Omega Protein Corporation
OMEGA PROTEIN CORP (Form: 10-Q, Received: 05/11/2015 16:08:35)

 

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, 2015

 

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 May 4, 2015: 21,718,072.

 



 

 
 

 

 

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, 2015 and December 31, 2014

3

Unaudited Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2015 and 2014

4

Unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2015 and 2014

5

Notes to Unaudited Condensed Consolidated Financial Statements

6
   

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

23
   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

38
   

Item 4. Controls and Procedures

38
   
   

PART II. OTHER INFORMATION

 
   

Item 1. Legal Proceedings

39
   

Item 1A. Risk Factors

39
   

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

39
   

Item 3. Defaults Upon Senior Securities

40
   

Item 4. Mine Safety Disclosures

40
   

Item 5. Other Information

40
   

Item 6. Exhibits

40
   

Signatures

42

 

 
2

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands, except par value amounts)

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements and Notes

 

 

   

March 31,

2015

   

December 31,

2014

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 223     $ 1,430  

Receivables, net

    41,954       36,621  

Inventories

    93,551       97,513  

Deferred tax asset, net

    1,845       1,871  

Prepaid expenses and other current assets

    4,083       4,936  

Total current assets

    141,656       142,371  

Other assets, net

    2,176       2,309  

Property, plant and equipment, net

    175,579       169,932  

Goodwill

    41,945       42,501  

Other intangible assets, net

    22,197       23,002  

Total assets

  $ 383,553     $ 380,115  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

Current liabilities:

               

Current maturities of long-term debt

  $ 18,379     $ 14,741  

Accounts payable

    19,173       21,047  

Accrued liabilities

    23,140       23,216  

Total current liabilities

    60,692       59,004  

Long-term debt, net of current maturities

    21,296       20,486  

Deferred tax liability, net

    24,949       25,949  

Pension liabilities, net

    4,968       5,375  

Other long-term liabilities

    4,229       3,419  

Total liabilities

    116,134       114,233  

Commitments and contingencies

               

Stockholders’ equity:

               

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

           

Common Stock, $0.01 par value; 80,000,000 authorized shares; 21,793,094 and 21,587,751 shares issued and 21,718,072 and   21,527,319 share outstanding at March 31, 2015 and December 31, 2014, respectively

    212       210  

Capital in excess of par value

    143,393       141,855  

Retained earnings

    136,937       135,268  

Treasury stock, at cost – 75,022 and 60,432 shares at March 31, 2015 and December 31, 2014, respectively

    (753 )     (595 )

Accumulated other comprehensive loss

    (12,370 )     (10,856 )

Total stockholders’ equity

    267,419       265,882  

Total liabilities and stockholders’ equity

  $ 383,553     $ 380,115  

   

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,

 
   

2015

   

2014

 

Revenues

  $ 71,623     $ 63,500  

Cost of sales

    56,828       43,007  

Gross profit

    14,795       20,493  
                 

Selling, general, and administrative expense

    9,416       6,093  

Research and development expense

    774       484  

Loss related to plant closure

    638       1,323  

Loss (gain) on disposal of assets

    307       247  

Operating income

    3,660       12,346  

Interest income

    4       8  

Interest expense

    (362 )     (247 )

Loss on foreign currency

    (545 )      

Other expense, net

    (110 )     (56 )

Income before income taxes

    2,647       12,051  
                 

Provision for income taxes

    978       4,080  

Net income

    1,669       7,971  
                 

Other comprehensive income (loss):

               

Foreign currency translation adjustment net of tax benefit of $886 and $0, respectively

    (1,645 )      

Energy swap adjustment, net of tax benefit of $34 and $10, respectively espectively

    (64 )     (18 )

Pension benefits adjustment, net of tax expense of $105 and $80, respectively

    195       149  

Comprehensive income

  $ 155     $ 8,102  

Basic earnings per share (See Note 13)

  $ 0.08     $ 0.38  

Weighted average common shares outstanding

    21,006       20,355  

Diluted earnings per share (See Note 13)

  $ 0.08     $ 0.37  

Weighted average common shares and potential common share equivalents outstanding

    21,466       21,014  

   

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,  
   

2015

   

2014

 

Cash flows from operating activities:

               

Net income

  $ 1,669     $ 7,971  

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

               

Depreciation and amortization

    5,878       5,217  

Loss related to plant closure

          231  

Loss (gain) on disposal of assets

    307       247  

Provisions for losses on receivables

    12       12  

Share based compensation

    546       392  

Deferred income taxes

    (525 )     285  

Unrealized loss on foreign currency fluctuations, net

    545        

Changes in assets and liabilities:

               

Receivables

    (5,855 )     (6,952 )

Inventories

    3,477       12,716  

Prepaid expenses and other current assets

    465       1,592  

Other assets

    (215 )     (135 )

Accounts payable

    (2,456 )     (775 )

Accrued liabilities

    (453 )     434  

Pension liability, net

    (212 )     (172 )

Other long term liabilities

    614       (28 )

Net cash provided by operating activities

    3,797       21,035  

Cash flows from investing activities:

               

Proceeds from disposition of assets

    15       61  

Capital expenditures

    (10,560 )     (12,815 )

Net cash used in investing activities

    (10,545 )     (12,754 )

Cash flows from financing activities:

               

Principal payments of long-term debt

    (3,133 )     (1,219 )

Proceeds from long-term debt

    7,838        

Purchase treasury stock at cost

    (158 )     (57 )

Proceeds from stock options exercised

    843       93  

Excess tax benefit of stock options exercised

    151       9  

Net cash provided by (used in) financing activities

    5,541       (1,174 )

Net increase (decrease) in cash and cash equivalents

    (1,207 )     7,107  

Cash and cash equivalents at beginning of year

    1,430       34,059  

Cash and cash equivalents at end of period

  $ 223     $ 41,166  

   

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

 

 
5

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1.

SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF OPERATIONS AND BASIS OF PRESENTATION

 

Business Description

 

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

 

The animal nutrition segment is comprised primarily of two subsidiaries: Omega Protein, Inc. (“Omega Protein”) and Omega Shipyard, Inc. (“Omega Shipyard”). Omega Protein, the Company’s principal operating subsidiary, is the successor to a business conducted since 1913. Omega Protein produces and markets a variety of products produced from menhaden (a herring-like species of fish found in commercial quantities in the U.S. coastal waters of the Atlantic Ocean and Gulf of Mexico), including regular grade and value-added specialty fish meals, crude and refined fish oils and fish solubles. Omega Protein’s fish meal products are primarily used as a protein ingredient in animal feed for swine, aquaculture and household pets. Fish oil is utilized primarily for animal and aquaculture feeds, as well as additives to human food products and dietary supplements. Omega Protein’s fish solubles are sold primarily to livestock feed manufacturers, aquaculture feed manufacturers and for use as an organic fertilizer. Omega Protein’s business is seasonal in nature and generally has higher revenues during the third quarter of each fiscal year. A portion of Omega Protein’s production is transferred to the human nutrition segment where it is further processed and sold. Omega Shipyard owns and operates a drydock facility in Moss Point, Mississippi that is used to provide shoreside maintenance for Omega Protein’s fishing fleet and, subject to outside demand and excess capacity, occasionally for third-party vessels.

 

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

 

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

 

Basis of Presentation

 

These interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally provided have been omitted. The interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014. 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, 2015, and the results of its operations for the three month periods ended March 31, 2015 and 2014 and its cash flows for the three month periods ended March 31, 2015 and 2014. Quarterly operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

 

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.

 

As of December 31, 2014, the Company revised the unaudited consolidated balance sheet to correct for the classification of $0.4 million of accounts payable to other long-term liabilities.  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, WSP and Bioriginal the Company’s revenues include sales of dietary supplement and food ingredients and products. The Company recognizes revenue for the sale of its products when price is established, collectability is reasonably assured and risk and rewards of ownership of its products and title are transferred to the customer.

 

Shipping and Handling

 

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

 

Inventories

 

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

 

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

 

Energy Swap Agreements

 

The Company does not enter into financial instruments for trading or speculative purposes. Omega Protein entered 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. The fair values of outstanding derivative instruments are summarized as follows:

 

Energy Swap

 

Consumption Period

   

Quantity

   

Price Per Unit

   

Energy Swap Asset/(Liability) as of

March 31, 2015

   

Deferred Tax Asset/(Liability) as of

March 31, 2015

 
                           

(in thousands)

 

Diesel - NYMEX Heating Oil Swap

 

May - November, 2015

   

3,038,978 Gallons

    $ 2.53     $ (2,350 )   $ 822  

Natural Gas - NYMEX Natural Gas Swap

 

April – October, 2015

   

187,575 MMBTUs

    $ 3.67       (175 )     61  

Propane – Natural Gas Liquids Swap

 

June - November, 2015

   

1,024,800 Gallons

    $ 0.86       (336 )     118  

Diesel - NYMEX Heating Oil Swap

 

May - November, 2016

   

2,050,679 Gallons

    $ 2.30       (833 )     292  

Natural Gas - NYMEX Natural Gas Swap

 

April – October, 2016

   

125,000 MMBTUs

    $ 3.35       (37 )     13  

Propane – Natural Gas Liquids Swap

 

June - November, 2016

   

1,355,000 Gallons

    $ 0.58       (47 )     16  
                            $ (3,778 )   $ 1,322  

 

 
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, 2014

   

Deferred Tax Asset/(Liability) as of

December 31, 2014

 
                           

(in thousands)

 

Diesel - NYMEX Heating Oil Swap

 

May - November, 2015

   

2,333,848 Gallons

    $ 2.75     $ (2,097 )   $ 734  

Natural Gas - NYMEX Natural Gas Swap

 

April – October, 2015

   

114,000 MMBTUs

    $ 4.09       (125 )     44  

Propane – Natural Gas Liquids Swap

 

June - November, 2015

   

1,024,800 Gallons

    $ 0.86       (346 )     121  

Diesel - NYMEX Heating Oil Swap

 

May - November, 2016

   

1,333,464 Gallons

    $ 2.50       (679 )     238  

Propane – Natural Gas Liquids Swap

 

June - November, 2016

   

341,600 Gallons

    $ 0.67       (41 )     14  
                            $ (3,288 )   $ 1,151  

 

As of March 31, 2015, Omega Protein has recorded a long-term liability of $0.9 million, net of the current portion included in other current liabilities of $2.9 million, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax asset of $1.3 million associated therewith. As of December 31, 2014, Omega Protein has recorded a long-term liability of $0.7 million net of the current portion included in other current liabilities of $2.6 million to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax asset of $1.2 million associated therewith. The effective portion of the change in fair value from inception to March 31, 2015 is recorded in “accumulated other comprehensive loss” in the Company’s unaudited condensed 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)  
   

2015

   

2014

 

Balance at January 1,

  $ (2,137 )   $ 179  

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

    (64 )     (18 )

Balance at March 31,

  $ (2,201 )   $ 161  

 

The $2.2 million reported in accumulated other comprehensive loss as of March 31, 2015 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 $1.7 million.

 

The aggregate fair value of derivative instruments in gross liability positions as of March 31, 2015 and December 31, 2014 was $3.8 million and $3.3 million, respectively. 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.

 

As of March 31, 2015 (in thousands)

 

Gross Amounts of Recognized Assets (Liabilities)

   

Gross

Amounts of

Assets

(Liabilities)

Offset

   

Net Amounts of Assets (Liabilities) Presented in the Balance Sheet

 

Energy swap derivatives – liability position

  $ (3,811 )   $ 33     $ (3,778 )

 

 
8

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

As of December 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 – liability position

  $ (3,288 )   $ -     $ (3,288 )

 

If, at any time, the swaps are determined to be ineffective 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, 2015 and 2014, the Company recognized a charge of $0.4 million and $0, respectively, to cost of sales resulting from transactions associated with the ineffectiveness of diesel energy swaps. The fair value of all outstanding derivatives is determined using a model with inputs that are observable in the market or can be derived from or corroborated by observable data (level 2).

 

Plant Closure

 

Property, plant and equipment impairments related to the closure of 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 three reporting units, 1) InCon and Cyvex, 2) WSP and 3) Bioriginal. The Company has recorded goodwill and certain other identifiable intangible assets that are more fully explained in Note 2 – Acquisition of Bioriginal Food & Science Corp. 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, 2015 (in thousands)

 

   

Gains and Losses

On Cash Flow

Hedges

     

Defined Benefit

Pension Items

     

Foreign currency

Translation

adjustment

   

Total

 

Balance as of December 31, 2014

  $ (2,137 )     $ (7,804 )     $ (915 )   $ (10,856 )

Other comprehensive loss before reclassifications

    (64 )               (1,645 )     (1,709 )

Amounts reclassified from accumulated other comprehensive loss

     

(a)

    195  

(b)

          195  

Net current-period other comprehensive income

    (64 )       195         (1,645 )     (1,514 )

Balance as of March 31, 2015

  $ (2,201 )     $ (7,609 )     $ (2,560 )   $ (12,370 )

 

 
9

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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

 

Balance as of 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  

Balance as of March 31, 2014

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

 

 

(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 15 to the consolidated financial statements in Item 8 of the Company’s Form 10-K for the fiscal year ended December 31, 2014.

 

Recently Issued Accounting Standards

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest- Imputation of Interest (Subtopic 835-30) .  The amendments require that debt issuance costs related to recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debit issuance costs are not affected by the amendments in this update. The new standard is effective in annual periods beginning after December 15, 2015 and interim periods within those annual periods. Early adoption is permitted. The Company’s adoption of FASB ASU No. 2015-03 is not expected to have a material impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) .  The amendments (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships (4) provide a scope exception from consolidation guidance for reporting entities with interest in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The new standard is effective in annual periods beginning after December 15, 2015 and interim periods within those annual periods. Early adoption is permitted. The Company’s adoption of FASB ASU No. 2015-02 is not expected to have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

In January 2015, the FASB issued ASU 2015-01, Income Statement- Extraordinary and Unusual Items (Subtopic 225-20) .  The update eliminates from GAAP the concept of extraordinary items. Eliminating the concept of extraordinary items will save time and reduce costs for preparers because they will not have to assess whether a particular event or transaction event is extraordinary. This alleviates uncertainty for preparers, auditors, and regulators because auditors and regulators no longer will need to evaluate whether a preparer treated an unusual and/or infrequent item appropriately. The new standard is effective in annual periods beginning after December 15, 2015 and interim periods within those annual periods. Early adoption is permitted. The Company’s adoption of FASB ASU No. 2015-01 is not expected to have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging: Determining whether the Host Contract in a Hybrid Financial Statement Issued in the Form of a Share is More Akin to Debt or Equity .  This ASU amended the Derivatives and Hedging Accounting Standards Codification to eliminate the use of different methods in practice and thereby reduce existing diversity under GAAP in the accounting for hybrid financial instruments used in the form of a share. The new standard is effective in annual periods beginning on or after December 15, 2015 with early adoption permitted. The Company’s adoption of FASB ASU No. 2014-16 is not expected to have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

 
10

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements- Going Concern (Subtopic 205-40). The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in the U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The guidance is effective for annual periods ending after December 15, 2016 and for annual periods thereafter. Early adoption is permitted.  The Company does not expect this ASU to have a material impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

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

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers .  This ASU amends the existing accounting standards for revenue recognition and is based on the principle that revenue should be recognized to depict the transfer of goods or services to a customer at an amount that reflects the consideration a company expects to receive in exchange for those goods or services.  The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. The Company is currently evaluating the potential impact of these changes on the consolidated results of operations, financial position and related disclosures.

 

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . This ASU changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity's operations and financial results. The new standard is effective in annual periods beginning on or after December 15, 2014 with early adoption permitted. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The Company’s adoption of FASB ASU No. 2014-08 effective January 1, 2015 did not have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

Foreign Currency Translations

 

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

 

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

 

 
11

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Stock-Based Compensation

 

Stock Options  

 

The Company has issued non-qualified stock options under its incentive plans. The options generally vested in equal installments over three years and expire in ten years. As of and for the quarters ended March 31, 2015 and 2014, all stock options were vested and no stock-based compensation costs related to stock options was incurred.

 

Restricted Stock  

 

The Company has issued shares of restricted stock under the 2006 Incentive Plan. Shares of restricted stock have generally vested 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 12 – Reconciliation of Basic and Diluted Per Share Data.

 

During the three month periods ended March 31, 2015 and 2014, the Company issued 82,072 and 92,545 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 $0.5 million and $0.3 million ($0.4 million and $0.2 million after tax) for the three months ended March 31, 2015 and 2014, respectively, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of March 31, 2015, there was approximately $4.3 million ($2.8 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 1.6 years, of which $1.5 million ($0.9 million after-tax) of compensation expense is expected to be recognized during the remainder of fiscal year 2015.

 

Performance Units  

 

On February 6, 2014, the Company adopted the 2014 Cash Incentive Performance Unit Plan and on February 26, 2015, the Company adopted the 2015 Cash Incentive Performance Unit Plan. The value of the units under the plans 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.

 

The Company’s compensation expense related to performance units was approximately $0.3 million and $0.1 million ($0.2 million and $0.1 million after tax) for the three months ended March 31, 2015 and 2014, respectively, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of March 31, 2015, there was approximately $2.7 million ($1.7 million after tax) of unrecognized compensation expense related to performance units that is expected to be recognized over a weighted-average period of 2.5 years, of which $0.8 million ($0.5 million after-tax) of compensation expense is expected to be recognized during the remainder of fiscal year 2015.

 

NOTE 2. ACQUISITION OF BIORIGINAL FOOD & SCIENCE CORP.

 

A. Description of the Transaction

 

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

 

B. Recording of Assets Acquired and Liabilities Assumed

 

In connection with its acquisition of Bioriginal, the Company paid an aggregate purchase price of $70.5 million, plus an estimated working capital adjustment of $0.7 million, to the sellers as follows: (i) $46.5 million in cash to the sellers, (ii) assumption of approximately $21.5 million of Bioriginal’s indebtedness, and (iii) issuance of 238,377 shares of restricted common stock of the Company valued at approximately $3.2 million (based on a 30-day average closing price) to certain sellers (the “Management Sellers”). The restrictions on the shares will terminate, with certain exceptions, on the third anniversary of the closing date and are subject to the terms and conditions of the Purchase Agreement; see Note - 1 Significant Accounting Policies Summary of Operations and Basis of Presentation for more information on Restricted Stock. The Purchase Agreement also provides for a performance-based earn-out amount of up to a maximum that, as of December 31, 2014, was $7.1 million Canadian dollars to be paid in September 2017 to the Management Sellers for achieving or exceeding certain adjusted EBITDA targets for Bioriginal during calendar years 2014 through 2016; see Note 12 Commitments and Contingencies for additional information. During the three months ended March 31, 2015, the Company received $0.1 million related to the finalization of the closing working capital adjustment.

 

 
12

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

The Company incurred approximately $2.8 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, 2014. The acquisition costs consisted primarily of legal, advisory, valuation, and other consulting fees. The transaction has been accounted for using the acquisition method of accounting which requires, among other things, that all assets acquired and liabilities assumed from acquisitions be recognized at their fair values as of the acquisition date. Any excess of the purchase price over the fair values of the net assets acquired are recorded as goodwill. The following table shows the allocation of the purchase price:  

 

Cash

  $ 93  

Accounts receivable

    15,072  

Inventories

    20,309  

Other current assets, net including prepaid expenses

    1,820  

Property, plant, and equipment

    3,026  

Identifiable intangible assets (a)

    16,987  

Liabilities assumed

    (38,288 )

Total identifiable net assets

    19,019  

Goodwill

    27,462  

Total consideration

  $ 46,481  

 

 

(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 Bioriginal includes the following:

 

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

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

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

 

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 Biorginial on a pro forma basis, as though the companies had been combined as of January 1, 2014. 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, 2014 and is not intended to be a projection of future results or trends.  

                  

    Revenue     Net income  
    (in thousands)  

2014 supplemental pro forma from January 1, 2014 – March 31, 2014

  $ 89,409     $ 8,890  

 

 
13

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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 unaudited condensed consolidated statements of comprehensive income for the three months ended March 31, 2015 and from December 2013 to March 31, 2015:

 

   

Three Months Ended

March 31, 2015

   

December 2013 to March 31, 2015

 
    (in thousands)  

Impairment of property, plant and equipment

  $     $ 7,922  

Write-off material and supplies inventory

          150  

Employee severance costs

          732  

Estimated decommissioning costs

          250  

Other ongoing closure costs not attributable to future production

    638       5,238  

Total loss related to plant closure

  $ 638     $ 14,292  

   

In addition to the above recognized losses, the Company expects that it may have additional losses related to ongoing costs not attributable to future production such as site costs, clean-up and disassembly.

 

NOTE 4. RECEIVABLES, NET

 

R eceivables are summarized as follows:

 

   

March 31,
2015

   

December 31,

2014

 
   

(in thousands)

 

Trade

  $ 35,742     $ 29,534  

Insurance

    1,276       1,711  

Income tax

    5,205       5,442  

Other

    134       370  

Total accounts receivable

    42,357       37,057  

Less allowance for doubtful accounts

    (403 )     (436 )

Receivables, net

  $ 41,954     $ 36,621  

 

NOTE 5. INVENTORY

 

The major classes of inventory are summarized as follows:

 

   

March 31, 

2015

   

December 31,

2014

   

March 31,

 2014

 
    (in thousands)  

Fish meal

  $ 9,343     $ 28,400     $ 14,988  

Fish oil

    15,155       19,300       24,194  

Fish solubles

    301       683       1,763  

Nutraceutical products

    5,212       4,635       4,299  

Bioriginal products

    24,708       26,219        

Dairy protein products

    2,955       2,783       1,442  

Unallocated inventory cost pool (including off-season costs)

    26,707       6,854       25,900  

Other materials and supplies

    9,170       8,639       8,829  

Total inventory

  $ 93,551     $ 97,513     $ 81,415  

 

 
14

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Inventory at March 31, 2015, December 31, 2014 and March 31, 2014 is stated at the lower of cost or market. The elements of the March 31, 2015 unallocated inventory cost pool include Omega Protein’s plant and vessel related labor, utilities, rent, repairs and depreciation, which are allocated to 2015 fishing season production.

 

NOTE 6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets are summarized below:

      

   

March 31,

2015

    December 31,
2014
 
    (in thousands)  

Prepaid insurance

  $ 1,348     $ 2,322  

Product deposits

    818       998  
Design expenses     353       331  

Selling expenses

    79       156  

Fair value of derivative instruments - energy swaps, current portion

    15        

Leases

    189       168  

Other prepaids and expenses

    1,281       961  

Total prepaid expenses and other current assets

  $ 4,083     $ 4,936  

 

Amounts included in prepaid expenses and other current assets consist primarily of prepaid operating expenses including insurance, rents, and selling expenses. Prepaid selling expenses are expensed in those periods in which the related revenue is recognized.

 

NOTE 7. OTHER ASSETS

 

Other assets are summarized as follows:

                

   

March 31,

2015

    December 31,
2014
 
    (in thousands)  

Fish nets, net of accumulated amortization of $3,012 and $2,694

  $ 881     $ 1,195  

Insurance receivable

    710       498  

Title XI debt issuance costs

    238       246  

Other debt issuance costs

    241       264  

Deposits and other

    106       106  

Total other assets, net

  $ 2,176     $ 2,309  

 

Amortization expense for fishing nets amounted to approximately $0.3 million for each of the three months ended March 31, 2015 and 2014.

 

As of March 31, 2015 and December 31, 2014, 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.

 

 
15

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

   

NOTE 8. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are summarized as follows:

                                                                                                                                                                                                

    March 31,
2015
   

December 31,

2014

 
    (in thousands)  

Land

  $ 9,356     $ 9,326  

Plant assets

    189,043       188,498  

Fishing vessels

    110,397       111,379  

Furniture and fixtures

    7,822       7,792  

Construction in progress

    26,070       15,893  

Total property and equipment

    342,688       332,888  

Less accumulated depreciation and impairment

    (167,109 )     (162,956 )

Property, plant and equipment, net

  $ 175,579     $ 169,932  

 

Depreciation expense for the three months ended March 31, 2015 and 2014 was $5.1 million and $4.7 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 each of the three month periods ended March 31, 2015 and 2014, the Company capitalized interest of approximately $0.2 million.

 

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.

 

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

 

As of December 31, 2014, the carrying value of InCon and Cyvex’s trade secrets and goodwill exceeded its calculated fair values by $0.6 million and $4.1 million, respectively, due primarily to recent operating results and the Company revising its forward looking cash flow forecast associated with this reporting unit. Fair value was determined by utilizing market and income approaches. As a result, a $4.7 million impairment expense was recognized during the year ended December 31, 2014. Key assumptions in the fair value calculation include future fish oil and nutraceutical sales volumes and prices, tolling, the portion of sales attributable to trade secrets, production costs and the discount rate. 

 

As of December 31, 2014, the calculated fair value of WSP’s trade secrets exceeds its $1.1 million carrying value by 100% or more. The calculated fair value of goodwill exceeds its carrying values by less than 1%. Key assumptions in the fair value calculation include dairy protein product sales volumes and prices, the portion of sales attributable to the brand name, the cost of availability of raw materials and the discount rate. 

 

It should be noted that the assessments of goodwill and indefinitely lived intangible assets are based on assumptions that require speculation and are highly subjective given the early stage and transitional nature of the businesses and the use of other reasonable, but different, assumptions could provide significantly different fair values and potentially impairments. The Company’s annual quantitative tests have assumed increasing cash flows over the next several years, based on anticipated sales growth and improved profitability. Even though for the three months ended March 31, 2015, the InCon and Cyvex reporting unit has not achieved the assumed results by a relatively small margin, the Company’s long-term outlook on these businesses remains consistent with the previous forecast. However, considering the level of sensitivity with respect to the key assumptions, if future cash flow expectations decline sufficiently, the estimated fair values would be reduced and could potentially result in a material impairment in a subsequent period.

 

 
16

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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

 

   

Bioriginal

   

WSP

   

Cyvex and

InCon

   

Total

 

January 1, 2015

  $ 27,045       11,614       3,842     $ 42,501  

Foreign currency translation adjustment

    (556 )                 (556 )

March 31, 2015

  $ 26,489       11,614       3,842     $ 41,945  

 

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

 

 

   

March 31,

2015

   

December 31,

2014

   

Weighted

Average

Life (years)

 

Carrying value of intangible assets subject to amortization:

                       

Customer relationships and non-competes

  $ 19,625     $ 19,625          

Less accumulated amortization

    (2,837 )     (2,344 )     10  

Total intangible assets subject to amortization, net

  $ 16,788     $ 17,281          

Foreign currency translation adjustment

    (431 )     (191 )        

Total intangible assets subject to foreign current translation adjustment, net

  $ 16,357     $ 17,090          

Indefinite life intangible assets – trade names/secrets and other

    5,840       5,912          

Total intangible assets

  $ 22,197     $ 23,002          

 

Amortization expense of the Company’s intangible assets for the three months ended March 31, 2015 and 2014 was approximately $0.5 million and $0.2 million, respectively. Estimated future amortization expense related to intangible assets is as follows (in thousands):

 

Remainder of 2015

  $ 1,478  

2016

    1,971  

2017

    1,971  

2018

    1,971  

Thereafter

    9,397  

Total estimated future amortization expense

  $ 16,788  

 

The Company’s goodwill and other intangible assets are more fully explained in Note 10 to the consolidated financial statements in Item 8 of the Company’s Form 10-K for the fiscal year ended December 31, 2014.

 

NOTE 10. NOTES PAYABLE AND LONG-TERM DEBT

 

A summary of the Company's long-term debt consisted of the following:

 

   

March 31,

   

December 31,

 
   

2015

   

2014

 
   

(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%

  $ 20,478     $ 21,111  

Amounts due on Loan Agreement in March 2017, interest at LIBOR plus an applicable rate (1.90% and 1.84% at March 31, 2015 and December 31, 2014, respectively)

    3,500       2,000  

ING Commercial Finance B.V., interest at EURIBOR plus an   applicable rate (1.70% and 1.76% at March 31, 2015 and December 31, 2014, respectively)

    2,161       2,367  

HSBC credit facility, matures March 2019, interest at HSBC prime rate plus an applicable rate (4.5% at March 31, 2015 and December 31, 2014)

    13,536       9,749  

Total debt

    39,675       35,227  

Less current maturities

    (18,379 )     (14,741 )

Long-term debt

  $ 21,296     $ 20,486  

 

 
17

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

The estimated fair value of the Company’s total debt at March 31, 2015 and December 31, 2014, based on quoted market prices available to the Company for issuance of similar debt with similar terms (level 2), was $41.3 million and $36.9 million, respectively.

 

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 million (the “Approval Letter”) which expires on June 20, 2016. To date, the Company has not borrowed any amounts under the Approval Letter and its ability to do so has been adversely affected by an EPA notice that the Company’s Omega Protein subsidiary is ineligible, as a result of its previous convictions under the Clean Water Act, for receipt of government contracts or benefits in certain cases. See “Risk Factors - If our Omega Protein subsidiary fails to comply with the terms of its probation under a plea agreement entered into in June 2013, we could be subject to criminal prosecution” in the Company’s Form 10-K for the year ended December 31, 2014 for further detail on this EPA notice. As of March 31, 2015, the Company had approximately $20.5 million of borrowings outstanding under Title XI and was in compliance with all of the covenants contained therein.

 

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 million (the “Commitment”). In September 2014, the Company and the Lenders amended the Loan Agreement to (i) permit the acquisition of Bioriginal by the Company, (ii) permit certain existing indebtedness of Bioriginal and the related liens, (iii) add certain collateral under the Loan Agreement relating to Bioriginal, and (iv) increase the commitment of the Lenders under the Loan Agreement by $10 million to a total of $70 million. The Loan Agreement also requires the Company to comply with various affirmative and negative covenants affecting the Company’s businesses and operations, including various financial covenants.

 

All Loans and all other obligations outstanding under the Loan Agreement are payable in full on March 21, 2017. As of March 31, 2015 and December 31, 2014, the Company had $3.5 million outstanding under the Loan Agreement and approximately $3.5 million in letters of credit. As of March 31, 2015, 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.

 

On June 6, 2010, Bioriginal Europe entered into a credit facility with ING Bank N.V. which provides borrowings up to 250,000 Euro.  Under the credit facility, interest is paid at 2.97% plus the EURIBOR rate (currently 2.98%).  The credit facility is secured by Bioriginal Europe’s equipment. The facility contains cross default provisions and other covenants.   As of March 31, 2015, there were no outstanding borrowings under the credit facility.

 

In March 2015, Bioriginal Europe extended the terms of its credit facility with ING Commercial Finance B.V. which provides borrowings up to an amount based on accounts receivable and inventory balances, and matures on March 31, 2018.  Advances are repayable on demand and bear interest payable monthly at 1.75% + EURIBOR (currently 1.70%).  The credit facility is secured by accounts receivable and inventory of Bioriginal Europe to a maximum of 85% of accounts receivable and 60% of inventory.  The credit facility contains cross default provisions and other covenants.  As of March 31, 2015, $2.2 million was outstanding under this credit facility, which is included in current maturities.

 

On April 15, 2014, Bioriginal Canada entered into a credit facility with HSBC Bank of Canada (the “Bioriginal Credit Facility”) which provides borrowings up to $20 million Canadian dollars and matures on March 15, 2019, subject to HSBC’s right to terminate the facility in its sole discretion. Under the Bioriginal Credit Facility, Bioriginal Canada has an operating line of credit for which interest is paid at HSBC prime rate plus 1.25% (currently 4.5%) and is secured by Bioriginal Canada’s accounts receivable and inventory and is payable on demand. Additionally, there is a separate maximum of $4.2 million related to letters of credit. At March 31, 2015, Bioriginal has issued $4.2 million in letters of credit in support of product purchases from a foreign supplier. Generally these letters of credit are insured by Export Development Canada and are not considered to be drawn under this credit facility. As of March 31, 2015, $13.5 million was outstanding under these subsections of the credit facility, which is included in current maturities.

 

 
18

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

The Company’s notes payable and long-term debt 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, 2014.

 

NOTE 11. ACCRUED LIABILITIES

 

Accrued liabilities are summarized as follows:

 

   

March 31,

   

December 31,

 
   

2015

   

2014

 
   

(in thousands)

 

Insurance

  $ 6,007     $ 5,998  

Reserve for plant closure costs

    327       456  

Salary and benefits

    4,552       7,273  

Trade creditors

    7,290       5,045  

Taxes, other than income tax

    605       222  

Income tax

    701        

Energy swap liability, current portion

    2,876       2,568  

Deferred revenue

    538       1,400  

Accrued interest

    244       246  

Other

          8  

Total accrued liabilities

  $ 23,140     $ 23,216  

 

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

 

Bioriginal Contingency

 

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

 

In addition to the acquisition date cash purchase price and restricted stock, the Management Sellers may also earn additional amounts based on the annual adjusted EBITDA of Bioriginal’s business during each of the calendar years 2014 through 2016. For each calendar year, if the adjusted EBITDA meets or exceeds agreed upon targets for the calendar year, the payout ranging from $1.2 million Canadian dollars to $2.9 million Canadian dollars will be earned, subject to certain forfeitures based on termination of Management Sellers’ employment. The maximum total payment for all three years is $7.1 million Canadian dollars.

 

The earn-out payments in Canadian dollars, if any, will be estimated on a quarterly basis and paid in September 2017. The Company will record the estimated contractual obligation as compensation expense during each year as it is deemed probable that such amount will be payable. As of March 31, 2015 and December 31, 2014, the Company recorded a $0.7 million and $0.4 million liability, respectively, related to this provision of the agreement. The threshold for a $1.2 million Canadian payment was achieved for 2014.

 

Legal Contingencies

 

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

 

 
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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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:

 

2015

   

2014

 

Allocation of earnings:

                               

Net income

  $ 1,669             $ 7,971          

Income allocated to participating securities

    (44 )             (192 )        

Income allocated to common shares outstanding

  $ 1,625             $ 7,779          
                                 

Weighted average common shares outstanding

    21,006               20,355          
                                 

Basic earnings per share

            0.08               0.38  
                                 

Stock options assumed exercised

    460               659          

Weighted average diluted common shares and potential common share equivalents outstanding

    21,466               21,014          
                                 

Diluted earnings per share

            0.08               0.37  

 

Options to purchase the following number of shares of common stock (in thousands) were outstanding during the three months ended March 31, 2015 and 2014 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,

2015

 

2014

125

 

130

 

NOTE 14. COMPONENTS OF NET PERIODIC BENEFIT COST

 

   

Three Months Ended

March 31,

 
   

2015

   

2014

 
   

(in thousands)

 

Service cost

  $     $  

Interest cost

    230       274  

Expected return on plan assets

    (276 )     (298 )

Amortization of prior service costs

           

Amortization of net loss

    300       229  

Net periodic pension cost

  $ 254     $ 205  

 

 
20

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

For the three months ended March 31, 2015 and 2014, the Company contributed approximately $0.4 million and $0.4 million, respectively, to the Company’s pension plan. The Company expects to make contributions of $0.8 million to the pension plan during the remainder of 2015.

 

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, 2015 and 2014 (in thousands). It should be noted that all cash and cash equivalent balances have been included in the identifiable assets of the unallocated segment.

 

2015

 

Animal

Nutrition

   

Human

Nutrition

   

Unallocated

   

Total

 

Revenue (1)

  $ 36,829     $ 34,794     $     $ 71,623  

Cost of sales

    26,283       30,545             56,828  

Gross profit

    10,546       4,249             14,795  

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

    557       5,029       4,604       10,190  

Loss related to plant closure

    638                   638  

Other (gains) and losses

    307                   307  

Operating income

  $ 9,044     $ (780 )   $ (4,604 )   $ 3,660  

Depreciation and amortization

  $ 4,273     $ 1,499     $ 106     $ 5,878  

Identifiable assets

  $ 211,055     $ 171,559     $ 899     $ 383,513  

Capital expenditures

  $ 9,113     $ 951     $ 496     $ 10,560  

 

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

 

2014

 

Animal

Nutrition

   

Human

Nutrition

   

Unallocated

   

Total

 

Revenue (2)

  $ 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  

 

(2) 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.

 

 
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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

A reconciliation of total segment operating income to total earnings from operations before income taxes is as follows (in thousands):

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 

Operating income for reportable segments

  $ 3,660     $ 12,346  

Interest income

    4       8  

Interest expense

    (362 )     (247 )

Loss on foreign currency

    (545 )      

Other expense, net

    (110 )     (56 )

Income before income taxes

  $ 2,647     $ 12,051  

 

 
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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, 2014 (the “2014 Form 10-K”), and in conjunction with the consolidated financial statements included in this report and in the 2014 Form 10-K.

 

Forward-looking statements in this Form 10-Q, future filings by the Company with the Securities and Exchange Commission (the “Commission” or “SEC”), 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 2014 Form 10-K and this Form 10-Q.

 

General

 

Omega Protein Corporation is a nutritional product company that develops, produces and delivers healthy products throughout the world to improve the nutritional integrity of foods, dietary supplements and animal feeds. 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. (“Omega Protein”) and Omega Shipyard, Inc. (“Omega Shipyard”). 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 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 operates under the names Nutegrity and Bioriginal Food & Science Corp. (“Bioriginal”). Nutegrity is comprised primarily of three subsidiaries: Cyvex Nutrition, Inc. (“Cyvex”), InCon Processing, L.L.C. (“InCon”) and Wisconsin Specialty Protein, L.L.C. (“WSP”). Cyvex, acquired by the Company in December 2010, is located in Irvine, California and is an ingredient provider in the nutraceutical industry. InCon, acquired by the Company in September 2011, is located in Batavia, Illinois and is a specialty processor that utilizes molecular distillation technology to concentrate Omega-3 fish oils and, subject to outside demand and excess capacity, a variety of other compound products for third-party tolling customers. WSP, acquired by the Company in February 2013, is a manufacturer and marketer of specialty dairy proteins and other related products headquartered in Madison, Wisconsin and operates a production facility in Reedsburg, Wisconsin.

 

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

 

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.

 

For financial information about our industry segments for the three months ended March 31, 2015 and 2014, see Note 15- Industry Segments.

 

 
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OMEGA PROTEIN CORPORATION

 

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,

 
   

2015

   

2014

 
   

Revenues

   

Percent

   

Revenues

   

Percent

 

Fish Meal

  $ 26.6       37.2 %   $ 28.6       45.0 %

Fish Oil

    2.6       3.6       20.0       31.5  

Refined Fish Oil

    6.8       9.5       5.5       8.7  

Fish Solubles and Other

    0.8       1.1       1.2       1.9  

Dietary Supplement and Food Ingredients and Products

    34.8       48.6       8.2       12.9  

Total

  $ 71.6       100.0 %   $ 63.5       100.0 %

 

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,

 
   

2015

   

2014

 
   

Revenues

   

Percent

   

Revenues

   

Percent

 
                                 

U.S. - Domestic Revenues

  $ 52.1       72.7 %   $ 32.7       51.5 %

Export Revenues

    19.5       27.3       30.8       48.5  

Total

  $ 71.6       100.0 %   $ 63.5       100.0 %

 

  Animal Nutrition Products

 

2015 Fishing Information.   At March 31, 2015, Omega Protein owned a fleet of 37 vessels and 27 spotter aircraft for use in its fishing operations and also leased additional aircraft where necessary to facilitate operations. For the 2015 fishing season in the Gulf of Mexico, which is expected to run from mid-April through October, Omega Protein plans to operate 21 fishing and carry vessels and 21 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 2015 season, Omega Protein plans to operate 8 fishing vessels and 7 independently-owned 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 2015 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 fish meal, oil and solubles production for the 2014 fishing season was 27% lower when compared to 2013 and 26% lower when compared to the Company’s five year fish meal, oil and solubles production average. This reduction is due primarily to the Company’s decision to close its Cameron, Louisiana facility and fish three less vessels, the limit on fish caught in the Atlantic Ocean during the 2013 and 2014 fishing seasons, lower than normal early season fish availability in the Gulf of Mexico in 2014 and a reduction in oils yields from 2013 to more historically normal levels in 2014. The below average fish meal, oil and solubles production has resulted in higher per unit inventory costs and fewer volumes available for future sale. These higher unit costs and fewer volumes available for sale have adversely impacted financial results for the third quarter of 2014 through the first quarter of 2015 and are expected to adversely affect financial results through the second quarter of 2015.

 

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.

 

 
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OMEGA PROTEIN CORPORATION

 

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, 2015, Omega Protein has sold forward on a contract basis approximately 41,000 short tons (1 short ton = 2,000 pounds) of fish meal and 16,000 metric tons (1 metric ton = 2,204.6 pounds) of fish oil for 2015, contingent on 2015 production and product availability. Of these 2015 forward sales, the majority was contracted during 2014. As a basis of comparison, 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.

 

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 May or June 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 $24.8 million as of March 31, 2015 versus $48.4 million as of December 31, 2014.

 

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, Japan and Taiwan. 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 1) free on board shipping point or 2) 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.

 

 
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OMEGA PROTEIN CORPORATION

 

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.

 

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.

 

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 its coast-wide range. The Company supports the ASMFC’s and GSMFC’s goal of maintaining a healthy population of menhaden.

 

ASMFC.  

 

2006 Chesapeake Bay Quota . In 2006, the ASMFC initiated a precautionary cap on the amount of menhaden that could be harvested by the Company in the Chesapeake Bay of 109,020 metric tons (“mt”). The ASMFC later reduced this amount to 87,200 mt beginning in the 2013 fishing year. The Company’s harvests in the Chesapeake Bay have generally been below the 87,200 mt level since 2007 and as a result, the Chesapeake Bay cap has not had a material adverse impact on the Company’s business, financial results, or results of operations.

 

2012 Coast-wide Quota. In December 2012, the ASMFC established a coast-wide limit on the amount of Atlantic menhaden that can be harvested each year (the “2012 Quota”). As a result, the total Atlantic menhaden harvest coast-wide for all participants in the menhaden fishery in the 2013 and 2014 fishing years was limited to 170,800 mt. This quota is divided among Atlantic coastal states based on average landings from 2009 through 2011. Based on this formula, Virginia’s share of the 2012 Quota was 85.3% or approximately 318 million pounds (approximately 144,576 mt) after deduction of a 1% quota set-aside. In turn, since 2013 Virginia has allocated its share of the 2012 Quota between the reduction and bait sectors of the menhaden industry on an approximate 90/10 basis resulting in an approximately 286 million pounds, or roughly 130,000 mt., quota for Omega Protein.

 

Based on the five year average through 2014, 34% of the Company’s fish catch and 31% of its production of fish meal, oil and solubles came from its Atlantic operations. As a result of the implementation of the 2012 Quota, 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 2014 harvest was 99.8% of its allocated quota.

 

2014 Stock Assessment and Coast-wide Quota Adjustment. In 2014, the ASMFC and the National Marine Fisheries Service jointly conducted a new benchmark stock assessment for Atlantic menhaden, which utilized new data sources and a new statistical model. This assessment was the first comprehensive revisiting of the stock assessment model since 2001 and the first stock review since a statistically inconclusive update assessment in 2012. Initial results of the 2014 assessment were peer reviewed in December 2014 by an international panel of fisheries experts. In January 2015, the final stock assessment, peer review report and an addendum addressing questions raised by the peer review panel was issued. The peer reviewers approved the stock assessment, while the addendum reported results of additional tests and a change to one of the model parameters requested by the review panel.

 

The ASMFC final 2014 stock assessment benchmark found that the Atlantic menhaden stock was not overfished and that overfishing for Atlantic menhaden was not occurring.

 

The ASMFC reviewed and accepted the stock assessment for management use in February 2015. In May 2015, the ASMFC Menhaden Board established a new coast-wide quota for Atlantic menhaden for 2015 and 2016 in response to the positive Atlantic Menhaden stock assessment. The revised coast-wide quota for the 2015 and 2016 fishing seasons is 187,880 mt, which represents a ten percent increase above the 2012 Quota. The allocation formula remains the same as established in 2012. As a result, after taking into account allocations among and within ASMFC member states, the Company’s harvest for 2015 and 2016 is limited to approximately 143,000 mt. As a result of this action, the Company expects to increase the number of Atlantic fishing vessels from seven to eight for the 2015 fishing season.

 

 
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At its May 2015 meeting, the ASMFC Menhaden Board also initiated a management action to review and potentially change the allocation of quota among the ASMFC member states. This reassessment was called for in the 2012 amendment that established the coast-wide quota system. Some ASMFC member states with relatively low allocations of menhaden have argued that Virginia’s 85+% share of the Atlantic menhaden quota is too high. While the current allocation is based on recent historical landings data, a common method by which the ASMFC allocates fishing privileges among its member states, it is possible that the ASMFC could decide to re-allocate in a manner that results in a lower percentage increase to Virginia and/or the Company. If this re-allocation were to occur and depending on the magnitude of the reduction, it could have a material adverse impact on the Company’s business, financial results or results of operations.

 

The management action initiated by the Menhaden Board in May 2015 will also consider establishing new management reference points – benchmarks used to establish quotas and determine when the stock is considered overfished – that consider Atlantic Menhaden’s role as forage in the marine ecosystem. The Company does not expect this management action to be completed and effective until 2017. The new, higher quota levels have been set by the Menhaden Board below new, more conservative reference points recommended by the stock assessment panel and the menhaden stock is above the level that would be considered overfished. As a result, while the Company does not anticipate that the new reference points under consideration will have a material adverse impact on its business, financial condition or results of operation, it is not possible to predict how the ASMFC may utilize these reference points and what effect that they might ultimately have on the Company’s business, financial condition 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 2014 total industry wide landings for Gulf menhaden were 391,854 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.

 

Texas. The Texas Parks and Wildlife Commission has adopted regulations related to the menhaden reduction fishery in Texas waters which limits the Total Allowable Catch (“TAC”) to 31.5 million pounds annually. The regulations also allow for a 10% underage or overage in each year which is credited or deducted, as applicable, to the TAC in the following year.

 

In 2014, the Company’s Texas fish catch did not approach the TAC. Omega Protein’s menhaden fish catch in Texas in 2014 was estimated by the National Marine Fisheries Service to be approximately 980,000 pounds (approximately 445 mt), or approximately 0.08% of Omega Protein’s total 2014 fish catch. With the 2013 closing of the Company’s Cameron, Louisiana plant, which was the plant closest to the Texas border, this limitation is unlikely to have any material adverse effect on the Omega Protein’s business, results of operation or financial condition.

 

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.

 

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 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.

 

 
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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 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 implemented these alternate measures prior to 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.

 

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.

 

 
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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 .  The Company’s human nutrition business has three primary product lines: dairy protein products, specialty oils and fatty acids and other nutraceutical ingredients. The human nutrition business consists of Nutegrity (which is a division of the Company comprised of Cyvex, InCon and WSP) and Bioriginal.

 

Diary Protein Products. Nutegrity produces a variety of value added dairy 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 dairy protein powders:

 

 

rBGH-Free: Artificial growth hormone-free cow’s milk whey protein products,

 

Organic: Certified organic cow’s milk whey protein products, and

 

Goat: Goat’s milk whey protein concentrate.

 

Nutegrity manufactures and sells Whey Protein Concentrate-80, Whey Protein Isolate, Milk Protein Concentrate 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 various tera’swhey® and tera’s™ brands. 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 produces most of its protein products at its Reedsburg, Wisconsin facility, which was acquired in February 2013. The dairy protein manufacturing facility was expanded in 2014 to 33,000 square feet.

 

Specialty Oils and Essential Fatty Acids. 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.

 

The Company is one of the only fully-integrated fish oil processing operation in the United States that both directly conducts fishing operations and also manufactures highly refined EPA, DHA and DPA from these marine resources. The Company can control the quality of its product from harvesting all the way through manufacturing and shipment.

 

Nutegrity’s Batavia, Illinois facility uses molecular distillation technology to concentrate long-chain Omega-3’s and other fatty acids and, subject to outside demand and excess capacity, a variety of other compound products for third-party tolling customers. With its technology, the facility can distill food products and specialty chemicals. The facility also provides analytical and processing expertise and pilot test capabilities.

 

The Omega Protein Technology and Innovation Center located in Houston, Texas serves as an in-house analytical laboratory and participates in various new product development and research and development projects by utilizing its scientific expertise and collaborating with Nutegrity and Bioriginal research and marketing personnel. The facility has food science application labs, as well as analytical, sensory and pilot plant capabilities. The facility also has a lipids research lab where the Company plans to continue to develop new Omega-3 products that have improved functionality and technical characteristics.

 

 
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Bioriginal is a leading supplier of specialty oils and essential fatty acids to the food and nutraceutical industries across North America, Europe and Asia. Bioriginal sources ingredients from across the world to formulate unique products for its customers. Bioriginal has the technical and scientific expertise to combine specialty oils and essential fatty acids to develop efficacious formulations and unique delivery systems to meet its customer’s needs. Plant based oils include coconut oil, flax, borage, evening primrose, and hemp. Marine based oils include krill oil, tuna oil and other EPA and DHA rich oils.

 

Bioriginal produces, packages and markets a variety of specialty oils and essential fatty acids, and has developed proprietary methods and systems to provide customized turnkey solutions for its customers. Processing capabilities at its Canadian (Saskatoon, Saskatchewan) and Netherlands (Den Bommel) facilities include cold press, blending, emulsifying and packaging.

 

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 .  The Company markets its proprietary brands of food and dietary ingredients through an integrated marketing program that includes internet, print, public relations and direct sales to companies manufacturing foods, beverages and dietary supplements in all their forms (i.e. capsules, tablets and softgels). The Company 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. 

 

Competition.   The food and dietary 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. The human nutrition division competes with manufacturers, distributors and marketers of food and dietary supplement ingredients both within and outside the United States, Canada and Europe.

 

Regulation. The processing, formulation, safety, manufacturing, packaging, labeling, advertising, and distribution of human nutrition division products are subject to regulation by one or more federal agencies, including the Food and Drug Administration (“FDA”), the Canadian Food Inspection Agency (“CFIA”), the Federal Trade Commission (“FTC”), Health Canada, 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, importation, and distribution and sale of dietary supplements and food ingredients in the United States. The CFIA regulates the manufacturing, packaging, storage, importation, and distribution and sale of food products in Canada. The FTC regulates marketing and advertising claims on food products and dietary supplements in the United States. Health Canada regulates the labeling of food products and dietary supplements in Canada.

 

Some Nutegrity and Bioriginal products are packaged and sold directly to retailers and consumers, and therefore are subject to greater oversight and enforcement action by the FTC. The FTC exercises jurisdiction over the advertising of food and dietary supplements. In recent years, the FTC has instituted numerous enforcement actions against food and dietary supplement companies for failure to have adequate substantiation for claims made in advertising or for the use of false or misleading advertising claims. Such actions could result in substantial financial penalties and significantly restrict the marketing of a product.

 

 
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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 human nutrition division 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 6 to the consolidated financial statements in Item 8 of the Company’s 2014 Form 10-K), valuation of losses related to Jones Act and worker’s compensation insurance claims (Note 1 to the consolidated financial statements in Item 8 of the Company’s 2014 Form 10-K), valuation of income and deferred taxes (Notes 1 and 13 to the consolidated financial statements in Item 8 of the Company’s 2014 Form 10-K), valuation of pension plan obligations (Notes 1 and 15 to the consolidated financial statements in Item 8 of the Company’s 2014 Form 10-K), energy swap valuations (Notes 1 and 18 to the consolidated financial statements in Item 8 of the Company’s 2014 Form 10-K) and the valuation of goodwill and other intangible assets (Notes 1 and 10 to the consolidated financial statements in Item 8 of the Company’s 2014 Form 10-K).

 

Specifically with respect to fish related 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 2014 the cost per unit of production decreased 1.0% from the third quarter of 2014 to the fourth quarter of 2014 due to slightly larger than anticipated production and slightly smaller than anticipated costs 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 does not amortize goodwill or indefinite-lived intangible assets but performs tests for impairment annually, or when indications of potential impairment exist, utilizing a fair value approach at the reporting unit level. The Company determines fair value using widely accepted valuation techniques, including the income approach which estimates the fair value of its reporting units based on the future discounted cash flows, and the market approach which estimates the fair value of its reporting units based on comparable market prices. In testing for a potential impairment of goodwill, the Company estimates the fair value of its reporting units to which goodwill relates and compares it to the carrying value (book value) of the assets and liabilities related to those businesses.

 

All of the Company’s goodwill and other intangible assets are the result of acquisitions in the human nutrition segment. T