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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 September 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 November 2, 2017: 22,478,928.

 

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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 September 30, 2017 and December 31, 2016	3
Unaudited Condensed Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016	4
Unaudited Condensed Consolidated Statement of Cash Flows for the nine months ended September 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	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	35
Item 4. Controls and Procedures	35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3. Defaults Upon Senior Securities	41
Item 4. Mine Safety Disclosures	41
Item 5. Other Information	41
Item 6. Exhibits	42
Signatures	43

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands, except share and par value amounts)

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements and Notes

 

 

		September 30, 2017				December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents		$	20,988			$	37,412
Receivables, net			47,888				38,796
Inventories, net			114,383				108,711
Prepaid expenses and other current assets			5,564				4,707
Total current assets			188,823				189,626
Property, plant and equipment, net			206,274				188,624
Goodwill			26,900				26,347
Other intangible assets, net			16,263				17,504
Other assets, net			4,221				5,764
Total assets		$	442,481			$	427,865
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt		$	936			$	1,097
Accounts payable			12,567				17,099
Accrued liabilities			36,693				37,928
Total current liabilities			50,196				56,124
Deferred tax liability, net			33,216				25,678
Pension liabilities, net			5,406				5,659
Other long-term liabilities			2,821				3,717
Total liabilities			91,639				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 22,464,028 and 22,411,695 shares outstanding at September 30, 2017 and December 31, 2016, respectively			225				223
Capital in excess of par value			157,450				155,761
Retained earnings			203,140				192,150
Treasury stock, at cost – 188,642 and 167,931 shares at September 30, 2017 and December 31, 2016, respectively			(3,390	)			(2,894	)
Accumulated other comprehensive loss			(6,583	)			(8,553	)
Total stockholders’ equity			350,842				336,687
Total liabilities and stockholders’ equity		$	442,481			$	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								Nine Months Ended
		September 30,								September 30,
		2017				2016				2017				2016
Revenues		$	90,285			$	108,753			$	257,777			$	306,246
Cost of sales			76,491				75,706				201,284				214,982
Gross profit			13,794				33,047				56,493				91,264
Selling, general, and administrative expense			11,262				9,435				31,294				29,474
Research and development expense			393				605				1,422				1,954
Impairment of goodwill and other intangible assets			—				—				—				11,614
Merger related expenses			1,420				—				1,420				—
Loss related to plant closures			—				663				—				2,328
Charges related to U.S. Attorney investigation			—				358				—				358
Loss (gain) on disposal of assets			28				(17	)			(182	)			(83	)
Operating income			691				22,003				22,539				45,619
Interest expense			(49	)			(108	)			(202	)			(387	)
Gain (loss) on foreign currency			998				159				(243	)			(1,199	)
Other income (expense), net			(9	)			(221	)			(145	)			(184	)
Income before income taxes			1,631				21,833				21,949				43,849
Provision for income taxes			713				7,280				7,593				15,253
Net income			918				14,553				14,356				28,596
Other comprehensive income (loss):
Foreign currency translation adjustment net of tax (expense) benefit of ($355), $31, ($995) and ($553), respectively			659				(58	)			1,847				1,027
Energy swap adjustment, net of tax benefit (expense) of ($465), ($285), $257 and ($1,212), respectively			864				530				(477	)			2,251
Pension benefits adjustment, net of tax expense of $108, $119, $323 and $358, respectively			200				221				600				665
Comprehensive income		$	2,641			$	15,246			$	16,326			$	32,539
Basic earnings per share (See Note 14)		$	0.04			$	0.65			$	0.64			$	1.28
Weighted average common shares outstanding			22,209				21,935				22,164				21,894
Diluted earnings per share (See Note 14)		$	0.04			$	0.64			$	0.63			$	1.27
Weighted average common shares and potential common share equivalents outstanding			22,449				22,232				22,438				22,194
Dividends declared per common share outstanding		$	0.05			$	—			$	0.15			$	—

 

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)

        

		Nine Months Ended September 30,
		2017				2016
Cash flows from operating activities:
Net income		$	14,356			$	28,596
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			19,532				19,149
Loss related to plant closures			—				2,131
Loss (gain) on disposal of assets			(182	)			(83	)
Impairment of goodwill and other intangible assets			—				11,614
Provisions for losses on receivables			7				29
Share based compensation			2,094				3,181
Deferred income taxes			7,712				(624	)
Unrealized loss (gain) on foreign currency fluctuations, net			243				1,199
Changes in assets and liabilities:
Receivables			(8,520	)			(6,681	)
Inventories			(5,140	)			7,675
Prepaid expenses and other current assets			(1,628	)			(85	)
Other assets			194				(2,546	)
Accounts payable			(4,616	)			(4,680	)
Accrued liabilities			(677	)			19,770
Pension liability, net			347				323
Other long term liabilities			177				(1,853	)
Net cash provided by operating activities			23,899				77,115
Cash flows from investing activities:
Capital expenditures			(37,130	)			(26,383	)
Proceeds from disposition of assets			834				107
Net cash used in investing activities			(36,296	)			(26,276	)
Cash flows from financing activities:
Dividends paid			(3,366	)			—
Principal payments of long-term debt			(280	)			(25,485	)
Proceeds from long-term debt			—				6,376
Treasury stock repurchase			(496	)			(367	)
Proceeds from equity compensation transactions			79				1,342
Excess tax benefit of equity compensation transactions			—				865
Net cash used in financing activities			(4,063	)			(17,269	)
Net (decrease) increase in cash and cash equivalents			(16,460	)			33,570
Translation effect on cash			36				4
Cash and cash equivalents at beginning of year			37,412				661
Cash and cash equivalents at end of period		$	20,988			$	34,235

 

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. The animal nutrition segment’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. Additionally, certain amounts applicable to the prior period have been reclassified to conform to the current classification.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s consolidated financial position as of September 30, 2017, and the results of its operations for the three month and nine month periods ended September 30, 2017 and 2016 and its cash flows for the nine month periods ended September 30, 2017 and 2016. Quarterly operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

 

 

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 Nine Months Ended September 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			65				—				1,847				1,912
Amounts reclassified from accumulated other comprehensive loss			(542	)(a)			600	(b)			—				58
Net current-period other comprehensive income			(477	)			600				1,847				1,970
Balance as of September 30, 2017		$	784			$	(6,857	)		$	(510	)		$	(6,583	)

 

Changes in Accumulated Other Comprehensive Loss by Component

For the Nine Months Ended September 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			1,018				—				1,027				2,045
Amounts reclassified from accumulated other comprehensive loss			1,233	(a)			665	(b)			—				1,898
Net current-period other comprehensive income			2,251				665				1,027				3,943
Balance as of September 30, 2016		$	239			$	(7,670	)		$	(1,664	)		$	(9,095	)

 

(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 August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which amends ASC 815. The purpose of this ASU is to better align accounting rules with a company’s risk management activities and financial reporting for hedging relationships, better reflect economic results of hedging in financial statements, simplify hedge accounting requirements and improve the disclosures of hedging arrangements. The amendment should be applied using the modified retrospective transition method. ASU 2017-12 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted. The Company currently plans to adopt the requirements of the new standard in the first quarter of 2018 and does not expect it to have a significant impact on its consolidated results of operations, financial position and related disclosures.

 

In March 2017, the FASB issued 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.

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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.

 

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 both its Animal Nutrition and Human Nutrition segments. 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 both the Animal Nutrition and Human Nutrition segments, 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 both the Animal Nutrition and Human Nutrition segments, 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 nine months ended September 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.

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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.

 

Business Interruption Insurance Proceeds

 

The Company recorded a receivable in September 2017 of approximately $0.3 million, net of deductible, from its business interruption insurance provider related to downtime at one of its Gulf of Mexico production facilities in August 2016. The proceeds were calculated based on lost inventory production. Given that the Company experienced a slight decrease in production as a result of the downtime, some of which would have been sold in 2017, the proceeds related to lost inventory production were recognized as an increase in revenues.

 

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 nine months ended September 30, 2017 and 2016 and from December 2015 to September 30, 2017:

 

		Three Months Ended September 30, 2017				Three Months Ended September 30, 2016				Nine Months Ended September 30, 2017				Nine Months Ended September 30, 2016				December 2015 to September 30, 2017
		(in thousands)
Impairment of property, plant and equipment		$	—			$	534			$	—			$	1,734			$	5,892
Write-off material and supplies inventory			—				336				—				575				575
Employee severance costs			—				138				—				677				611
Estimated decommissioning costs			—				(375	)			—				(375	)			—
Other closure costs			—				30				—				30				74
Total loss (gain) related to plant closure		$	—			$	663			$	—			$	2,641			$	7,152

 

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

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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 nine months ended September 30, 2017 and 2016 and from December 2013 to September 30, 2017:

  

		Three Months Ended September 30, 2017				Three Months Ended September 30, 2016				Nine Months Ended September 30, 2017				Nine Months Ended September 30, 2016				December 2013 to September 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			—				—				—				(313	)			6,405
Total loss (gain) related to plant closure		$	—			$	—			$	—			$	(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 to 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 September 30, 2017 and 2016 (in thousands):

 

2017		Animal Nutrition				Human Nutrition				Unallocated				Total
Revenue (1)		$	57,931			$	32,354			$	—			$	90,285
Cost of sales			48,687				27,804				—				76,491
Gross profit			9,244				4,550				—				13,794
Selling, general and administrative expenses (including research and development)			539				4,266				6,850				11,655
Merger related expenses			—				—				1,420				1,420
Loss (gain) on disposal of assets			28				—				—				28
Operating income (loss)		$	8,677			$	284			$	(8,270	)		$	691
Depreciation and amortization		$	5,001			$	1,270			$	233			$	6,504
Identifiable assets		$	279,282			$	135,669			$	27,530			$	442,481
Capital expenditures		$	9,730			$	—			$	—			$	9,730

 

2016		Animal Nutrition				Human Nutrition				Unallocated				Total
Revenue (2)		$	77,658			$	31,095			$	—			$	108,753
Cost of sales			48,532				27,174				—				75,706
Gross profit			29,126				3,921				—				33,047
Selling, general and administrative expenses (including research and development)			559				3,719				5,762				10,040
Loss (gain) related to plant closures			—				663				—				663
Charges related to U.S. Attorney investigation			358				—				—				358
Loss (gain) on disposal of assets			(17	)			—				—				(17	)
Operating income (loss)		$	28,226			$	(461	)		$	(5,762	)		$	22,003
Depreciation and amortization		$	4,978			$	1,383			$	189			$	6,550
Identifiable assets		$	257,009			$	139,709			$	38,435			$	435,153
Capital expenditures		$	6,798			$	95			$	1,218			$	8,111

 

(1) 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.

 

(2) Excludes revenue from internal customers of $0.2 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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

 

2017		Animal Nutrition				Human Nutrition				Unallocated				Total
Revenue (3)		$	155,019			$	102,758			$	—			$	257,777
Cost of sales			116,429				84,855				—				201,284
Gross profit			38,590				17,903				—				56,493
Selling, general and administrative expenses (including research and development)			1,662				11,948				19,106				32,716
Merger related expenses			—				—				1,420				1,420
Loss (gain) on disposal of assets			(193	)			11				—				(182	)
Operating income (loss)		$	37,121			$	5,944			$	(20,526	)		$	22,539
Depreciation and amortization		$	15,030			$	3,798			$	704			$	19,532
Identifiable assets		$	279,282			$	135,669			$	27,530			$	442,481
Capital expenditures		$	36,999			$	109			$	22			$	37,130

 

2016		Animal Nutrition				Human Nutrition				Unallocated				Total
Revenue (4)		$	209,455			$	96,791			$	—			$	306,246
Cost of sales			129,355				85,627				—				214,982
Gross profit			80,100				11,164				—				91,264
Selling, general and administrative expenses (including research and development)			1,707				12,328				17,393				31,428
Impairment of goodwill and other intangible assets			—				11,614				—				11,614
Loss (gain) related to plant closures			(313	)			2,641				—				2,328
Charges related to U.S. Attorney investigation			358				—				—				358
Loss (gain) on disposal of assets			(83	)			—				—				(83	)
Operating income (loss)		$	78,431			$	(15,419	)		$	(17,393	)		$	45,619
Depreciation and amortization		$	14,388			$	4,190			$	571			$	19,149
Identifiable assets		$	257,009			$	139,709			$	38,435			$	435,153
Capital expenditures		$	22,702			$	1,599			$	2,082			$	26,383

 

(3) Excludes revenue from internal customers of $1.6 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 $0.6 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 September 30,
		2017				2016
Operating income for reportable segments		$	8,961			$	27,765
Unallocated operating loss			(8,270	)			(5,762	)
Interest expense			(49	)			(108	)
Gain (loss) gain on foreign currency			998				159
Other income (expense), net			(9	)			(221	)
Income before income taxes		$	1,631			$	21,833

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

		Nine Months Ended September 30,
		2017				2016
Operating income for reportable segments		$	43,065			$	63,012
Unallocated operating loss			(20,526	)			(17,393	)
Interest expense			(202	)			(387	)
Gain (loss) gain on foreign currency			(243	)			(1,199	)
Other income (expense), net			(145	)			(184	)
Income before income taxes		$	21,949			$	43,849

 

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.

 

During the third quarter of 2017, the Company identified a triggering event resulting from WSP branded products sales falling below the Company’s forecast. The Company followed the accounting guidance from ASC 360-10 and determined that the long-lived asset group of WSP, which includes the trade name and customer relationships intangibles, are recoverable. The accounting guidance from ASC 360-10 requires the Company to calculate the sum of the undiscounted cash flows expected to be produced by the long-lived asset group over the remaining useful life of the asset group and compare that sum to the carrying value of the asset group. The calculated sum of those undiscounted cash flows resulted in a value that significantly exceeds the carrying value of the asset group. Therefore, an impairment of WSP’s intangible assets does not exist. It is possible that conditions could deteriorate in future periods such that an impairment could exist. The Company will evaluate the applicable events and circumstances and follow the applicable accounting guidance to assess WSP’s intangibles as of December 31, 2017.

 

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			553
September 30, 2017		$	26,900

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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

 

		Balance at January 1, 2017				Amortization				Foreign currency translation adjustment				Balance at September 30, 2017
Customer relationships and brand names, net of accumulated amortization of $6,275 and $7,829, respectively		$	14,259				(1,554	)			244			$	12,949
Indefinite life intangibles – trade names/secrets and other			3,245				—				69				3,314
Total intangible assets		$	17,504				(1,554	)			313			$	16,263

 

 

Amortization expense of the Company’s intangible assets for each of the three month periods ended September 30, 2017 and 2016 was approximately $0.5 million and for the nine month periods ended September 30, 2017 and 2016 was approximately $1.6 million and $1.5 million, respectively. The table below shows estimated future amortization expense related to intangible assets (in thousands):

 

Remainder of 2017		$	520
2018			2,074
2019			2,074
2020			2,074
2021			1,694
Thereafter			4,513
Total estimated future amortization expense		$	12,949

 

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):

 

		September 30, 2017				December 31, 2016
Trade		$	40,867			$	32,137
Insurance			1,537				4,600
Income tax			5,480				2,258
Other			703				538
Total accounts receivable			48,587				39,533
Less allowance for doubtful accounts			(699	)			(737	)
Receivables, net		$	47,888			$	38,796

 

NOTE 6. INVENTORY, NET

 

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

 

		September 30, 2017				December 31, 2016				September 30, 2016
Fish meal		$	45,437			$	30,511			$	38,683
Fish oil			21,930				24,191				25,960
Fish solubles			755				834				567
Unallocated inventory cost pool (including off-season costs)			625				8,090				575
Other nutraceutical products			3,211				3,648				4,038
Bioriginal Food & Science products			25,929				24,699				22,944
Dairy protein products			5,914				6,424				8,416
Other materials and supplies			10,582				10,314				10,685
Total inventory		$	114,383			$	108,711			$	111,868

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Inventory at September 30, 2017, December 31, 2016 and September 30, 2016 is stated at the lower of cost and net realizable value. The elements of the September 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):

 

		September 30, 2017				December 31, 2016
Prepaid insurance		$	2,869			$	1,707
Selling expenses			139				82
Leases			97				334
Energy swap			911				1,565
Other prepaids and expenses			1,548				1,019
Total prepaid expenses and other current assets		$	5,564			$	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):

 

		September 30, 2017				December 31, 2016
Fish nets, net of accumulated amortization of $2,039 and $1,069		$	1,808			$	1,346
Insurance receivables			1,134				2,571
Debt issuance costs			686				861
Energy swap			294				372
Note receivable			194				319
Asset held for sale			—				91
Deposits and other			105				204
Total other assets, net		$	4,221			$	5,764

 

Amortization expense for fishing nets amounted to approximately $0.4 million and $0.3 million for the three months ended September 30, 2017 and 2016, respectively, and $1.0 million and $0.8 million for the nine months ended September 30, 2017 and 2016, respectively.

 

As of September 30, 2017 and December 31, 2016, insurance receivables primarily relate 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.

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 9. PROPERTY, PLANT AND EQUIPMENT, NET

 

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

 

		September 30, 2017				December 31, 2016
Land		$	9,458			$	9,458
Plant assets			210,691				206,897
Fishing vessels			135,364				127,149
Furniture and fixtures			15,233				15,240
Construction in progress			40,523				23,134
Total property and equipment			411,269				381,878
Less accumulated depreciation and impairment			(204,995	)			(193,254	)
Property, plant and equipment, net		$	206,274			$	188,624

 

Depreciation expense was $5.5 million and $5.8 million for the three months ended September 30, 2017 and 2016, respectively, and $16.8 million and $16.7 million for the nine months ended September 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 the three months ended September 30, 2017 and 2016, the Company capitalized interest of $0 and less than $0.1 million, respectively. For the nine months ended September 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 September 30, 2017				Deferred Tax Asset/(Liability) as of September 30, 2017
										(in thousands)
Diesel - NYMEX Heating Oil Swap		Oct. - November, 2017		530,500 Gallons		$	1.51			$	238			$	(83	)
Natural Gas - NYMEX Natural Gas Swap		October, 2017		56,300 MMBTUs		$	2.87				6				(2	)
Propane – Natural Gas Liquids Swap		Oct. - November, 2017		481,300 Gallons		$	0.45				217				(76	)
Diesel - NYMEX Heating Oil Swap		May - November, 2018		2,777,000 Gallons		$	1.63				253				(89	)
Natural Gas - NYMEX Natural Gas Swap		April – October, 2018		503,000 MMBTUs		$	2.86				38				(13	)
Propane – Natural Gas Liquids Swap		June - November, 2018		2,517,000 Gallons		$	0.56				327				(115	)
Diesel - NYMEX Heating Oil Swap		May - November, 2019		2,028,500 Gallons		$	1.69				40				(14	)
Natural Gas - NYMEX Natural Gas Swap		April – October, 2019		374,200 MMBTUs		$	2.77				(11	)			4
Propane – Natural Gas Liquids Swap		June - November, 2019		1,563,500 Gallons		$	0.57				97				(34	)
										$	1,205			$	(422	)

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Energy Swap		Consumption Period		Quantity		Price Per Unit				Energy Swap Asset/(Liability) as of December 31, 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 September 30, 2017, Omega Protein has recorded a long-term other asset of $0.3 million, net of the current portion included in prepaid expenses and other current assets of $0.9 million, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax liability of $0.4 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 September 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 September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Beginning balance		$	(80	)		$	(291	)		$	1,261			$	(2,012	)
Net (gain) loss, net of tax, reclassified to unallocated inventory cost pool			(459	)			692				(542	)			1,233
Net change associated with current period swap transactions, net of tax			1,323				(162	)			65				1,018
Balance as of September 30,		$	784			$	239			$	784			$	239

 

The $0.8 million reported in accumulated other comprehensive loss as of September 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 $0.6 million.

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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

 

As of September 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		$	1,244			$	(39	)		$	1,205

 

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):

 

		September 30,				December 31,
		2017				2016
ING Commercial Finance B.V., interest at EURIBOR plus an applicable rate (1.58% at September 30, 2017 and 1.67% at December 31, 2016)		$	936			$	1,097
Total debt			936				1,097
Less current maturities			(936	)			(1,097	)
Long-term debt		$	—			$	—

 

The estimated fair value of the Company’s total debt at September 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.

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

As of September 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 September 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 (1.58% at September 30, 2017).  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 September 30, 2017 and December 31, 2016, Bioriginal Food & Science Europe had $0.9 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):

 

		September 30,				December 31,
		2017				2016
Insurance		$	5,145			$	9,352
Salary and benefits			18,851				11,677
Trade creditors			8,999				11,139
Taxes, other than income tax			1,352				523
Income tax			518				943
Bioriginal earn-out			—				2,622
Deferred revenue (1)			1,540				1,299
Accrued interest			12				12
Other			276				361
Total accrued liabilities		$	36,693			$	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 earned 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 were 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 was $3.5 million Canadian dollars.

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

The earn-out payment was 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 September 30, 2017 and December 31, 2016 the outstanding liability associated with the earn-out was $0 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.

 

On March 2, 2017 and April 5, 2017, two class action lawsuits captioned Malone v. Omega Protein Corporation and Diehl v. Omega Protein Corporation, respectively, were filed against the Company and two of its officers in the United States District Court for the Southern District of New York. The Malone action was voluntarily dismissed, without prejudice, by the plaintiff on March 29, 2017. On October 27, 2017, the lead plaintiff in the Diehl action filed a second consolidated amended complaint. The Diehl action purports to assert 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 in Diehl 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 complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by the Company and two of its officers relating to allegedly known environmental violations at two of the Company’s plants and regarding the Company’s finances and business prospects, which allegedly operated to inflate artificially the price paid for the Company’s securities during the class period. The complaints seek unspecified compensatory damages, including interest thereon, attorneys’ fees and other costs.

 

On March 3, 2017, a class action lawsuit captioned Ahern v. Omega Protein Corporation was filed against the Company and two of its officers in the United States District Court for the Central District of California. This suit 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 plaintiff seeks to represent a proposed class of all persons who purchased or otherwise acquired the Company’s publicly traded securities during the period from August 3, 2016 through March 1, 2017. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by the Company and two of its officers relating to allegedly known environmental violations at one of the Company’s plants and regarding the Company’s business, operational and financial results, 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. On May 1, 2017, the Company filed a motion to transfer this lawsuit from the United States District Court for the Central District of California to the United States District Court for the Southern District of New York.

 

On May 15, 2017, the Ahern action was transferred to the United States District Court for the Southern District of New York, where it was subsequently consolidated with the Diehl action, on July 14, 2017. 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 consolidated amended complaint seeks unspecified compensatory damages, including interest thereon, attorneys’ fees and other costs.

 

On August 8, 2017, a shareholder derivative lawsuit captioned Penn v. Scholtes was filed against three of the Company’s officers and five of its directors in the United States District Court for the Southern District of New York. This suit purports to assert claims on behalf of the Company against three of the Company’s officers and five of its directors for alleged breach of fiduciary duties and violations of Section 14(a) of the Exchange Act and Rule 14a-9 under the Exchange Act. The complaint seeks damages allegedly caused by the officers and directors allegedly permitting environmental violations at one of the Company’s fisheries and improperly granting incentive compensation with knowledge of the violations. The complaint also seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by three officers and five directors relating to allegedly known environmental violations in the Company’s proxy statements. The complaint seeks unspecified compensatory damages, unspecified punitive damages, attorneys’ fees and other costs, and equitable relief.

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

On September 11, 2017, a shareholder derivative lawsuit captioned Sehlmeyer v. Scholtes was filed against two of the Company’s officers and six of its directors in the District Court of Clark County, Nevada, asserting claims similar to those asserted in the Penn derivative suit. However, on October 11, 2017, the plaintiff amended his complaint, deleting the derivative claims and instead asserting putative class action claims against the Company, one of the Company’s officers, and seven of the Company’s directors arising out of the announcement that the Company had entered into a merger agreement under which it will be acquired by Cooke Inc. This suit purports to assert claims against one of the Company’s officers and seven of its directors for alleged breach of fiduciary duties. The complaint seeks relief for the officer’s and directors’ alleged failure to act in the shareholders’ best interests by failing to maximize shareholder value. The complaint seeks an injunction preventing the defendants from consummating the proposed merger, rescission of the proposed merger, attorneys’ fees and other costs, and other equitable relief.

 

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.

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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.

 

The Company grants certain incentive compensation awards, including restricted stock, to employees and non-employee directors that are considered to be participating securities. Due to the presence of participating securities, earnings per share is calculated using the two-class method.

 

Three Months Ended September 30:		2017								2016
Allocation of earnings:
Net income		$	918							$	14,553
Income allocated to participating securities			(10	)							(257	)
Income allocated to common shares outstanding		$	908							$	14,296
Weighted average common shares outstanding			22,209								21,935
Basic earnings per share						$	0.04							$	0.65
Stock options assumed exercised			240								297
Weighted average diluted common shares and potential common share equivalents outstanding			22,449								22,232
Diluted earnings per share						$	0.04							$	0.64

 

Nine Months Ended September 30:		2017								2016
Allocation of earnings:
Net income		$	14,356							$	28,596
Income allocated to participating securities			(179	)							(484	)
Income allocated to common shares outstanding		$	14,177							$	28,112
Weighted average common shares outstanding			22,164								21,894
Basic earnings per share						$	0.64							$	1.28
Stock options assumed exercised			274								300
Weighted average diluted common shares and potential common share equivalents outstanding			22,438								22,194
Diluted earnings per share						$	0.63							$	1.27

 

There were no options to purchase shares of common stock excluded from the computation of diluted earnings per share during the three and nine months ended September 30, 2017 and 2016.

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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 nine month periods ended September 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 $0.6 million and $0.7 million ($0.4 million and $0.5 million after tax) for the three months ended September 30, 2017 and 2016, respectively, and approximately $1.6 million and $1.8 million ($1.1 million and $1.2 million after tax) for the nine months ended September 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 September 30, 2017, there was approximately $1.5 million ($1.0 million after tax) of unrecognized compensation expense related to non-vested restricted stock that is expected to be recognized over a weighted-average period of 1.0 years, of which $0.4 million ($0.2 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 $0.1 million and $0.6 million ($0.1 million and $0.4 million after tax) for the three months ended September 30, 2017 and 2016, respectively, and approximately $0.5 million and $1.4 million ($0.3 million and $0.9 million after tax) for the nine months ended September 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 September 30, 2017, there was approximately $1.6 million ($1.1 million after tax) of unrecognized compensation expense related to performance units that is expected to be recognized over a weighted-average period of 1.8 years, of which $0.3 million ($0.2 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 September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
		(in thousands)								(in thousands)
Service cost		$	—			$	—			$	—			$	—
Interest cost			223				251				669				753
Expected return on plan assets			(185	)			(213	)			(555	)			(638	)
Amortization of prior service costs			—				—				—				—
Amortization of net loss			307				341				921				1,024
Net periodic pension cost		$	345			$	379			$	1,035			$	1,139

 

For the nine months ended September 30, 2017 and 2016, the Company contributed approximately $0.4 million and $0.5 million, respectively, to the Company’s pension plan. The Company expects to make contributions of $0.1 million to the pension plan during the remainder of 2017.

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 17. SUBSEQUENT EVENTS

 

On October 5, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cooke Inc. (“Cooke”) and Alpha MergerSub, Inc. (“Merger Sub”) pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as an indirect wholly-owned subsidiary of Cooke. The respective boards of directors of the Company and Cooke unanimously approved the Merger Agreement.

 

On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, each outstanding share of the Company’s common stock (other than shares of common stock held by the Company or Cooke or any of their subsidiaries) will be converted into the right to receive $22.00 in cash, less any required withholding taxes. Each outstanding option to purchase shares of common stock will become fully exercisable and will be converted into the right to receive an amount in cash equal to the excess, if any, of $22.00 payable in respect of a share of common stock over the applicable per share exercise price of such outstanding option, less applicable withholding taxes. The restrictions applicable to each share of restricted common stock issued pursuant to the Company’s 2006 Incentive Plan or its 2015 Long-Term Incentive Plan will immediately lapse and each such share of restricted common stock will be converted into the right to receive $22.00, less any required withholding taxes.

 

The consummation of the Merger is subject to the approval of the Company’s shareholders and certain customary regulatory and other closing conditions, including, in the case of the Company, its obligations under a Purchase and Sale Agreement with Alpha VesselCo Holdings, Inc. relating to the sale of certain assets subject to the jurisdiction of the United States Maritime Administration (“MARAD”), which the Company entered into concurrently with the Merger Agreement.

 

The Merger Agreement contains customary non-solicitation covenants obligating the Company not to solicit alternative acquisition proposals from third parties. The Merger Agreement also contains certain termination rights, including the right of either party to terminate the Merger Agreement if the Merger is not consummated by February 11, 2018 (which date may be extended upon the written request of Cooke by up to 60 days in order to obtain MARAD approval, so long as all conditions to the Merger have been met, other than the condition relating to MARAD approval and any conditions which by their nature can only be satisfied at closing). Upon termination of the Merger Agreement under certain specified circumstances, the Company may be required to pay Cooke, or Cooke may be required to pay the Company, a termination fee of $20 million.

 

Cooke intends to fund the transactions contemplated by the Merger Agreement through debt financing that has been committed to Cooke by DNB Capital LLC, BMO Capital Markets Corp. and certain of their respective affiliates. The Merger Agreement does not contain a financing condition.

 

 

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, 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.

 

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

 

Proposed Merger with Cooke Inc.

 

On October 5, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cooke Inc. (“Cooke”) and Alpha MergerSub, Inc. (“Merger Sub”) pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as an indirect wholly-owned subsidiary of Cooke. The respective boards of directors of the Company and Cooke unanimously approved the Merger Agreement.

 

 

OMEGA PROTEIN CORPORATION

 

On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, each outstanding share of the Company’s common stock (other than shares of common stock held by the Company or Cooke or any of their subsidiaries) will be converted into the right to receive $22.00 in cash, less any required withholding taxes. Each outstanding option to purchase shares of common stock will become fully exercisable and will be converted into the right to receive an amount in cash equal to the excess, if any, of $22.00 payable in respect of a share of common stock over the applicable per share exercise price of such outstanding option, less applicable withholding taxes. The restrictions applicable to each share of restricted common stock issued pursuant to the Company’s 2006 Incentive Plan or its 2015 Long-Term Incentive Plan will immediately lapse and each such share of restricted common stock will be converted into the right to receive $22.00, less any required withholding taxes.

 

The consummation of the Merger is subject to the approval of the Company’s shareholders and certain customary regulatory and other closing conditions, including, in the case of the Company, its obligations under a Purchase and Sale Agreement with Alpha VesselCo Holdings, Inc. relating to the sale of certain assets subject to the jurisdiction of the United States Maritime Administration (“MARAD”), which the Company entered into concurrently with the Merger Agreement.

 

The Merger Agreement contains customary non-solicitation covenants obligating the Company not to solicit alternative acquisition proposals from third parties. The Merger Agreement also contains certain termination rights, including the right of either party to terminate the Merger Agreement if the Merger is not consummated by February 11, 2018 (which date may be extended upon the written request of Cooke by up to 60 days in order to obtain MARAD approval, so long as all conditions to the Merger have been met, other than the condition relating to MARAD approval and any conditions which by their nature can only be satisfied at closing). Upon termination of the Merger Agreement under certain specified circumstances, the Company may be required to pay Cooke, or Cooke may be required to pay the Company, a termination fee of $20 million.

 

Cooke intends to fund the transactions contemplated by the Merger Agreement through debt financing that has been committed to Cooke by DNB Capital LLC, BMO Capital Markets Corp. and certain of their respective affiliates. The Merger Agreement does not contain a financing condition.

 

Human Nutrition Segment Strategic Review Process

 

On February 22, 2017, the Company announced that it 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 human nutrition 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. In addition, pursuant to the Merger Agreement, Cooke’s consent is required for any transaction involving the Company’s human nutrition segment.

 

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 September 30,
		2017								2016
		Revenues				Percent				Revenues				Percent
Animal Nutrition Revenues
Fish Meal		$	41.6				46.2	%		$	56.4				51.9	%
Fish Oil			7.9				8.7				14.7				13.5
Refined Fish Oil			8.0				8.9				6.3				5.8
Fish Solubles and Other			0.4				0.4				0.3				0.3
Subtotal of Animal Nutrition			57.9				64.2				77.7				71.5
Human Nutrition Revenues
Specialty oils			26.2				29.0				24.6				22.6
Dairy protein products			4.0				4.4				3.3				3.0
Other nutraceutical ingredients			2.2				2.4				3.2				2.9
Subtotal of Human Nutrition			32.4				35.8				31.1				28.5
Total		$	90.3				100.0	%		$	108.8				100.0	%

 

 

OMEGA PROTEIN CORPORATION

 

		Nine Months Ended September 30,
		2017								2016
		Revenues				Percent				Revenues				Percent
Animal Nutrition Revenues
Fish Meal		$	102.1				39.6	%		$	133.2				43.6	%
Fish Oil			29.7				11.5				54.9				17.9
Refined Fish Oil			21.9				8.5				19.1				6.2
Fish Solubles and Other			1.4				0.5				2.2				0.7
Subtotal of Animal Nutrition			155.1				60.1				209.4				68.4
Human Nutrition Revenues
Specialty oils			81.1				31.5				75.9				24.8
Dairy protein products			14.1				5.5				12.9				4.2
Other nutraceutical ingredients			7.5				2.9				8.0				2.6
Subtotal of Human Nutrition			102.7				39.9				96.8				31.6
Total		$	257.8				100.0	%		$	306.2				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 September 30,
		2017								2016
		Revenues				Percent				Revenues				Percent
U.S. - Domestic Revenues		$	49.4				54.7	%		$	48.5				44.6	%
Export Revenues			40.9				45.3				60.3				55.4
Total		$	90.3				100.0	%		$	108.8				100.0	%

 

Nine Months Ended September 30,