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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.

 

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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 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	22
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

 

 

 

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, 2017 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.

 

 

OMEGA 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,
		2017				2016				2017				2016
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 closures			—				1,023				—				1,665
Loss (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 (loss) 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.

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

                      

		Six Months Ended June 30,
		2017				2016
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.

 

 

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. 

 

 

 

 

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, 2016		$	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.

 

 

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.

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 2. PLANT CLOSURES

 

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, 2017				Three Months Ended June 30, 2016				Six Months Ended June 30, 2017				Six Months Ended June 30, 2016				December 2015 to June 30, 2017
		(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, 2017				Three Months Ended June 30, 2016				Six Months Ended June 30, 2017				Six Months Ended June 30, 2016				December 2013 to June 30, 2017
		(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.

 

 

 

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, 2017 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

 

 

 

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,
		2017				2016
Operating income for reportable segments		$	17,739			$	15,657
Unallocated operating loss			(5,693	)			(6,684	)
Interest expense			(72	)			(134	)
Gain (loss) 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.

 

 

 

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, 2017		$	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
2018			2,074
2019			2,074
2020			2,074
2021			1,694
Thereafter			4,455
Total estimated future amortization expense		$	13,408

 

 

 

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

 

Receivables, net are summarized below (in thousands):

 

		June 30, 2017				December 31, 2016
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, 2016				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, 2017				December 31, 2016
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

 

 

 

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, 2017				December 31, 2016
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, 2016
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.

 

 

 

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		July - 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	)

 

 

 

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).

 

 

 

NOTE 11. NOTES PAYABLE AND LONG-TERM DEBT

 

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

 

		June 30,				December 31,
		2017				2016
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.

 

 

 

NOTE 12. ACCRUED LIABILITIES

 

Accrued liabilities are summarized below (in thousands):

 

		June 30,				December 31,
		2017				2016
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
Bioriginal 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 13. 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.

 

 

 

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.

 

 

Three Months Ended June 30:		2017								2016
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 15. 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.

 

 

 

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 16. COMPONENTS OF NET PERIODIC BENEFIT COST

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2017				2016				2017				2016
		(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%.

 

 

 

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, 2016 (the “2016 Form 10-K”), and in conjunction with the consolidated financial statements included in this report and in the 2016 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 2016 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.

 

 

 

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,
		2017								2016
		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	%

 

 

 

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,
		2017								2016
		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