Omega Protein Corporation
OMEGA PROTEIN CORP (Form: 10-Q, Received: 05/04/2016 16:05:12)

 

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, 2016

 

OR

 

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period From __________ to __________.

 

Commission file number: 001-14003

 

OMEGA PROTEIN CORPORATION

(Exact name of Registrant as specified in its charter)

 

State of Nevada

 

76-0562134

 

(State or other jurisdiction of

 

(I.R.S. Employer

 

incorporation or organization)  

 

Identification No.)

 

 

2105 City West Blvd., Suite 500

     
Houston, Texas   77042-2838  
(Address of principal executive offices)   (Zip Code)  

 

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


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No__.

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X No ___ .

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Small reporting company ☐

 

                      

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes      No X .

 

Number of shares outstanding of the Registrant's Common Stock, par value $0.01 per share, on April 29, 2016: 22,252,876.

 



   

 
 

 

 

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, 2016 and December 31, 2015

3

 

Unaudited Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2016 and 2015

4

 

Unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2016 and 2015

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

     

Item 4.

Controls and Procedures

26

     
     
PART II. OTHER INFORMATION  
     
Item 1.

Legal Proceedings  

27

     
Item 1A. Risk Factors 27
     
Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds  

27

     
Item 3.

Defaults Upon Senior Securities  

28

     
Item 4.

Mine Safety Disclosures  

28

     
Item 5. Other Information 28
     
Item 6. Exhibits 28
     
Signatures   29

 

 
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,

2016

   

December 31,

2015

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 1,382     $ 661  

Receivables, net

    48,390       40,489  

Inventories

    109,747       119,994  

Deferred tax asset, net

    2,934       3,422  

Prepaid expenses and other current assets

    2,799       4,496  

Total current assets

    165,252       169,062  

Property, plant and equipment, net

    179,196       176,089  

Goodwill

    38,319       38,127  

Other intangible assets, net

    19,716       20,107  

Other assets, net

    3,888       3,818  

Total assets

  $ 406,371     $ 407,203  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Current maturities of long-term debt

  $ 2,063     $ 1,214  

Accounts payable

    10,164       15,876  

Accrued liabilities

    29,385       33,254  

Total current liabilities

    41,612       50,344  

Long-term debt, net of current maturities

    21,840       22,882  

Deferred tax liability, net

    27,975       27,844  

Pension liabilities, net

    5,906       6,048  

Other long-term liabilities

    4,098       4,915  

Total liabilities

    101,431       112,033  
                 

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; 22,419,604 and 22,371,179 shares issued and 22,252,876 and 22,221,027 shares outstanding at March 31, 2016 and December 31, 2015, respectively

    220       220  

Capital in excess of par value

    151,933       151,250  

Retained earnings

    167,623       159,243  

Treasury stock, at cost – 166,728 and 150,152 shares at March 31, 2016 and December 31, 2015, respectively

    (2,863 )     (2,505 )

Accumulated other comprehensive loss

    (11,973 )     (13,038 )

Total stockholders’ equity

    304,940       295,170  

Total liabilities and stockholders’ equity

  $ 406,371     $ 407,203  

 

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,

 
   

2016

   

2015

 

Revenues

  $ 84,843     $ 71,623  

Cost of sales

    60,024       56,828  

Gross profit

    24,819       14,795  
                 

Selling, general, and administrative expense

    8,933       9,416  

Research and development expense

    636       774  

Loss related to plant closures

    642       638  

(Gain) loss on disposal of assets

    (35 )     307  

Operating income

    14,643       3,660  

Interest expense

    (145 )     (358 )

Loss on foreign currency

    (1,431 )     (545 )

Other expense, net

    (79 )     (110 )

Income before income taxes

    12,988       2,647  
                 

Provision for income taxes

    4,608       978  

Net income

    8,380       1,669  
                 

Other comprehensive income (loss):

               

Foreign currency translation adjustment net of tax (expense) benefit of ($390) and $886, respectively

    725       (1,645 )

Energy swap adjustment, net of tax (expense) benefit of ($64) and $34, respectively espectively

    118       (64 )

Pension benefits adjustment, net of tax expense of $120 and $105, respectively

    222       195  
                 

Comprehensive income

  $ 9,445     $ 155  

Basic earnings per share (See Note 14)

  $ 0.38     $ 0.08  

Weighted average common shares outstanding

    21,861       21,006  

Diluted earnings per share (See Note 14)

  $ 0.37     $ 0.08  

Weighted average common shares and potential common share equivalents outstanding

    22,168       21,466  

   

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,

 
   

2016

   

2015

 

Cash flows from operating activities:

               

Net income

  $ 8,380     $ 1,669  

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

               

Depreciation and amortization

    6,216       5,878  

Loss related to plant closures

    613        

Loss (gain) on disposal of assets

    (35 )     307  

Provisions for losses on receivables

    26       12  

Share based compensation

    472       546  

Deferred income taxes

    528       (525 )

Unrealized loss on foreign currency fluctuations, net

    1,431       545  

Changes in assets and liabilities:

               

Receivables

    (8,384 )     (5,855 )

Inventories

    10,429       3,477  

Prepaid expenses and other current assets

    1,707       465  

Other assets

    (374 )     (215 )

Accounts payable

    (5,770 )     (2,456 )

Accrued liabilities

    (3,818 )     (453 )

Pension liability, net

    80       (212 )

Other long term liabilities

    (719 )     614  

Net cash provided by operating activities

    10,782       3,797  

Cash flows from investing activities:

               

Capital expenditures

    (9,704 )     (10,560 )

Proceeds from disposition of assets

    35       15  

Net cash used in investing activities

    (9,669 )     (10,545 )

Cash flows from financing activities:

               

Principal payments of long-term debt

    (5,500 )     (3,133 )

Proceeds from long-term debt

    5,232       7,838  

Treasury stock repurchase

    (358 )     (158 )

Proceeds from equity compensation transactions

          843  

Excess tax benefit of equity compensation transactions

    211       151  

Net cash (used in) provided by financing activities

    (415 )     5,541  

Net increase (decrease) in cash and cash equivalents

    698       (1,207 )

Translation effect on cash

    23        

Cash and cash equivalents at beginning of year

    661       1,430  

Cash and cash equivalents at end of period

  $ 1,382     $ 223  

 

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 products company that develops, produces and delivers nutritious 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 used 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 bait manufactures 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.

 

The human nutrition segment operates under the tera’s branded product and “Bioriginal” names. Bioriginal has three primary product lines: specialty oils, protein products and other nutraceutical ingredients. Bioriginal is comprised primarily of four subsidiaries: Bioriginal Food & Science Corp. (“Bioriginal Food & Science”), Wisconsin Specialty Protein, L.L.C. (“WSP”), Cyvex Nutrition, Inc. (“Cyvex”) and InCon Processing, L.L.C. (“InCon”). Bioriginal Food & Science, 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 to the food and nutraceutical industries. 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. Cyvex is located in Irvine, California and is a supplier for the food and nutraceutical industries. InCon is located in Batavia, Illinois and is a specialty processor that utilizes molecular distillation technology to purify and concentrate Omega-3 fish oils and, subject to outside demand and excess capacity, a variety of other compound products for third-party tolling customers. In March 2016, as part of its strategy to focus on non-concentrated omega-3 oils instead of concentrated omega-3 oils, the Company decided to exit its Batavia, Illinois oil concentration facility and relocate certain assets from this facility to other Company facilities. In order to satisfy current customer obligations, the Company plans to continue to operate this facility on a limited basis through the middle of 2017. For additional information related to the closure of the Batavia facility, see Note 2 – Plant Closures.

 

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, 2015. 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, 2016, and the results of its operations and cash flows for the three month periods ended March 31, 2016 and 2015. Quarterly operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

 

 

 
6

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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, 2016 (in thousands)

 

   

Gains and Losses

On Cash Flow

Hedges

     

Defined Benefit

Pension Items

     

Foreign Currency

Translation

Adjustment

   

Total

 

Balance as of December 31, 2015

  $ (2,012 )     $ (8,335 )     $ (2,691 )   $ (13,038 )

Other comprehensive loss before reclassifications

    118                 725       843  

Amounts reclassified from accumulated other comprehensive loss

     

(a)

    222  

(b)

          222  

Net current-period other comprehensive income

    118         222         725       1,065  

Balance as of March 31, 2016

  $ (1,894 )     $ (8,113 )     $ (1,966 )   $ (11,973 )

 

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 )

 

 

(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, 2015.

 

Recently Issued Accounting Standards

 

On March 30, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09,  Compensation - Stock Compensation.   ASU 2016-09 was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. ASU 2016-09 covers accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU No. 2016-09 will be effective for us as of January 1, 2017. The Company is currently reviewing the effect of ASU No. 2016-09.

 

In February 2016, the FASB issued ASU 2016-02, Leases , which is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. ASU 2016-02 will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, including interim periods within those fiscal years. The Company is currently assessing the potential impact of ASU 2016-02 on the Company’s consolidated results of operations, financial position and related disclosures.

 

 
7

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Foreign Currency Translations

 

All amounts are expressed in U.S. Dollars unless otherwise indicated. The U.S. Dollar is the functional currency of Bioriginal Food & Science’s Canadian-based subsidiaries (“Bioriginal Food & Science 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 Food & Science’s Netherlands-based subsidiaries (“Bioriginal Food & Science 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 average rates in effect in the period of the transaction. 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 stockholders' 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 an addition or reduction in the Company's net investment in such operations.

 

NOTE 2. PLANT CLOSURE S

 

Batavia Plant

 

As part of our strategic review and as a result of operating results that did not meet expectations, we re-assessed our business strategy to produce and sell concentrated menhaden fish oils. During this assessment, efforts to sell significant volumes of concentrated menhaden fish oils were decreased and the Company determined that the carrying values of certain assets located at our facility in Batavia, Illinois were no longer recoverable. As a result, the following charges were recorded in the Company’s unaudited condensed consolidated statements of comprehensive income for the three months ended March 31, 2016 and from December 2015 to March 31, 2016:

 

   

Three Months

Ended

March 31,

2016

   

December 2015 

to March 31, 

2016

 
    (in thousands)  

Impairment of property, plant and equipment

  $ 10     $ 4,168  

Write-off material and supplies inventory

    239       239  

Employee severance costs

    356       356  

Estimated decommissioning costs

          375  

Total loss related to plant closure

  $ 605     $ 5,138  

 

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. To the extent we are unable to recover the remaining carrying value of the assets at the facility, we could have additional impairment charges. The remaining carrying value of these assets is $2.6 million.

 

Cameron Plant

 

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, 2016 and 2015 and from December 2013 to March 31, 2016:

       

 

   

Three Months

Ended

March 31,

2016

   

Three Months

Ended

March 31,

2015

   

December 2013

to March 31,

2016

 
    (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

    37       638       6,755  

Total loss related to plant closure

  $ 37     $ 638     $ 15,809  

 

 
8

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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.

 

NOTE 3. INDUSTRY SEGMENTS

 

The Company evaluates and reviews its results of operations in two segments, animal nutrition and human nutrition. These segments are managed separately and information on each segment is used by 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, 2016 and 2015 (in thousands).

 

2016

 

Animal

Nutrition

   

Human

Nutrition

   

Unallocated

   

Total

 

Revenue (1)

  $ 50,195     $ 34,648     $     $ 84,843  

Cost of sales

    29,749       30,275             60,024  

Gross profit

    20,446       4,373             24,819  

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

    486       4,136       4,947       9,569  

Loss related to plant closures

    37       605             642  

Other (gains) and losses

    (35 )                 (35 )

Operating income

  $ 19,958     $ (368 )   $ (4,947 )   $ 14,643  

Depreciation and amortization

  $ 4,670     $ 1,354     $ 192     $ 6,216  

Identifiable assets

  $ 243,639     $ 156,770     $ 5,962     $ 406,371  

Capital expenditures

  $ 8,462     $ 1,075     $ 167     $ 9,704  

 

2015

 

Animal

Nutrition

   

Human

Nutrition

   

Unallocated

   

Total

 

Revenue (2)

  $ 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 closures

    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 $0.1 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

 

(2)

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

 

 
9

 

 

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,

 
   

2016

   

2015

 

Operating income for reportable segments

  $ 14,643     $ 3,660  

Interest expense

    (145 )     (358 )

Loss on foreign currency

    (1,431 )     (545 )

Other expense, net

    (79 )     (110 )

Income before income taxes

  $ 12,988     $ 2,647  

 

NOTE 4 . RECEIVABLES, NET

 

R eceivables are summarized below:

    

     

March 31, 

2016

     

December 31,

2015

 
      (in thousands)  

Trade

  $ 42,365     $ 32,179  

Insurance

    4,116       6,769  

Income tax

    1,491       1,133  

Other

    1,012       976  

Total accounts receivable

    48,984       41,057  

Less allowance for doubtful accounts

    (594 )     (568 )

Receivables, net

  $ 48,390     $ 40,489  

 

NOTE 5 . INVENTORY

 

The major classes of inventory are summarized below:

 

   

March 31, 

2016

   

December 31, 

2015

   

March 31,

2015

 
    (in thousands)  

Fish meal

  $ 17,438     $ 37,308     $ 9,343  

Fish oil

    18,195       25,600       15,155  

Fish solubles

    317       696       301  

Unallocated inventory cost pool (including off-season costs)

    29,523       7,807       26,707  

Nutraceutical products

    5,877       6,393       5,212  

Bioriginal Food & Science products

    19,819       24,024       24,708  

Dairy protein products

    8,919       8,447       2,955  

Other materials and supplies

    9,659       9,719       9,170  

Total inventory

  $ 109,747     $ 119,994     $ 93,551  

 

Inventory at March 31, 2016, December 31, 2015 and March 31, 2015 is stated at the lower of cost and net realizable value. The elements of the March 31, 2016 unallocated inventory cost pool include Omega Protein’s plant and vessel related labor, utilities, rent, repairs and depreciation, which are allocated to 2016 fishing season production.

 

NOTE 6 . PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets are summarized below:

 

 

   

March 31,

2016

   

December 31,

2015

 
    (in thousands)  

Prepaid insurance

  $ 1,514     $ 2,317  

Product deposits

          767  

Selling expenses

    5       50  

Leases

    350       119  

Other prepaids and expenses

    930       1,243  

Total prepaid expenses and other current assets

  $ 2,799     $ 4,496  

 

 
10

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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

 

NOTE 7 . OTHER ASSETS

 

Other assets are summarized below:

 

          

   

March 31,

2016

   

December 31,

2015

 
    (in thousands)  

Fish nets, net of accumulated amortization of $1,275 and $1,003

  $ 910     $ 1,193  

Insurance receivables

    1,755       1,369  

Debt issuance costs

    1,092       1,150  

Deposits and other

    131       106  

Total other assets, net

  $ 3,888     $ 3,818  

 

Amortization expense for fishing nets amounted to approximately $0.3 million for each of the three months ended March 31, 2016 and 2015.

 

As of March 31, 2016 and December 31, 2015, insurance receivables primarily relates to Jones Act claims for employees aboard its vessels. This estimated amount is recorded gross of estimated claims which may be due to claimants and is included in accrued insurance liabilities.

 

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

 

NOTE 8 . PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are summarized below:

 

                                                                                                                                                                                               

   

March 31,

2016

   

December 31,

2015

 
    (in thousands)  

Land

  $ 9,407     $ 9,407  

Plant assets

    207,846       207,249  

Fishing vessels

    114,471       114,453  

Furniture and fixtures

    12,286       12,315  

Construction in progress

    21,672       13,793  

Total property and equipment

    365,682       357,217  

Less accumulated depreciation and impairment

    (186,486 )     (181,128 )

Property, plant and equipment, net

  $ 179,196     $ 176,089  

   

Depreciation expense for the three months ended March 31, 2016 and 2015 was $5.4 million and $5.1 million, respectively.

 

 
11

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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, 2016 and 2015, the Company capitalized interest of approximately $0.1 million and $0.2 million, respectively.

 

NOTE 9 . ENERGY SWAP AGREEMENTS

 

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 propane energy prices for its fish meal and fish oil production operations. The swaps effectively fix pricing for the quantities listed below during the consumption periods.

 

Energy Swap

 

Consumption Period

 

Quantity

 

Price

Per

Unit

   

Energy Swap

Asset/(Liability)

as of

March 31,

2016

   

Deferred Tax

Asset/(Liability)

as of

March 31,

2016

 
                   

(in thousands)

 

Diesel - NYMEX Heating Oil Swap

 

May - November, 2016

 

2,936,779

Gallons

  $ 2.03     $ (2,279 )   $ 798  

Natural Gas - NYMEX Natural Gas Swap

 

April – October, 2016

 

374,850

MMBTUs

  $ 3.05       (340 )     119  

Propane – Natural Gas Liquids Swap

 

June - November, 2016

 

2,560,790

Gallons

  $ 0.53       (172 )     60  

Diesel - NYMEX Heating Oil Swap

 

May - November, 2017

 

1,801,960

Gallons

  $ 1.47       (136 )     48  

Natural Gas - NYMEX Natural Gas Swap

 

April – October, 2017

 

312,400

MMBTUs

  $ 2.82       (33 )     11  

Propane – Natural Gas Liquids Swap

 

June - November, 2017

 

1,464,800

Gallons

  $ 0.40       83       (29 )
                    $ (2,877 )   $ 1,007  

 

Energy Swap

 

Consumption Period

 

Quantity

 

Price Per Unit

   

Energy Swap

Asset/(Liability) as

of

December 31,

2015

   

Deferred Tax

Asset/(Liability)

as of

December 31,

2015

 
                   

(in thousands)

 

Diesel - NYMEX Heating Oil Swap 

 

May - November, 2016

 

2,418,679

Gallons

  $ 2.23     $ (2,319 )   $ 812  

Natural Gas - NYMEX Natural Gas Swap 

 

April – October, 2016

 

374,850

MMBTUs

  $ 3.05       (207 )     72  

Propane – Natural Gas Liquids Swap

 

June - November, 2016

 

1,902,590

Gallons

  $ 0.58       (322 )     113  

Diesel - NYMEX Heating Oil Swap 

 

May - November, 2017

 

716,560

Gallons

  $ 1.69       (165 )     58  

Natural Gas - NYMEX Natural Gas Swap 

 

April – October, 2017

 

187,400

MMBTUs

  $ 2.97       (45 )     15  
                    $ (3,058 )   $ 1,070  

 

 
12

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

As of March 31, 2016, Omega Protein has recorded a long-term liability of $0.1 million, net of the current portion included in other current liabilities of $2.8 million, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax asset of $1.0 million associated therewith. As of December 31, 2015, Omega Protein has recorded a long-term liability of $0.2 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 $1.1 million associated therewith. The effective portion of the change in fair value from inception to March 31, 2016 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).

 

   

2016

   

2015

 

Balance at January 1,

  $ (2,012 )   $ (2,137 )

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

    118       (64 )

Balance at March 31,

  $ (1,894 )   $ (2,201 )

 

The $1.9 million reported in accumulated other comprehensive loss as of March 31, 2016 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 $1.8 million.

 

The aggregate fair value of derivative instruments in gross liability positions as of March 31, 2016 and December 31, 2015 was $3.2 million and $3.1 million, respectively.

 

As of March 31, 2016 (in thousands)

 

Gross

Amounts of

Recognized

Assets

(Liabilities)

   

Gross

Amounts of

Assets

(Liabilities)

Offset

   

Net Amounts

of Assets

(Liabilities)

Presented in

the Balance

Sheet

 

Energy swap derivatives – asset position

  $ 32     $ (1 )   $ 31  

Energy swap derivatives – liability position

  $ (3,203 )   $ 295     $ (2,908 )

   

As of December 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

  $ (3,058 )   $ -     $ (3,058 )

 

If, at any time, the swaps are determined to be ineffective due to changes in the Company’s energy usage, price correlations 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, 2016 and 2015, the Company recognized charges of $0 and $0.4 million, 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).

 

NOTE 10 . GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

Goodwill is tested annually for impairment, and whenever an event occurs or circumstances change that would more likely than not indicate that the carrying value of a reporting unit that includes goodwill is greater than the fair value of that reporting unit. 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 occurred.

 

 
13

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

As of December 31, 2015, the Company completed its annual assessment of the WSP reporting unit’s goodwill for potential impairment. In that assessment, the Company estimated that the fair value of the reporting unit exceeded its carrying value by $2.5 million or 12%. Key assumptions and sensitivities related to that assessment 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, 2015. During the first quarter of 2016, this reporting unit experienced gross profits and operating income slightly lower than assumed in the December 31, 2015 analysis. However, the Company’s long-term outlook on these businesses remains consistent with the previous forecast and the Company determined that an interim assessment for impairment is not necessary for the WSP reporting unit. In future quarters, the Company will continue to monitor events and circumstances related to WSP for any indicators that the carrying value of WSP, including goodwill, is greater than the fair value of this reporting unit. Considering the level of sensitivity with respect to 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.

 

The following table summarizes the changes in the carrying amount of goodwill by reporting unit (in thousands):

 

   

Bioriginal Food

& Science

   

WSP

   

Total

 

January 1, 2016

  $ 26,513       11,614     $ 38,127  

Foreign currency translation adjustment

    192             192  

March 31, 2016

  $ 26,705       11,614     $ 38,319  

 

 

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

 

 

   

Balance at

January 1, 2016

   

Reclassified

   

(1)

Amortization

   

Foreign

currency

translation

adjustment

   

Balance at

March 31, 2016

 

Customer relationships and brand names, net of accumulated amortization of $4,230 and $4,724, respectively

  $ 14,851       362       (494 )     71     $ 14,790  

Indefinite life intangibles – trade names/secrets and other

    5,256       (362 )           32       4,926  

Total intangible assets

  $ 20,107             (494 )     103     $ 19,716  

 

 

(1)

Weighted average life of approximately 10 years.

 

Amortization expense of the Company’s intangible assets for each of the three months ended March 31, 2016 and 2015 was approximately $0.5 million. The table below shows estimated future amortization expense related to intangible assets (in thousands):

 

Remainder of 2016

  $ 1,515  

2017

    2,017  

2018

    2,017  

2019

    2,017  

Thereafter

    7,224  

Total estimated future amortization expense

  $ 14,790  

 

 
14

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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, 2015.

 

NOTE 11 . NOTES PAYABLE AND LONG-TERM DEBT

 

The Company's long-term debt is summarized in the table below (in thousands):

 

   

March 31,

2016

   

December 31,

2015

 

Amounts due on Loan Agreement in August 2020, interest at a Base Rate, LIBOR, and CDOR plus an applicable margin (1.69% to 3.50% at March 31, 2016 and 1.49% to 2.70% at December 31, 2015)

  $ 21,840     $ 22,882  

ING Commercial Finance B.V., interest at EURIBOR plus an applicable rate (1.70% at March 31, 2016 and December 31, 2015)

    2,063       1,214  

Total debt

    23,903       24,096  

Less current maturities

    (2,063 )     (1,214 )

Long-term debt

  $ 21,840     $ 22,882  

 

The estimated fair value of the Company’s total debt at March 31, 2016 and December 31, 2015, based on quoted market prices available to the Company for issuance of similar debt with similar terms (level 2), approximated carrying value.

 

On August 20, 2015 (the “Closing Date”), the Company and certain subsidiaries entered into a Second 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, N.A., JP Morgan Chase Bank, N.A. and BMO Harris 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 $125.0 million in the aggregate (the “Commitment”), with $95.0 million of such Commitment allocated to Revolving A Loans to be made to the Company or Omega Protein in U.S. Dollars or Alternative Currencies (as such term is defined in the Loan Agreement) and $30.0 million of such Commitment allocated to Revolving B Loans to be made to the Company and certain subsidiaries, including Bioriginal Food & Science, in U.S. Dollars or Canadian Dollars. The Commitment includes a sub-facility for swingline loans up to an amount not to exceed $10.0 million, a sub-facility for standby letters of credit issued for the account of the Company or Omega Protein up to an amount not to exceed $20.0 million, a sub-facility for standby or commercial letters of credit issued for the account of Bioriginal Food & Science up to an amount not to exceed $7.5 million (subject to a temporary increase of $9.0 million), and an accordion feature that allows the Company to increase the amount of the Commitment up to an additional $75.0 million, subject to the further commitments of the Lenders and other customary conditions precedent. The Loan Agreement amended and restated the Company’s existing senior secured credit facility (the “Prior Loan Agreement”). The proceeds of the Loan Agreement were used to (a) refinance existing debt under the Prior Loan Agreement, (b) pay fees and expenses incurred in connection with refinancing the Prior Loan Agreement and entry into the Loan Agreement, (c) refinance certain debt owed to HSBC Bank Canada pursuant to an agreement that has been terminated, and (d) provide ongoing working capital and for other general corporate purposes of the Company and its subsidiaries.

 

All Loans and all other obligations outstanding under the Loan Agreement shall be payable in full in August 2020 . As of March 31, 2016 and December 31, 2015, the Company had $23.9 million and $24.1 million outstanding under the Loan Agreement and approximately $8.6 million and $7.8 million in letters of credit issued, respectively. As of March 31, 2016, 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.

 

In March 2015, Bioriginal Food & Science 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%).  This credit facility is secured by accounts receivable and inventory of Bioriginal Food & Science Europe to a maximum of 85% of accounts receivable and 60% of inventory.  This credit facility contains cross default provisions and other covenants.  As of March 31, 2016 and December 31, 2015, Bioriginal Food & Science Europe had $2.1 million and $1.2 million outstanding under this credit facility, respectively, which is included in current maturities.

 

 
15

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

In June 2010, Bioriginal Food & Science Europe entered into a credit facility with ING Bank N.V. which provides borrowings up to 250,000 Euro and matures on November 16, 2016.  Under the credit facility, interest is paid at 2.70% plus the EURIBOR rate (currently 2.49%).  This credit facility is secured by Bioriginal Food & Science Europe’s equipment. This facility contains cross default provisions and other covenants.   As of March 31, 2016 and December 31, 2015, there were no outstanding borrowings under this credit facility.

  

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, 2015.

 

NOTE 12. ACCRUED LIABILITIES

 

 

Accrued liabilities are summarized below:

 

   

March 31,

2016

   

December 31,

2015

 
   

(in thousands)

 

Insurance

  $ 7,597     $ 9,751  

Reserve for plant closure costs

    731       375  

Salary and benefits

    6,323       9,630  

Trade creditors

    5,849       7,085  

Taxes, other than income tax

    534       145  

Income tax

    4,988       3,199  

Energy swap liability, current portion

    2,798       2,849  

Deferred revenue

    283       99  

Accrued interest

    12       35  

Other

    270       86  

Total accrued liabilities

  $ 29,385     $ 33,254  

 

Deferred revenue represents payments primarily received from international customers related to revenues which were not recognized until the subsequent period due to revenue recognition criteria.

 

NOTE 1 3 . COMMITMENTS AND CONTINGENCIES

 

Bioriginal Contingency

 

In September 2014, the Company acquired all of the outstanding equity of Bioriginal Food & Science pursuant to the terms of a share purchase agreement. A portion of the equity of Bioriginal Food & Science that was sold was indirectly held by the management, who continue to be employed by Bioriginal Food & Science and share in the management of Bioriginal Food & Science’s business.

 

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 Food & Science’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, the management sellers will be eligible for an earn-out payment ranging from $1.2 million to $2.9 million Canadian Dollars, subject to certain forfeitures based on termination of management sellers’ employment. Based on results for 2014 and 2015, the expected maximum total payment for all three years is $5.3 million Canadian dollars.

 

The earn-out payments are estimated on a quarterly basis and will be paid-out in September 2017. The Company records 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, 2016 and December 31, 2015, the outstanding liability associated with the earn-out was $1.7 million and $1.3 million, respectively.

 

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.

 

 
16

 

 

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

 

Basic earnings per share is calculated by dividing net income allocated to common shares outstanding by the weighted average number of shares of common stock outstanding during the period. 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, earnings per share is calculated using the two-class method.

 

Three Months Ended March 31:

 

2016

   

2015

 

Allocation of earnings:

                               

Net income

  $ 8,380             $ 1,669          

Income allocated to participating securities

    (137 )             (44 )        

Income allocated to common shares outstanding

  $ 8,243             $ 1,625          
                                 

Weighted average common shares outstanding

    21,861               21,006          

Basic earnings per share

            0.38               0.08  
                                 

Stock options assumed exercised

    307               460          

Weighted average diluted common shares and potential common

                               

share equivalents outstanding

    22,168               21,466          

Diluted earnings per share

            0.37               0.08  

 

Options to purchase the following number of shares of common stock (in thousands) were outstanding during the three months ended March 31, 2016 and 2015, 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,

 

2016

   

2015

 
0     125  

 

NOTE 1 5 . STOCK-BASED COMPENSATION

 

Restricted Stock  

 

The Company has issued shares of restricted stock under the 2015 Long Term Incentive Plan (“2015 Incentive Plan”) and 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 14 – Reconciliation of Basic and Diluted Per Share Data.

 

 
17

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

During the three month periods ended March 31, 2016 and 2015, the Company issued 48,425 and 82,072 shares of restricted stock under the 2015 Incentive Plan and 2006 Incentive Plan, respectively, to employees and non-employee directors. The Company’s compensation expense related to restricted stock was approximately $0.5 million and $0.5 million ($0.3 million and $0.4 million after tax) for the three months ended March 31, 2016 and 2015, respectively, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of March 31, 2016, there was approximately $3.5 million ($2.3 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 1.5 years, of which $1.6 million ($1.0 million after-tax) of compensation expense is expected to be recognized during the remainder of fiscal year 2016.

 

Performance Units  

 

On February 6, 2014, the Company adopted the 2014 Cash Incentive Performance Unit Plan, on February 26, 2015, the Company adopted the 2015 Cash Incentive Performance Unit Plan and on March 8, 2016, the Company adopted the 2016 Cash Incentive Performance Unit Plan. The value of the units will be determined by reference to the performance of the Company’s common stock during the relevant performance period compared to the performance of the Russell 2000 Index member companies (the “Peer Group”) during that same period. One third of the Performance Units granted will be earned at the end of each calendar year of the performance period and will be valued for the calendar year based on the Total Shareholder Return (“TSR”) of the Company compared to the TSR of the Peer Group. The performance units contain a service provision of approximately 3 years and are liability-classified awards included in other long-term liabilities which are adjusted to fair value on a quarterly basis.

 

The Company’s compensation expense related to performance units was approximately $0.2 million and $0.3 million ($0.1 million and $0.2 million after tax) for the three months ended March 31, 2016 and 2015, respectively, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of March 31, 2016, there was approximately $3.0 million ($2.0 million after tax) of unrecognized compensation expense related to performance units that is expected to be recognized over a weighted-average period of 2.1 years, of which $1.3 million ($0.8 million after-tax) of compensation expense is expected to be recognized during the remainder of fiscal year 2016.

 

NOTE 1 6 . COMPONENTS OF NET PERIODIC BENEFIT COST

 

   

Three Months Ended

March 31,

 
   

2016

   

2015

 
   

(in thousands)

 

Service cost

  $     $  

Interest cost

    251       230  

Expected return on plan assets

    (212 )     (276 )

Amortization of prior service costs

           

Amortization of net loss

    341       300  

Net periodic pension cost

  $ 380     $ 254  

 

For the three months ended March 31, 2016 and 2015, the Company contributed approximately $0.2 million and $0.4 million, respectively, to the Company’s pension plan. The Company expects to make contributions of $0.4 million to the pension plan during the remainder of 2016.

 

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.

   

 
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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, 2015 (the “2015 Form 10-K”), and in conjunction with the consolidated financial statements included in this report and in the 2015 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 2015 Form 10-K and this Form 10-Q.

 

General

 

Omega Protein Corporation is a nutritional products company that develops, produces and delivers nutritious 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 Company’s 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. 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 100-metric tons per day of 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. 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.

 

Prior to December 31, 2015, the Company’s human nutrition segment operated under the names Nutegrity and Bioriginal Food & Science Corp. (“Bioriginal Food & Science”). Nutegrity was comprised primarily of three subsidiaries: Cyvex Nutrition, Inc. (“Cyvex”), InCon Processing, L.L.C. (“InCon”) and Wisconsin Specialty Protein, L.L.C. (“WSP”).  Subsequent to December 31, 2015, the Company combined the Nutegrity and Bioriginal Food & Science names into one name and does business under the name “Bioriginal” which includes all of the human nutrition businesses except the tera’s ® branded products. Bioriginal has three primary product lines: protein products, specialty oils and other nutraceutical ingredients. Bioriginal Food & Science, 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 to the food and nutraceutical industries. 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. Cyvex is located in Irvine, California and is an ingredient supplier for the food and nutraceutical industries. InCon is located in Batavia, Illinois and is a specialty processor that utilizes molecular distillation technology to purify and concentrate Omega-3 fish oils and, subject to outside demand and excess capacity, a variety of other compound products for third-party tolling customers. On March 8, 2016, as part of its strategy to focus on non-concentrated omega-3 oils instead of concentrated omega-3 oils, the Company decided to exit its Batavia, Illinois oil concentration facility and relocate certain assets from this facility to other Company facilities. In order to satisfy current customer obligations, the Company plans to continue to operate this facility on a limited basis through the middle of 2017. For additional information see Note 2 – Plant Closures to the unaudited condensed consolidated financial statements in Item 1. 

 

The Company also operates a technical center in Houston, Texas, the Omega Protein Technology and Innovation Center, which has food science application labs as well as analytical, sensory, lipids research and pilot plant capabilities.

 

For financial information about the Company’s industry segments for the three months ended March 31, 2016 and 2015, see Note 3 – Industry Segments to the unaudited condensed consolidated financial statements in Item 1.

 

 
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OMEGA PROTEIN CORPORATION

 

Company Overview

 

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

 

   

Three Months Ended March 31,

 
   

201 6

   

201 5

 
   

Revenues

   

Percent

   

Revenues

   

Percent

 

Animal Nutrition Revenues

                               

Fish Meal

  $ 34.1       40.2 %   $ 26.6       37.2 %

Fish Oil

    8.8       10.4       2.6       3.6  

Refined Fish Oil

    6.4       7.5       6.8       9.5  

Fish Solubles and Other

    0.9       1.1       0.8       1.1  

Human Nutrition Revenues

                               

Specialty oils

    27.7       32.7       28.0       39.1  

Dairy protein products

    4.4       5.2       3.5       4.9  

Other nutraceutical ingredients

    2.5       2.9       3.3       4.6  

Total

  $ 84.8       100.0 %   $ 71.6       100.0 %

 

The following table sets forth the Company’s revenues by geography (in millions) and the approximate percentage of total revenues represented thereby, for the indicated periods:

 

   

Three Months Ended March 31,

 
   

2016

   

2015

 
   

Revenues

   

Percent

   

Revenues

   

Percent

 
                                 

U.S. - Domestic Revenues

  $ 56.8       66.9 %   $ 52.1       72.7 %

Export Revenues

    28.0       33.1       19.5       27.3  

Total

  $ 84.8       100.0 %   $ 71.6       100.0 %

 

  Animal Nutrition Products

 

201 6 Fishing Information.   At March 31, 2016, 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 2016 fishing season in the Gulf of Mexico, which is expected to run from mid-April through October, Omega Protein plans to operate 20 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 2016 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 2016 fishing season will depend in large part on the volume of fish caught, and the oil yield associated with the catch.  For illustrative purposes, the Company’s 2015 fish catch was 34.6% above the 2014 fish catch and related production results were 29.3% above 2014 production. The increased fish catch and related production for 2015 was due in part to increased processing rates as a result of recent capital investment. The higher percentage increase in fish catch as compared to production is due to a reduction in total yield, primarily as a result of lower fish oil yields. The Company believes that fish oil yields are influenced by multiple factors, including but not limited to, fish diet, weather, water temperature and nutrient content, fish population and age of fish, but such possible relationships and inter-relationships are not generally well understood. The increased fish catch offset the impact of lower oil yields and resulted in lower per unit inventory cost for the 2015 fishing season as compared to the 2014 fishing season.

 

 
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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 have fluctuated from year to year based upon perceived market availability and forward price expectations. As of March 31, 2016, Omega Protein has sold forward on a contract basis approximately 54,000 short tons (1 short ton = 2,000 pounds) of fish meal and 15,000 metric tons (1 metric ton = 2,204.6 pounds) of fish oil for 2016, contingent on 2016 production and product availability. Of these 2016 forward sales, the majority was contracted during 2015. As a basis of comparison, as of March 31, 2015, Omega Protein had sold forward on a contract basis approximately 41,000 short tons of fish meal and 16,000 metric tons of fish oil for 2015.

 

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 volumes do not necessarily correlate with sales volumes 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 the 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. 

 

Results of Operations

 

The following discussion segregates the financial results of our two industry segments: animal nutrition and human nutrition. For a discussion of our segments, see Note 3 - Industry Segments to the unaudited condensed consolidated financial statements in Item 1.

 

Interim Results for the First Quarters ended March 31, 2016 and 2015

 

Animal Nutrition

                                                                             

    Three Months Ended March 31,  
    2016     2015    

Increase

(Decrease)

 
   

(in millions)

 

Revenues

  $ 50.2     $ 36.8     $ 13.4  

Cost of sales

    29.7       26.3       3.4  
Gross profit     20.5       10.5       10.0  

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

    0.5       0.6       (0.1 )

Loss related to plant closures

          0.6       (0.6 )

Other (gains) and losses

          0.3       (0.3 )

Operating income

  $ 20.0     $ 9.0     $ 11.0  

 

Revenues .    Animal nutrition revenues increased $13.4 million, or 36.3%, from $36.8 million for the three months ended March 31, 2015 to $50.2 million for the three months ended March 31, 2016. The increase in animal nutrition related revenues was primarily due to increased sales volumes of 34.6% and 103.2% for the Company’s fish meal and fish oil, respectively, partially offset by decreased sales prices of 5.1% and 20.2% for the Company’s fish meal and fish oil, respectively. Considering fish meal, fish oil and fish solubles sales activities in total, the Company experienced a $14.6 million increase in revenues due to the increase in sales volumes partially offset by a $1.2 million decrease in revenues caused by decreased sales prices, when comparing the three months ended March 31, 2016 and 2015. The increase in fish meal and fish oil sales volumes is primarily due to the timing of contracts and increased level of inventory at the beginning of 2016 due to increased production during the 2015 fishing season compared to the 2014 fishing season. The decrease in fish oil sales prices is due to a change in the product mix related to a larger relative volume of unrefined fish oil sales during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015.

 

Cost of sales .    Animal nutrition cost of sales, including depreciation and amortization, for the three months ended March 31, 2016 was $29.7 million, an increase of $3.4 million, or 13.1%, as compared to the three months ended March 31, 2015. Cost of sales as a percentage of revenues was 59.2% for the three months ended March 31, 2016 compared to 71.4% for the three months ended March 31, 2015. The decrease in cost of sales as a percentage of revenues was primarily the result of decreased cost per unit of sales of 21.1% during the three months ended March 31, 2016 compared to the three months ended March 31, 2015, due to higher fish catch and production in the 2015 fishing season compared to the 2014 fishing season.

 

 
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Gross profit .    Animal nutrition gross profit increased $10.0 million, or 94.0%, from $10.5 million for the three months ended March 31, 2015 to $20.5 million for the three months ended March 31, 2016 due largely to the increase in sales volumes. Gross profit as a percentage of revenue was 40.7% for the three months ended March 31, 2016 compared to 28.6% for the three months ended March 31, 2015. The increase in gross profit as a percentage of revenue was primarily due to the decreased cost per unit of sales as discussed above.

 

Selling, general and administrative expenses .    Animal nutrition selling, general and administrative expenses decreased $0.1 million to $0.5 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The decrease in selling, general and administrative expenses is primarily due to decreased labor expenses during the three months ended March 31, 2016 compared to the three months ended March 31, 2015.

 

Loss related to plant closure s . As a result of the closing of the Cameron, Louisiana fish processing plant, the Company recognized an ongoing loss on closure of approximately $0.6 million in the three months ended March 31, 2015 primarily related to the relocation of certain assets at the Cameron facility and other closure costs not related to future inventory production. The loss for the three months ended March 31, 2016 was less than $0.1 million.

 

Other (gains) and losses.    The Company recorded other losses for the three months ended March 31, 2015 of $0.3 million related to the disposal of assets in the ordinary course of business. The gain for the three months ended March 31, 2016 was less than $0.1 million.

 

Human Nutrition

                                                                    

 

    Three Months Ended March 31,  
    2016     2015    

Increase

(Decrease)

 
   

(in millions)

 

Revenues

  $ 34.7     $ 34.8     $ (0.1 )

Cost of sales

    30.3       30.6       (0.3 )

Gross profit

    4.4       4.2       0.2  
                         

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

    4.2       5.0       (0.8 )

Loss related to plant closures

    0.6             0.6  

Operating income (loss)

  $ (0.4 )   $ (0.8 )   $ 0.4  

 

Revenues .    Human nutrition revenues decreased $0.1 million, or 0.4%, from $34.8 million for the three months ended March 31, 2015 to $34.7 million for the three months ended March 31, 2016, primarily due to decreases in sales of other nutraceuticals ingredients and menhaden Omega-3 concentrates and tolling, partially offset by increases in sales of protein products. Specialty oils decreased by $0.3 million to $27.7 million (including $0.9 million from menhaden omega-3 concentrates and tolling) of revenue in the three months ended March 31, 2016 from $28.0 million (including $1.5 million from menhaden omega-3 concentrates and tolling) in the three months ended March 31, 2015. Protein products increased by $0.9 million to $4.4 million of revenue during the three months ended March 31, 2016 from $3.5 million during the three months ended March 31, 2015. The increase in revenues from protein products was primarily due to higher sales of bulk ingredients. Other nutraceutical ingredients decreased by $0.8 million to $2.5 million of revenue during the three months ended March 31, 2016 as compared to $3.3 million during the three months ended March 31, 2015.

 

Cost of sales .    Human nutrition cost of sales, including depreciation and amortization, for the three months ended March 31, 2016 was $30.3 million, a $0.3 million or 0.9% decrease compared to the three months ended March 31, 2015. Human nutrition cost of sales as a percentage of revenue decreased from 87.8% for the three months ended March 31, 2015 to 87.4% for the three months ended March 31, 2016. Specialty oils added $24.7 million (including $1.7 million from menhaden omega-3 concentrates and tolling) and $25.0 million (including $2.2 million from menhaden omega-3 concentrates and tolling) of cost of sales during the three months ended March 31, 2016 and 2015, respectively.

 

Protein products cost of sales was $3.9 million for the three months ended March 31, 2016 as compared to $3.5 million during the three months ended March 31, 2015. Other nutraceutical ingredients cost of sales was $1.7 million during the three months ended March 31, 2016 as compared to $2.1 million for the three months ended March 31, 2015. The increase in protein products and decrease in other nutraceutical ingredients cost of sales were mainly attributed to changes in sales.

 

 
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OMEGA PROTEIN CORPORATION

 

Gross profit .    Human nutrition gross profit increased $0.2 million, or 2.9%, from $4.2 million for the three months ended March 31, 2015 to $4.4 million for the three months ended March 31, 2016. Gross profit as a percentage of revenue was 12.6% for the three months ended March 31, 2016 as compared to 12.2% for the three months ended March 31, 2015. The increase in gross profit as a percentage of revenue was primarily due to increased protein products gross profit as a percentage of revenues.

 

Selling, general and administrative expenses .    Human nutrition selling, general and administrative expenses decreased $0.8 million, or 17.8%, from $5.0 million for the three months ended March 31, 2015 to $4.2 million for the three months ended March 31, 2016. The decrease in selling, general and administrative expenses is primarily due to decreased labor expenses during the three months ended March 31, 2016 compared the three months ended March 31, 2015.

 

Loss related to plant closure s . As a result of the planned closing of the Batavia, Illinois oil concentration facility, the Company recognized a loss of $0.6 million in the three months ended March 31, 2016 largely related to employee severance accruals. No such charge was recognized during the three months ended March 31, 2015.

 

Unallocated

                                                                      

                                                                                    

    Three Months Ended March 31,  
    2016     2015    

Increase

(Decrease)

 
    (in millions)   

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

  $ 4.9     $ 4.6     $ 0.3  

 

Selling, general and administrative expenses (including research and development) . Unallocated selling, general and administrative expenses increased $0.3 million, or 7.5%, from $4.6 million for the three months ended March 31, 2015 to $4.9 million for the three months ended March 31, 2016. The increase in selling, general and administrative expenses is primarily due to increased labor and other expenses during the three months ended March 31, 2016 compared the three months ended March 31, 2015.

 

Other non-segmented results of operation

 

Interest expense .    Interest expense decreased $0.3 million from $0.4 million for the three months ended March 31, 2015 to $0.1 million for the three months ended March 31, 2016. The decrease in interest expense is primarily due to the decreased total debt balance and applicable interest rates for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. Capitalized interest, which offsets interest expense, was $0.1 million and $0.2 million for the three months ended March 31, 2016 and 2015, respectively.

 

(Loss) on foreign currency .    The Company recorded a $1.4 million and a $0.5 million loss on foreign currency in the three months ended March 31, 2016 and 2015, respectively, due to fluctuations in the Canadian dollar foreign exchange rate and working capital balances at Bioriginal Food & Science’s Canadian operations.

 

Provision for income taxes.     The Company recorded a $4.6 million provision for income taxes for the three months ended March 31, 2016 representing an effective tax rate of 35.5% for income taxes compared to 36.9% for the three months ended March 31, 2015. The decrease in the effective tax rate is primarily the result of increased income before income taxes for the quarter ended March 31, 2016, which reduced the impact of non-deductible expenses. The statutory tax rate of 35% for U.S. federal taxes was in effect for each of the three months ended March 31, 2016 and 2015.

 

Seasonal and Quarterly Results

 

Omega Protein’s menhaden harvesting and processing business is seasonal in nature. Omega Protein generally has higher sales during the third quarter of each fiscal year due to increased product availability and customer demand. Additionally, due to differences in gross profit margins for Omega Protein’s various products, any variation in the mix of product sales between quarters may result in significant variations of total gross profit margins. These margins may also be affected by changes in costs from year to year and month to month, which includes variations in production yields. Similarly, from time to time Omega Protein defers sales of inventory, which may affect comparable period comparisons. As a result, the Company’s quarterly operating results have fluctuated in the past and may fluctuate in the future.

 

 
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OMEGA PROTEIN CORPORATION

 

Liquidity and Capital Resources

 

The Company’s primary sources of liquidity and capital resources have been cash flows from operations and bank credit facilities. These sources of cash flows have been used for operations, capital expenditures, payment of long-term debt, business acquisitions and the purchase and retirement of shares of the Company’s common stock.

 

At March 31, 2016, the Company had an unrestricted cash balance of $1.4 million, an increase of $0.7 million from December 31, 2015. Omega Protein’s annual revenues and its resulting liquidity are highly dependent on annual fish catch, production yields, selling prices for its products and inventories available for sale.  Omega Protein’s average selling price for its animal nutrition products for the three months ended March 31, 2016 was consistent with its average selling price for the year ended December 31, 2015.  However, Omega Protein’s average per unit cost of sales for its animal nutrition ingredients for the three months ended March 31, 2016 was 6.6% lower than its average per unit cost of sales for the year ended December 31, 2015.

 

The aggregate amount of the Company’s outstanding indebtedness as of March 31, 2016 was $23.9 million compared to $24.1 million as of December 31, 2015.  The Company has a moderately leveraged financial structure which could limit its financial flexibility. In particular, the Company will be required to use a portion of its cash flows to pay principal and interest on its debt, which will reduce the amount of money the Company has for operations, capital expenditures, expansion, acquisitions or general corporate or other business activities. In addition, the covenants contained in the Company’s debt agreements limit its ability to borrow money in the future for acquisitions, capital expenditures or to meet the Company’s operating expenses or other general corporate obligations. See “Item 1A. Risk Factors - The Company has a moderate amount of indebtedness, which may adversely affect its ability to operate its business, remain in compliance with debt covenants and make payments on its debt” in the Company’s 2015 Form 10-K.

 

As of March 31, 2016, the Company has contracted through energy swap derivatives or physical contracts a portion of its estimated 2016 and 2017 energy use.

 

Source of Capital: Operations

 

Net cash flow provided by operating activities increased from approximately $3.8 million for the three months ended March 31, 2015 to $10.8 million for the three months ended March 31, 2016. The increase in operating cash flow is primarily attributable to increased net income from the sale of animal nutrition segment inventory as a result of increased fish catch in 2015 as compared to 2014.

 

Source of Capital: Debt

 

Net financing activities used cash of $0.4 million and provided cash of $5.5 during the three months ended March 31, 2016 and 2015, respectively. The three months ended March 31, 2016 included $0.2 million in proceeds and tax effects received from stock options exercised, $0.4 million in stock repurchases relating to employee returns of restricted stock to the Company in satisfaction of withholding taxes, $5.5 million in debt principal payments and $5.2 million in debt principal borrowings. The three months ended March 31, 2015 included $1.0 million in proceeds and tax effects received from stock options exercised, $0.2 million in stock repurchases relating to employee returns of restricted stock to the Company in satisfaction of withholding taxes, $3.1 million in debt principal payments and $7.8 million in debt principal borrowings.

 

On August 20, 2015 (the “Closing Date”), the Company and certain subsidiaries entered into a Second 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, N.A., JP Morgan Chase Bank, N.A. and BMO Harris 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 $125.0 million in the aggregate (the “Commitment”), with $95.0 million of such Commitment allocated to Revolving A Loans to be made to the Company or Omega Protein in U.S. Dollars or Alternative Currencies (as such term is defined in the Loan Agreement) and $30.0 million of such Commitment allocated to Revolving B Loans to be made to the Company and certain subsidiaries, including Bioriginal Food & Science, in U.S. Dollars or Canadian Dollars. The Commitment includes a sub-facility for swingline loans up to an amount not to exceed $10.0 million, a sub-facility for standby letters of credit issued for the account of the Company or Omega Protein up to an amount not to exceed $20.0 million, a sub-facility for standby or commercial letters of credit issued for the account of Bioriginal Food & Science up to an amount not to exceed $7.5 million (subject to a temporary increase of $9.0 million), and an accordion feature that allows the Company to increase the amount of the Commitment up to an additional $75.0 million, subject to the further commitments of the Lenders and other customary conditions precedent.

   

 
24

 

 

OMEGA PROTEIN CORPORATION

 

All Loans and all other obligations outstanding under the Loan Agreement shall be payable in full in August 2020 . As of March 31, 2016 and December 31, 2015, the Company had $23.9 million and $24.1 million outstanding under the Loan Agreement and approximately $8.6 million and $7.8 million in letters of credit issued, respectively. As of March 31, 2016, 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.

 

In March 2015, Bioriginal Food & Science 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%).  This credit facility is secured by accounts receivable and inventory of Bioriginal Food & Science Europe to a maximum of 85% of accounts receivable and 60% of inventory.  This credit facility contains cross default provisions and other covenants.  As of March 31, 2016 and December 31, 2015, Bioriginal Food & Science Europe had $2.1 million and $1.2 million outstanding under this credit facility, respectively, which is included in current maturities.

 

In June 2010, Bioriginal Food & Science Europe entered into a credit facility with ING Bank N.V. which provides borrowings up to 250,000 Euro and matures on November 16, 2016.  Under the credit facility, interest is paid at 2.70% plus the EURIBOR rate (currently 2.49%).  This credit facility is secured by Bioriginal Food & Science Europe’s equipment. This facility contains cross default provisions and other covenants.   As of March 31, 2016 and December 31, 2015, there were no outstanding borrowings under this credit facility.

 

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, 2015.

 

Use of Capital: Capital Investments

 

The Company’s investing activities consist mainly of capital expenditures for equipment purchases, replacements, vessel refurbishments, plant expansions, fish oil refining processes and technology. The Company made capital expenditures of approximately $9.7 million and $10.6 million, including $0.1 and $0.2 million of capitalized interest, for the three month periods ended March 31, 2016 and 2015, respectively. The Company anticipates investing an additional $28 million to $36 million in capital expenditures during the remainder of 2016, excluding capitalized interest, primarily for the expansion of production capabilities, refurbishment of vessels and plant assets, regulatory and environmental requirements and for the improvement of certain equipment. Additional investment opportunities or requirements may arise during the year, which could cause capital expenditures to exceed this range.

 

Use of Capital: Financing

 

In May 2016, the Company announced a share repurchase program of up to $40 million over the next 3 years. The Company is not obligated under the program to acquire any particular number of shares and can suspend or terminate the program at any time. Although this program was not in place as of March 31, 2016, it is possible that it could impact financing cash flows during the remainder of 2016.  

 

Use of Capital: Contractual Obligations

 

The following tables aggregate information about the Company’s contractual cash obligations and other commercial commitments (in thousands) as of March 31, 2016: