Omega Protein Corporation
OMEGA PROTEIN CORP (Form: 10-Q, Received: 08/02/2017 16:04:38)

 

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 June 30, 2017

 

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, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

       Large accelerated filer ☐      Accelerated filer ☒      Non-accelerated filer ☐ (Do not check if a smaller reporting company)   

       Smaller reporting company ☐   Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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 July 27, 2017: 22,464,351.

 



 

 

 

 

OMEGA PROTEIN CORPORATION

TABLE OF CONTENTS

 

 

PART I.   FINANCIAL INFORMATION

 
   

Item 1.   Financial Statements and Notes

 
   

Unaudited Condensed Consolidated Balance Sheet as of June 30, 2017  and December 31, 2016

3

Unaudited Condensed Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2017 and 2016

4

Unaudited Condensed Consolidated Statement of Cash Flows for the  six months ended June 30, 2017 and 2016

5

Notes to Unaudited Condensed Consolidated Financial Statements

6

   

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

2 2

   

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

32

   

Item 4.   Controls and Procedures

32

   
   

PART II. OTHER INFORMATION

 
   

Item 1.   Legal Proceedings

33

   

Item 1A.   Risk Factors

33

   

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

35

   

Item 3.   Defaults Upon Senior Securities

35

   

Item 4.   Mine Safety Disclosures

35

   

Item 5.   Other Information

35

   

Item 6.   Exhibits

36

   

Signatures

37

 

 

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

 

 

     

 

June 30 ,

 

 

2017

 

       

December 31,

2016

 

ASSETS

                 

Current assets:

                 

Cash and cash equivalents

  $ 9,967       $ 37,412  

Receivables, net

    55,187         38,796  

Inventories, net

    110,708         108,711  

Prepaid expenses and other current assets

    6,359         4,707  

Total current assets

    182,221         189,626  

Property, plant and equipment, net

    202,278         188,624  

Goodwill

    26,733         26,347  

Other intangible assets, net

    16,697         17,504  

Other assets, net

    4,248         5,764  

Total assets

  $ 432,177       $ 427,865  
                   

LIABILITIES AND STOCKHOLDERS ’ EQUITY

                 
                   

Current liabilities:

                 

Current maturities of long-term debt

  $ 1,884       $ 1,097  

Accounts payable

    12,817         17,099  

Accrued liabilities

    29,758         37,928  

Total current liabilities

    44,459         56,124  

Deferred tax liability, net

    30,399         25,678  

Pension liabilities, net

    5,524         5,659  

Other long-term liabilities

    3,070         3,717  

Total liabilities

    83,452         91,178  
                   

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, 652,670 and 22,579,626 shares issued and 22,464,351 and 22,411,695 shares outstanding at June 30, 2017 and December 31, 2016, respectively

    223         223  

Capital in excess of par value

    156,848         155,761  

Retained earnings

    203,345         192,150  

Treasury stock, at cost – 188,319 and 167,931 shares at June 30, 201 7 and December 31, 2016, respectively

    (3,385 )       (2,894 )

Accumulated other comprehensive loss

    (8,306 )       (8,553 )

Total stockholders ’ equity

    348,725         336,687  

Total liabilities and stockholders ’ equity

  $ 432,177       $ 427,865  

 

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

 

3

 

 

O MEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(In thousands, except per share amounts)

  

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

201 7

   

201 6

   

201 7

   

201 6

 

Revenues

  $ 93,923     $ 112,650     $ 167,492     $ 197,493  

Cost of sales

    71,415       79,252       124,793       139,276  

Gross profit

    22,508       33,398       42,699       58,217  
                                 

Selling, general, and administrative expense

    9,781       11,106       20,032       20,039  

Research and development expense

    506       713       1,029       1,349  

Impairment of goodwill and other intangible assets

          11,614             11,614  

Loss related to plant closure s

          1,023             1,665  

L oss (gain) on disposal of assets

    175       (31 )     (210 )     (66 )

Operating income

    12,046       8,973       21,848       23,616  

Interest expense

    (72 )     (134 )     (153 )     (279 )

Gain (l oss) gain on foreign currency

    (353 )     73       (1,241 )     (1,358 )

Other income (expense), net

    (86 )     116       (136 )     37  

Income before income taxes

    11,535       9,028       20,318       22,016  
                                 

Provision for income taxes

    4,177       3,365       6,880       7,973  

Net income

    7,358       5,663       13,438       14,043  
                                 

Other comprehensive income (loss):

                               

Foreign currency translation adjustment net of tax expense of $598, $194, $640 and $584, respectively

    1,111       360       1,188       1,085  

Energy swap adjustment, net of tax benefit (expense) of $319, ($863), $722 and ($927), respectively

    (593 )     1,603       (1,341 )     1,721  

Pension benefits adjustment, net of tax expense of $108, $120, $215 and $239, respectively

    200       222       400       444  

Comprehensive income

  $ 8,076     $ 7,848     $ 13,685     $ 17,293  

Basic earnings per share (See Note 14)

  $ 0.33     $ 0.25     $ 0.60     $ 0.63  

Weighted average common shares outstanding

    22,157       21,885       22,140       21,873  

Diluted earnings per share (See Note 14)

  $ 0.32     $ 0.25     $ 0.59     $ 0.62  

Weighted average common shares and potential common share equivalents outstanding

    22,423       22,180       22,427       22,174  

Dividends declared per common share outstanding

  $ 0.05     $     $ 0.10     $  

 

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)

                       

   
Six Months Ended
June 30 ,
 
   

201 7

   

201 6

 

Cash flows from operating activities:

               

Net income

  $ 13,438     $ 14,043  

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

               

Depreciation and amortization

    13,028       12,599  

Loss related to plant closures

          1,986  

Loss (gain) on disposal of assets

    (210 )     (66 )

Impairment of goodwill and other intangible assets

          11,614  

Provisions for losses on receivables

    7       29  

Share based compensation

    1,383       1,855  

Deferred income taxes

    5,384       (1,747 )

Unrealized loss (gain) on foreign currency fluctuations, net

    1,241       1,358  

Changes in assets and liabilities:

               

Receivables

    (16,594 )     (14,930 )

Inventories

    (1,615 )     13,091  

Prepaid expenses and other current assets

    (2,944 )     (1,596 )

Other assets

    339       (2,117 )

Accounts payable

    (4,983 )     (5,271 )

Accrued liabilities

    (7,591 )     10,821  

Pension liability, net

    265       241  

Other long term liabilities

    18       (6 )

Net cash provided by operating activities

    1,166       41,904  

Cash flows from investing activities:

               

Capital expenditures

    (27,400 )     (18,272 )

Proceeds from disposition of assets

    773       85  

Net cash used in investing activities

    (26,627 )     (18,187 )

Cash flows from financing activities:

               

Dividends paid

    (2,243 )      

Principal payments of long-term debt

          (24,500 )

Proceeds from long-term debt

    656       6,392  

Treasury stock repurchase

    (491 )     (358 )

Proceeds from equity compensation transactions

    79       283  

Excess tax benefit of equity compensation transactions

          211  

Net cash used in financing activities

    (1,999 )     (17,972 )

Net (decrease) increase in cash and cash equivalents

    (27,460 )     5,745  

Translation effect on cash

    15       (2 )

Cash and cash equivalents at beginning of year

    37,412       661  

Cash and cash equivalents at end of period

  $ 9,967     $ 6,404  

 

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 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 specialty fish meal, 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 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 dry-dock facility in Moss Point, Mississippi that is used to provide shore side 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 three subsidiaries: Bioriginal Food & Science Corp. (“Bioriginal Food & Science”), Wisconsin Specialty Protein, L.L.C. (“WSP”) and Cyvex Nutrition, Inc. (“Cyvex”). 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 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.

 

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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. 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.  Additionaly, certain amounts applicable to the prior period have been reclassified to conform to the current classification. 

 

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 June 30, 2017, and the results of its operations for the three month and six month periods ended June 30, 2017 and 2016 and its cash flows for the six month periods ended June 30, 2017 and 2016. Quarterly operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

 

 

6

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Accumulated Other Comprehensive Loss

 

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

 

              Changes in Accumulated Other Comprehensive Loss by Component

                   For the Six Months Ended June 30, 2017 (in thousands)

 

   

Gains and Losses

On Cash Flow

Hedges

     

Defined Benefit

Pension Items

     

Foreign Currency

Translation

Adjustment

   

Total

 

Balance as of December 31, 201 6

  $ 1,261       $ (7,457 )     $ (2,357 )   $ (8,553 )

Other comprehensive gain (loss) before reclassifications

    (1,341 )               1,188       (153 )

Amounts reclassified from accumulated other comprehensive loss

     

(a)

    400  

(b)

          400  

Net current-period other comprehensive income

    (1,341 )       400         1,188       247  

Balance as of June 30, 2017

  $ (80 )     $ (7,057 )     $ (1,169 )   $ (8,306 )

 

              Changes in Accumulated Other Comprehensive Loss by Component

         For the Six Months Ended June 30, 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 gain (loss) before reclassifications

    1,180                 1,085       2,265  

Amounts reclassified from accumulated other comprehensive loss

    541  

(a)

    444  

(b)

          985  

Net current-period other comprehensive income

    1,721         444         1,085       3,250  

Balance as of June 30, 2016

  $ (291 )     $ (7,891 )     $ (1,606 )   $ (9,788 )

 

 

(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, 2016.

 

Recently Issued and Adopted Accounting Standards

 

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update  (“ASU”) 2017-07,  Compensation – Retirement Benefits, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost . ASU 2017-07 requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement .   ASU 2017-07 is effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated results of operations, financial position and related disclosures.

 

In December 2016, the FASB issued amendments to Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The amendments allow entities not to make quantitative disclosures about remaining performance obligations in certain cases and require entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. The amendments also make additional technical corrections and improvements to the new revenue standard. The guidance will be effective with the same date and transition requirements as those in ASC 606.

 

7

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

ASC 606 is effective for the Company beginning January 1, 2018. The Company is continuing to evaluate the standard ’s impact on its consolidated results of operations and financial condition. The Company has conducted contract reviews of the most significant contracts in its Animal Nutrition segment and is currently developing a project plan to conduct detailed contract reviews in the Human Nutrition segment to determine necessary adjustments to existing accounting policies and to support a complete evaluation of the standard’s impact on the Company’s consolidated results of operations and financial condition. For the majority of the Company’s revenue arrangements, transactions are not accounted for under industry-specific guidance that will be superseded by the ASC and generally consist of a single performance obligation to transfer promised goods. Additionally, there are expanded disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers which the Company is also developing as it works through the project plan. 

 

Based upon review of the most significant contracts in the Animal Nutrition segment, the Company has not identified any terms or conditions in the contracts reviewed to date that would suggest the adoption of ASC 606 will result in a different pattern of revenue recognition than that recorded under current guidance.  However, the Company will continue to evaluate this assessment as further review is performed, which includes incremental contract reviews for the Animal Nutrition Segment, as well as beginning the Company’s assessment of the Human Nutrition segment, which could identify changes under ASU 2014-09.

 

The Company currently anticipates utilizing the modified retrospective method of adoption on January 1, 2018.

 

In March 2016, the FASB issued ASU 2016-09,   Compensation – Stock Compensation, Improvements to Employee Share-Based Payment Accounting .  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. The Company prospectively adopted the provisions of ASU No. 2016-09 effective January 1, 2017, which decreased the provision for income taxes by $0.3 million and relocated the $0.3 million excess tax benefit of equity compensation transactions cash flow from financing to operating on the condensed consolidated statement of cash flows as compared to the presentation for the six months ended June 30, 2016.

 

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. The Company will adopt ASU 2016-02 on January 1, 2019 and is assessing its potential impact on the Company ’s consolidated results of operations, financial position and related disclosures.

 

In November 2015, the FASB issued ASU 2015-17 , Balance Sheet Classification of Deferred Taxes , which amended existing guidance on income taxes to require the classification of all deferred tax assets and liabilities as non-current on the balance sheet.  The Company retrospectively adopted the provisions of ASU 2015-17 effective January 1, 2017, which netted the December 31, 2016 previously reported $3.4 million current deferred tax asset with the previously reported $29.1 million long-term deferred tax liability into a recasted $25.7 million long-term deferred tax liability.

 

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 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 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 stockholders' equity. Adjustments to the accumulated other comprehensive income (loss) account are not recorded in the consolidated statement of comprehensive income until realized through an addition or reduction in the Company's net investment in such operations.

 

8

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 2 . PLANT CLOSURE S

 

Batavia Plant

 

As part of a strategic review that began in late 2015 and as a result of operating results that did not meet expectations, the Company re-assessed its business strategy to produce and sell concentrated menhaden fish oils. During this assessment, sales efforts were reduced and the Company determined that the carrying values of certain assets located at the Company’s facility in Batavia, Illinois were no longer recoverable. In March 2016, the Company decided to exit this facility. In September 2016, the Company entered into an agreement to sell substantially all of the assets of InCon Processing, L.L.C. at the Batavia facility for $0.5 million in the form of a note receivable, and that sale closed on October 3, 2016.

 

The following table shows all charges related to the plant closure that have been recorded in the Company ’s consolidated statements of comprehensive income during the three and six months ended June 30, 2017 and 2016 and from December 2015 to June 30, 2017:

 

   
Three Months
Ended
June 30, 201 7
   
Three Months
Ended
June 30, 201 6
   
Six Months
Ended
June 30, 201 7
   
Six Months
Ended
June 30, 201 6
   
December 201 5
to
June 30, 201 7
 
    (in thousands)  

Impairment of property, plant and equipment

  $     $ 1,190     $     $ 1,200     $ 5,892  

Write-off material and supplies inventory

                      239       575  

Employee severance costs

          183             539       611  

Other closure costs

                            74  

Total loss (gain) related to plant closure

  $     $ 1,373     $     $ 1,978     $ 7,152  

 

The Company does not expect additional expenses related to this closure.

 

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 consolidated statements of comprehensive income during the three and six months ended June 30, 2017 and 2016 and from December 2013 to June 30, 2017:

 

   
Three Months
Ended
June 30, 201 7
   
Three Months
Ended
June 30, 201 6
   
Six Months
Ended
June 30, 201 7
   
Six Months
Ended
June 30, 201 6
   
December 2013
to
June 30, 201 7
 
    (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

          (350 )           (313 )     6,405  

Total loss (gain) related to plant closure

  $     $ (350 )   $     $ (313 )   $ 15,459  

 

The Company does not expect additional expenses related to this closure.

 

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 maker as decisions are made about the Company’s overall resource allocation and assess performance. Key measurements include revenue growth, operating income and return on invested capital.

 

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 for sale to the human nutrition market. The human nutrition segment is comprised of assets used to produce, procure, market and sell products, including plant oils, dairy proteins, fish oils and nutraceuticals to human nutrition markets.

 

9

 

 

OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

The tables below present information about reported segments for three months ended June 30, 2017 and 2016 (in thousands):

 

 

2017

 

Animal

Nutrition

   

Human

Nutrition

   

 

Unallocated

   

 

Total

 

Revenue (1)

  $ 57,147     $ 36,776     $     $ 93,923  

Cost of sales

    41,939       29,476             71,415  

Gross profit

    15,208       7,300             22,508  

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

    568       4,026       5,693       10,287  

Loss (gain) on disposal of assets

    175                   175  

Operating income (loss)

  $ 14,465     $ 3,274     $ (5,693 )   $ 12,046  

Depreciation and amortization

  $ 4,973     $ 1,292     $ 234     $ 6,499  

Identifiable assets

  $ 277,140     $ 138,253     $ 16,784     $ 432,177  

Capital expenditures

  $ 13,449     $ 74     $ 22     $ 13,545  

 

 

2016

 

Animal

Nutrition

   

Human

Nutrition

   

 

Unallocated

   

 

Total

 

Revenue ( 2 )

  $ 81,602     $ 31,048     $     $ 112,650  

Cost of sales

    51,074       28,178             79,252  

Gross profit

    30,528       2,870             33,398  

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

    662       4,473       6,684       11,819  

Impairment of goodwill and other intangible assets

          11,614             11,614  

Loss (gain)  related to plant closures

    (350 )     1,373             1,023  

Loss (gain) on disposal of assets

    (31 )                 (31 )

Operating income (loss)

  $ 30,247     $ (14,590 )   $ (6,684 )   $ 8,973  

Depreciation and amortization

  $ 4,740     $ 1,453     $ 190     $ 6,383  

Identifiable assets

  $ 256,755     $ 140,937     $ 10,794     $ 408,486  

Capital expenditures

  $ 7,442     $ 429     $ 697     $ 8,568  

 

(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.

 

(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.

 

The tables below present information about reported segments for the six months ended June 30, 201 7 and 2016 (in thousands):

 

 

2017

 

Animal

Nutrition

   

Human

Nutrition

   

 

Unallocated

   

 

Total

 

Revenue (3)

  $ 97,088     $ 70,404     $     $ 167,492  

Cost of sales

    67,742       57,051             124,793  

Gross profit

    29,346       13,353             42,699  

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

    1,123       7,682       12,256       21,061  

Loss (gain) on disposal of assets

    (221 )     11             (210 )

Operating income (loss)

  $ 28,444     $ 5,660     $ (12,256 )   $ 21,848  

Depreciation and amortization

  $ 10,029     $ 2,528     $ 471     $ 13,028  

Identifiable assets

  $ 277,140     $ 138,253     $ 16,784     $ 432,177  

Capital expenditures

  $ 27,269     $ 109     $ 22     $ 27,400  

 

10

 

 

OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

2016

 

Animal

Nutrition

   

Human

Nutrition

   

 

Unallocated

   

 

Total

 

Revenue ( 4 )

  $ 131,797     $ 65,696     $     $ 197,493  

Cost of sales

    80,823       58,453             139,276  

Gross profit

    50,974       7,243             58,217  

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

    1,148       8,609       11,631       21,388  

Impairment of goodwill and other intangible assets

          11,614             11,614  

Loss (gain) related to plant closures

    (313 )     1,978             1,665  

Loss (gain) on disposal of assets

    (66 )                 (66 )

Operating income (loss)

  $ 50,205     $ (14,958 )   $ (11,631 )   $ 23,616  

Depreciation and amortization

  $ 9,410     $ 2,807     $ 382     $ 12,599  

Identifiable assets

  $ 256,755     $ 140,937     $ 10,794     $ 408,486  

Capital expenditures

  $ 15,904     $ 1,504     $ 864     $ 18,272  

 

(3) Excludes revenue from internal customers of $0.8 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

( 4) Excludes revenue from internal customers of $0.5 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

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

 

   

Three Months Ended June 30 ,

 
   

201 7

   

201 6

 

Operating income for reportable segments

  $ 17,739     $ 15,657  

Unallocated operating loss

    (5,693 )     (6,684 )

Interest expense

    (72 )     (134 )

Gain (l oss) on foreign currency

    (353 )     73  

Other income  (expense), net

    (86 )     116  

Income before income taxes

  $ 11,535     $ 9,028  

 

   

Six Months Ended June 30,

 
   

2017

   

2016

 

Operating income for reportable segments

  $ 34,104     $ 35,247  

Unallocated operating loss

    (12,256 )     (11,631 )

Interest expense

    (153 )     (279 )

Gain (loss) on foreign currency

    (1,241 )     (1,358 )

Other income  (expense), net

    (136 )     37  

Income before income taxes

  $ 20,318     $ 22,016  

 

NOTE 4. 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. In determining fair value of a reporting unit, the Company uses various approaches, including an income approach, which is considered to be a Level 3 fair value measurement.

 

11

 

 

OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

During the second quarter of 2017, the Company completed its annual impairment testing of goodwill and indefinite life intangible assets related to its acquisition of Bioriginal Food & Science in September 2014.   As of June 30, 2017, the calculated fair value of Bioriginal Food & Science’s trade name exceeded its $3.3 million carrying value by 5% and the calculated fair value of goodwill exceeded its $26.7 million carrying value by 29%. At this time, the Company does not consider the carrying value of these assets to be at risk due to the level of anticipated profitability of Bioriginal Food & Science. Key assumptions in the fair value calculation include sales volumes and prices, the portion of sales attributable to trade names, the cost and availability of raw materials and the discount rate.

 

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

 

   

Bioriginal Food

& Science

 

January 1, 201 7

  $ 26,347  

Foreign currency translation adjustment

    386  

June 30 , 2017

  $ 26,733  

 

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

 

   

Balance at

January 1, 2017

   

Amortization

   

Foreign

currency

translation

adjustment

   

Balance at

June 30 , 2017

 

Customer relationships and brand names, net of accumulated amortization of $6,275 and $7,311, respectively

  $ 14,259       (1,036 )     185     $ 13,408  
                                 

Indefinite life intangibles – trade names/secrets and other

    3,245             44       3,289  

Total intangible assets

  $ 17,504       (1,036 )     229     $ 16,697  

 

 

   

Balance at

January 1, 2016

   

Reclassified

   

Amortization

   

Foreign

currency

translation

adjustment

   

Balance at

June 30 , 2016

 

Customer relationships and brand names, net of accumulated amortization of $4,230 and $ 5,237, respectively

  $ 14,851       362       (1,007 )     41     $ 14,247  
                                         

Indefinite life intangibles – trade names/secrets and other

    5,256       (362 )           21       4,915  

Total intangible assets

  $ 20,107             (1,007 )     62     $ 19,162  

 

Amortization expense of the Company’s intangible assets for each of the three month periods ended June 30, 2017 and 2016 was approximately $0.5 million and for each of the six month periods ended June 30, 2017 and 2016 was approximately $1.0 million. The table below shows estimated future amortization expense related to intangible assets (in thousands):

 

Remainder of 2017

  $ 1,037  

201 8

    2,074  

201 9

    2,074  

20 20

    2,074  

2021

    1,694  

Thereafter

    4,455  

Total estimated future amortization expense

  $ 13,408  

 

12

 

 

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, 2016.

 

NOTE 5 . RECEIVABLES, NET

 

R eceivables, net are summarized below (in thousands):

 

   

June 30 ,

2017

   
December 31,
201 6
 

Trade

  $ 51,341     $ 32,137  

Insurance

    1,087       4,600  

Income tax

    3,230       2,258  

Other

    234       538  

Total accounts receivable

    55,892       39,533  

Less allowance for doubtful accounts

    (705 )     (737 )

Receivables, net

  $ 55,187     $ 38,796  

 

NOTE 6 . INVENTORY

 

The major classes of inventory are summarized below (in thousands):

 

   

June 30 ,

2017

   

December 31,

201 6

   

June 30 ,

2016

 

Fish meal

  $ 17,528     $ 30,511     $ 26,214  

Fish oil

    11,297       24,191       13,816  

Fish solubles

    643       834       201  

Unallocated inventory cost pool (including off-season costs)

    35,952       8,090       21,457  

Other nutraceutical products

    3,760       3,648       5,370  

Bioriginal Food & Science products

    24,704       24,699       21,382  

Dairy protein products

    5,641       6,424       7,870  

Other materials and supplies

    11,183       10,314       10,679  

Total inventory

  $ 110,708     $ 108,711     $ 106,989  

 

Inventory at June 30, 2017, December 31, 2016 and June 30, 2016 is stated at the lower of cost and net realizable value. The elements of the June 30, 2017 unallocated inventory cost pool include Omega Protein’s plant and vessel-related labor, utilities, rent, repairs and depreciation, which are allocated to 2017 fishing season production.

 

NOTE 7 . PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets are summarized below (in thousands):

 

   
June 30 ,
201 7
   

December 31,

201 6

 

Prepaid insurance

  $ 4,228     $ 1,707  

Selling expenses

    203       82  

Leases

    98       334  

Energy swap

    253       1,565  

Other prepaids and expenses

    1,577       1,019  

Total prepaid expenses and other current assets

  $ 6,359     $ 4,707  

 

13

 

 

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 8 . OTHER ASSETS , NET

 

Other assets, net are summarized below (in thousands):

 

 

   
June 30 ,
201 7
   

December 31,

201 6

 

Fish nets, net of accumulated amortization of $1,673 and $1,069

  $ 2,028     $ 1,346  

Insurance receivables

    1,135       2,571  

Debt issuance costs

    744       861  

Energy swap

          372  

Note receivable

    236       319  

Asset held for sale

          91  

Deposits and other

    105       204  

Total other assets, net

  $ 4,248     $ 5,764  

 

Amortization expense for fishing nets amounted to approximately $0.3 million for each of the three month periods ended June 30, 2017 and 2016 and $0.6 million and $0.5 million for the six months ended June 30, 2017 and 2016, respectively.

 

As of June 30, 2017 and December 31, 2016, insurance receivables primarily relates to Jones Act claims for employees aboard its vessels. This estimated amount is recorded gross of estimated claims which may be due to claimants and is included in accrued insurance liabilities.

 

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

 

NOTE 9 . PROPERTY, PLANT AND EQUIPMENT , NET

 

Property, plant and equipment, net are summarized below (in thousands):

 

   

June 30 ,

2017

   

December 31,

201 6

 

Land

  $ 9,458     $ 9,458  

Plant assets

    209,898       206,897  

Fishing vessels

    137,306       127,149  

Furniture and fixtures

    15,171       15,240  

Construction in progress

    32,758       23,134  

Total property and equipment

    404,591       381,878  

Less accumulated depreciation and impairment

    (202,313 )     (193,254 )

Property, plant and equipment, net

  $ 202,278     $ 188,624  

 

 

Depreciation expense was $5.6 million and $5.5 million for the three months ended June 30, 2017 and 2016, respectively, and $11.3 million and $10.9 million for the six months ended June 30, 2017 and 2016, 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 and six month periods ended June 30, 2017 and 2016, the Company capitalized interest of approximately $0 and $0.1 million, respectively.

 

14

 

 

OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 10 . 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.

 

The following tables summarize the Company's energy swap agreements by type and consumption period:

 

Energy Swap

 

Consumption Period

 

Quantity

   

Price

Per

Unit

   

Energy Swap

Asset/(Liability)

as of

June 30 ,

2017

   

Deferred Tax

Asset/(Liability)

as of

June 30 ,

2017

 
                       

(in thousands)

 

Diesel - NYMEX Heating Oil Swap

 

July - November, 2017

    1,861,900  Gallons     $ 1.51     $ (64 )   $ 22  

Natural Gas - NYMEX Natural Gas Swap

 

July – October, 2017

    293,900 MMBTUs     $ 2.87       53       (18 )

Propane – Natural Gas Liquids Swap

 

Ju ly - November, 2017

    2,058,100  Gallons     $ 0.45       322       (113 )

Diesel - NYMEX Heating Oil Swap

 

May - November, 2018

    2,582,000  Gallons     $ 1.63       (216 )     76  

Natural Gas - NYMEX Natural Gas Swap

 

April – October, 2018

    387,000 MMBTUs     $ 2.84       8       (3 )

Propane – Natural Gas Liquids Swap

 

June - November, 2018

    2,131,000  Gallons     $ 0.55              

Diesel - NYMEX Heating Oil Swap

 

May - November, 2019

    1,839,500  Gallons     $ 1.69       (167 )     58  

Natural Gas - NYMEX Natural Gas Swap

 

April – October, 2019

    258,200 MMBTUs     $ 2.76       (8 )     3  

Propane – Natural Gas Liquids Swap

 

June - November, 2019

    1,563,500  Gallons     $ 0.57       (51 )     18  
                        $ (123 )   $ 43  

 

 

Energy Swap

 

Consumption Period

 

Quantity

   

Price Per Unit

   

Energy Swap

Asset/(Liability)

as of

December 31,

2016

   

Deferred Tax

Asset/(Liability)

as of

December 31,

2016

 
                       

(in thousands)

 

Diesel - NYMEX Heating Oil Swap

 

May - November, 2017

    2,732,960  Gallons     $ 1.47     $ 717     $ (251 )

Natural Gas - NYMEX Natural Gas Swap

 

April – October, 2017

    375,700 MMBTUs     $ 2.85       268       (94 )

Propane – Natural Gas Liquids Swap

 

June - November, 2017

    2,566,800  Gallons     $ 0.45       543       (190 )

Diesel - NYMEX Heating Oil Swap

 

May - November, 2018

    1,800,000  Gallons     $ 1.65       216       (75 )

Natural Gas - NYMEX Natural Gas Swap

 

April – October, 2018

    283,400 MMBTUs     $ 2.84       22       (8 )

Propane – Natural Gas Liquids Swap

 

June - November, 2018

    1,470,000  Gallons     $ 0.53       171       (60 )
                        $ 1,937     $ (678 )

 

15

 

 

OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

As of June 30, 2017, Omega Protein has recorded a long-term liability of $0.4 million, net of the current portion included in prepaid expenses and other current assets of $0.3 million, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax asset of less than $0.1 million associated therewith. As of December 31, 2016, Omega Protein has recorded a long-term asset included in other assets of $0.4 million, net of the current portion included in prepaid expenses and other current assets of $1.5 million, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax liability of $0.7 million associated therewith. The effective portion of the change in fair value from inception to June 30, 2017 is recorded in “accumulated other comprehensive loss” in the Company’s consolidated financial statements. The following table illustrates the changes recorded, net of tax, in accumulated other comprehensive income (loss) resulting from the energy swap agreements (in thousands):

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

Beginning balance

  $ 513     $ (1,894 )   $ 1,261     $ (2,012 )

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

    (83 )     541       (83 )     541  

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

    (510 )     1,062       (1,258 )     1,180  

Balance as of June 30,

  $ (80 )   $ (291 )   $ (80 )   $ (291 )

 

The $ 0.1 million reported in accumulated other comprehensive loss as of June 30, 2017 will be reclassified to the unallocated inventory cost pool in the period when the energy consumption takes place. The amount to be reclassified, net of taxes, during the next 12 months is expected to be approximately $0.2 million.

 

The following table illustrates the fair value of derivative instruments in gross asset (liability) positions (in thousands):

 

 

As of June 30, 2017

 

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

  $ 502     $ (249 )   $ 253  

Energy swap derivatives – liability position

  $ (414 )   $ 38     $ (376 )

 

 

 

As of December 31, 2016

 

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

  $ 1,962     $ (25 )   $ 1,937  

 

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. 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).

 

16

 

 

OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 1 1 . NOTES PAYABLE AND LONG-TERM DEBT

 

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

 

   

June 30 ,

   

December 31,

 
   

201 7

   

201 6

 

ING Commercial Finance B.V., interest at EURIBOR plus an applicable rate (1. 59% at June 30, 2017 and 1.67% at December 31, 2016)

  $ 1,884     $ 1,097  

Total debt

    1,884       1,097  

Less current maturities

    (1,884 )     (1,097 )

Long-term debt

  $     $  

 

The estimated fair value of the Company ’s total debt at June 30, 2017 and December 31, 2016, 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 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 and are expected to be used, as applicable, to (a) refinance existing debt under the Prior Loan Agreement, (b) pay fees and expenses incurred in connection with the refinancing of the Prior Loan Agreement and the 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.

 

As of June 30, 2017, the Company was in compliance with all financial covenants under the Loan Agreement. All Loans and all other obligations outstanding under the Loan Agreement shall be payable in full in August 2020 .

 

As of June 30, 2017 and December 31, 2016, the Company had $0 outstanding under the Loan Agreement and approximately $8.6 million in letters of credit. 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 1.59%).  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 June 30, 2017 and December 31, 2016, Bioriginal Food & Science Europe had $1.9 million and $1.1 million outstanding under this credit facility, respectively, which is included in current maturities.

 

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, 2016.

 

17

 

 

OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 1 2. ACCRUED LIABILITIES

 

Accrued liabilities are summarized below (in thousands):

 

   

June 30 ,

   

December 31,

 
   

201 7

   

201 6

 

Insurance

  $ 4,924     $ 9,352  

Salary and benefits

    11,243       11,677  

Trade creditors

    8,116       11,139  

Taxes, other than income tax

    944       523  

Income tax

    468       943  

Biorigin al earn-out

    2,716       2,622  

Deferred revenue ( 1)

    888       1,299  

Accrued interest

    12       12  

Other

    447       361  

Total accrued liabilities

  $ 29,758     $ 37,928  

 

 

(1)

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 Food & Science 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 will also earn additional amounts based on the annual adjusted Canadian dollar EBITDA of Bioriginal Food & Science’s business during each of the calendar years 2014 through 2016. For each calendar year, if the adjusted EBITDA met or exceeded agreed upon targets, the management sellers are 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, 2015 and 2016, the total payment for all three years is $3.5 million Canadian dollars.

 

The earn-out payment will be made in September 2017. The Company recorded the estimated contractual obligation as compensation expense during each year as it was deemed probable that such amount would be payable. As of June 30, 2017 and December 31, 2016 the outstanding liability associated with the earn-out was $2.7 million and $2.6 million, respectively.

 

Legal Contingencies

 

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

 

In March and April of 2017, three class action lawsuits were filed against the Company and two of its officers. One of the lawsuits was subsequently voluntarily dismissed and the other two lawsuits were subsequently consolidated into one lawsuit. On July 17, 2017, the lead plaintiff in the consolidated action filed a consolidated amended complaint. As with the pre-consolidated actions, the consolidated amended complaint asserts claims against the Company and two of its officers for alleged violations of Section 10(b) and Section 20(a) of the Exchange Act and Rule 10b-5 under the Exchange Act. The lead plaintiff seeks to represent a proposed class of all persons who purchased or otherwise acquired the Company’s securities during the period from August 6, 2013 through March 1, 2017. The consolidated amended complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by the Company and two of its officers, which allegedly operated to inflate artificially the market price of the Company’s securities during the class period. The complaint seeks unspecified compensatory damages, including interest thereon, attorneys’ fees and other costs. Although the Company believes the allegations in this lawsuit are without merit and intends to contest such litigation vigorously, litigation is subject to inherent uncertainties and we are not able at this time to determine the outcome of this lawsuit or its potential liability, if any. It is possible that an adverse result in the litigation could have a material adverse effect on the Company’s business, reputation, results of operations and financial condition. In addition, defending the lawsuit may be costly and could require significant involvement of the Company’s senior management and divert management's attention from its business and operations.

 

18

 

 

OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

In October 2016, the Company received a Civil Investigative Demand from the Department of Justice requesting information in connection with a False Claims Act investigation. The government’s investigation concerns whether there has been or is a violation of the False Claims Act in connection with Omega Protein’s May 2010 certification to the U.S. Department of Commerce that Omega Protein’s Reedville, Virginia facility was in compliance with federal environmental laws in order to obtain a loan guarantee under the Department of Commerce’s Title XI loan program. That Title XI loan was repaid in full in November 2015 and the Company and its subsidiaries currently have no Title XI indebtedness outstanding. The Company has delivered responsive documents to the Department of Justice. The Company cannot predict the outcome of the investigation or the effect of the findings of the investigation on the Company, but it is possible that the foregoing matter could result in a material adverse effect on the Company’s business, reputation, results of operation and financial condition.

 

In December 2016, the Company received a subpoena from the Securities and Exchange Commission (“SEC”) requesting information in connection with an investigation relating to a Company subsidiary’s compliance with its probation terms and the Company’s protection of whistleblower employees. In May 2017, the Company received another subpoena from the SEC seeking documents relating to its Title XI loans, including documents relating to the Company’s public disclosures that it was in compliance with all of the covenants in the loan agreements for such Title XI loans. The same SEC subpoena also calls for the production of documents concerning the Company’s calculation of its cost of sales for fiscal years 2014 through 2016, including documents related to its statement that “[t]he decrease in cost per unit of sales is primarily due to lower cost per unit for beginning of year inventory as a result of higher fish catch and production in the 2015 fishing season compared to 2014.” The subpoena also seeks documents reflecting the Company’s accounting policies and procedures for inventories and cost of sales for fiscal years 2014 through 2016, including its methodologies for calculating and allocating direct and indirect costs. The Company has delivered responsive documents to the SEC in connection with the December 2016 subpoena and is in the process of responding to the May 2017 subpoena. The Company cannot predict the outcome of the investigation or the effect of the findings of the investigation on the Company, but it is possible that the foregoing matters could result in a material adverse effect on the Company’s business, reputation, results of operation and financial condition.

 

In December 2016, Omega Protein entered into a plea agreement with the United States Attorney’s Office for the Western District of Louisiana to resolve the previously disclosed government investigation related to that subsidiary’s Abbeville, Louisiana operations. Under the plea agreement, the subsidiary agreed to plead guilty to two felony counts under the Clean Water Act. The plea agreement provides for a sentence consisting of (i) a $1.0 million fine, (ii) a three-year probationary period for the subsidiary ending in January 2020, and (iii) a payment by the subsidiary of $0.2 million for community service. The plea agreement was approved by the U.S. District Court for the Western District of Louisiana on January 18, 2017.

 

In December 2016, the U.S. District Court for the Eastern District of Virginia held a hearing on a previously disclosed motion filed by the U.S. Attorney for the Eastern District of Virginia to revoke Omega Protein’s probation relating to a June 2013 plea agreement because of issues resolved by the plea agreement described in the prior paragraph. At that hearing, the Virginia court imposed an additional two-year probation period on Omega Protein to run from June 4, 2016 to June 4, 2018. The remainder of this two year probation period will run concurrently with the three year probation period set forth in the plea agreement described in the prior paragraph.

 

NOTE 14. RECONCILIATION OF BASIC AND DILUTED PER SHARE DATA (in thousands except per share data)

 

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.

 

19

 
 
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
 

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 calcul ated using the two-class method.

 

Three Months Ended June 30 :

 

201 7

   

201 6

 

Allocation of earnings:

                               

Net income

  $ 7,358             $ 5,663          

Income allocated to participating securities

    (93 )             (95 )        

Income allocated to common shares outstanding

  $ 7,265             $ 5,568          
                                 

Weighted average common shares outstanding

    22,157               21,885          
                                 

Basic earnings per share

          $ 0.33             $ 0.25  
                                 

Stock options assumed exercised

    266               295          

Weighted average diluted common shares and potential common share equivalents outstanding

    22,423               22,180          

Diluted earnings per share

          $ 0.32             $ 0.25  

 

Six Months Ended June 30:

 

2017

   

2016

 

Allocation of earnings:

                               

Net income

  $ 13,438             $ 14,043          

Income allocated to participating securities

    (175 )             (233 )        

Income allocated to common shares outstanding

  $ 13,263             $ 13,810          
                                 

Weighted average common shares outstanding

    22,140               21,873          
                                 

Basic earnings per share

          $ 0.60             $ 0.63  
                                 

Stock options assumed exercised

    287               301          

Weighted average diluted common shares and potential common share equivalents outstanding

    22,427               22,174          

Diluted earnings per share

          $ 0.59             $ 0.62  

 

There were no options to purchase shares of common stock during the three and six months ended June 30, 2017 and 2016 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.

 

NOTE 1 5 . STOCK-BASED COMPENSATION

 

Restricted Stock  

 

The Company has issued shares of restricted stock under the 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.

 

During the six month periods ended June 30, 2017 and 2016, the Company issued 61,044 and 70,622 shares of restricted stock under the 2015 Incentive Plan, respectively, to employees and non-employee directors. The Company’s compensation expense related to restricted stock was approximately $0.5 million and $0.6 million ($0.4 million and $0.4 million after tax) for the three months ended June 30, 2017 and 2016, respectively, and approximately $1.0 million and $1.1 million ($0.7 million and $0.7 million after tax) for the six months ended June 30, 2017 and 2016, respectively, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of June 30, 2017, there was approximately $2.1 million ($1.4 million after tax) of unrecognized compensation expense related to non-vested restricted stock that is expected to be recognized over a weighted-average period of 0.9 years, of which $1.0 million ($0.6 million after-tax) of compensation expense is expected to be recognized during the remainder of fiscal year 2017.

 

20

 

 

OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Performance Units  

 

On February 26, 2015, March 8, 2016 and February 27, 2017 , the Company adopted cash incentive performance unit plans. 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 accrued liabilities and 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 $0.6 million ($0.1 million and $0.4 million after tax) for the three months ended June 30, 2017 and 2016, respectively, and approximately $0.4 million and $0.8 million ($0.2 million and $0.5 million after tax) for the six months ended June 30, 2017 and 2016, respectively, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of June 30, 2017, there was approximately $2.2 million ($1.4 million after tax) of unrecognized compensation expense related to performance units that is expected to be recognized over a weighted-average period of 1.9 years, of which $0.7 million ($0.5 million after-tax) of compensation expense is expected to be recognized during the remainder of fiscal year 2017.

 

NOTE 1 6 . COMPONENTS OF NET PERIODIC BENEFIT COST

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

201 7

   

201 6

   

201 7

   

201 6

 
   

(in thousands)

   

(in thousands)

 

Service cost

  $     $     $     $  

Interest cost

    223       251       446       502  

Expected return on plan assets

    (185 )     (213 )     (370 )     (425 )

Amortization of prior service costs

                       

Amortization of net loss

    307       342       614       683  

Net periodic pension cost

  $ 345     $ 380     $ 690     $ 760  

 

For the six months ended June 30, 2017 and 2016, the Company contributed approximately $0.2 million and $0.3 million, respectively, to the Company’s pension plan. The Company expects to make contributions of $0.3 million to the pension plan during the remainder of 2017.

 

NOTE 17. INCOME TAXES

 

The Company generally determines, with the exception of certain nonrecurring items, its periodic income tax benefit or expense based upon the current period income and the annual estimated tax rate for the Company adjusted for any change to prior period estimates. The estimated tax rate is revised, if necessary, as of the end of each successive interim period during the fiscal year to the Company’s current annual estimated tax rate.

 

For the six months ended June 30, 2017, the income tax provision reflects an effective tax rate of 33.9%, compared to an effective tax rate of 36.2% for the six months ended June 30, 2016. The statutory tax rate of 35% for U.S. federal taxes was in effect for each of the six month periods ended June 30, 2017 and 2016.  The decrease in the effective tax rate for the six months ended June 30, 2017 is primarily a result of the adoption of ASU 2016-09. The adoption decreased the provision for income taxes by $0.3 million due to the excess tax benefit of equity compensation transactions, which reduced the effective tax rate by 1.7%.

 

21

 

 

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, 201 6 (the “201 6 Form 10-K”), and in conjunction with the consolidated financial statements included in this report and in the 201 6 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 the Company’s 201 6 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 dry-dock facility in Moss Point, Mississippi that is used to provide shore side 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 three subsidiaries: Bioriginal Food & Science Corp. (“Bioriginal Food & Science”), Wisconsin Specialty Protein, L.L.C. (“WSP”) and Cyvex Nutrition, Inc. (“Cyvex”). 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 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.

 

On February 22, 2017, the Company announced that it has initiated a strategic alternatives review for the Company ’s human nutrition segment. That review could result in, among other things, a sale, consolidation or business combination, asset divestiture, partnering or other collaboration agreements with respect to the human nutrition segment in one or more transactions, continuing to operate the human nutrition segment in the ordinary course of business or an exit from portions of that business. However, there can be no assurance that the Company will be successful in identifying or completing any strategic alternative, that any such strategic alternative will yield additional value for shareholders or that the review process will not have an adverse impact on the Company’s business. In addition, if the review were to result in a sale of the human nutrition segment, it would make the Company more susceptible to factors affecting its animal nutrition segment. For additional information, see the first and second risk factors under “Item 1A. Risk Factors—Risks Relating to the Company’s Business and Industry” in the Company’s 2016 Form 10-K.

 

The Company has not set a timetable for completion of the strategic alternatives review process and does not intend to discuss or disclose developments with respect to the process unless and until such time as the Board of Directors has approved a definitive course of action or otherwise concludes its review of strategic alternatives.

 

22

 

 

OMEGA PROTEIN CORPORATION

 

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 and six months ended June 30, 2017 and 2016, see Note 3 – Industry Segments to the unaudited condensed consolidated financial statements in Item 1.

 

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 June 30 ,

 
   

201 7

   

201 6

 
   

Revenues

   

Percent

   

Revenues

   

Percent

 

Animal Nutrition Revenues

                               

Fish Meal

  $ 29.6       31.6 %   $ 43.0       38.2 %

Fish Oil

 

20.1

      21.4       31.3       27.8  

Refined Fish Oil

    6.8       7.2       6.3       5.6  

Fish Solubles and Other

    0.6       0.6       1.0       0.9  

Subtotal of Animal Nutrition

    57.1       60.8       81.6       72.5  
                                 

Human Nutrition Revenues

                               

Specialty oils

    28.3       30.1       23.5       20.9  

Dairy protein products

    5.6       6.0       5.2       4.6  

Other nutraceutical ingredients

    2.9       3.1       2.3       2.0  

Subtotal of Human Nutrition

    36.8       39.2       31.0       27.5  
                                 

Total

  $ 93.9       100.0 %   $ 112.6       100.0 %

 

   

Six Months Ended June 30,

 
   

2017

   

2016

 
   

Revenues

   

Percent

   

Revenues

   

Percent

 

Animal Nutrition Revenues

                               

Fish Meal

  $ 60.4       36.1 %   $ 77.1       39.0 %

Fish Oil

    21.8       13.0       40.1       20.3  

Refined Fish Oil

    13.9       8.3       12.7       6.4  

Fish Solubles and Other

    1.0       0.6       1.9       1.0  

Subtotal of Animal Nutrition

    97.1       58.0       131.8       66.7  
                                 

Human Nutrition Revenues

                               

Specialty oils

    55.0       32.8       51.3       26.0  

Dairy protein products

    10.1       6.0       9.6       4.9  

Other nutraceutical ingredients

    5.3       3.2       4.8       2.4  

Subtotal of Human Nutrition

    70.4       42.0       65.7       33.3  
                                 

Total

  $ 167.5       100.0 %   $ 197.5       100.0 %

 

23

 

 

OMEGA PROTEIN CORPORATION

 

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 June 30 ,

 
   

201 7

   

201 6

 
   

Revenues

   

Percent

   

Revenues

   

Percent

 
                                 

U.S. - Domestic Revenues

  $ 54.7       58.3 %   $ 51.6       45.8 %

Export Revenues

    39.2       41.7       61.0       54.2  

Total

  $ 93.9       100.0 %   $ 112.6       100.0 %

 

   

Six Months Ended June 30 ,

 
   

2017

   

2016

 
   

Revenues

   

Percent

   

Revenues

   

Percent

 
                                 

U.S. - Domestic Revenues

  $ 107.8       64.3 %   $ 108.5       54.9 %

Export Revenues

    59.7       35.7       89.0       45.1  

Total

  $ 167.5       100.0 %   $ 197.5       100.0 %

 

  Animal Nutrition Products

 

201 7 Fishing Information.   At June 30, 2017, Omega Protein owned a fleet of 38 vessels and 27 spotter aircraft for use in its fishing operations and also leased additional aircraft where necessary to facilitate operations. During the 2017 fishing season in the Gulf of Mexico, which is ex