Omega Protein Corporation
OMEGA PROTEIN CORP (Form: 10-Q, Received: 11/04/2010 16:37:29)
Table of Contents

 

 

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, 2010

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

incorporation or organization)

 

(I.R.S. Employer

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   ¨     No   ¨ .

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes   ¨     No   x .

Number of shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, on November 1, 2010: 18,819,278.

 

 

 


Table of Contents

 

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, 2010 and December 31, 2009

     3   
 

Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the three months and nine months ended September 30, 2010 and 2009

     4   
 

Unaudited Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2010 and 2009

     5   
 

Notes to Unaudited Condensed Consolidated Financial Statements

     6   
Item 2.  

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

     23   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     38   
Item 4.  

Controls and Procedures

     38   
PART II. OTHER INFORMATION   
Item 1.  

Legal Proceedings

     39   
Item 1A.  

Risk Factors

     40   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     41   
Item 3.  

Defaults Upon Senior Securities

     41   
Item 4.  

Removed and Reserved

     41   
Item 5.  

Other Information

     41   
Item 6.  

Exhibits

     41   
Signatures      42   

 

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Table of Contents

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements and Notes

 

     September 30,
2010
    December 31,
2009
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 19,455      $ 2,177   

Receivables, net

     17,901        11,225   

Inventories

     70,895        63,826   

Deferred tax asset, net

     5,539        3,426   

Prepaid expenses and other current assets

     3,362        3,235   
                

Total current assets

     117,152        83,889   

Other assets, net

     2,860        3,301   

Energy swap asset, net of current portion

     58        229   

Property, plant and equipment, net

     111,012        110,625   
                

Total assets

   $ 231,082      $ 198,044   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Current maturities of long-term debt

   $ 2,894      $ 2,380   

Current portion of capital lease obligation

     412        369   

Accounts payable

     1,027        2,392   

Accrued liabilities

     26,026        16,952   
                

Total current liabilities

     30,359        22,093   

Long-term debt, net of current maturities

     31,075        23,540   

Capital lease obligation, net of current portion

     943        1,265   

Interest rate swap liability, net of current portion

     223        395   

Deferred tax liability, net

     11,995        4,540   

Pension liabilities, net

     7,884        9,185   
                

Total liabilities

     82,479        61,018   
                

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; 18,819,278 and 18,727,446 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively

     188        187   

Capital in excess of par value

     116,341        114,772   

Retained earnings

     39,745        29,813   

Accumulated other comprehensive loss

     (7,671     (7,746
                

Total stockholders’ equity

     148,603        137,026   
                

Total liabilities and stockholders’ equity

   $ 231,082      $ 198,044   
                

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

 

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OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share amounts)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Revenues

   $ 56,014      $ 49,940      $ 124,571      $ 121,848   

Cost of sales

     40,742        48,678        94,461        115,267   
                                

Gross profit

     15,272        1,262        30,110        6,581   

Selling, general, and administrative expense

     3,603        3,041        10,825        9,554   

Research and development expense

     415        365        1,349        1,047   

Losses (proceeds) resulting from Gulf of Mexico oil spill disaster, net of recoveries

     (587     —          —          —     

(Other proceeds) loss resulting from natural

disaster, net – 2008 storms

     —          (1     (234     392   

Other proceeds relating to natural disaster,

net – 2005 storms

     —          —          —          (2,656

(Gain) loss on disposal of assets

     (15     100        253        98   
                                

Operating income (loss)

     11,856        (2,243     17,917        (1,854

Interest income

     22        36        28        168   

Interest expense

     (676     (2,269     (1,934     (4,046

Other expense, net

     (143     (82     (321     (296
                                

Income (loss) before income taxes

     11,059        (4,558     15,690        (6,028

Provision (benefit) for income taxes

     4,089        (1,738     5,758        (2,015
                                

Net income (loss)

     6,970        (2,820     9,932        (4,013

Other comprehensive income (loss):

        

Foreign currency translation adjustment, net of tax expense of $0, $0, $0 and $13, respectively

     —          —          —          25   

Energy swap adjustment, net of tax expense (benefit) of $79, ($113), ($254) and $169, respectively

     153        (220     (493     328   

Interest rate swap adjustment, net of tax expense of $0, $490, $0 and $632, respectively

     —          952        —          1,226   

Pension benefits adjustment, net of tax expense of $98, $104, $293 and $313, respectively

     190        202        568        606   
                                

Comprehensive income (loss)

   $ 7,313      $ (1,886   $ 10,007      $ (1,828
                                

Basic earnings (loss) per share

   $ 0.37      $ (0.15   $ 0.53      $ (0.21
                                

Weighted average common shares outstanding

     18,819        18,712        18,792        18,712   
                                

Diluted earnings (loss) per share

   $ 0.37      $ (0.15   $ 0.53      $ (0.21
                                

Weighted average common shares and potential common share equivalents outstanding

     18,929        18,712        18,852        18,712   
                                

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

 

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OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

 

     Nine Months Ended

September 30,

 
     2010     2009  

Cash flows from operating activities:

    

Net income (loss)

   $ 9,932      $ (4,013

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     11,003        10,057   

(Other proceeds) loss resulting from natural disaster, net – 2008 storms

     (234     273   

Other proceeds relating to natural disaster, net – 2005 storms

            (2,656

Loss on disposal of assets

     253        98   

Provisions for losses on receivables

     36        36   

Share based compensation

     1,216        548   

Deferred income taxes

     5,596        (1,872

Changes in assets and liabilities:

    

Receivables

     (6,323     12,019   

Inventories

     (7,069     (965

Prepaid expenses and other current assets

     (1,093     (1,543

Other assets

     (590     (1,348

Accounts payable

     (1,365     744   

Accrued liabilities

     8,902        12,367   

Pension liability, net

     (732     532   
                

Total adjustments

     9,600        28,290   
                

Net cash provided by operating activities

     19,532        24,277   
                

Cash flows from investing activities:

    

Proceeds from insurance companies and grants, hurricanes

     234        10,156   

Proceeds from disposition of assets

     50        49   

Capital expenditures

     (10,662     (15,198
                

Net cash used in investing activities

     (10,378     (4,993
                

Cash flows from financing activities:

    

Principal payments of long-term debt

     (1,951     (21,177

Principal payments of capital lease obligation

     (279     (219

Proceeds from long-term debt

     10,000        —     

Proceeds from stock options exercised

     307        —     

Tax effect of stock options exercised

     47        —     
                

Net cash provided by (used in) financing activities

     8,124        (21,396
                

Effect of exchange rate changes on cash and cash equivalents

     —          25   
                

Net increase (decrease) in cash and cash equivalents

     17,278        (2,087

Cash and cash equivalents at beginning of year

     2,177        13,995   
                

Cash and cash equivalents at end of period

   $ 19,455      $ 11,908   
                

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

 

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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 (“Omega” or the “Company”) produces and markets a variety of products produced from menhaden (a herring-like species of fish found in commercial quantities in the U.S. coastal waters of the Atlantic Ocean and Gulf of Mexico), including regular grade and value-added specialty fish meals, crude and refined fish oils and fish solubles. The Company’s fish meal products are primarily used as a protein ingredient in animal feed for swine, cattle, aquaculture and household pets. Fish oil is utilized for animal and aquaculture feeds, industrial applications, as well as for additives to human food products and dietary supplements. The Company’s fish solubles are sold primarily to livestock feed manufacturers, aquaculture feed manufacturers and for use as an organic fertilizer.

Basis of Presentation

These interim financial statements of Omega have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally provided have been omitted. The interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

In the opinion of management the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s consolidated financial position as of September 30, 2010, and the results of its operations for the three and nine month periods ended September 30, 2010 and 2009 and its cash flows for the nine month periods ended September 30, 2010 and 2009. Operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

Consolidation

The consolidated financial statements include the accounts of Omega and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Financial Statement Preparation

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Company’s financial statements and the accompanying notes and the reported amounts of revenues and expenses during the reporting period. Actual amounts, when available, could differ from those estimates and those differences could have a material affect on the financial statements.

 

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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

The Company has reclassified cash flows from receivables of $389,000 to prepaid expenses and other current assets on the Consolidated Statement of Cash Flows for the nine months ended September 30, 2009 to conform with the presentation for the nine months ended September 30, 2010.

Gulf of Mexico Oil Spill Disaster

In response to the oil spill caused by the Deepwater Horizon oil rig explosion in the Gulf of Mexico in April 2010 and the subsequent temporary and intermittent closures of certain commercial and recreational fishing grounds by the Louisiana Department of Fisheries and Wildlife, the Mississippi Department of Marine Resources and the National Oceanic and Atmospheric Administration (“NOAA”), the Company temporarily relocated its nine Moss Point, Mississippi fishing vessels and three carry vessels to fishing grounds on the west side of the Mississippi River Delta in an attempt to minimize vessel downtime and business interruptions. The docking and re-supply areas for the Moss Point fleet were temporarily relocated from the Company’s Moss Point facility to the Company’s Morgan City, Louisiana facility. The Company’s Abbeville, Louisiana facility was also available to provide support as needed. The Moss Point fleet returned to its home port in early July 2010 due to expanded closures but was not able to fish most of its customary fishing grounds due to closures until early August 2010.

The subsequent expansions of the closed state and federal fishing grounds in response to the Gulf of Mexico oil spill disaster required the Company to temporarily cease fishing with certain vessels from time to time beginning in late June through early August 2010. Although the fishing grounds began to reopen slowly during August which allowed the Company to fish in previously restricted areas, some fishing grounds remained closed and continued to affect the Company’s fishing through September 30, 2010. See Note 12 – Gulf of Mexico Oil Spill Disaster for a description of costs incurred by the Company related to the oil spill.

During the quarter ended September 30, 2010, the Company filed a claim for damages with BP and also met with BP’s third party claims adjuster. On August 23, 2010, the claims process for BP was moved to the Gulf Coast Claims Facility (GCCF), an independent claims facility tasked with claims administration and payment distribution for those businesses and individuals that suffered damages and incurred other costs related to the oil spill.

On September 2 and October 19, 2010, the Company received its first and second emergency payments from the GCCF of $7.3 million and $11.4 million, respectively. These payments and possible future payments were or will be utilized in the following manner: 1) $0.6 million of the payments offset recognized losses as of June 30, 2010 related to costs that were not able to be allocated to production as a result of intermittent plant closures, 2) the payments will offset costs the Company expects to incur during the fourth quarter of 2010 to purchase 5,000 metric tons of fish meal to satisfy forward sale contracts, and 3) to a) offset the high costs per unit of production the Company incurred during the 2010 fishing season in the Gulf of Mexico as a result of the closure of its fishing grounds and, b) make possible purchases of additional tons of fish meal and fish oil based upon the Company’s available inventory, customer demand and prevailing market conditions. These emergency payments were received without any stipulations and the Company has not waived its rights to possible future claims.

The majority of the first emergency payment was credited to the unallocated inventory cost pool (including off-season costs) as of September 30, 2010. The second emergency payment was included to project the Company’s 2010 cost per unit of production, along with projected production and costs for the remainder of the fishing season, as of September 30, 2010, but was not recognized as a receivable or in the unallocated inventory cost pool. Because both of these payments were included in the projected cost per unit of production calculation for the 2010 fishing season, cost of sales was partially reduced by 13%, or $7.2 million, for the quarter ended September 30, 2010 and will continue to be partially reduced through June 30, 2011. Despite the aforementioned partial reduction, cost per unit of production for the 2010 fishing season is the highest in the Company’s history due to the effect of the closure of its fishing grounds related to the Gulf of Mexico oil spill disaster.

 

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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

The Gulf of Mexico oil spill disaster directly affected the Company by decreasing its fish catch due to the closure of state and federal fishing grounds and increased the cost of its normal fishing effort due to the repositioning and staging of its fleet at other locations. The decrease in fish catch reduced the Company’s volume of inventory available to sell. The decrease in fish catch and additional costs incurred also increased the Company’s cost per unit of production to record highs which will partially offset its gross profit percentage as 2010 inventory is sold. The Company cannot predict what effect the oil spill will have on future years’ fish catch or customer perceptions about its products.

Hurricane Losses, Insurance Recoveries and Other Proceeds

2008 Hurricane Activity

During the nine months ended September 30, 2010, the Company received a grant of $0.2 million from the State of Louisiana Hurricane Gustav and Ike Fisheries Recovery Program. The grant provides assistance for commercial fishing owners impacted by Hurricanes Gustav and Ike in 2008. The grant proceeds were recognized as “(Other proceeds) loss resulting from natural disaster, net – 2008 storms” in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income.

2005 Hurricane Activity

During the nine month period ended September 30, 2009, the Company received a grant of $2.7 million, net of fees and expenses, from the State of Mississippi. The grant provided assistance for commercial fishing owners impacted by Hurricane Katrina in 2005. The Mississippi grant was recognized as “Other proceeds relating to natural disasters, net – 2005 storms” in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the nine months ended September 30, 2009.

On August 31, 2007, the Company filed a lawsuit in the District Court of Harris, Texas 295th Judicial District, against its prior insurance broker, Aon Risk Services of Texas, who procured the Company’s property insurance policies for the 2005/2006 policy year, which were the subject of prior litigation as a result of claims relating to Hurricanes Rita and Katrina. The Company’s lawsuit against Aon alleges negligent procurement, negligent misrepresentation, breach of contract and violations of Texas insurance and consumer protection laws. Trial for this matter is scheduled for May 2011.

Inventories

During the off-seasons, in connection with the upcoming fishing seasons, the Company incurs costs (i.e., plant and vessel related labor, utilities, rent, repairs, and depreciation) that are directly related to the Company’s infrastructure. These costs accumulate in inventory and are applied as elements of the cost of production of the Company’s products throughout the fishing season ratably based on the Company’s monthly fish catch and the expected total fish catch for the season.

Any costs related to abnormal downtime at the Company’s plants are charged to expense as incurred. Such costs were incurred and offset by proceeds received from the GCCF during the three and nine month periods ended September 30, 2010 as a consequence of the Deepwater Horizon oil rig explosion and the resulting oil spill in the Gulf of Mexico in April 2010, which costs are explained more fully in Note 12 - Gulf of Mexico Oil Spill Disaster.

 

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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

Insurance

There have been no material insurance policy changes from those previously disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2009. Prior to the 2010 fishing season, the Company had maintained business interruption insurance in immaterial amounts. The Company’s insurance coverage for 2010 does not include business interruption insurance.

Interest Rate Swap Agreements

The Company does not enter into financial instruments for trading or speculative purposes. The Company entered into interest rate swap agreements to manage its cash flow exposure to interest rate changes with notional amounts as indicated below that are scheduled to mature through March 2012. As originally established, the swaps effectively converted all the Company’s variable rate debt under the Term Loan to a fixed rate, without exchanging the notional principal amounts. Prior to September 30, 2009, these agreements were designated as a cash flow hedge and reflected at fair value in the Company’s Unaudited Condensed Consolidated Balance Sheet as a component of total liabilities, and the related gains or losses were deferred in stockholders’ equity as a component of accumulated other comprehensive loss.

 

Date of Contract

   Original
Notional
Amount
     Contracted
Interest
Rate
    Notional
Amount as of

September  30,
2010
     Total Liability as  of
September 30,
2010
 

April 4, 2007

   $ 19,950,000         5.16   $ 11,471,000       $ 637,000   

February 7, 2008

     10,237,500         3.36     6,038,000         207,100   

March 19, 2008

     4,436,250         2.96     2,616,000         77,400   
                      
        $ 20,125,000       $ 921,500   

On September 24, 2009, the Company paid $16.6 million of the borrowings outstanding under the Term Loan using the Company’s existing cash balances. Additionally, on October 21, 2009, the Company entered into a Loan Agreement with Wells Fargo Bank N.A. which replaced the Company’s prior senior credit facility. The details are described more fully in Note 6 to the consolidated financial statements of the Company’s Form 10-K for the fiscal year ended December 31, 2009. As a consequence of the debt prepayment and refinancing, the Company determined that the forecasted interest payments associated with the interest rate swaps would not occur. As a result, hedge accounting relating to the interest rate swaps was discontinued and all amounts previously recognized in accumulated other comprehensive loss were reclassified to earnings during 2009. The total interest expense associated with the interest rate swap transactions for the three and nine months ended September 30, 2010 and 2009 was $109,400, $1,440,300, $383,800 and $1,891,100, respectively. The interest rate swap agreements remained outstanding as of September 30, 2010.

As of September 30, 2010 and December 31, 2009, the Company has recorded a long-term liability of $222,700 and $394,600, respectively, net of the current portion, in accrued liabilities of $698,800 and $856,100, respectively, to recognize the fair value of interest rate derivatives.

 

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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

The following table illustrates the changes recorded, net of tax, in accumulated other comprehensive loss resulting from the interest rate swap agreements (in thousands).

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2010      2009     2010      2009  

Beginning balance

   $ —         $ (952   $ —         $ (1,226

Net loss, net of tax, reclassified into earnings

     —           (176     —           (474

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

     —           178        —           750   

Ineffective portion of swaps, net of tax, reclassified into earnings

     —           950        —           950   
                                  

Ending balance

   $ —         $ —        $ —         $ —     
                                  

Energy Swap Agreements

The Company does not enter into financial instruments for trading or speculative purposes. The Company has entered into energy swap agreements to manage its cash flow exposure related to the volatility of natural gas, diesel and Bunker C energy prices. The swaps effectively fix pricing for the quantities listed below during the consumption periods.

 

Energy Swap

   Consumption Period      Quantity      Price
Per
Unit
     Energy Swap
Asset (Liability)

as of
September 30,
2010
    Deferred Tax
Asset (Liability)

as of
September 30,
2010
 

Diesel - NYMEX Heating Oil Swap

     Oct - Nov, 2010        
 
662,000
Gallons
  
  
   $ 1.86       $ 247,700      $ (84,200

Natural Gas - NYMEX Natural Gas Swap

     Oct, 2010        
 
38,000
MMBTUs
  
  
   $ 6.29         (93,300     31,700   

Bunker C - Platts Calendar Avg NY Swap

     Oct - Nov, 2010        
 
399,000
Gallons
  
  
   $ 1.53         132,400        (45,000

Diesel - NYMEX Heating Oil Swap

     Apr - Oct, 2011        
 
1,714,000
Gallons
  
  
   $ 2.12         374,500        (127,300

Natural Gas - NYMEX Natural Gas Swap

     Apr - Oct, 2011        
 
235,000
MMBTUs
  
  
   $ 5.69         (306,800     104,300   

Bunker C - Platts Calendar Avg NY Swap

     Jun - Nov, 2011        
 
672,000
Gallons
  
  
   $ 1.77         122,800        (41,800

Natural Gas - NYMEX Natural Gas Swap

     Apr - Oct, 2012        
 
101,000
MMBTUs
  
  
   $ 5.30         (36,200     12,300   

Bunker C - Platts Calendar Avg NY Swap

     Jun - Nov, 2012        
 
378,000
Gallons
  
  
   $ 2.00         (23,100     7,900   
                         
            $ 418,000      $ (142,100
                         

As of September 30, 2010 and December 31, 2009, the Company has recorded a long-term asset of $58,200 and $228,800, respectively, net of the current portion included in prepaid expenses and other current assets of $359,800 and $936,900, respectively, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax liability of $142,100 and $396,300, respectively, associated therewith. The effective portion of the change in fair value from inception to September 30, 2010 is recorded in “accumulated other comprehensive income (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).

 

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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2010      2009     2010     2009  

Beginning balance

   $ 123       $ 548      $ 769      $ —     

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

     103         —          260        —     

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

     50         (220     (753     328   
                                 

Ending balance

   $ 276       $ 328      $ 276      $ 328   
                                 

The $275,900 reported in accumulated other comprehensive loss as of September 30, 2010 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 $237,500.

If, at any time, the swaps are determined to be ineffective, in whole or in part, due to changes in the Company’s energy usage or underlying hedge agreements or assumptions, the fair value of the portion of the energy swaps determined to be ineffective will be recognized as gain or loss in the unallocated inventory cost pool for the applicable period. See Note 14 – Fair Value Disclosures for additional information.

Accumulated Comprehensive Loss

The components of accumulated other comprehensive loss included in shareholders’ equity are as follows:

 

     September 30,
2010
    December 31,
2009
 
     (in thousands)  

Fair Value of Energy Swaps, net of tax provision of $142 as of September 30, 2010 and $396 as of December 31, 2009

   $ 276      $ 769   

Pension Benefits Adjustments, net of tax benefit of $4,094 as of September 30, 2010 and $4,387 as of December 31, 2009

     (7,947     (8,515
                

Accumulated Other Comprehensive Loss

   $ (7,671   $ (7,746
                

Recently Issued Accounting Standards

In June 2009, the FASB issued FASB ASC 860-10, “Transfers and Servicing”. The standard requires additional information about transfers of financial assets, including securitization transactions, and enhanced disclosures when companies have continuing exposure to the risks related to transferred financial assets. In addition, it eliminates the concept of a qualifying special-purpose entity. This statement is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, which corresponds to the Company’s fiscal year beginning January 1, 2010. The Company’s adoption of FASB ASC 860-10 effective January 1, 2010 did not have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

In June 2009, the FASB issued guidance to FASB ASC 810, “Consolidation”. This guidance amends the consolidation guidance for variable interest entities. Also, it requires additional disclosures about involvement with variable interest entities and any significant changes in risk exposure due to that involvement. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, which corresponds to the Company’s fiscal year beginning January 1, 2010. The Company’s adoption of FASB ASC 810 effective January 1, 2010 did not have a material impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, which requires additional fair value disclosures. This guidance requires reporting entities to disclose transfers in and out of Levels 1 and 2 and requires gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value hierarchy. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements related to Level 3 activity. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company’s adoption of FASB ASU No. 2010-06 effective January 1, 2010 did not have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

Stock-Based Compensation

The Company has a stock-based compensation plan, which is described in more detail in Note 11 to the consolidated financial statements of the Company’s Form 10-K for the fiscal year ended December 31, 2009. Net income (loss) for the three and nine months ended September 30, 2010 and 2009 includes $0.5 million, $0.2 million, $1.2 million, and $0.5 million ($0.3 million, $0.2 million, $0.8 million and $0.4 million after-tax), respectively, of share-based compensation costs which are included in selling, general and administrative expenses in the condensed consolidated statement of operations and comprehensive income. As of September 30, 2010, there was $2.9 million ($1.9 million after-tax) of total unrecognized compensation costs related to nonvested share-based compensation that is expected to be recognized over a weighted-average period of 2.1 years, of which $0.4 million ($0.3 million after-tax) of total share-based compensation is expected to be recognized during the remainder of fiscal year 2010.

Shareholder Rights Plan

In June 2010, the Company’s Board of Directors adopted a Shareholder Rights Plan. The Plan is designed to protect the Company from unfair or coercive takeover tactics and to prevent an acquirer from gaining control of the Company without offering a fair price to all shareholders. See Note 15 – Shareholders Rights Plan for additional information.

Note 2. Receivables, net

Receivables as of September 30, 2010 and December 31, 2009 are summarized as follows:

 

     September 30,
2010
    December 31,
2009
 
     (in thousands)  

Trade

   $ 17,207      $ 10,202   

Insurance

     164        137   

Income tax

     703        1,013   

Other

     32        52   
                

Total receivables

     18,106        11,404   

Less: allowance for doubtful accounts

     (205     (179
                

Receivables, net

   $ 17,901      $ 11,225   
                

 

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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

Note 3. Inventory

The major classes of inventory as of September 30, 2010 and December 31, 2009 are summarized as follows:

 

     September 30,
2010
     December 31,
2009
 
     (in thousands)  

Fish meal

   $ 40,465       $ 27,851   

Fish oil

     14,893         16,753   

Fish solubles

     1,385         2,617   

Unallocated inventory cost pool (including off-season costs)

     6,266         7,362   

Other materials & supplies

     7,886         9,243   
                 

Total inventory

   $ 70,895       $ 63,826   
                 

Inventory at September 30, 2010 and December 31, 2009 is stated at the lower of cost or market. The elements of unallocated inventory cost pool include plant and vessel related labor, utilities, rent, repairs and depreciation, to be allocated to inventories produced through the remainder of the 2010 fishing season.

As a result of the oil spill caused by the Deepwater Horizon oil rig explosion in the Gulf of Mexico in April 2010 and the subsequent temporary and intermittent closures of certain commercial and recreational fishing grounds by the Louisiana Department of Fisheries and Wildlife, the Mississippi Department of Marine Resources and the National Oceanic and Atmospheric Administration (“NOAA”), the Company incurred the temporary interruption of fish processing at its three Gulf Coast facilities. As a result of this interruption, intermittent fishing grounds and facilities closures and the oil spill’s estimated impact on the Company’s 2010 Gulf of Mexico fishing season, the Company filed a claim for damages with BP and, subsequently, with the Gulf Coast Claims Facility (GCCF), an independent claims facility tasked with claims administration and payment distribution for those businesses and individuals that suffered damages and incurred other costs related to the oil spill. On September 2, 2010, the Company received a $7.3 million emergency payment from the GCCF related to its claims against BP, of which $6.7 million of the proceeds were recorded to the unallocated inventory cost pool and will be utilized to offset costs the Company expects to incur during the fourth quarter of 2010 to purchase approximately 5,000 metric tons of fish meal to make up for lost production. The remaining $0.6 million of the claims payment was recognized as “Losses (proceeds) resulting from Gulf of Mexico oil spill disaster, net of recoveries” in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the three months ended September 30, 2010 to offset previously recognized losses related to the oil spill.

On October 19, 2010, the Company received a second emergency payment from the GCCF of $11.4 million, net of fees and expenses. The Company will record this payment and possible future payments in the period received to the unallocated inventory cost pool which will be applied as elements of the cost of sales in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income as production from the 2010 fishing season and purchased inventories are sold. See Note 12—Gulf of Mexico Oil Spill Disaster.

As a result of Hurricane Ike in 2008, the Company sustained additional previously unrecognized damage to its Cameron, Louisiana materials and supplies inventory. The Company recognized $0 and $33,000 material and supply inventory write-offs for the three and nine months ended September 30, 2009, respectively. See Note 13 – Hurricane Losses, Insurance Recoveries and Other Proceeds.

 

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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

Note 4. Other Assets

Other assets as of September 30, 2010 and December 31, 2009 are summarized as follows:

 

     September 30,
2010
     December 31,
2009
 
     (in thousands)  

Fish nets, net of accumulated amortization of $1,943 and $1,059

   $ 1,572       $ 1,292   

Insurance receivable, net of allowance for doubtful accounts

     619         1,292   

Title XI loan origination fee

     324         285   

Other debt issuance costs (1)

     279         383   

Deposits and other

     66         49   
                 

Total other assets, net

   $ 2,860       $ 3,301   
                 

 

(1)

On October 21, 2009, the Company entered into a Loan Agreement with Wells Fargo Bank N.A., and the remaining outstanding balance under the prior Senior Credit Facility was paid in full. See Note 6 to the consolidated financial statements of the Company’s Form 10-K for the fiscal year ended December 31, 2009 for more detail. Consequently, the unamortized balance of “Other debt issuance costs” incurred in conjunction with the prior Senior Credit Facility on March 26, 2007 was recorded as “Loss resulting from debt refinancing” in the Consolidated Statement of Operations for the year ending December 31, 2009. The deferred debt issuance costs incurred relating to the Loan Agreement with Wells Fargo Bank N.A. was $0.4 million and will be amortized over the term of the agreement.

Amortization expense for fishing nets amounted to approximately $0.3 million, $0.3 million, $0.9 million and $0.8 million for the three and nine months ended September 30, 2010 and 2009, respectively.

As of September 30, 2010 and December 31, 2009, the allowance for doubtful insurance receivable accounts was $0.2 million.

Note 5. Property and Equipment

Property and equipment at September 30, 2010 and December 31, 2009 are summarized as follows:

 

     September 30,
2010
    December 31,
2009
 
     (in thousands)  

Land

   $ 7,690      $ 7,690   

Plant assets

     123,288        111,401   

Fishing vessels

     103,195        102,125   

Furniture and fixtures

     5,827        5,755   

Construction in progress

     6,740        13,012   
                

Total property and equipment

     246,740        239,983   

Less: accumulated depreciation

     (135,728     (129,358
                

Property, plant and equipment, net

   $ 111,012      $ 110,625   
                

Depreciation expense for the three and nine months ended September 30, 2010 and 2009 was $3.5 million, $3.1 million, $10.0 million and $9.1 million, 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 and nine month periods ended September 30, 2010 and 2009, the Company capitalized interest of approximately $56,800, $180,500, $140,800 and $495,200, respectively.

As a result of Hurricane Ike in 2008, the Company sustained damage to its property and equipment at its Abbeville and Cameron, Louisiana fish processing facilities. The Company recognized a $273,000 loss on the involuntary conversion of damaged property and equipment related to plant assets in the nine month period ended September 30, 2009. See Note 13 – Hurricane Losses, Insurance Recovery and Other Proceeds.

 

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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

Note 6. Notes Payable and Long-Term Debt

At September 30, 2010 and December 31, 2009, the Company’s long-term debt consisted of the following:

 

     September 30,
2010
    December 31,
2009
 
     (in thousands)  

U.S. government guaranteed obligations (Title XI loans) collateralized by a first lien on certain vessels and certain plant assets:

    

Amounts due in installments through 2025, interest from 5.73% to 7.60%

   $ 33,805      $ 25,725   

Amounts due in installments through 2014, interest at Eurodollar rates plus 0.45% (0.98% and 0.73% at September 30, 2010 and December 31, 2009, respectively)

     164        195   
                

Total debt

     33,969        25,920   

Less current maturities

     (2,894     (2,380
                

Long-term debt

   $ 31,075      $ 23,540   
                

On December 1, 2005, pursuant to the Title XI program, the United States Department of Commerce Fisheries Finance Program (the “FFP”) approved a second financing application made by the Company in the amount of $16.4 million (the “Second Approval Letter”). In May 2006, the Company submitted a $6.3 million financing request under the Second Approval Letter. The Company closed on the $6.3 million FFP loan in the first quarter of 2007. In September 2009, the Company submitted a $10.0 million financing request under the remaining Second Approval Letter. The Company closed on the $10.0 million financing request on June 1, 2010. Proceeds from the loan will be used to reimburse the Company for prior expenditures for fishing vessel refurbishments and improvements to the Company’s shore-side marine assets. The loan has a term of 15 years, bears an interest rate at 5.73% per year and is secured by first liens on a Company fishing vessel and certain assets located at the Company’s Reedville, Virginia facility. As of September 30, 2010, the Company had approximately $34.0 million of borrowings outstanding under Title XI and was in compliance with all of the covenants contained therein.

As of September 30, 2010 and December 31, 2009, the Company had no amounts outstanding under the $35 million revolving credit facility with Wells Fargo Bank, N.A. and approximately $3.0 million in letters of credit issued primarily in support of worker’s compensation insurance programs. The Company has no off-balance sheet arrangements other than normal operating leases and standby letters of credit. Additionally, as of September 30, 2010, the Company was in compliance with all covenants under the Loan Agreement.

Note 7. Capital Lease Obligation

On May 29, 2008 and July 10, 2008, the Company entered into capital lease agreements to lease barges for a period of 5 years. Following is a summary of future minimum payments under the capitalized lease agreements (in thousands):

 

Remainder of 2010

   $ 135   

2011

     566   

2012

     609   

2013

     291   
        

Total minimum lease payments

     1,601   

Less amount representing interest

     (246
        

Present value of minimum payments

     1,355   

Less current portion of capital lease obligation

     (412
        

Long-term capital lease obligation

   $ 943   
        

As of September 30, 2010 and December 31, 2009, assets recorded under capital lease obligations are included in property, plant and equipment, net as follows (in thousands):

 

     September 30,
2010
    December 31
2009
 
                

Fishing vessels and marine equipment, at cost

   $ 2,076      $ 2,076   

Less accumulated depreciation

     (952     (640
                

Property, plant and equipment, net

   $ 1,124      $ 1,436   
                

 

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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

Note 8. Accrued Liabilities

Accrued liabilities as of September 30, 2010 and December 31, 2009 are summarized as follows:

 

     September 30,
2010
     December 31,
2009
 
     (in thousands)  

Salary and benefits

   $ 10,727       $ 3,791   

Insurance

     8,488         7,726   

Taxes, other than income tax

     1,372         76   

Trade creditors

     3,188         3,099   

Fair market value of interest rate swap, current portion

     699         856   

Deferred revenue

     876         985   

Accrued interest

     318         227   

Federal Tax Payable

     232         —     

Other

     126         192   
                 

Total accrued liabilities

   $ 26,026       $ 16,952   
                 

Note 9. Commitments and Contingencies

Contract Commitments

As of September 30, 2010, the Company has entered into purchase commitments of approximately $28,000 related to natural gas basis contracts that will be delivered in quantities expected to be used in the normal course of business during the remaining 2010 fishing season.

As of consequence of the Gulf of Mexico oil spill disaster and its impact on the Company’s 2010 fishing season and related production, as of September 30, 2010 the Company has entered into purchase commitments of approximately $6.7 million to purchase 5,000 metric tons of Moroccan fish meal that is expected to be delivered in the fourth quarter of 2010.

 

     Volume      Contract Price      Total Commitment  

Natural gas (per MMBTU)

     75,633       $ 0.37       $ 27,984   

Fish Meal (metric tons)

     5,000       $ 1,330       $ 6,650,000   

Regulatory Matters

In April 2010, the Company received a request for information pursuant to Section 308 of the Federal Water Pollution Control Act (Clean Water Act) from Region 3 of the United States Environmental Protection Agency (the “EPA”) concerning the Company’s wastewater practices used in its fishing operations at its Reedville, Virginia facility. The Company has responded to the request. The Company cannot predict the outcome of the EPA’s review.

 

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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

Note 10. Reconciliation of Basic and Diluted Per Share Data (in thousands except per share data)

 

     Earnings
(Numerator)
    Shares
(Denominator)
     Per Share
Data
 

Three Months Ended September 30, 2010

       

Net earnings

   $ 6,970        —        
                   

Basic earnings per common share:

       

Earnings available to common shareholders

   $ 6,970        18,819       $ 0.37   
             

Effect of dilutive securities:

       

Stock options assumed exercised

     —          110      
                   

Diluted earnings per common share:

       

Earnings available to common shareholders plus stock options assumed exercised

   $ 6,970        18,929       $ 0.37   
                         
     Earnings
(Numerator)
    Shares
(Denominator)
     Per Share
Data
 

Three Months Ended September 30, 2009

       

Net loss

   $ (2,820     —        
                   

Basic loss per common share:

       

Loss available to common shareholders

   $ (2,820     18,712       $ (0.15
             

Effect of dilutive securities:

       

Stock options assumed exercised

     —          —        
                   

Diluted loss per common share:

       

Loss available to common shareholders plus stock options assumed exercised

   $ (2,820     18,712       $ (0.15
                         
     Earnings
(Numerator)
    Shares
(Denominator)
     Per Share
Data
 

Nine Months Ended September 30, 2010

       

Net earnings

   $ 9,932        —        
                   

Basic earnings per common share:

       

Earnings available to common shareholders

   $ 9,932        18,792       $ 0.53   
             

Effect of dilutive securities:

       

Stock options assumed exercised

     —          60      
                   

Diluted earnings per common share:

       

Earnings available to common shareholders plus stock options assumed exercised

   $ 9,932        18,852       $ 0.53   
                         
     Earnings
(Numerator)
    Shares
(Denominator)
     Per Share
Data
 

Nine Months Ended September 30, 2009

       

Net loss

   $ (4,013     —        
                   

Basic loss per common share:

       

Loss available to common shareholders

   $ (4,013     18,712       $ (0.21
             

Effect of dilutive securities:

       

Stock options assumed exercised

     —          —        
                   

Diluted loss per common share:

       

Loss available to common shareholders plus stock options assumed exercised

   $ (4,013     18,712       $ (0.21
                         

 

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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

Options to purchase 1,405,702 and 1,465,702 shares of common stock at exercise prices ranging from $4.19 to $15.88 per share were outstanding during the three and nine months ended September 30, 2010, respectively, but were not included in 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.

Options to purchase 1,304,251 shares of common stock at exercise prices ranging from $1.65 to $15.88 per share were outstanding during the three and nine months ended September 30, 2009, but were not included in the computation of diluted earnings per share because inclusion of these shares would have been antidilutive.

Note 11. Components of Net Periodic Benefit Cost

 

     Three Months  Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  
     (in thousands)     (in thousands)  

Service cost

   $ —        $ —        $ —        $ —     

Interest cost

     340        363        1,019        1,089   

Expected return on plan assets

     (285     (253     (855     (758

Amortization of prior service costs

     —          —          —          —     

Amortization of net loss

     287        306        861        918   
                                

Net periodic pension cost

   $ 342      $ 416      $ 1,025      $ 1,249   
                                

For the nine months ended September 30, 2010 and 2009, the Company contributed approximately $1.5 million and $0.4 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 2010.

Note 12. Gulf of Mexico Oil Spill Disaster

As a result of the Gulf of Mexico oil spill disaster in April 2010 and subsequent closure of the Company fishing grounds as detailed in Note 1, the Company recognized a loss of $0.6 million related to damages incurred during the quarter ended June 30, 2010. On September 2 and October 19, 2010, the Company received its first and second emergency payments from the Gulf Coast Claims Facility of $7.3 million and $11.4 million, respectively. A portion of these receipts offset the $0.6 million dollar loss previously recognized with the balance of the payment and future payments expected to be utilized as follows: 1) offset costs the Company expects to incur to purchase fish meal and fish oil, and 2) offset the high costs per unit of production the Company incurred during the 2010 fishing season in the Gulf of Mexico as a result of the closure of its fishing grounds.

 

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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

The majority of the first emergency payment was credited to the unallocated inventory cost pool (including off-season costs) as of September 30, 2010. The second emergency payment was included to project the Company’s 2010 cost per unit of production, along with projected production and costs for the remainder of the fishing season, as of September 30, 2010, but was not recognized as a receivable or in the unallocated inventory cost pool. Because both of these payments were included in the projected cost per unit of production calculation for the 2010 fishing season, cost of sales was partially reduced by 13%, or $7.2 million, for the quarter ended September 30, 2010 and will continue to be partially reduced through June 30, 2011. Despite the aforementioned partial reduction, cost per unit of production for the 2010 fishing season is the highest in the Company’s history due to the effect of the closure of its fishing grounds related to the Gulf of Mexico oil spill disaster.

Note 13. Hurricane Losses, Insurance Recoveries and Other Proceeds

2008 Hurricane

On September 13, 2008, the Company’s Abbeville and Cameron, Louisiana fish processing facilities were damaged by Hurricane Ike. For the three and nine month periods ending September 30, 2010 and 2009, the following amounts were recognized in the Company’s statement of operations (in thousands):

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2010      2009     2010     2009  

Write-off of other materials and supplies

   $ —         $ —        $ —        $ 33   

Involuntary conversion of property and equipment

     —           —          —          273   

Clean-up costs incurred

     —           (1     —          86   

State of Louisiana Hurricanes Gustav and Ike Grant

     —           —          (234     —     
                                 

(Other proceeds ) loss resulting from natural disaster, net – 2008 storms

   $ —         $ (1   $ (234   $ 392   
                                 

Not included in the amounts listed in the above table are the replacement capital costs of property and equipment, which did not have any book basis and were destroyed in the hurricane.

See Note 12 in the Company’s Form 10-K for the fiscal year ended December 31, 2009 for additional information.

During the nine months ended September 30, 2010, the Company received a grant of $0.2 million from the State of Louisiana Hurricane Gustav and Ike Fisheries Recovery Program. The grant provides assistance for commercial fishing owners impacted by Hurricanes Gustav and Ike in 2008. The grant proceeds were recognized as “(Other proceeds) loss resulting from natural disaster, net – 2008 storms” in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income.

2005 Hurricanes

During the nine month period ended September 30, 2009, the Company received a grant of $2.7 million, net of fees and expenses, from the State of Mississippi. The grant provided assistance for commercial fishing owners impacted by Hurricane Katrina in 2005. The Mississippi grant was recognized as “Other proceeds relating to natural disasters, net – 2005 storms” in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the nine months ended September 30, 2009. For the three and nine month periods ended September 30, 2009, the following amounts were recognized in the Company’s statement of operations:

 

     Three Months
Ended
     Nine Months
Ended
 
     September 30, 2009  
     (in thousands)  

Other proceeds relating to natural disasters, net – 2005 storms

   $ —         $ (2,656
                 

 

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OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

Note 14. Fair Value Disclosures

The following disclosures of the estimated fair value of financial instruments are made in accordance with the requirements of FASB ASC 825-10-50, Disclosure About Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies and are described in the following paragraphs.

Fair value estimates are subject to certain inherent limitations. Estimates of fair value are made at a specific point in time, based on relevant market information and information about the financial instrument. The estimated fair values of financial instruments presented below are not necessarily indicative of amounts the Company might realize in actual market transactions. Estimates of fair value are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The carrying amounts of cash and cash equivalents, accounts receivables, accounts payable, and accrued expenses approximate fair value because of the short maturity of these items. The carrying amounts of notes payable outstanding under the Company’s loan agreement approximate fair value because the interest rates on these instruments change with market interest rates. At September 30, 2010 and December 31, 2009, the Company had no borrowings under its bank credit facility except for $3.0 million in letters of credit support obligations.

The carrying values and respective fair market values of the Company’s long-term debt are presented below (in thousands). The fair value of the Company’s long-term debt is estimated based on the quoted market prices available to the Company for issuance of similar debt with similar terms at September 30, 2010 and December 31, 2009.

 

     September 30,
2010
     December 31,
2009
 

Long-term Debt:

     

Carrying Value

   $ 33,969       $ 25,920   

Estimated Fair Market Value

   $ 36,592       $ 26,755   

The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2010 and December 31, 2009. As required by FASB ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

     September 30, 2010  
     Fair Value Measurements Using     Assets
(Liabilities) at
Fair Value
 
     Level 1      Level 2      Level 3    

Assets (Liabilities) (in thousands)

          

Energy swap asset

   $ —         $ 418      $ —        $ 418   

Interest rate swap liability

     —           —           (922     (922
                                  

Total Assets (Liabilities)

   $ —         $ 418      $ (922   $ (504
                                  
     December 31, 2009  
     Fair Value Measurements Using     Assets
(Liabilities) at
Fair Value
 
     Level 1      Level 2      Level 3    

Assets (Liabilities) (in thousands)

          

Energy swap asset

   $ —         $ 1,166      $ —        $ 1,166   

Interest rate swap liability

     —           —           (1,251     (1,251
                                  

Total Assets (Liabilities)

   $ —         $ 1,166       $ (1,251   $ (85
                                  

The determination of the fair values above incorporates various factors required under FASB ASC 820-10. These factors include not only the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits, letters of credit and priority interests), but also the impact of the Company’s nonperformance risk on its liabilities.

The fair value of the interest rate swap liability is determined using an income valuation model based on the present value of expected future cash flows as determined by comparing the Company’s rate to the Euro-dollar futures curve. This model includes inputs or significant value drivers which might not be observable in or corroborated by the market. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3.

The fair value of the diesel, Bunker C, and natural gas energy swaps is derived from the underlying market price of similar instruments at a specific valuation date. The underlying market price for the diesel and natural gas swaps is based upon the NYMEX Futures Curve. The underlying market price for the Bunker C swaps is based upon the Platts Forward Curve HP 0.3% for 2010 and 2011 and the Platts Forward Curve HP 1.0% for 2012. These methods rely upon quoted prices for similar instruments in active markets. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 2.

The following table provides a reconciliation of all assets and liabilities measured at fair value on a recurring basis which use Level 3, or significant unobservable inputs or significant value drivers for the three and nine months ended September 30, 2010 and 2009 (in thousands):

 

     Fair Value Measurements Using Significant Unobservable
Inputs (Level 3 Inputs)
 
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Beginning balance

   $ (1,025   $ (1,442   $ (1,251   $ (1,858

Net loss reclassified into interest expense related to interest rate swap transactions unrealized

     (109     (267     (384     (718

Net change associated with current period interest rate swap transactions realized

     212        269        713        1,136   
                                

Ending balance

   $ (922   $ (1,440   $ (922   $ (1,440
                                

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

Note 15. Shareholder Rights Plan

In June 2010, the Company’s Board of Directors adopted a Shareholder Rights Plan. The Plan is designed to protect the Company from unfair or coercive takeover tactics and to prevent an acquirer from gaining control of the Company without offering a fair price to all shareholders. Pursuant to the Plan, the Board declared a dividend of one Right for each outstanding share of the Company’s Common Stock. Each Right will entitle the holder (except for the 15% acquirer described below) to buy a share of Company Common Stock (or an equivalent) at a 50% discount.

The Rights will trade with the Company’s Common Stock until exercisable. The Rights will not be exercisable until ten days following a public announcement that a person or group has acquired 15% of the Company’s Common Stock or until ten business days after a person or group begins a tender offer that would result in ownership of 15% of the Company’s Common Stock, subject to certain extensions by the Board. In the event that an acquirer becomes a 15% beneficial owner of Common Stock, the Rights “flip in” and become Rights to buy the Company’s Common Stock at a 50% discount, and Rights owned by that acquirer become void.

In the event that the Company is merged and its Common Stock is exchanged or converted, or if 50% or more of the Company’s assets or earnings power is sold or transferred, the Rights “flip over” and entitle the holders to buy shares of the acquiror’s common stock at a 50% discount. A tender or exchange offer for all outstanding shares of the Company’s Common Stock at a price and on terms determined to be fair and otherwise in the best interests of the Company and its shareholders by a majority of the Company’s independent directors will not trigger either the “flip-in” or “flip-over” provisions.

The Rights may be redeemed by the Company for $0.01 per right at any time until ten days following the first public announcement that an acquirer has acquired the level of ownership that triggers the Rights Plan. The Rights extend for 10 years and will expire on June 30, 2020. The distribution of the Rights was made to shareholders of record on July 12, 2010.

Note 16. Subsequent Event

On October 19, 2010, the Company received a second emergency payment from the Gulf Coast Claims Facility of $11.4 million, net of fees and expenses. The Company will record this payment and future payments, if any, through the second quarter of 2011 to the unallocated inventory cost pool which will be applied as elements of the cost of sales in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income as products are sold. See Note 12—Gulf of Mexico Oil Spill Disaster.

 

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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 and Risk Factors contained in the Form 10-K for the fiscal year ended December 31, 2009 (the “2009 Form 10-K”), and in conjunction with the consolidated financial statements included in this report and in the 2009 Form 10-K.

Forward-looking statements in this Form 10-Q, future filings by the Company with the Securities and Exchange Commission (the “Commission”), 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.

General

Omega Protein Corporation is the largest processor, marketer and distributor of fish meal and fish oil products in the United States. As used herein, the term “Omega” or the “Company” refers to Omega Protein Corporation or 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 produces and sells a variety of protein and oil products derived from menhaden, a species of wild herring-like fish found along the Gulf of Mexico and Atlantic coasts. The fish are not genetically modified or enhanced. The Company processes several grades of fish meal, as well as fish oil and fish solubles. The Company’s fish meal products are primarily used as a protein ingredient in animal feed for swine, cattle, aquaculture and household pets. Fish oil is utilized for animal and aquaculture feeds, industrial applications, additives to human food products and as dietary supplements. The Company’s fish solubles are sold primarily to livestock feed manufacturers, aquaculture feed manufacturers and for use as an organic fertilizer.

All of the Company’s products contain healthy long-chain Omega-3 fatty acids. Omega-3 fatty acids are commonly referred to as “essential fatty acids” because human and animal bodies do not produce them. Instead, essential fatty acids must be obtained from outside sources, such as food or special supplements. Long-chain Omega-3s are also commonly referred to as a “good fat” for their health benefits, as opposed to “bad fats” that create or aggravate health conditions through long-term consumption. Scientific research suggests that long-chain Omega-3s as part of a balanced diet may provide significant benefits for health issues such as cardiovascular disease, inflammatory conditions and other ailments.

Under its production process, the Company produces OmegaPure ® , a taste-free, odorless refined fish oil which is the only marine source of long-chain Omega-3s directly affirmed (as opposed to self affirmed) by the U.S. Food and Drug Administration (“FDA”) as a food ingredient that is Generally Recognized as Safe (“GRAS”).

The Company operates four menhaden processing plants: two in Louisiana, one in Mississippi and one in Virginia. The Company also operates a Health and Science Center in Reedville, Virginia, which provides 100-metric tons per day fish oil processing capacity for the Company’s food, industrial and feed grade oils. The Company’s technical center in Houston, Texas, the OmegaPure Technology and Innovation Center, has food science application labs as well as analytical, sensory, lipids research and pilot plant capabilities.

 

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The Company operates through two primary subsidiaries: Omega Protein, Inc. and Omega Shipyard, Inc. Omega Protein, Inc. is the Company’s principal operating subsidiary for its menhaden processing business and is the successor to a business conducted since 1913. Omega Shipyard, Inc. owns a drydock facility in Moss Point, Mississippi, which is used to provide shoreside maintenance for the Company’s fishing fleet and, subject to outside demand and excess capacity, occasionally for third-party vessels. Revenues from shipyard work for third-party vessels for the three and nine month periods ended September 30, 2010 and 2009 were not material. The Company also has a number of other immaterial direct and indirect subsidiaries.

Company Overview

2010 Fishing Information.  At September 30, 2010, the Company owned a fleet of 50 fishing vessels and 34 spotter aircraft for use in its fishing operations and also leased additional aircraft where necessary to facilitate operations. During the 2010 fishing season in the Gulf of Mexico, which runs from mid-April through October, the Company is operating 29 fishing and carry vessels and 29 spotter aircraft. The fishing area in the Gulf is generally located along the Gulf Coast, with a concentration off the Louisiana and Mississippi coasts. The fishing season along the Atlantic coast begins in early May and usually extends into December. During the 2010 season, the Company is operating 10 fishing vessels and 8 spotter aircraft along the Mid-Atlantic coast, concentrated primarily in and around Virginia and North Carolina. The remaining fleet of fishing vessels and spotter aircraft are not routinely operated during the fishing season and are back-up to the active fleet, used for other transportation purposes, inactive or in the process of refurbishment in the Company’s shipyard. Historical fish catch results at the end of the third quarter for the past five years are as follows:

 

     2010      2009      2008      2007      2006  

Fish Catch in Tons as of September 30,

     367,650         417,712         388,935         475,566         475,667   

The fish catch for July 2010 was materially worse than the fish catch in May and June 2010, due largely to the increase in restricted fishing areas being closed by state and federal regulators. As of October 28, 2010, the Company’s total fish catch (Gulf of Mexico plus Atlantic) was at approximately 86% of the Company’s total 2010 fish catch plan. However, the Company’s Gulf of Mexico fish catch was 27% behind its Gulf of Mexico 2010 fish catch plan. In response to this fish catch shortfall, the Company expects to purchase third party inventory as necessary to service customers until it begins its 2011 fishing season. To the extent that the Company makes these purchases and fulfills existing forward sales contracts, its revenues will be generally unaffected but the profit margins could be substantially reduced or possibly eliminated and result in losses on those transactions. See “- Liquidity and Capital Resources – Use of Capital: Fish Meal and Oil Purchases”.

The Company cautions that, because of the volatility of fish catch generally and the unpredictability of future effects of the oil spill specifically (see below), no projections or extrapolations for the 2010 fishing season or other future fishing season should be made from this data. The Company has historically not reported fish catch data, but is doing so because of the uniqueness of the situation created by the oil spill.

Gulf of Mexico Oil Spill Disaster. In response to the oil spill caused by the Deepwater Horizon oil rig explosion in the Gulf of Mexico in April 2010 and the subsequent temporary and intermittent closures of certain commercial and recreational fishing grounds by the Louisiana Department of Fisheries and Wildlife, the Mississippi Department of Marine Resources and the National Oceanic and Atmospheric Administration (“NOAA”), the Company temporarily relocated its nine Moss Point, Mississippi fishing vessels and three carry

 

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vessels to fishing grounds on the west side of the Mississippi River Delta in an attempt to minimize vessel downtime and business interruptions. The docking and re-supply areas for the Moss Point fleet were temporarily relocated from the Company’s Moss Point facility to the Company’s Morgan City, Louisiana facility. The Company’s Abbeville, Louisiana facility was also available to provide support as needed. The Moss Point fleet returned to its home port in early July 2010 due to expanded closures but was not able to fish its customary fishing grounds due to closures until early August 2010.

The subsequent expansions of the closed state and federal fishing grounds in response to the Gulf of Mexico oil spill disaster required the Company to temporarily cease fishing with certain vessels from time to time beginning in late June through early August 2010. Although the fishing grounds began to reopen slowly during August which allowed the Company to fish in previously restricted areas, some fishing grounds remained closed and continued to affect the Company’s fishing through September 30, 2010. See Note 12 – Gulf of Mexico Oil Spill Disaster for a description of costs incurred by the Company related to the oil spill.

During the quarter ended September 30, 2010, the Company filed a claim for damages with BP and also met with BP’s third party claims adjuster. On August 23, 2010, the claims process for BP was moved to the Gulf Coast Claims Facility (GCCF), an independent claims facility tasked with claims administration and payment distribution for those businesses and individuals that suffered damages and incurred other costs related to the oil spill.

On September 2 and October 19, 2010, the Company received its first and second emergency payments from the GCCF of $7.3 million and $11.4 million, respectively. These payments and possible future payments were or will be utilized in the following manner: 1) $0.6 million of the payments offset recognized losses as of June 30, 2010 related to costs that were not able to be allocated to production as a result of intermittent plant closures, 2) the payments will offset costs the Company expects to incur during the fourth quarter of 2010 to purchase 5,000 metric tons of fish meal to satisfy forward sale contracts, and 3) to a) offset the high costs per unit of production the Company incurred during the 2010 fishing season in the Gulf of Mexico as a result of the closure of its fishing grounds and, b) make possible purchases of additional tons of fish meal and fish oil based upon the Company’s available inventory, customer demand and prevailing market conditions. These emergency payments were received without any stipulations and the Company has not waived its rights to possible future claims.

The Gulf of Mexico oil spill disaster directly affected the Company by decreasing its fish catch due to the closure of state and federal fishing grounds and increased the cost of its normal fishing effort due to the repositioning and staging of its fleet at other locations. The decrease in fish catch reduced the Company’s volume of inventory available to sell which may reduce its sales volumes and revenues for the fourth quarter of 2010 and possibly into 2011. The decrease in fish catch and additional costs incurred also increased the Company’s cost per unit of production to record highs which will partially offset its gross profit percentage as 2010 inventory is sold. For the quarter ended September 30, 2010, the increase in cost per unit of production is offset by increased fish meal sales prices. The Company cannot predict what effect the oil spill will have on future years’ fish catch or customer perceptions about its products.

Sales Contracts. The Company sells a sizeable portion of its products on a two-to-twelve-month forward contract basis with the balance sold on a spot basis through purchase orders. During 2007, 2008 and 2009 approximately 50%, 65% and 50%, respectively, of the Company’s fish meals and crude fish oil had been sold on a forward contract basis prior to those years’ respective fishing season. Prior to the beginning of the Company’s 2010 Gulf of Mexico fishing season on April 19, 2010, approximately 86% and 32% of the Company’s 2010 forecasted fish meal and crude fish oil sales volumes, respectively, had either been sold or sold forward on a contract basis. Due to the Gulf of Mexico oil spill, the Company may have a shortfall of fish

 

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meal and fish oil necessary to fulfill these contracts. The Company’s sales contracts generally contain force majeure and other production allocation provisions and the Company may elect to purchase additional product from third parties to supplement its production and seek reimbursement from BP through the GCCF for any additional costs associated with those purchases. Historically, the percentage of fish meal and crude fish oil sold on a forward contract basis have fluctuated from year to year based upon perceived market availability and forward price expectations. See “- Liquidity and Capital Resources – Use of Capital: Fish Meal and Oil Purchases”.

The Company’s annual revenues are highly dependent on pricing, annual fish catch, production yields and inventories and, in addition, inventory is generally carried over from one year to the next year. The Company determines the level of inventory to be carried over based on existing contracts, prevailing market prices of the products and anticipated customer usage and demand during the off-season. Thus, production volume does not necessarily correlate with sales volume in the same year and sales volumes will fluctuate from quarter to quarter. The Company’s fish meal products have a useable life of approximately one year from date of production. Practically, however, the Company attempts to empty its warehouses of the previous season’s products by the second or third month of the new fishing season. The Company’s crude fish oil products do not lose efficacy unless exposed to oxygen and, therefore, their storage life typically is longer than that of fish meal.

Revenues by Product. 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,     Nine Months Ended September 30,  
     2010     2009     2010     2009  
     Revenues      Percent     Revenues      Percent     Revenues      Percent     Revenues      Percent  

Fish Meal

                    

Regular Grade

   $ 7.6         13.6   $ 5.2         10.4   $ 20.0         16.1   $ 16.4         13.5

Special Select

     28.0         49.8        29.2         58.5        55.7         44.7        58.2         47.7   

Sea-Lac

     5.3         9.5        1.5         3.0        10.1         8.1        6.0         4.9   

Fish Oil

                    

Crude Oil

     10.3         18.6        9.2         18.5        24.2         19.4        23.3         19.2   

Refined Oil

     3.6         6.4        3.4         6.8        10.1         8.1        13.0         10.7   

Fish Solubles

     1.2         2.1        1.4         2.8        4.5         3.6        4.9         4.0   
                                                                    

Total

   $ 56.0         100.0   $ 49.9         100.0   $ 124.6         100.0   $ 121.8         100.0
                                                                    

Customers and Marketing.  Most of the Company’s marine protein products are sold directly to approximately 250 customers by the Company’s agriproducts sales department, while a smaller amount is sold through independent sales agents. Product inventory was $56.7 million as of September 30, 2010 versus $47.2 million as of December 31, 2009.

A number of countries in which the Company currently sells products impose various tariffs and duties, none of which have a significant impact on the Company’s foreign sales. Certain of these duties have been reduced in recent years for certain countries under the North American Free Trade Agreement and the Uruguay Round Agreement of the General Agreement on Tariffs and Trade. In all cases, the Company’s products are shipped to its customers either by FOB shipping point or CIF terms, and therefore, the customer is responsible for any tariffs, duties or other levies imposed on the Company’s products sold into these markets.

During the off season, the Company fills purchase orders from the inventory it has accumulated during the fishing season or in some cases, by re-selling meal and oil purchased from other suppliers. Generally, prices for the Company’s products tend to be lower during the fishing season when product is more abundant than in the off season. Throughout the entire year, prices are often significantly influenced by supply and demand in world markets for competing products, primarily other global sources of fish meal and oil, and also soybean meal for its fish meal products, and vegetable oils for its fish oil products when used as an alternative.

 

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Purchases and Sales of Third-Party Meal and Oils . The Company has from time to time purchased fish meal and fish oil from other domestic and international manufacturers. These purchase and resale transactions have to date been ancillary to the Company’s base manufacturing and sales business.

Occasionally the Company’s fish catch and resultant product inventories are reduced, primarily due to adverse weather conditions, and the Company further expands its purchase and resale of other fish meals and oils (primarily Panamanian, Peruvian and Mexican fish meal and U.S. menhaden fish meal and oil). Although operating margins from these activities are less than the margins typically generated from the Company’s base domestic production, these operations provide the Company with a source of fish meal and oil to sell into other markets, some of which, the Company has not historically had a presence. During 2007, the Company purchased fish oil totaling approximately 5,500 tons, or approximately 9.1% of fish oil sales volume for 2007. The Company did not purchase any fish meal or fish oil during 2008. During 2009, the Company purchased approximately 11,000 tons of menhaden fish meal, or approximately 7.6% of fish meal sales volumes for 2009. During the nine months ended September 30, 2010 and 2009, the Company purchased 0 tons and approximately 10,600 tons of fish meal, or 0% and approximately 10.3% of fish meal sales volumes for the same period, respectively. Subsequent to September 30, 2010, the Company expects to close on a purchase of 5,000 metric tons of fish meal from a third party for approximately $6.7 million.

Due to the Gulf of Mexico oil spill disaster, the Company anticipates that it will purchase fish meal from third parties to supplement its production shortfalls. The Company has received and will continue to seek reimbursement from BP through the GCCF for, among other things, costs associated with these purchases. See “- Liquidity and Capital Resources – Use of Capital: Fish Meal and Oil Purchases”.

Hurricane Activity and Damages.

2008 Hurricane Activity

During the nine months ended September 30, 2010, the Company received a grant of $0.2 million from the State of Louisiana Hurricane Gustav and Ike Fisheries Recovery Program. The grant provides assistance for commercial fishing owners impacted by Hurricanes Gustav and Ike in 2008. The grant proceeds were recognized as “(Other proceeds) loss resulting from natural disaster, net – 2008 storms” in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income.

2005 Hurricane Activity

During the first quarter of 2009, the Company received a grant related to the impact of Hurricane Katrina of $2.7 million, net of fees and expenses, from the State of Mississippi. The Mississippi grant was recognized as “Other proceeds relating to natural disasters, net – 2005 storms” in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the nine months ended September 30, 2009.

On August 31, 2007, the Company filed a lawsuit in the District Court of Harris, Texas 295th Judicial District, against its prior insurance broker, Aon Risk Services of Texas, who procured the Company’s property insurance policies for the 2005/2006 policy year, which were the subject of prior litigation as a result of claims relating to Hurricanes Rita and Katrina. The Company’s lawsuit against Aon alleges negligent procurement, negligent misrepresentation, breach of contract and violations of Texas insurance and consumer protection laws. Trial for this matter is scheduled in May 2011.

 

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Competition.  The Company competes with a smaller domestic privately-owned menhaden fishing company and with international marine protein and oil producers, including Mexican sardine processors and South American anchovy and mackerel processors. In addition, but to a lesser extent, the Company’s marine protein and oil business is also subject to significant competition from producers of vegetable and other animal protein products and oil products such as Archer Daniels Midland and Cargill. Many of these competitors have significantly greater financial resources and more extensive and diversified operations than those of the Company.

Omega competes on price, quality and performance characteristics of its products, such as protein level and amino acid profile in the case of fish meal. The principal competition for the Company’s fish meal and fish solubles is from other global production of marine proteins as well as other protein sources such as soybean meal and other vegetable or animal protein products. The Company believes, however, that these other non-marine sources are not complete substitutes because fish meal offers nutritional values not contained in such other sources. Other globally produced fish oils provide the primary market competition for the Company’s fish oil, as well as soybean and rapeseed oil.

Fish meal prices have historically borne a relationship to prevailing soybean meal prices (more weakly correlated in recent years), while prices for fish oil are generally influenced by prices for vegetable oils, such as rapeseed, soybean and palm oils. Thus, the prices for the Company’s products are established by worldwide supply and demand relationships over which the Company has no control and tend to fluctuate significantly over the course of a year and from year to year. For example, during 2008, the Company experienced fish oil price increases of approximately 73.4% when compared to 2007, whereas palm oil and soy oil prices rose 35% and 43%, respectively. Beginning in the third quarter of 2008, pricing in the agricultural commodity markets began to decrease. Spot fish oil prices followed these general trends during the second half of 2008 and throughout 2009.

During the first nine months of 2010, the ratio of fish meal prices to soybean meal prices increased due to higher fish meal prices caused by a tight supply of fish meal globally. It is possible that this ratio could return to a normal range in the fourth quarter of 2010 and into 2011, thus decreasing the price of fish meal.

Price List. The Company posts its latest internally generated price list for its various products on its Company website, omegaproteininc.com. The Company expects to post updates to the price list as they become available, which may occur as frequently as weekly. The Company may elect to discontinue this disclosure at any time without prior notice. Pricing and product availability information disclosed in the price list are subject to change without prior notice, and the Company undertakes no obligation to update such information. Information on the Company’s website is not incorporated by reference into this report and does not constitute part of this report.

Regulation.  The Company’s operations are subject to federal, state and local laws and regulations relating to the locations and periods in which fishing may be conducted as well as environmental and safety matters. At the state and local level, certain state and local government agencies have enacted legislation or regulations which prohibit, restrict or regulate menhaden fishing within their jurisdictional waters.

The Company’s menhaden fishing operations are also subject to regulation by two interstate compact commissions created by federal law: the Atlantic States Marine Fisheries Commission (“ASMFC”) which consists of 15 states along the Atlantic Coast, and the Gulf States Marine Fisheries Commission which consists of 5 states along the Gulf of Mexico. In 2005, the ASMFC recommended precautionary restrictions on the Chesapeake Bay menhaden harvest, despite its finding that menhaden are not overfished and that overfishing is not occurring on a coast wide basis, in order to determine whether localized depletion was occurring in Chesapeake Bay.

 

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The ASMFC conserves and manages the menhaden fishery throughout the stock’s coast-wide range. According to federal and ASMFC technical experts, the menhaden population is not over-fished and over-fishing is not occurring throughout its range. The Company supports the ASMFC’s goal of maintaining healthy populations of menhaden and the current research program designed to answer ecological questions regarding menhaden in the Chesapeake Bay and coast-wide. The Chesapeake Bay cap was established as a precautionary measure while research is conducted to address, among other things, the question whether the menhaden harvest in the Bay could cause what is being termed “localized depletion” of menhaden there. No evidence of such localized depletion has been produced.

Because the research regarding menhaden is on-going, in 2009 the ASMFC and Virginia approved an extension of the existing Chesapeake Bay cap for an additional three years (2011-2013) beyond its currently scheduled expiration date in 2010.

The Company monitors regulations which affect fish meal and fish oil in the United States and in some cases, those foreign jurisdictions where it sells its products. To date, such regulations have not had a material adverse effect on the Company’s business, but it is possible they may do so in the future.

Critical Accounting Policies and Estimates

The methods, estimates and judgments used in applying the Company’s critical accounting policies have a significant impact on the results reported in the Consolidated Financial Statements. The SEC has defined the critical accounting policies as the ones that are most important to the portrayal of the Company’s financial condition and operating results, and requires the Company to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are highly uncertain at the time of estimation. Based on this definition, most critical policies include: valuation of inventory (Notes 1 and 3 in the Company’s most recent Form 10-K), valuation of losses related to Jones Act and worker’s compensation insurance claims (Note 1 in the Company’s most recent Form 10-K), valuation of income and deferred taxes (Notes 1 and 9 in the Company’s most recent Form 10-K), and valuation of pension plan obligations (Notes 1 and 11 in the Company’s most recent Form 10-K).

The Company also has other key accounting policies and accounting estimates relating to allowance of doubtful accounts (Note 1 in the Company’s most recent Form 10-K), valuation of shares-based compensation (Note 11 in the Company’s most recent Form 10-K) and interest and energy swap valuations (Notes 1 and 15 in the Company’s most recent Form 10-K). The Company believes that these key accounting policies and accounting estimates either do not generally require us to make estimates and judgments that are as difficult or as subjective as its critical accounting policies, or it is less likely that they would have a material impact on our reported results of operations for a given period.

For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies.

Results of Operations

The following table sets forth as a percentage of revenues, certain items of the Company’s results of operations for each of the indicated periods.

 

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     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2010     2009     2010     2009  

Revenues

     100.0     100.0     100.0     100.0

Cost of sales

     72.7        97.5        75.8        94.6   
                                

Gross profit

     27.3        2.5        24.2        5.4   

Selling, general and administrative expense

     6.3        6.1        8.6        7.8   

Research and development expense

     0.9        0.7        1.2        0.9   

Losses (proceeds) resulting from Gulf of Mexico oil spill disaster, net of recoveries

     (1.1     —          —          —     

(Other proceeds) loss resulting from natural disaster, net – 2008 storms

     —          —          (0.2     0.3   

Other proceeds relating to natural disaster, net – 2005 storms

     —          —          —          (2.2

(Gain) loss on disposal of assets

     —          0.2        0.2        0.1   
                                

Operating income (loss)

     21.2        (4.5     14.4        (1.5

Interest income

     —          0.1        —          0.1   

Interest expense

     (1.2     (4.5     (1.6     (3.3

Other expense, net

     (0.3     (0.2     (0.2     (0.2
                                

Income (loss) before income taxes

     19.7        (9.1     12.6        (4.9

Provision (benefit) for income taxes

     7.3        (3.5     4.6        (1.7
                                

Net income (loss)

     12.4     (5.6 %)      8.0     (3.2 %) 
                                

Interim Results for the Third Quarters ended September 30, 2010 and September 30, 2009

Revenues . Revenues increased $6.1 million, or 12.2%, from $49.9 million for the three months ended September 30, 2009 to $56.0 million for the three months ended September 30, 2010. The increase in revenues was due to higher sales prices of 56.4% and 33.4% for the Company’s fish meal and fish oil, respectively, which was partially offset by lower sales volumes of 27.2% and 17.4% for the Company’s fish meal and fish oil, respectively. Considering fish meal, fish oil and fish solubles sales activities in total, the Company experienced a $21.4 million increase in revenues due to increased sales prices and a $15.3 million decrease in revenue caused by decreased sales volumes, when comparing the three months ended September 30, 2010 to the three months ended September 30, 2009. The increase in fish meal prices in the third quarter of 2010 is due to contracts entered into during the global tightening of fish meal availability experienced during 2010. The increase in fish oil prices in the third quarter of 2010 is due to the stabilization of prices during 2010 as compared to the market lows experienced during 2009. The decrease in sales volumes from the third quarter of 2010 as compared to 2009 is partially due to lower production level and inventory available to sell as a result of the 2010 Gulf of Mexico oil spill disaster.

Cost of sales . Cost of sales, including depreciation and amortization, for the quarter ended September 30, 2010 was $40.7 million, a $7.9 million decrease, or 16.3%, when compared to the quarter ended September 30, 2009. Cost of sales as a percentage of revenues was 72.7% for the quarter ended September 30, 2010 as compared to 97.5% for the quarter ended September 30, 2009. The decrease in cost of sales as a percentage of revenue was primarily due to the increase in fish meal and fish oil sales prices, partially offset by increased per unit of production costs due to a lower fish catch associated with the Gulf of Mexico oil spill disaster.

Gross profit . Gross profit increased $14.0 million from a gross profit of $1.3 million for the quarter ended September 30, 2009 to a gross profit $15.3 million for the quarter ended September 30, 2010. Gross profit as a percentage of revenue was 27.3% for the quarter ended September 30, 2010 as compared to 2.5% for the quarter ended September 30, 2009. The increase in gross profit as a percentage of revenue was primarily due the increase in fish meal and fish oil sales prices, as discussed above.

 

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Selling, general and administrative expenses . Selling, general and administrative expenses increased $0.6 million, or 18.5%, from $3.0 million for the quarter ended September 30, 2009 to $3.6 million for the quarter ended September 30, 2010. The increase in selling, general and administrative expenses is mainly due to increased costs associated with employee compensation. Specifically, share based compensation in the current quarter increased $0.2 million as compared to the prior year quarter due to 2010 stock option grants.

Research and development expenses . Research and development expenses were $0.4 million for the quarters ended September 30, 2010 and 2009.

Losses (proceeds) resulting from Gulf of Mexico oil spill disaster, net of recoveries. During the quarter ended September 30, 2010, the Company received an emergency payment from the Gulf Coast Claims Facility of $7.3 million of which $0.6 million offset the loss recognized for the quarter ended June 30, 2010, prior to the receipt of any funds. The remainder of the payment and any future payments will be applied to the Company’s inventory cost pool to offset excessive costs incurred in relation to its 2010 Gulf of Mexico fish catch and cost related to purchased product. No such proceeds were received during the quarter September 30, 2009.

(Gain) loss on disposal of assets . The (gain) loss on disposal of assets was ($15,000) and $100,000 for the three months ended September 30, 2010 and 2009, respectively. The losses relate to the disposal of miscellaneous plant assets in the ordinary course of business.

Operating income (loss).  As a result of the factors discussed above, the Company’s operating income increased $14.1 million from an operating loss of $2.2 million for the quarter ended September 30, 2009 to operating income of $11.9 million for the quarter ended September 30, 2010. As a percentage of revenues, operating income (loss) increased from a loss of 4.5% for the quarter ended September 30, 2009 to income of 21.2% for the quarter ended September 30, 2010.

Interest income . Interest income decreased by $14,000 from $36,000 for the three months ended September 30, 2009 to $22,000 for the three months ended September 30, 2010. The decrease was primarily due to the decreased cash balance upon which interest is earned during the quarter ended September 30, 2010 as compared to the quarter ended September 30, 2009.

Interest expense . Interest expense decreased $1.6 million, or 70.2%, from $2.3 million for the quarter ended September 30, 2009 to $0.7 million for the quarter ended September 30, 2010. The decrease in interest expense is primarily due to the Company’s cash flow interest rate hedges becoming ineffective during the quarter ended September 30, 2009 as the result of early debt repayments made which resulted in $1.4 million of additional interest expense. The decrease in interest expense is also due to the decreased debt balance associated with the Company repaying its term loan in September and October 2009. These decreases were partially offset by a decrease in capitalized interest, which is netted against interest expense, for the current quarter which was less than the prior year quarter due to the completion of certain capital projects.

Other expense, net . Other expense, net was $0.1 million for the quarters ended September 30, 2010 and 2009.

Provision (benefit) for income taxes.  The Company recorded a $4.1 million provision for income taxes for the quarter ended September 30, 2010 representing an effective tax rate of 37.0% for income taxes compared to 38.1% for the quarter ended September 30, 2009. The decrease in the effective tax rate is primarily a result of the impact of certain nondeductible items and the increased level of expected book income. The Company believes that it is more probable than not that the recorded estimated deferred tax asset benefits and state operating loss carry-forwards will be realized except for the amount for which a valuation allowance has been provided. The statutory tax rate of 34% for U.S. federal taxes was in effect for the three month periods ended September 30, 2010 and 2009.

 

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Interim Results for the Nine Months ended September 30, 2010 and September 30, 2009

Revenues . Revenues increased $2.8 million, or 2.2%, from $121.8 million for the nine months ended September 30, 2009 to $124.6 million for the nine months ended September 30, 2010. The increase in revenues was due to higher sales prices of 42.8% and 3.6% for the Company’s fish meal and fish oil, respectively, which was partially offset by lower sales volumes of 25.4% and 8.9% for the Company’s fish meal and fish oil, respectively. Considering fish meal, fish oil and fish solubles sales activities in total, the Company experienced a $31.8 million increase in revenues due to the increase in sales prices and a $29.0 million decrease in revenue caused by decreased sales volumes, when comparing the nine months ended September 30, 2010 to the nine months ended September 30, 2009. The increase in fish meal prices in the first nine months of 2010 is due to contracts entered into during the global tightening of fish meal availability experienced during 2010. The decrease in sales volumes from the first nine months of 2009 is partially due to the Company beginning 2010 with less fish meal and fish oil inventory as compared to the beginning of 2009. Additionally, the decrease in sales volumes from the first nine months of 2009 is partially due to lower production level and inventory available to sell as a result of the 2010 Gulf of Mexico oil spill disaster.

Cost of sales . Cost of sales, including depreciation and amortization, for the nine months ended September 30, 2010 was $94.5 million, a $20.8 million decrease, or 18.1%, as compared to the nine months ended September 30, 2009. Cost of sales as a percentage of revenues was 75.8% for the nine months ended September 30, 2010 as compared to 94.6% for the nine months ended September 30, 2009. The decrease in cost of sales as a percentage of revenue was primarily due to the increase in fish meal sales prices, partially offset by increased per unit of production costs due to a lower fish catch associated with the Gulf of Mexico oil spill disaster.

Gross profit . Gross profit increased $23.5 million from $6.6 million for the nine months ended September 30, 2009 to $30.1 million for the nine months ended September 30, 2010. Gross profit as a percentage of revenue was 24.2% for the nine months ended September 30, 2010 as compared to 5.4% for the nine months ended September 30, 2009. The increase in gross profit as a percentage of revenue was primarily due the increase in fish meal sales prices, as discussed above.

Selling, general and administrative expenses . Selling, general and administrative expenses increased $1.2 million, or 13.3%, from $9.6 million for the nine months ended September 30, 2009 to $10.8 million for the nine months ended September 30, 2010. The increase in selling, general and administrative expenses is primarily due to increased costs associated with employee compensation. Specifically, share based compensation in the nine months ended September 30, 2010 increased $0.7 million as compared to the nine months ended September 30, 2009 due to 2010 stock option grants.

Research and development expenses . Research and development expenses increased $0.3 million from $1.0 million for the nine months ended September 30, 2009 to $1.3 million for the nine months ended September 30, 2010. The 28.8% increase is mainly attributable to employee and travel related costs.

(Other proceeds) loss resulting from natural disaster, net—2008 storms. For the nine months ended September 30, 2010, the Company recognized a gain of $0.2 million related to a grant from the State of Louisiana Hurricane Gustav and Ike Fisheries Recovery Program. This amount represents the total grant expected to be received in 2010. For the nine months ended September 30, 2009, the Company incurred losses, net of insurance receivable, of $0.4 million relating to damages incurred at its Abbeville and Cameron, Louisiana, fish processing facilities related to Hurricane Ike in 2008.

 

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Other proceeds relating to natural disaster, net—2005 storms. For the nine months ended September 30, 2009, the Company received a federal hurricane assistance grant of $2.7 million from the State of Mississippi, net of fees, related to the impact of Hurricane Katrina on the Company. No grant was received for the nine months ended September 30, 2010.

(Gain) loss on disposal of assets . The loss on disposal of assets was $0.3 million for the nine months ended September 30, 2010. The loss primarily relates to two decommissioned fishing vessels which were sold as scrap. For the nine months ended September 30, 2009, the Company recognized a loss of $0.1 million relating to the disposal of miscellaneous plant assets in the ordinary course of business.

Operating income (loss).  As a result of the factors discussed above, the Company’s operating income increased $19.7 million from an operating loss of $1.8 million for the nine months ended September 30, 2009 to operating income of $17.9 million for the nine months ended September 30, 2010. As a percentage of revenues, operating income increased from an operating loss of 1.5% for the nine months ended September 30, 2009 to operating income of 14.4% for the nine months ended September 30, 2010.

Interest income . Interest income decreased by $140,000 from $168,000 for the nine months ended September 30, 2009 to $28,000 for the nine months ended September 30, 2010. The decrease was primarily due to the decreased cash balance upon which interest is earned during the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009.

Interest expense . Interest expense decreased $2.1 million, or 52.2%, from $4.0 million for the nine months ended September 30, 2009 to $1.9 million for the nine months ended September 30, 2010. The decrease in interest expense is primarily due to the Company’s cash flow interest rate hedges becoming ineffective during the nine months ended September 30, 2009 as the result of early debt repayments made which resulted in $1.4 million of additional interest expense. The decrease in interest expense is also due to the decreased debt balance associated with the Company repaying its term loan in September and October 2009. These decreases were partially offset by a decrease in capitalized interest, which is netted against interest expense, for the current nine month period which was less than the prior year nine month period due to the completion of certain capital projects.

Other expense, net . Other expense, net was $0.3 million for the nine months ended September 30, 2010 and 2009.

Provision (benefit) for income taxes.  The Company recorded a $5.8 million provision for income taxes for the nine months ended September 30, 2010 representing an effective tax rate of 36.7% for income taxes compared to 33.4% for the nine months ended September 30, 2009. The increase in the effective tax rate is primarily a result of the impact of certain nondeductible items and the increased level of expected book income. The Company believes that it is more probable than not that the recorded estimated deferred tax asset benefits and state operating loss carry-forwards will be realized except for the amount for which a valuation allowance has been provided. The statutory tax rate of 34% for U.S. federal taxes was in effect for the nine month periods ended September 30, 2010 and 2009.

 

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Seasonal and Quarterly Results

The Company’s menhaden harvesting and processing business is seasonal in nature. The Company generally has higher sales during the menhaden harvesting season (which includes the second and third quarter of each year) due to increased product availability, but prices during the fishing season tend to be lower than during the off-season. Additionally, due to differences in gross profit margins for the Company’s various products, any variation in the mix of product sales between quarters may result in significant variations of total gross profit margins. As a result, the Company’s quarterly operating results have fluctuated in the past and may fluctuate in the future. In addition, from time to time the Company defers sales of inventory based on worldwide prices for competing products that affect prices for the Company’s products which may affect comparable period comparisons.

Liquidity and Capital Resources

Historically, the Company’s primary sources of liquidity and capital resources have been cash flows from operations, bank credit facilities and term loans from various lenders provided pursuant to the U.S. Maritime Administration’s Fisheries Finance Program (“FFP”), which is offered through National Marine Fisheries Services (“NMFS”) under Title XI of the Marine Act of 1936 (“Title XI”). These sources of cash flows have been used for operations, capital expenditures, payment of long-term debt and the purchase and retirement of shares of the Company’s common stock in 2006.

At September 30, 2010, the Company had an unrestricted cash balance of $19.5 million, an increase of $17.3 million from December 31, 2009. This increase was primarily due to operations, proceeds from a Title XI term loan of $10 million and the reimbursement of losses from the GCCF of $7.3 million, partially offset by debt payments, capital spending and spending related to the 2010 fishing season. The Company’s annual revenues and its resulting liquidity are highly dependent on annual fish catch, production yields, selling prices for its products and inventories available for sale. The Company’s selling prices for its products increased 24.9% for the nine months ended September 30, 2010 as compared to fiscal year 2009.

The aggregate amount of the Company’s outstanding indebtedness at September 30, 2010 was approximately $34.0 million compared to approximately $25.9 million at December 31, 2009. The Company has a moderately leveraged financial structure which could limit its financial flexibility. In particular, the Company will be required to use a portion of its cash flows to pay principal and interest on its debt, which will reduce the amount of money the Company has for operations, capital expenditures, expansion, acquisitions or general corporate or other business activities. In addition, the covenants contained in the Company’s debt agreements limit its ability to borrow money in the future for acquisitions, capital expenditures or to meet the Company’s operating expenses or other general corporate obligations. See “Risk Factors—The Company has a moderate amount of indebtedness, which may adversely affect its ability to operate its business, remain in compliance with debt covenants and make payments on its debt” in the Company’s 2009 Form 10-K.

Source of Capital: Operations

Net cash flow provided by operating activities decreased from approximately $24.3 million for the nine month period ended September 30, 2009 to $19.5 million for the nine month period ended September 30, 2010. The decrease in operating cash flow is primarily attributable to changes in inventory, receivables, and accrued liabilities. Specifically, the decrease in operating cash flow related to changes in receivables is due to a large amount of export sales that were classified as receivables as of December 31, 2008 and subsequently collected during the nine months ended September 30, 2009. Operating activities for the nine month period ended September 30, 2010 also includes the receipt of $7.3 million from the GCCF related to the Gulf of Mexico oil spill disaster and a grant of $0.2 million from the State of Louisiana related to the impacts of Hurricanes Gustav and Ike.

 

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Source of Capital: Debt

Net financing activities provided (used) cash of $8.1 million and ($21.4) million during the nine month periods ended September 30, 2010 and 2009, respectively. The nine month period ended September 30, 2010 included $10.0 million in proceeds from a Title XI term loan, $2.2 million in debt and capital lease principal payments and $0.4 million in proceeds and tax effects received from stock options exercised. The nine month period ended September 30, 2009 included $21.4 million in debt and capital lease principal payments.

On December 1, 2005, pursuant to the Title XI program, the United States Department of Commerce Fisheries Finance Program (the “FFP”) approved a second financing application made by the Company in the amount of $16.4 million (the “Second Approval Letter”). In May 2006, the Company submitted a $6.3 million financing request under the Second Approval Letter. The Company closed on the $6.3 million FFP loan in the first quarter of 2007. In September 2009, the Company submitted a $10.0 million financing request under the remaining Second Approval Letter. The Company closed on the $10.0 million financing request on June 1, 2010. As of September 30, 2010, the Company had approximately $34.0 million of borrowings outstanding under Title XI and was in compliance with all of the covenants contained therein.

On March 26, 2007 the Company entered into a credit agreement with Bank of America, N.A. (as administrative agent, lender, swing line lender and letter of credit issuer), Regions Bank, Compass Bank and Farm Credit Bank of Texas which provided the Company with a $55 million senior credit facility (the “Senior Credit Facility”) consisting of (i) a 5-year revolving credit facility of up to $20 million, including a $7.5 million sub-limit for the issuance of standby letters of credit and a $2.5 million sub-limit for swing line loans and (ii) a 5-year term loan (the “Term Loan”) of $35 million.

On October 21, 2009, the Company entered into a Loan Agreement with Wells Fargo Bank N.A. (“the Loan Agreement”) which replaced the prior Senior Credit Facility. The Loan Agreement with Wells Fargo Bank provides the Company with a senior secured credit facility consisting of a 3-year revolving credit facility of up to $35 million, including a $7.5 million sub-limit for the issuance of standby letters of credit, and is secured by substantially all of the Company’s assets except for those already pledged in connection with existing federal Fisheries Finance Program loans. The Loan Agreement replaced the prior Senior Credit Facility, under which, just prior to closing, $11.4 million was outstanding under the Term Loan and $2.8 million was outstanding under letters of credit. In connection with the closing of the Loan Agreement, the Company repaid the Term Loan at closing and the letters of credit were transferred to Wells Fargo Bank. As of December 31, 2009, the Company recognized $0.4 million in deferred debt issuance costs associated with the Loan Agreement on the Consolidated Balance Sheet. Additionally, the Company recognized a $0.4 million charge in the Consolidated Statement of Operations related to unamortized deferred debt issuance costs associated with the Senior Credit Facility.

As of September 30, 2010, the Company had no amounts outstanding under the Loan Agreement and approximately $3.0 million in letters of credit issued primarily in support of worker’s compensation insurance programs. The Company has no off-balance sheet arrangements other than normal operating leases and standby letters of credit.

The Loan Agreement bears interest at LIBOR plus an applicable margin. In addition, the Company is required to comply with various affirmative and negative covenants affecting its business and financial operations, as well as the following financial covenants:

 

   

The Company is required to maintain on a consolidated basis a ratio of Total Liabilities (as defined in the Loan Agreement) excluding the non-current portion of Subordinated Liabilities (as defined in the Loan Agreement) to Tangible Net Worth (as defined in the Loan Agreement) not exceeding 1.00 to 1.00.

 

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The Company is required to maintain on a consolidated basis Tangible Net Worth equal to at least the sum of the following: (a) $130,000,000, plus (b) 50% of net income (if positive, with no deduction for losses) earned in each quarterly accounting period commencing after December 31, 2009, plus (c) 100% of the net proceeds from any Equity Interests (as defined in the Loan Agreement) issued after the date of the Loan Agreement, plus (d) 100% of any increase in stockholders’ equity resulting from the conversion of debt securities to equity interests after the closing date.

 

   

The Company is required to maintain on a consolidated basis an Asset Coverage Ratio (as defined in the Loan Agreement) of at least 2.50 to 1.00.

 

   

The Company (a) may not incur on a consolidated basis a net loss before taxes and extraordinary items in any two consecutive quarterly accounting periods, commencing with the fiscal quarter ending September 30, 2010, and (b) may not incur on a consolidated basis a net loss before taxes and extraordinary items for any annual accounting period, commencing with the fiscal year ending December 31, 2010.

As of September 30, 2010, the Company was in compliance with all covenants under the Loan Agreement. For a more detailed description of the Loan Agreement, see the Company’s current report on Form 8-K filed with the SEC on October 23, 2009.

Use of Capital: Operations

Net investing activities used cash of $10.4 million and $5.0 million for the nine month periods ended September 30, 2010 and 2009, respectively. The Company’s investing activities consist mainly of capital expenditures for equipment purchases, replacements, vessel refurbishments, and fish oil refining processes. The Company made capital expenditures of approximately $10.7 million and $15.2 million, for the nine month periods ended September 30, 2010 and 2009, respectively. The Company anticipates making an additional $4.4 million in capital expenditures during the remainder of 2010 primarily for the refurbishment of vessels and plant assets and for the repair of certain equipment. Investing activities for the nine month period ended September 30, 2009 also includes the receipt of a grant of $2.7 million, net of fees and expenses, related to the impact of Hurricane Katrina, from the State of Mississippi, and the receipt of $7.5 million in proceeds from insurance companies relating to Hurricane Ike.

Use of Capital: Acquisitions

The Company from time to time considers potential transactions including, but not limited to, enhancement of physical facilities to improve production capabilities and the acquisition of other businesses. Certain of the potential transactions reviewed by the Company would, if completed, result in its entering new lines of business (generally including certain businesses to which the Company sells its products such as pet food manufacturers, aquaculture feed manufacturers, fertilizer companies and organic and supplement foods manufacturers and distributors), although historically, reviewed opportunities have been generally related in some manner to the Company’s existing operations or which would have added new protein products to the Company’s product

 

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lines. Although the Company does not budget for acquisitions and, as of the date hereof, does not have any commitment with respect to a material acquisition, it could enter into such agreement in the future. Depending on the size of the acquisition, the Company would expect to finance the transaction using internally generated cash flows and its current credit agreements, or, if necessary, equity or debt financings. The Company cannot assure that such financings will be available on acceptable terms, if at all.

Use of Capital: Contractual Obligations

The following tables aggregate information about the Company’s contractual cash obligations and other commercial commitments (in thousands) as of September 30, 2010:

 

Contractual Cash Obligations

   Payments Due by Period  
   Total      Less than
1 year
     1 to 3
years
     4 to 5
years
     After 5
years
 

Long-term debt

   $ 33,969       $ 2,894       $ 6,086       $ 5,829       $ 19,160   

Capital lease obligation

     1,355         412         943         —           —     

Interest on long term debt and capital lease obligation

     13,353         2,310         3,716         2,803         4,524   

Operating lease obligations

     8,118         2,089         3,801         2,020         208   

Pension funding

     11,698         1,651         5,737         2,655         1,655   

Fish meal purchase obligations (1)

     6,650         6,650         —           —           —     

Energy commitments ( 2 )

     28         28         —           —           —     
                                            

Total Contractual Cash Obligations

   $ 75,171       $ 16,034       $ 20,283       $ 13,307       $ 25,547   
                                            

 

(1)

As of September 30, 2010, the Company has entered into purchase commitments of approximately $6.7 million to purchase Moroccan fish meal that is expected to be delivered in the fourth quarter of 2010.

( 2 )

As of September 30, 2010, the Company has entered into purchase commitments of approximately $28,000 related to natural gas basis contracts that will be delivered in quantities expected to be used in the normal course of business during the remainder of the 2010 fishing season.

Use of Capital: Fish Meal and Oil Purchases

Due to the Gulf of Mexico oil spill, the Company may have a shortfall of fish meal and fish oil necessary to fulfill its existing sale contracts, as well as other possible customer demands. The Company expects to purchase fish meal from third parties to supplement its production and has received and will continue to seek reimbursement from BP through the GCCF for, among other things, costs associated with those purchases. To the extent that the Company effects these purchases and fulfills existing forward sales contracts, its revenues will be generally unaffected but the profit margins could be substantially reduced or possibly eliminated, resulting in losses on those particular transactions.

Available Information

The Company files annual, quarterly and current reports and other information with the SEC. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed under the Securities and Exchange Act of 1934 (“Exchange Act”), as well as Section 16 filings by officers and directors, are available free of charge at the Company’s website at www.omegaproteininc.com or at the SEC’s website at www.sec.gov and are posted as soon as reasonably

 

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practicable after they are filed with the SEC. The Company will provide a copy of these documents to stockholders upon request. Information on the Company’s website or any other website is not incorporated by reference into this report and does not constitute part of this report.

In addition, the public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F. Street, NE., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov .

The Company’s Corporate Governance Guidelines, Code of Business Conduct and Ethics, Code of Ethics for Financial Professionals, as well as the Charters for the Board’s Audit Committee, Compensation Committee, Corporate Governance and Nominating Committee and Scientific Committee, are available at the Company’s website. These Guidelines, Codes and Charters are not incorporated by reference into this report and do not constitute part of this report. The Company will provide a copy of these documents to stockholders upon request.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, the financial condition of the Company is exposed to minimal market risk associated with interest rate movements on the Company’s borrowings. In the past, to mitigate this risk, the Company has entered into interest rate swap agreements to effectively lock-in the LIBOR component of certain debt instruments. A one percent increase or decrease in the levels of interest rates on variable rate debt would not result in a material change to the Company’s results of operations. However, as a result of entering into the Loan Agreement with Wells Fargo Bank, N.A. in October 2009, the interest rate swap agreements became ineffective and the Company is again subject to interest rate fluctuations resulting from the LIBOR component for the Loan Agreement.

The Company is also exposed to market risk associated with natural gas and diesel prices. To partially mitigate this risk, the Company has forward purchased a portion of its expected natural gas, diesel and Bunker C usage for 2010, 2011 and 2012. The Company is currently exposed to market risk associated with increases in natural gas, Bunker C, and diesel prices related to the portion not covered by swaps for 2010, 2011 and 2012.

Although the Company sells products in foreign countries, all of the Company’s revenues are billed and paid for in US dollars. As a result, management does not believe that the Company is exposed to any significant foreign country currency exchange risk, and the Company does not utilize market risk sensitive instruments to manage its exposure to this risk.

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

 

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

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

 

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

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

(b) Changes in Internal Controls

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

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

The Company is defending various claims and litigation arising from operations which arise in the ordinary course of the Company’s business. In the opinion of management, any losses resulting from these matters will not have a material adverse affect on the Company’s results of operations, cash flows or financial position.

On August 31, 2007, the Company filed a lawsuit in the District Court of Harris, Texas 295th Judicial District, against its prior insurance broker, Aon Risk Services of Texas, who procured the Company’s property insurance policies for the 2005/2006 policy year, which were the subject of prior litigation as a result of claims relating to Hurricanes Rita and Katrina. The Company’s lawsuit against Aon alleges negligent procurement, negligent misrepresentation, breach of contract and violations of Texas insurance and consumer protection laws. Trial for this matter is scheduled for May 2011.

In April 2010, the Company received a request for information pursuant to Section 308 of the Federal Water Pollution Control Act (Clean Water Act) from Region 3 of the United States Environmental Protection Agency (the “EPA”) concerning the Company’s wastewater practices used in its fishing operations at its Reedville, Virginia facility. The Company has responded to the request. The Company cannot predict the outcome of the EPA’s review.

 

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Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2009 except as follows.

Risks Relating to the Company’s Business and Industry:

The Company’s operations are geographically concentrated in the Gulf of Mexico where they are susceptible to oil spills from offshore drilling, production and transportation activities. Three of the Company’s four operating plants are located in the Gulf of Mexico (two in Louisiana and one in Mississippi), a region which has historically had a high concentration of oil and gas infrastructure. If this infrastructure were to be become damaged due to natural or other disasters, then it is possible that environmental damages to the area and ecosystem could result.

For example, in response to the oil spill caused by the Deepwater Horizon oil rig explosion in the Gulf of Mexico in April 2010 and the subsequent temporary and intermittent closures of certain commercial and recreational fishing grounds by the Louisiana Department of Fisheries and Wildlife, the Mississippi Department of Marine Resources and the National Oceanic and Atmospheric Administration (“NOAA”), the Company relocated its nine Moss Point, Mississippi fishing vessels and three carry vessels to fishing grounds on the west side of the Mississippi River Delta in an attempt to minimize vessel downtime and business interruptions. The docking and re-supply areas for the Moss Point fleet were temporarily relocated from the Company’s Moss Point facility to the Company’s Morgan City, Louisiana facility. The Company’s Abbeville, Louisiana facility was also available to provide support as needed. The subsequent expansions of the closed fishing grounds required the Company to temporarily redeploy its vessels among its various Gulf facility locations to avoid the restricted areas. The oil spill and fishing ground closures resulted, initially, in the temporary interruption of fish processing at the Moss Point, Mississippi facility. The spill and expanded state and federal fishing ground closures forced the Company to almost completely cease all fishing operations at its three Gulf Coast facilities beginning in late June through July 2010. Subsequent to July, although the fishing grounds have begun to reopen in some areas which allowed the Company to fish in previously restricted areas, there are still some fishing grounds which remain closed and continued to effect the Company’s fishing through September 30, 2010.

The Company cannot predict what effect the oil spill, the Company’s response plan or the fisheries partial closure, will have on its fish catch, processing efficiency or customer perceptions about its products.

The Company cannot predict with any certainty: (1) the effect of the oil spill on the Company’s business operations and fish-catch, both short-term and long-term, (2) the effect of government intervention in connection with the oil spill, including without limitation, any restrictions that may be imposed on fishing, navigation and access to the Company’s facilities or restrictions on the sale of marine proteins produced from the Gulf of Mexico, (3) the effect of the oil spill, short-term and long-term, on the menhaden fishery or ecosystem supporting that fishery, (4) customer perceptions about marine products from the Gulf of Mexico or the United States due to concerns about contamination or availability, and (5) the amount of any reimbursement from BP or the GCCF for damages caused by the Deepwater Horizon oil spill that is ultimately received by the Company.

Provisions of the Company’s Articles of Incorporation and Bylaws, as well as Nevada and federal law and the Company’s Shareholder Rights Plan could delay or prevent corporate takeovers and could prevent stockholders from realizing a premium on their investment. Certain provisions of the Company’s Articles of Incorporation, Bylaws, the Company’s Shareholder Rights Plan, as well as the Nevada Corporation Law, could delay or frustrate the removal of incumbent directors and could make difficult a merger, tender offer or proxy contest involving the Company, even if such events could be

 

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viewed as beneficial by its stockholders. The Company’s Board of Directors is empowered to issue preferred stock in one or more series without stockholder action and did so in connection with the implementation of the Shareholder Rights Plan described below. Any issuance of this blank-check preferred stock could materially limit the rights of holders of the Company’s common stock and render more difficult or discourage an attempt to obtain control of the Company by means of a tender offer, merger, proxy contest or otherwise. In addition, the Articles of Incorporation and Bylaws contain a number of provisions which could impede a takeover or change in control of the Company, including, among other things, staggered terms for members of its Board of Directors, the requiring of two-thirds vote of stockholders to amend certain provisions of the Articles of Incorporation or the inability to take action by written consent or to call special stockholder meetings. Certain provisions of the Nevada Corporation Law could also discourage takeover attempts that have not been approved by the Company’s Board of Directors. In addition, federal law requires that at least 75% of the Company’s outstanding capital stock be owned by U.S. citizens which will discourage takeover attempts by potential foreign purchasers.

In June 2010, the Company’s Board of Directors adopted a Shareholder Rights Plan, pursuant to which rights were distributed to our stockholders at a rate of one right for each share of common stock held of record as of July 12, 2010. The Shareholder Rights Plan is designed to enhance the Board’s ability to prevent an acquirer from depriving stockholders of the long-term value of their investment and to protect stockholders against attempts to acquire the Company by means of unfair or abusive takeover tactics. However, the existence of the Shareholder Rights Plan may impede a takeover not supported by the Board, including a takeover that may be desired by a majority of the Company’s stockholders or involving a premium over the prevailing stock price.

 

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

None

 

Item 3. Defaults Upon Senior Securities

None

 

Item 4. Removed and Reserved

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

Exhibit No.

  

Description of Exhibit

31.1    Rule 13a-14(a)/15d-14(a) Certification for Chief Executive Officer.
31.2    Rule 13a-14(a)/15d-14(a) Certification for Chief Financial Officer.
32.1    Section 1350 Certification for Chief Executive Officer.
32.2    Section 1350 Certification for Chief Financial Officer.

 

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SIGNATURES

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

 

  OMEGA PROTEIN CORPORATION
                      (Registrant)
November 4, 2010   By:  

/s/ ROBERT W. STOCKTON

    (Executive Vice President, Chief Financial Officer)

 

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Exhibit 31.1

CERTIFICATION

I, Joseph L. von Rosenberg III, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Omega Protein Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 4, 2010   By:  

/s/ Joseph L. von Rosenberg

  Name:   Joseph L. von Rosenberg III
  Title:   President and Chief Executive Officer

 

Exhibit 31.2

CERTIFICATION

I, Robert W. Stockton, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Omega Protein Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 4, 2010   By:  

/s/ Robert W. Stockton

  Name:   Robert W. Stockton
  Title:  

Executive Vice President and Chief Financial Officer

 

Exhibit 32.1

Certification of Form 10-Q for the Quarter ended September 30, 2010, pursuant to Section

906 of the Sarbanes-Oxley Act of 2002

The undersigned Chief Executive Officer of Omega Protein Corporation, certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

 

the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and

 

 

the information contained in the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 fairly presents, in all material respects, the financial condition and results of operations of Omega Protein Corporation.

This certification is being furnished solely to comply with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as a part of the Form 10-Q.

A signed original of this written statement required by Section 906 has been provided to Omega Protein Corporation and will be retained by Omega Protein Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

Dated: November 4, 2010

 

/s/ JOSEPH L. VON ROSENBERG, III

Joseph L. von Rosenberg, III
President and Chief Executive Officer

 

Exhibit 32.2

Certification of Form 10-Q for the Quarter ended September 30, 2010, pursuant to Section

906 of the Sarbanes-Oxley Act of 2002

The undersigned Chief Financial Officer of Omega Protein Corporation, certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

 

the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and

 

 

the information contained in the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 fairly presents, in all material respects, the financial condition and results of operations of Omega Protein Corporation.

This certification is being furnished solely to comply with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as a part of the Form 10-Q.

A signed original of this written statement required by Section 906 has been provided to Omega Protein Corporation and will be retained by Omega Protein Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

Dated: November 4, 2010

 

/s/ ROBERT W. STOCKTON

Robert W. Stockton
Executive Vice President and
Chief Financial Officer