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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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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

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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.

 

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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

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands, except par value amounts)

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements and Notes

 

 

 

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

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(In thousands, except per share amounts)

 

 

  

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

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

 

                    

 

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

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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.

 

 

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,
		2016								2015
		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

 

2016 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.

 

 

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.

 

 

OMEGA PROTEIN CORPORATION

 

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 closures. 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.

 

 

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 closures. 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.

 

 

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.

  

 

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:

 

		Payments Due by Period
Contractual Cash Obligations		Total				Less than 1 year				1 to 3 years				4 to 5 years				After 5 years
Debt		$	23,903			$	2,063			$	—			$	21,840			$	—
Interest on debt			1,866				429				823				614				—
Operating lease obligations			11,281				2,873				5,243				2,575				590
Pension funding (1)			5,380				560				1,625				1,800				1,395
Total Contractual Obligations		$	42,430			$	5,925			$	7,691			$	26,829			$	1,985

  

(1)

Represents estimated future contributions to the plan based on the expected return on plan assets and assumptions regarding discount rates

 

 

OMEGA PROTEIN CORPORATION

 

 

The Company believes that the existing cash, cash equivalents, cash flow from operations and funds available through the Loan Agreement described above will be sufficient to meet its working capital and capital expenditure requirements through the next twelve months.

 

Critical Accounting Policies and Estimates

 

The methods, estimates and judgments used in applying the Company’s critical accounting policies have a significant impact on the results reported in the Consolidated Financial Statements. The SEC has defined the critical accounting policies as the ones that are most important to the portrayal of the Company’s financial condition and operating results, and requires the Company to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are highly uncertain at the time of estimation. Based on this definition, the Company’s most critical policies include: valuation of inventory (Notes 1 and 6 to the consolidated financial statements in Item 8 of the Company’s 2015 Form 10-K), valuation of losses related to Jones Act and worker’s compensation insurance claims (Note 1 to the consolidated financial statements in Item 8 of the Company’s 2015 Form 10-K), valuation of income and deferred taxes (Notes 1 and 13 to the consolidated financial statements in Item 8 of the Company’s 2015 Form 10-K), valuation of property, plant and equipment including impairments (Note 9 to the consolidated financial statements in Item 8 of the Company’s 2015 Form 10-K), valuation of pension plan obligations (Notes 1 and 15 to the consolidated financial statements in Item 8 of the Company’s 2015 Form 10-K), energy swap valuations (Notes 1 to the consolidated financial statements in Item 8 of the Company’s 2015 Form 10-K) and the valuation of goodwill and other intangible assets (Notes 1 and 10 to the consolidated financial statements in Item 8 of the Company’s 2015 Form 10-K).

 

For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies or methodologies regarding estimates and judgements.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

 

In the normal course of business, the financial condition of the Company is exposed to minimal market risk associated with interest rate movements on the Company’s borrowings.  In the past, to mitigate this risk, the Company has entered into interest rate swap agreements to effectively lock-in the LIBOR component of certain debt instruments.  However, no interest rate swap agreements are currently in effect. As of March 31, 2016, $23.9 million of the Company’s indebtedness was subject to variable interest rates. A one percent increase or decrease in the levels of interest rates on variable rate debt would not result in a material change to the Company’s results of operations. 

 

Although the Company sells products in foreign countries, most of the Company’s revenues and costs are billed and paid for in US dollars. As a result, management does not believe that the Company is exposed to significant foreign country currency exchange risk. The Company had not historically utilized market risk sensitive instruments to manage its exposure to this risk but began to do so to a limited extent in 2015.

 

There have been no significant changes to the Company’s exposure to market risk since the Company’s 2015 Form 10-K.

 

Item 4. Controls and Procedures.

 

(a) Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, the Company conducted an evaluation of the effectiveness of its “disclosure controls and procedures,” as that phrase is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. The evaluation was carried out under the supervision and with the participation of management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).

 

Based on and as of the date of that evaluation, the Company’s CEO and CFO have concluded that (i) the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, and (ii) that the Company’s disclosure controls and procedures are effective.

 

 

OMEGA PROTEIN CORPORATION

 

Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclose material information otherwise required to be set forth in the Company’s periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.

 

(b) Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company is defending various claims and litigation arising from operations in the ordinary course of the Company’s business. In the opinion of management, except as noted in the Company’s annual report on Form 10-K for the year ended December 31, 2015, any losses resulting from these matters will not have a material adverse effect on the Company’s results of operations, cash flows or financial position.

 

Item 1A. Risk Factors

 

There have been no material changes from the risk factors previously disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2015.

 

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

 

The Company has never declared any dividends since it became a public company in April 1998. The Company generally intends to retain earnings, if any, and does not anticipate declaring or paying dividends on its common stock in the foreseeable future. Any future determination as to payment of dividends will be made at the discretion of the Board of Directors of the Company and will depend upon the Company’s operating results, financial condition, capital requirements, general business conditions and such other factors that the Board of Directors deems relevant. See “Item 2—Management’s Discussion and Analysis of Financial Conditional and Results of Operations—Liquidity and Capital Resources.”

 

The following table sets forth information with respect to repurchases by the Company of its shares of Common Stock during the first quarter of 2016:

 

Period		Total number of shares repurchased (1)				Average price paid per share				Total number of shares purchased as part of publicly announced plans or programs				Approximate dollar value of shares that may yet be purchased under the plans or programs
January 1- January 31, 2016			—				—				—				—
February 1- February 29, 2016			16,576			$	21.64				—				—
March 1- March 31, 2016			—				—				—				—
First Quarter 2016			16,576			$	21.64				—				—

_______________________

(1)	During the first quarter of 2016, all repurchased shares related to stock received by the Company for the payment of withholding taxes due on vesting of restricted stock awards.

 

 

OMEGA PROTEIN CORPORATION

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable

 

Item 5. Other Information

 

On April 24, 2016, certain employees in our Moss Point, Mississippi plant voted on a representation petition brought by the International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers union. The employees voted against representation by the union.

 

Item 6. Exhibits

 

	Exhibit No.		Description of Exhibit
	*10.1		Omega Protein Corporation 2016 Cash Incentive Performance Unit Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 11, 2016).
	*10.2		Form of Award of Restricted Stock Agreement for March 8, 2016 grants of restricted stock awards (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on March 11, 2016).
	31.1		Rule 13a-14(a)/15d-14(a) Certification for Chief Executive Officer.
	31.2		Rule 13a-14(a)/15d-14(a) Certification for Chief Financial Officer.
	32.1		Section 1350 Certification for Chief Executive Officer.
	32.2		Section 1350 Certification for Chief Financial Officer.
	#101.INS		XBRL Instance Document.
	#101.SCH		XBRL Taxonomy Extension Schema Document.
	#101.PRE		XBRL Taxonomy Presentation Linkbase Document.
	#101.LAB		XBRL Taxonomy Label Linkbase Document.
	#101.CAL		XBRL Taxonomy Calculation Linkbase Document.
	#101.DEF		XBRL Definition Linkbase Document.

 

---

 

* Incorporated by reference

 

# Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under those Sections.

  

 

OMEGA PROTEIN CORPORATION

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

	OMEGA PROTEIN CORPORATION
			(Registrant)
May 4, 2016		By:	/s/ Andrew C. Johannesen
			Andrew C. Johannesen
			Executive Vice President, Chief Financial Officer

 

 

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