    35,397         37,637  

Long-term debt, net of current maturities

    20,485         21,130  

Deferred tax liability, net

    19,574         19,351  

Pension liabilities, net

    3,705         4,117  

Other long-term liabilities

    1,971         1,929  

Total liabilities

    81,132         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; 20,906,734 and 20,804,189 shares issued and 20,902,111 and 20,804,189 share outstanding at March 31, 2014 and December 31, 2013, respectively

    204         203  

Capital in excess of par value

    136,851         136,428  

Retained earnings

    124,778         116,807  

Treasury stock, at cost – 4,623 shares

    (57 )        

Accumulated other comprehensive loss

    (6,077 )       (6,208 )

Total stockholders’ equity

    255,699         247,230  

Total liabilities and stockholders’ equity

  $ 336,831       $ 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

March 31,

 
   

2014

   

2013

 

Revenues

  $ 63,500     $ 48,923  

Cost of sales

    43,007       36,826  

Gross profit

    20,493       12,097  
                 

Selling, general, and administrative expense

    6,093       6,443  

Research and development expense

    484       555  

Loss related to plant closure

    1,323        

Loss (gain) on disposal of assets

    247       376  

Operating income

    12,346       4,723  

Interest income

    8       8  

Interest expense

    (247 )     (392 )

Other expense, net

    (56 )     (83 )

Income before income taxes

    12,051       4,256  

Provision for income taxes

    4,080       1,411  

Net income

    7,971       2,845  
                 

Other comprehensive income (loss):

               

Energy swap adjustment, net of tax (benefit) expense of ($10) and $139, respectively

    (18 )     257  

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

    149       251  

Comprehensive income

  $ 8,102     $ 3,353  

Basic earnings per share (See Note 13)

  $ 0.38     $ 0.14  

Weighted average common shares outstanding

    20,355       19,465  

Diluted earnings per share (See Note 13)

  $ 0.37     $ 0.14  

Weighted average common shares and potential common share equivalents outstanding

    21,014       20,189  

 

 

 

 

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)

 

   

Three Months Ended
March 31,

 
   

2014

   

2013

 

Cash flows from operating activities:

               

Net income

  $ 7,971     $ 2,845  

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

               

Depreciation and amortization

    5,217       4,977  

Loss on disposal of assets, plant closure

    231        

Loss (gain) on disposal of assets

    247       376  

Provisions for losses on receivables

    12       12  

Share based compensation

    392       457  

Deferred income taxes

    285       497  

Changes in assets and liabilities:

               

Receivables

    (6,952 )     (1,270 )

Inventories

    12,716       7,007  

Prepaid expenses and other current assets

    1,592       1,670  

Other assets

    (135 )     6,971  

Accounts payable

    (775 )     (858 )

Accrued liabilities

    434       (8,196 )

Pension liability, net

    (172 )     (104 )

Other long term liabilities

    (28 )     23  

Net cash provided by operating activities

    21,035       14,407  

Cash flows from investing activities:

               

Proceeds from disposition of assets

    61       60  

Acquisition of Wisconsin Specialty Protein, net of cash acquired

          (26,779 )

Capital expenditures

    (12,815 )     (7,193 )

Net cash used in investing activities

    (12,754 )     (33,912 )

Cash flows from financing activities:

               

Principal payments of long-term debt

    (1,219 )     (777 )

Principal payments of capital lease obligation

          (151 )

Purchase treasury stock at cost

    (57 )      

Proceeds from stock options exercised

    93        

Excess tax benefit of stock options exercised

    9        

Net cash provided by (used in) financing activities

    (1,174 )     (928 )

Net increase (decrease) in cash and cash equivalents

    7,107       (20,433 )

Cash and cash equivalents at beginning of year

    34,059       55,998  

Cash and cash equivalents at end of period

  $ 41,166     $ 35,565  

 

 

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 company that develops, produces and delivers healthy products throughout the world to improve the nutritional integrity of functional 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 name Nutegrity, has three primary product lines: protein products, Omega-3 fish oil ingredients 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 participates in the nutraceutical industry as an ingredient provider. 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 2 – Acquisition of Wisconsin Specialty Protein, L.L.C. for additional information related to the Company’s acquisition of WSP.

 

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 March 31, 2014, and the results of its operations for the three month periods ended March 31, 2014 and 2013 and its cash flows for the three month periods ended March 31, 2014 and 2013. Quarterly operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

 

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.

 

 
6

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

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.

 

Certain amounts applicable to the prior periods have been reclassified to conform to the classifications currently followed. For the three months ended March 31, 2013, the Company reclassified $0.8 million of cash flows from investing activities to cash flows from operating activities related to accrued capital expenditures.  This revision was not considered to be material, individually or in the aggregate, to previously issued financial statements. The revisions had no effect on the results of operations (net or comprehensive income) or financial condition (stockholders’ equity).  

 

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 and WSP, the Company’s revenues also include sales of dietary supplement ingredients to the nutraceutical industry and whey protein products to the food and nutritional supplement industries. The Company recognizes revenue for the sale of its products when price is established, collectability is reasonably assured, and title and rewards of ownership of its products 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 fuel oil 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.

 

   

Consumption

     

Price

Per

   

Energy Swap

Asset/(Liability)

as of

March 31,

   

Deferred Tax

Asset/(Liability)

as of

March 31,

 

Energy Swap

 

Period

 

Quantity

 

Unit

   

 2014

   

2014

 

Diesel - NYMEX Heating Oil Swap

 

May – Nov., 2014

 

1,998,916 Gallons

  $ 2.91     $ 24,000     $ (8,400 )

Natural Gas - NYMEX Natural Gas Swap

 

Apr. – Oct., 2014

 

307,374 MMBTUs

  $ 3.67       231,700       (81,100 )

Propane – Natural Gas Liquids Swap

 

May – Nov., 2014

 

683,000 Gallons

  $ 1.09       (8,000 )     2,800  
                    $ 247,700     $ (86,700 )

   

 
7

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

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     $ 131,400     $ (46,000 )

Natural Gas - NYMEX Natural Gas Swap

 

Apr. – Oct., 2014

 

307,374 MMBTUs

  $ 3.67       143,200       (50,100 )
                    $ 274,600     $ (96,100 )

 

As of March 31, 2014 and December 31, 2013, Omega Protein has recorded a current asset in prepaid expenses of $0.3 million 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 March 31, 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)  
   

2014

   

2013

 

Balance at January 1,

  $ 179     $ 28  

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

    (18 )     257  

Balance at March 31,

  $ 161     $ 285  

 

The $0.2 million reported in accumulated other comprehensive loss as of March 31, 2014 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.

 

The aggregate fair value of derivative instruments in gross asset positions as of March 31, 2014 and December 31, 2013 was $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 $28,000 and $0, respectively, of liabilities included in master netting arrangements with those same counterparties.

 

As of March 31, 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 – asset position

  $ 276     $ (28 )   $ 248  

 

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  

 

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 three months ended March 31, 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 16 – Fair Value Disclosures for additional information.

 

 

 
8

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

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 3 – 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 two reporting units, 1) InCon and Cyvex and 2) WSP. The Company has recorded goodwill and certain other identifiable intangible assets that are more fully explained in Note 2 – Acquisition of Wisconsin Specialty Protein, L.L.C. and Note 9 – 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 Three Months Ended March 31, 2014 (in thousands)

 

   

Gains and Losses

On Cash Flow

Hedges

     

Defined Benefit

Pension Items

     

Total

 

Beginning balance December 31, 2013

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

Other comprehensive loss before reclassifications

    (18 )               (18 )

Amounts reclassified from accumulated other comprehensive loss

     

(a)

    149  

(b)

    149  

Net current-period other comprehensive income

    (18 )       149         131  

Ending balance March 31, 2014

  $ 161       $ (6,238 )     $ (6,077 )

 

Changes in Accumulated Other Comprehensive Loss by Component

For the Three Months Ended March 31, 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

    257                 257  

Amounts reclassified from accumulated other comprehensive loss

     

(a)

    251  

(b)

    251  

Net current-period other comprehensive income

    257         251         508  

Ending balance March 31, 2013

  $ 285       $ (9,701 )     $ (9,416 )

 

 

(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.

   

Recently Issued Accounting Standards

 

In April 2014, the Financial Accounting Standards Board (the "FASB") issued an Accounting Standards Update ("ASU") No. 2014-08 that 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.

 

 

 
9

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

In July 2013, the FASB issued ASU No. 2013-11 which 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.

 

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 March 31, 2013 includes $0.2 million ($0.1 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 March 31, 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 13 – Reconciliation of Basic and Diluted Per Share Data.

 

During the three month periods ended March 31, 2014 and 2013, the Company issued 92,545 and 25,000 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 was approximately $0.3 million ($0.2 million after tax) for the three months ended March 31, 2014 and 2013, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of March 31, 2014, there was approximately $2.1 million ($1.4 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 1.3 years, of which $1.0 million ($0.6 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.

 

 

 
10

 

 

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 for the three months ended March 31, 2014, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of March 31, 2014, there was approximately $1.3 million of unrecognized compensation cost related to performance units that is expected to be recognized over the next 2.75 years, of which $0.4 million of compensation expense is expected to be recognized during the remainder of fiscal year 2014.

 

NOTE 2.   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.

 

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.

 

 

      (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  

 

 

(a)

See Note 9 – 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 will result from combining the operations of WSP with the operations of Nutegrity, 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).

 

 

 
11

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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 9 - 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 – March 31, 2013

  $ 838     $ (20)  

2013 supplemental pro forma from January 1, 2013 – March 31, 2013

  $ 50,991     $ 2,848  

 

NOTE 3.  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 months ended March 31, 2014 and cumulative to date:

 

      

     

March 31,

2014

     

Cumulative to

 Date

 
      (in thousands)  

Impairment of property, plant and equipment

  $ 92     $ 4,888  

Write-off material and supplies inventory

    17       114  

Employee severance costs

    214       559  

Estimated decommissioning costs

          250  

Other ongoing closure costs not attributable to future production

    1,000       2,109  

Total loss related to plant closure

  $ 1,323     $ 7,920  

 

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

 

NOTE 4.  RECEIVABLES, NET

 

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

 

     

March 31,

2014

     

December 31,

2013

 
      (in thousands)  

Trade

  $ 26,003     $ 18,689  

Insurance

    1,819       1,806  

Income tax

    607       714  

Other

    30       310  

Total accounts receivable

    28,459       21,519  

Less allowance for doubtful accounts

    (379 )     (379 )

Receivables, net

  $ 28,080     $ 21,140  

 

 

 
12

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 5.  INVENTORY

 

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

 

      March 31,

2014

     

December 31, 

2013

     

March 31,

2013

 
      (in thousands)  

Fish meal

  $ 14,988     $ 30,119     $ 8,073  

Fish oil

    24,194       41,081       8,604  

Fish solubles

    1,763       2,599       389  

Nutraceutical products

    4,299       3,650       3,781  

Dairy protein products

    1,442       1,355       815  

Unallocated inventory cost pool (including off-season costs)

    25,900       6,655       28,859  

Other materials and supplies

    8,829       8,880       10,053  

Total inventory

  $ 81,415     $ 94,339     $ 60,574  

 

Inventory at March 31, 2014, December 31, 2013 and March 31, 2013 is stated at the lower of cost or market. The elements of March 31, 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 6.  PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

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

      

     

March 31,

2014

     

December 31,

2013

 
      (in thousands)  

Prepaid insurance

  $ 1,183     $ 2,422  

Selling expenses

    325       869  

Fair market value of energy swaps, current portion

    248       275  

Whey process filters

    176       38  

Leases

    40       53  

Other prepaids and expenses

    325       258  

Total prepaid expenses and other current assets

  $ 2,297     $ 3,915  

 

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 16 – Fair Value Disclosures for additional information). Prepaid selling expenses are expensed in those periods in which the related revenue is recognized.

 

NOTE 7.  OTHER ASSETS

 

Other assets as of March 31, 2014 and December 31, 2013 are summarized as follows:

                  

     

March 31,  

2014

     

December 31,

2013

 
      (in thousands)  

Fish nets, net of accumulated amortization of $1,703 and $2,610

  $ 1,169     $ 1,517  

Insurance receivable

    3,175       3,048  

Title XI debt issuance costs

    264       272  

Other debt issuance costs

    276       299  

Deposits and other

    106       98  

Total other assets, net

  $ 4,990     $ 5,234  

 

Amortization expense for fishing nets amounted to approximately $0.3 million for the three months ended March 31, 2014 and 2013.

 

 

 
13

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

As of March 31, 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 8.  PROPERTY, PLANT AND EQUIPMENT

 

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

                                                                                                                                                                                            

     

March 31,

2014

     

December 31,

2013

 
      (in thousands)  

Land

  $ 7,457     $ 7,457  

Plant assets

    159,863       159,337  

Fishing vessels

    105,735       101,745  

Furniture and fixtures

    7,091       7,091  

Construction in progress

    23,035       16,846  

Total property and equipment

    303,181       292,476  

Less accumulated depreciation and impairment

    (152,579)       (148,363)  

Property, plant and equipment, net

  $ 150,602     $ 144,113  

 

 

Depreciation expense for the three months ended March 31, 2014 and 2013 was $4.7 million and $4.5 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 month periods ended March 31, 2014 and 2013, the Company capitalized interest of approximately $0.2 million and $0.1 million, respectively.

 

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, in 2013 the Company recognized a $4.8 million impairment of its fixed assets that it does not plan to use in future operations. For more information see Note 3 – Plant Closure.

 

NOTE 9.  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. Key assumptions in the fair value calculation include discount rates and future sales volumes, prices and production costs. It should be noted that these assumptions are highly subjective given the early stage and transitional nature of the businesses.

 

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

 

   

WSP

   

Cyvex and

Incon

   

Total

 

January 1, 2014

  $ 11,614       7,986     $ 19,600  

Acquisitions

                 

March 31, 2014

  $ 11,614       7,986     $ 19,600  

 

 

 
14

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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

 

   

March 31,

2014

   

December 31,

2013

   

Weighted

Average

Life (years)

 

Carrying value of intangible assets subject to amortization:

                       

Customer relationships and non-competes

  $ 5,930     $ 5,930          

Less accumulated amortization

    (781 )     (613 )     10  

Total intangible assets subject to amortization, net

  $ 5,149     $ 5,317          

Indefinite life intangible assets – trade names/secrets and other

    2,615       2,615          

Total intangible assets

  $ 7,764     $ 7,932          

 

Amortization expense of the Company’s intangible assets for the three months ended March 31, 2014 and 2013 was approximately $0.2 million and $0.1 million, respectively. Estimated future amortization expense related to intangible assets is as follows (in thousands):

 

Remainder of 2014

  $ 497  

2015

    655  

2016

    654  

2017

    654  

Thereafter

    2,689  

Total estimated future amortization expense

  $ 5,149  

 

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 10.  NOTES PAYABLE AND LONG-TERM DEBT

 

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

 

     

March 31,

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%

  $ 23,003     $ 24,211    

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

    20       31    

Total debt

    23,023       24,242    

Less current maturities

    (2,538 )     (3,112 )  

Long-term debt

  $ 20,485     $ 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 may be 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 March 31, 2014, the Company had approximately $23.0 million of borrowings outstanding under Title XI and was in compliance with all of the covenants contained therein.

 

 

 
15

 
 

 

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”).

 

All Loans and all other obligations outstanding under the Loan Agreement are payable in full on March 21, 2017. As of March 31, 2014 and December 31, 2013, the Company had no amounts outstanding under the $60 million Loan Agreement and approximately $3.5 million in letters of credit. As of March 31, 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.

 

NOTE 11.  ACCRUED LIABILITIES

 

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

 

   

March 31,

2014

   

December 31,

2013

 
   

(in thousands)

 

Insurance

  $ 7,649     $ 7,222  

Reserve for plant closure costs

    514       595  

Salary and benefits

    4,313       9,423  

Trade creditors

    5,622       5,100  

Taxes, other than income tax

    603       64  

Income tax

    7,382       4,132  

Deferred revenue

    1,907       2,362  

Accrued interest

    210       200  

Other

    54       47  

Total accrued liabilities

  $ 28,254     $ 29,145  

 

As of March 31, 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 12.  COMMITMENTS AND CONTINGENCIES

 

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.

 

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.

 

 

 
16

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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 three months ended March 31, 2014 and year ended December 31, 2013, the Company has not recorded an annual earn-out estimate.

 

Legal Contingencies

 

The Company has been 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 intends to contest the claim 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 13.  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 March 31:

 

2014

   

2013

 

Allocation of earnings:

                               

Net income

  $ 7,971             $ 2,845          

Income allocated to participating securities

    (192 )             (61 )        

Income allocated to common shares outstanding

  $ 7,779             $ 2,784          
                                 

Weighted average common shares outstanding

    20,355               19,465          
                                 

Basic earnings per share

            0.38               0.14  
                                 

Stock options assumed exercised

    659               724          

Weighted average diluted common shares and potential common share equivalents outstanding

    21,014               20,189          
                                 

Diluted earnings per share

            0.37               0.14  

 

Options to purchase the following number of shares of common stock (in thousands) were outstanding during the three months ended March 31, 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 March 31,  
    2014       2013  
    130       168  

 

 

 
17

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 14.  COMPONENTS OF NET PERIODIC BENEFIT COST

 

   

Three Months Ended

March 31,

 
   

2014

   

2013

 
   

(in thousands)

 

Service cost

  $     $  

Interest cost

    274       248  

Expected return on plan assets

    (298 )     (253 )

Amortization of prior service costs

           

Amortization of net loss

    229       386  
                 

Net periodic pension cost

  $ 205     $ 381  

 

For the three months ended March 31, 2014 and 2013, the Company contributed approximately $0.4 million and $0.3 million, respectively, to the Company’s pension plan. The Company expects to make contributions of $1.6 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 15.  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.

 

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 March 31, 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.    

 

2014

 

Animal Nutrition

   

Human Nutrition

   

Unallocated

   

Total

 

Revenue (1)

  $ 55,270     $ 8,230     $     $ 63,500  

Cost of sales

    36,167       6,840             43,007  

Gross profit

    19,103       1,390             20,493  

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

    553       1,921       4,103       6,577  

Loss related to plant closure

    1,323                   1,323  

Other (gains) and losses

    56       191             247  

Operating income

  $ 17,171     $ (722 )   $ (4,103 )   $ 12,346  

Depreciation and amortization

  $ 4,368     $ 701     $ 148     $ 5,217  

Identifiable assets

  $ 222,761     $ 71,814     $ 42,256     $ 336,831  

Capital expenditures

  $ 4,597     $ 8,209     $ 9     $ 12,815  

 

(1) Excludes revenue from internal customers of $0.7 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

 

 
18

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

2013

 

Animal Nutrition

   

Human Nutrition (2)

   

Unallocated

   

Total

 

Revenue (3)

  $ 42,337     $ 6,586     $     $ 48,923  

Cost of sales

    31,094       5,732             36,826  

Gross profit

    11,243       854             12,097  

Selling, general and administrative expenses

(including research and development)

    628       1,296       5,074       6,998  

Other (gains) and losses

    376                   376  

Operating income

  $ 10,239     $ (442 )   $ (5,074 )   $ 4,723  

Depreciation and amortization

  $ 4,349     $ 438     $ 190     $ 4,977  

Identifiable assets

  $ 197,754     $ 59,035     $ 37,331     $ 294,120  

Capital expenditures

  $ 6,785     $ 289     $ 119     $ 7,193  

 

(2) Includes revenues and related expenses for WSP from February 27, 2013 through March 31, 2013.

 

(3) Excludes revenue from internal customers of $0.6 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

A reconciliation of total segment operating income to total earnings from operations before income taxes for the three months ended March 31, 2014 and 2013 is as follows (in thousands):

 

   

Three Months Ended March 31,

 
   

2014

   

2013

 

Operating income for reportable segments

  $ 12,346     $ 4,723  

Interest income

    8       8  

Interest expense

    (247)       (392)  

Other expense, net

    (56)       (83)  

Income before income taxes

  $ 12,051     $ 4,256  

 

NOTE 16.  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.

 

The carrying values and respective fair 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 March 31, 2014 and December 31, 2013.

 

   

March 31,

2014

   

December 31,

2013

 

Long-term Debt (Level 2):

               

Carrying Value

  $ 23,023     $ 24,242  

Estimated Fair Value

  $ 24,314     $ 25,285  

 

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 March 31, 2014 and December 31, 2013. 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.

 

   

March 31, 2014

 
   

Fair Value Measurements Using

   

Assets

 
   

Level 1

   

Level 2

   

Level 3

        (Liabilities) at
Fair Value
 

Assets (Liabilities) (in thousands)

                               

Energy swap

  $     $ 248     $     $ 248  
                                 

Total Assets (Liabilities)

  $     $ 248     $     $ 248  

 

 

 
19

 

 

   

December 31, 2013

 
   

Fair Value Measurements Using

   

Assets

 
   

Level 1

   

Level 2

   

Level 3

        (Liabilities) at
Fair Value
 

Assets (Liabilities) (in thousands)

                               

Energy swap

  $     $ 275     $     $ 275  
                                 

Total Assets (Liabilities)

  $     $ 275     $     $ 275  

 

NOTE 17.  SUBSEQUENT EVENT

 

On April 1, 2014, the Company’s Board of Directors terminated the Company’s Shareholder Rights Plan (“SRP”). The SRP was adopted in June 2010, shortly after the BP oil spill in the U.S. Gulf of Mexico, and was originally scheduled to terminate in June 2020.

 

 

 
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OMEGA PROTEIN CORPORATION

 

Item 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 contained in the Form 10-K for the fiscal year ended December 31, 2013 (the “2013 Form 10-K”), and in conjunction with the consolidated financial statements included in this report and in the 2013 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. In evaluating those statements, you should carefully consider the information above as well as the risks outlined in Item 1A. Risk Factors in our 2013 Form 10-K and this Form 10-Q.

 

General

 

Omega Protein Corporation is a nutritional company that develops, produces and delivers healthy products throughout the world to improve the nutritional integrity of functional foods, dietary supplements and animal feeds. 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 in two primary industry segments: animal nutrition and human nutrition.

 

The animal nutrition segment is comprised primarily of two subsidiaries: Omega Protein, Inc. and Omega Shipyard, Inc. Omega Protein, Inc. (“Omega Protein”), the Company’s principal operating subsidiary, is predominantly dedicated to the production of animal nutrition products and operates in the menhaden harvesting and processing business and is the successor to a business conducted since 1913. In December 2013, the Company closed its Cameron, Louisiana menhaden processing plant and re-deployed some of that plant’s harvesting and processing assets to its other plants. Omega Protein currently operates a total of three menhaden processing plants in the states of Louisiana, Mississippi and Virginia. The Company also operates a Health and Science Center in Reedville, Virginia, which provides a 100-metric tons per day fish oil input capacity for the Company’s food, industrial and feed grade oils. A portion of Omega Protein’s production is transferred to its human nutrition segment where it is further processed and sold. Omega Shipyard, Inc. (“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 name 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 on February 27, 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. For additional information related to the Company’s acquisition of WSP, see Note 2 – Acquisition of Wisconsin Specialty Protein, L.L.C to the unaudited condensed consolidated financial statements in Item 1. The Company also operates a technical center in Houston, Texas, the Omega Protein Technology and Innovation Center, which has food science application labs as well as analytical, sensory, lipids research and pilot plant capabilities.

 

Company Overview

 

Revenues Composition. The following table sets 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 March 31,

 
   

2014

   

2013

 
   

Revenues

   

Percent

   

Revenues

   

Percent

 

Fish Meal

  $ 28.6       45.0 %   $ 27.4       56.0 %
Fish Oil     20.0       31.5       7.9       16.2  

Refined Fish Oil

    5.5       8.7       5.5       11.2  

Fish Solubles and Other

    1.2       1.9       1.5       3.1  

Dietary Supplement and Food Ingredients and Products

    8.2       12.9       6.6       13.5  

Total

  $ 63.5       100.0 %   $ 48.9       100.0 %

 

 

 
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OMEGA PROTEIN CORPORATION

 

The following table sets 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 March 31,

 
   

2014

   

2013

 
   

Revenues

   

Percent

   

Revenues

   

Percent

 
                                 

Domestic Revenues

  $ 32.7       51.5 %   $ 27.1       55.4 %

Export Revenues

    30.8       48.5       21.8       44.6  

Total

  $ 63.5       100.0 %   $ 48.9       100.0 %

 

  Animal Nutrition Products

 

2014 Fishing Information.   At March 31, 2014, Omega Protein owned a fleet of 39 vessels and 31 spotter aircraft for use in its fishing operations and also leased additional aircraft where necessary to facilitate operations. For the 2014 fishing season in the Gulf of Mexico, which runs from mid-April through October, Omega Protein plans to operate 21 fishing and carry vessels and 19 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 is expected to begin in May and can extend into early December. For the 2014 season, Omega Protein plans to operate 7 fishing vessels and 7 leased spotter aircraft along the Mid-Atlantic coast. 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, in the process of refurbishment in the Company’s shipyard or held for disposal.

 

The results of the 2014 fishing season will depend in large part on the volume of fish caught, and the oil and meal yields associated with the catch.  For illustrative purposes, the Company’s 2013 fish catch was 5.9% below the recent five year average but the related fish meal, oil and solubles production was 2.4% above the recent five year average due to improved oil yields. This reduction in fish catch was due in part to the Company’s decision to delay the start of its 2013 Atlantic fishing season and utilize one less vessel due to the limit on fish caught along the Atlantic enacted by the Atlantic States Marine Fisheries Commission (“ASMFC”) in 2013. The Company’s oil yields for 2013 were higher by 103.4% compared to 2012 and by 34.0% compared to the Company’s five year oil yield average. The Company believes that fish oil yields are influenced by multiple factors, including but not limited to, fish diet, weather, water temperature, fish population and age of fish, but such possible relationships and inter-relationships are not generally well understood. 

 

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 primarily for animal and aquaculture feeds, as well as additives to human food products and dietary supplements. A portion of Omega Protein’s production is transferred to the human nutrition segment where it is further processed and sold. Omega Protein’s fish solubles are sold primarily to bait 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.

 

Sales Contracts. Omega Protein generally sells most of its products on up to a twelve-month forward contract basis with the balance sold on a spot basis through purchase orders or under longer-term forward contracts. Omega Protein’s sales contracts generally contain force majeure and other production allocation provisions. 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 March 31, 2014, Omega Protein had sold forward on a contract basis approximately 58,000 short tons of fish meal and 26,000 metric tons of fish oil for 2014, contingent on 2014 production and product availability. Of these 2014 forward sales, the majority was contracted during 2013. As a basis of comparison, as of March 31, 2013, Omega Protein had sold forward on a contract basis approximately 68,000 short tons of fish meal and 15,000 metric tons of fish oil for 2013.

 

 

 
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OMEGA PROTEIN CORPORATION

Omega Protein’s annual revenues are highly dependent on pricing, annual fish catch, production yields and inventories. Inventory is generally carried over from one year to the next year and 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.

Customers and Marketing.      Most of Omega Protein’s marine products are sold directly to approximately 200 customers by Omega Protein’s agriproducts sales department, while a smaller amount is sold through independent sales agents and the Company’s human nutrition segment. Omega Protein’s animal nutrition segment product inventory was $40.9 million as of March 31, 2014 versus $73.8 million as of December 31, 2013.

 

Omega Protein’s fish meal is sold to feed producers as a high-protein ingredient for the swine, aquaculture and pet food industries. Crude fish oil sales primarily involve export markets where the fish oil is used as an ingredient in aquaculture feeds. Over the past decade, increasing percentages of Omega Protein’s fish meal and oil products have been sold into the aquaculture industry. Generally, the growth of the worldwide aquaculture industry has resulted in increasing demand for fish oils and meals to improve feed efficiency, nutritional value and health of farm-raised fish species.

 

Omega Protein’s products are sold both in the U.S. and internationally. International sales consist of both fish meal and fish oil and are primarily to China, Norway, Canada, Saudi Arabia and Japan. Omega Protein’s sales in these foreign markets are denominated in U.S. dollars and are not directly affected by currency fluctuations. Such sales could be adversely affected by changes in demand resulting from fluctuations in currency exchange rates.

 

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 free on board shipping point or costs, insurance and freight 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.

 

Competition.     Omega Protein competes with a smaller domestic privately-owned menhaden fishing company and with numerous fish processors outside the United States. 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 and oil products. Many of these competitors have significantly greater financial resources, less onerous regulatory costs 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 marine proteins as well as other protein sources such as soybean meal and other vegetable or animal protein products. Omega Protein believes, however, that these other non-marine sources are not complete substitutes because fish meal offers nutritional values not contained in such other sources. Other globally produced fish oils provide the primary market competition for Omega Protein’s fish oil, as well as soybean and rapeseed oil.

 

Fish meal prices have generally borne a loose relationship to other protein sources, and the prices for Omega Protein’s fish meal and fish oil 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. 

 

 

 
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OMEGA PROTEIN CORPORATION

 

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 are subject to changes from time to time, 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 14 states along the Atlantic seaboard and three agencies, and the Gulf States Marine Fisheries Commission (“GSMFC”) which consists of five states along the Gulf of Mexico. The ASMFC and GSMFC manage the menhaden fishery throughout the stock’s coast-wide range. The Company supports the ASMFC’s and GSMFC’s goal of maintaining a healthy population of menhaden.

 

ASMFC. In December 2012, the ASMFC established a coast-wide limit on the amount of Atlantic menhaden that can be harvested each year. Based on a 20% reduction from the 2009-2011 average annual landings, total menhaden harvest in the 2013 fishing year and beyond will be limited to 170,800 metric tons (“mt”). The Company expects that this total harvest level will remain in place through 2015 when a new assessment of the Atlantic menhaden population will be conducted. The new catch limit represents a 24% reduction from the 2012 coastal harvest level of 224,200 mt, of which the Company accounted for 160,600 mt. Changes in these catch levels beyond 2015 likely will be influenced by the results of the planned 2014 benchmark stock assessment.

 

The ASMFC also voted to allocate the new catch quota among the Atlantic states based on the share of menhaden landings over the same three year period. As a result, Virginia received approximately 85 percent of the quota, or between about 144,270 mt and 146,000 mt, to be split between the Company and the Virginia bait fishery. The Company’s allowable catch for 2014 and 2015 is expected to be between approximately 129,900 mt and 131,500 mt for each year, significantly below the five year average catch through 2012 of 163,300 mt and its previous low harvest of 141,100 mt in 2008. Based on the five year average through 2012, 34% of the Company’s fish catch and 30% of its production of fish meal, oil and solubles came from its Atlantic business. As a result of the implementation of the ASMFC restrictions, prior to the commencement of the 2013 fishing season the Company reduced the number of vessels at its Reedville plant from eight to seven and reduced the number of Reedville employees from 260 to 225. Omega Protein estimates its 2013 harvest was approximately 99.8% of its allocated quota.

 

In 2012, the ASMFC reduced the cap on the amount of menhaden that the Company can harvest in the Chesapeake Bay from 109,020 mt to 87,200 mt (the “Bay cap”). The Bay cap was originally established as a precautionary measure in 2006 while research was to be 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.

 

The Bay cap did not affect the Company’s Chesapeake Bay harvests for the years 2007 through 2013. Since the imposition of the original Bay cap in 2006, the Company’s harvests from these waters have been near or below the new 87,200 mt Bay cap level. Therefore, the Company does not expect that the new Bay cap will have a material adverse effect on its business, financial results or results of operations.

 

GSMFC . In October 2013, the GSMFC adopted reference points for the Gulf menhaden fishery. The reference points do not establish any caps or quotas on the Gulf menhaden fishery but rather measure the rate of harvest in order to insure the continued health of the population. The reference points were set at 663,583 mt annually as the target reference point and 680,765 mt annually as the threshold reference point. For reference, the 2013 total industry wide landings for Gulf menhaden were 497,503 mt.

 

The GSMFC recommended that if the target level of 663,583 mt were to be exceeded two years in a row, the GSMFC would request an update to the Gulf menhaden stock assessment. In addition, if the threshold level of 680,765 mt were to be exceeded in a single year, the GSMFC would also request a stock assessment update. The next Gulf stock assessment is scheduled for 2018.

 

Omega Protein, through its operation of fishing vessels, is subject to the jurisdiction of the U.S. Coast Guard, the National Transportation Safety Board and the U.S. Customs Service. The U.S. Coast Guard and the National Transportation Safety Board set safety standards and are authorized to investigate vessel accidents and recommend improved safety standards. The U.S. Customs Service is authorized to inspect vessels at will.

 

The Company’s operations are subject to federal, state and local laws and regulations relating to the protection of the environment, including the federal Clean Water Act, which imposes strict controls against the discharge of pollutants in reportable quantities, and along with the Oil Pollution Act, imposes substantial liability for the costs of oil removal, remediation and damages. Omega Protein’s operations also are subject to the federal Comprehensive Environmental Response, Compensation, and Liability Act, which imposes liability, without regard to fault, on certain classes of persons that contributed to the release of any “hazardous substances” into the environment and the federal Occupational Safety and Health Act (“OSHA”). The implementation of continuing safety and environmental regulations from these authorities could result in additional requirements and procedures for the Company, and it is possible that the costs of these requirements and procedures could be material.

 

 

 
24

 

 

OMEGA PROTEIN CORPORATION

 

The OSHA hazard communications standard, the Environmental Protection Agency community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and similar state statutes require the Company to organize information about hazardous materials used or produced in its operations. Certain of this information must be provided to employees, state and local governmental authorities and local citizens. Numerous other environmental laws and regulations, along with similar state laws, also apply to the operations of the Company, and all such laws and regulations are subject to change.

 

In April 2010, the Company received a request for information from the EPA concerning its bail wastewater practices used in its fishing operations at its Reedville, Virginia facility. In February 2011, the U.S. Coast Guard conducted inspections at the Company’s Reedville facility regarding the Reedville vessels’ bilge water discharge practices. Based on these inquiries, both agencies commenced investigations of the Company’s bail waste water and bilge water practices at its Reedville facility. The U.S. Attorney’s Office for the Eastern District of Virginia subsequently reviewed both the results of the Coast Guard inspection and the EPA request for information.

 

In June 2013, the Company’s subsidiary, Omega Protein, resolved both the U.S. Coast Guard and EPA investigations by entering into a plea agreement with the United States Attorney’s Office for the Eastern District of Virginia. Pursuant to terms of the plea agreement, the Company’s subsidiary pled guilty to two Clean Water Act violations. The plea agreement required the subsidiary to pay a $5.5 million fine, be placed on a three year term of probation, and implement an environmental compliance program. In addition to the $5.5 million fine, the subsidiary was required to make a $2.0 million contribution to the National Fish and Wildlife Foundation to fund projects in Virginia related to the protection of the environmental health of the Chesapeake Bay. The plea agreement was approved by the U.S. District Court for the Eastern District of Virginia in June 2013 and the subsidiary paid both the $5.5 million fine and the $2.0 million contribution in July 2013. Omega Protein will be on probation until June 2016, unless the probation period is terminated earlier by the court.

 

In 2013, Omega Protein requested an equivalency determination from the U.S. Coast Guard for its Gulf of Mexico fleet regarding the use of certain vessel equipment required for “ocean-going vessels” (as defined by Coast Guard regulations) that operate beyond the 12 nautical mile limit. In April 2013, the Coast Guard granted Omega Protein a partial waiver for its 2013 fishing season that allowed Omega Protein to travel, but not fish, outside 12 nautical miles of shore. In January 2014, the Coast Guard granted Omega Protein’s request to utilize alternate and enhanced management procedures in lieu of the Coast Guard’s required vessel equipment, subject to certain restrictions. The Coast Guard also granted Omega Protein a 12 month waiver from the equipment requirements to allow the Company sufficient time to implement these alternate measures, and also allowed fishing beyond the 12 nautical mile limit for a 12 month period, subject to certain restrictions. The Company intends to implement these measures by the beginning of the 2015 fishing season.

 

The Company has made, and anticipates that it will make in the future, expenditures in the ordinary course of its business in connection with environmental and regulatory matters. It is possible that environmental laws and regulations could require material expenditures or otherwise adversely affect the Company’s operations.

 

Omega Protein is also subject to laws and regulations in foreign countries regarding the importation of fish meal or fish oil in those jurisdictions. Some of these laws and regulations, particularly in countries such as China whose regulatory regimes may still be evolving, or in supra-national jurisdictions such as the European Union, may adversely affect the Company’s business, results of operations and financial condition. More stringent laws and regulations, or new interpretations of, or changes to, those laws and regulations, in foreign jurisdictions on contaminant levels, health and sanitation requirements, import documentation, license requirement restrictions imposed by port of entry protocols or other similar restrictions could result in: (i) Omega Protein’s incurrence of additional capital expenditures and operating costs in order to comply with these requirements, (ii) Omega Protein’s withdrawal from marketing its products in those jurisdictions which could lead to material loss of revenues, earnings and market share, or (iii) costs of demurrage, cure or product recall incurred by Omega Protein as it complies with, or attempts to comply with, these restrictions. For example, exports of fish meal to China and the European Union are subject to certain health and sanitation requirements that are administered by the Seafood Inspection Program (“SIP”), a U.S. federal agency selected by those jurisdictions as the competent authority to oversee compliance with export requirements by U.S. based manufacturers. Pursuant to SIP’s interpretation and application of China’s and the European Union’s health and sanitation requirements, Omega Protein’s processing facilities and its St. Louis fish meal warehouse may from time to time be limited or restricted in their ability to obtain export certificates in support of shipments of fish meal to China or the European Union or certain shipments by the Company may be re-processed in order to meet these foreign health and sanitation requirements. These limitations and restrictions may have an adverse effect on the Company’s business, financial condition or results of operations.

  

 

 
25

 

 

Omega Protein’s harvesting operations are subject to the Shipping Act of 1916 and the regulations promulgated there under by the Department of Transportation, Maritime Administration which require, among other things, that Omega Protein be incorporated under the laws of the U.S. or a state, the Company’s chief executive officer be a U.S. citizen, no more of the Company’s directors be non-citizens than a minority of the number necessary to constitute a quorum and at least 75% of the Company’s outstanding capital stock (including a majority of the Company’s voting capital stock) be owned by U.S. citizens. If the Company fails to observe any of these requirements, it will not be eligible to conduct its harvesting activities in U.S. jurisdictional waters. Such a loss of eligibility would have a material adverse effect on the Company’s business, results of operations and financial condition.

 

To protect against such loss of eligibility, the Company’s Articles of Incorporation (i) contain provisions limiting the aggregate percentage ownership by non-citizens of each class of the Company’s capital stock to no more than 25% of the outstanding shares of each such class (the “Permitted Percentage”) so that any purported transfer to non-citizens of shares in excess of the Permitted Percentage will be ineffective as against the Company for all purposes (including for purposes of voting, dividends and any other distribution, upon liquidation or otherwise), (ii) provide for a dual stock certificate system to determine such ownership pursuant to which certificates representing shares of Company Common Stock bear legends that designate such certificates as either “citizen” or “non-citizen” depending on the citizenship of the owner, and (iii) permit the Company’s Board of Directors to make such determinations as may reasonably be necessary to ascertain such ownership and implement restrictive limitations on those shares that exceed the Permitted Percentage (the “Excess Shares”). For example, the Company’s Board is authorized, among other things, to redeem for cash (upon written notice) any Excess Shares in order to reduce the aggregate ownership by non-citizens to the Permitted Percentage.

 

Human Nutrition Products

 

Products .  Nutegrity, the Company’s human nutrition business, has three primary product lines: protein products, Omega-3 fish oil ingredients and other nutraceutical ingredients.

 

Protein Products . Nutegrity 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. Nutegrity has three main categories of whey protein powders:

 

 

rBGH-Free: Artificial growth hormone-free and gluten-free cow’s milk whey protein concentrate,

 

 

Organic: USDA certified organic cow’s milk whey protein concentrate, and

 

 

Goat: Gluten-free goat’s milk whey protein concentrate for those who cannot tolerate cow dairy products.

 

Nutegrity manufactures and sells Whey Protein Concentrate-80 and bulk ingredients globally to leading nutritional and food and beverage companies worldwide. By-products from the manufacturing process, including lactose, cream and animal feed supplements, are also sold.

 

Nutegrity also manufactures, blends and sells protein powder meal replacement / supplement products under its tera’swhey® brand. These products are sold to retail customers primarily in the natural, specialty foods and specialty supplements channels. The target market for these products is adults who seek a healthy lifestyle through minimally processed foods.

 

Nutegrity operates a 20,000 square foot dairy protein manufacturing facility in Reedsburg, Wisconsin which is in the process of being expanded to a 33,000 square foot facility. This expansion is expected to be completed in 2014.

 

Omega-3 Fish Oil Ingredients . Nutegrity produces OmegaActiv™, a concentrated form of refined fish oil which is marketed as a dietary supplement ingredient.

 

Nutegrity also produces OmegaPure®, a highly refined fish oil designed to deliver a stable, odorless, flavorless source of Omega-3 fatty acids which is marketed for food applications. OmegaPure® is kosher-certified by Orthodox Union.

 

 

 
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OMEGA PROTEIN CORPORATION

 

Other Nutraceutical Ingredients . Nutegrity markets and sells an extensive list of other nutraceutical ingredients derived from fruit, vegetable and botanicals.  These products include the following signature ingredients:

 

•AvoVida® Avocado/ Soy Unsaponifiables for joint support;

 

•BioVinca® Vinpocetine for brain function support;

 

•BioVin® grape extract for cardiovascular support;

 

•Novusetin™ for cognitive health support;

 

•Euro Black Currant™ berry extract that provides anthocyanins with a high ORAC (Oxygen Radical Absorbance Capacity value); and

 

•BroccoPhane® broccoli sprout concentrate containing sulforophane.

 

Marketing .  Nutegrity 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). Nutegrity also directs and participates in clinical research studies, often in collaboration with scientists and research institutions, to validate the benefits of a product and provide scientific support for product claims and marketing initiatives.

 

The Company’s Batavia, Illinois facility is a specialty toll 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. The Company believes that the Batavia facility’s concentration technology allows the Company 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 the Batavia facility are marketed and sold under the Company’s OmegaActiv™ brand.

 

On February 27, 2013, the Company acquired the Reedsburg, Wisconsin facility, which produces and markets 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. The Company believes the acquisition of the Reedsburg facility will enhance its presence in the specialty proteins markets and advance its goal of providing sustainable, value-added nutrition ingredients.

     

Competition.   The U.S. dietary supplement ingredient supplier industry is a large, highly fragmented and growing industry, with no single industry participant accounting for a majority of total industry sales. Competition is based primarily on price, quality and assortment of products, customer service, marketing support and availability of new ingredients. In addition, the market is highly sensitive to the introduction of new products.  Nutegrity competes with manufacturers, distributors and marketers of dietary supplement ingredients both within and outside the United States.

 

Regulation. The processing, formulation, safety, manufacturing, packaging, labeling, advertising, and distribution of Nutegrity products are subject to regulation by one or more federal agencies, including the FDA, the Federal Trade Commission (“FTC”), the Consumer Product Safety Commission (“CPSC”), the United States Department of Agriculture (“USDA”), and the Environmental Protection Agency (“EPA”), and by various agencies of the states and localities in which the products are sold. The area of business that these and other authorities regulate include, among others:

 

•    claims and advertising;
•    labels;
•    ingredients; and
•    manufacturing, distributing, importing, selling and storing of products.

 

In particular, the FDA regulates the formulation, manufacturing, packaging, storage, labeling, promotion, importation, and distribution and sale of dietary supplements and food ingredients in the United States, while the FTC regulates marketing and advertising claims.

 

Some Nutegrity products are packaged and sold directly to retailers and consumers, and therefore are subject to greater oversight and enforcement action by the FTC. In recent years, the FTC has instituted numerous enforcement actions against consumer packaged goods companies for failure to have adequate substantiation for claims made in advertising or for use of false or misleading advertising claims.

 

 

 
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OMEGA PROTEIN CORPORATION

 

New Legislation and Regulations. Legislation or regulations may be introduced which, if passed, would impose substantial new regulatory requirements on the manufacture, packaging, labeling, advertising and distribution and sale of Nutegrity products. The Company cannot determine what effect additional domestic or international governmental legislation, regulations, or administrative orders, when and if promulgated, would have on Company’s business in the future. New legislation or regulations may require the reformulation, elimination, or relabeling of certain products to meet new standards and revisions to certain sales and marketing materials, and it is possible that the costs of complying with these new regulatory requirements could be material.

 

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 7 to the consolidated financial statements in Item 8 of the Company’s 2013 Form 10-K), valuation of losses related to Jones Act and worker’s compensation insurance claims (Note to the consolidated financial statements in Item 8 of the Company’s 2013 Form 10-K), valuation of income and deferred taxes (Notes 1 and 14 in the Company’s 2013 Form 10-K), valuation of pension plan obligations (Notes 1 and 16 to the consolidated financial statements in Item 8 of the Company’s 2013 Form 10-K), and the valuation of goodwill and other intangible assets (Notes 1 and 11 to the consolidated financial statements in Item 8 of the Company’s 2013 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 2013 the cost per unit of production decreased 6.5% from the third quarter of 2013 to the fourth quarter of 2013 due to larger than anticipated production during the fourth quarter. 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.

 

The Company also has other key accounting policies and accounting estimates relating to the allowance of doubtful accounts (Note 1 to the consolidated financial statements in Item 8 of the Company’s 2013 Form 10-K), valuation of shares-based compensation (Note 16 to the consolidated financial statements in Item 8 of the Company’s 2013 Form 10-K) and energy swap valuations (Notes 1 and 21 to the consolidated financial statements in Item 8 of the Company’s 2013 Form 10-K).  The Company believes that these key accounting policies and accounting estimates either do not generally require the Company 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 the Company’s 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.

 

Results of Operations

 

The following discussion segregates the financial results of our two industry segments: animal nutrition and human nutrition. For a discussion of our segments, see Note 15 - Industry Segments to the unaudited condensed consolidated financial statements in Item 1.

 

Interim Results for the First Quarters ended March 31, 2014 and March 31, 2013

 

Animal Nutrition                                                                              

 

      Three Months Ended March 31,  
      2014       2013      

Increase

(Decrease)

 
      (in millions)  

Revenues

  $ 55.3     $ 42.3     $ 13.0  

Cost of sales

    36.2       31.1       5.1  

Gross profit

 

19.1

      11.2       7.9  

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

    0.6       0.6        

Loss related to plant closure

    1.3             1.3  

Other (gains) and losses

          0.4       (0.4)  

Operating income

  $ 17.2     $ 10.2     $ 7.0  

 

 

 
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Revenues .    Animal nutrition related revenues increased $13.0 million, or 30.5%, from $42.3 million for the three months ended March 31, 2013 to $55.3 million for the three months ended March 31, 2014.  The increase in animal nutrition related revenues was primarily due to increased sales prices of 14.9% and 1.4% for the Company’s fish meal and fish oil, respectively, and increased sales volumes for the Company’s fish oil of 87.8%, partially offset by decreased sales volumes of 9.5% for the Company’s fish meal.  Considering fish meal, fish oil and fish solubles sales activities in total, the Company experienced approximately a $5.6 million increase in revenues due to the increase in sales prices and a $7.4 million increase in revenue caused by increased sales volumes, when comparing the three months ended March 31, 2014 and 2013.  The increase in fish meal sales prices for the three months ended March 31, 2014 is primarily due to sales made pursuant to contracts entered into during 2013 when fish meal prices were higher due to global supply and demand, as compared to the three months ended March 31, 2013, which was primarily due to sales made pursuant to contracts entered into during 2012.  The increase in fish oil sales prices is due primarily to a limited global supply and increased demand primarily from the aquaculture and human supplement industries, partially offset by a change in product mix.  The increase in fish oil sales volumes is primarily due to the timing of contracts and increased available fish oil inventory due to high fish oil yields. The decrease in fish meal sales volumes for the three months ended March 31, 2014 is primarily due to the timing of contracts.

 

Cost of sales .    Animal nutrition related cost of sales, including depreciation and amortization, for the three months ended March 31, 2014 was $36.2 million, an increase of $5.1 million, or 16.3%, as compared to the three months ended March 31, 2013. Cost of sales as a percentage of revenues was 65.4% for the three months ended March 31, 2014 as compared to 73.4% for the three months ended March 31, 2013.  The decrease in cost of sales as a percentage of revenues was primarily the result of increased revenue per unit of 16.5%, partially offset by increased cost per unit of sales of 3.8% during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.  The increase in revenue per unit is primarily due to increased fish meal and fish oil sales prices as discussed above as well as a change in product mix as higher priced fish oil comprised a larger percentage of total sales volumes.  The increase in cost per unit of sales during three months ended March 31, 2014 is primarily due to product mix as higher cost fish oil comprised a larger percentage of total sales volumes.

 

Gross profit .    Animal nutrition related gross profit increased $7.9 million, or 69.9%, from $11.2 million for the three months ended March 31, 2013 to $19.1 million for the three months ended March 31, 2014.  Gross profit as a percentage of revenue was 34.6% for the three months ended March 31, 2014 as compared to 26.6% for the three months ended March 31, 2013.  The increase in gross profit as a percentage of revenue was primarily due to the increase in revenue per unit as discussed above.  

 

Selling, general and administrative expenses.     Animal nutrition related selling, general and administrative expenses was $0.6 million for the three months ended March 31, 2014 and 2013.

 

Loss related to plant closure . As a result of the closing of the Cameron, Louisiana fish processing plant, the Company recognized an ongoing loss on closure of approximately $1.3 million during the three months ended March 31, 2014 related to the employee severances and other closure costs not related to future inventory production. The Company did not recognize losses related to this matter during the three months ended March 31, 2013.

 

Other (gains) and losses.     The Company recorded minimal animal nutrition gains for the three months ended March 31, 2014. The Company recorded animal nutrition related losses for the three months ended March 31, 2013 of $0.4 million primarily relating to a $0.3 million reduction in an insurance receivable associated with the 2011 F/V Sandy Point incident.

 

Human Nutrition