Omega Protein Corporation
OMEGA PROTEIN CORP (Form: 10-Q, Received: 08/05/2015 16:14:04)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

 

FORM 10-Q

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

 

SECURITIES EXCHANGE ACT OF 1934 

 

     

For the quarterly period ended June 30, 2015

 

OR

 

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

  SECURITIES EXCHANGE ACT OF 1934  

 

For the Transition Period From __________ to __________.

 

Commission file number: 001-14003

 

OMEGA PROTEIN CORPORATION

(Exact name of Registrant as specified in its charter)

 

State of Nevada

76-0562134

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

   

2105 City West Blvd., Suite 500

 

Houston, Texas

77042-2838

(Address of principal executive offices)

(Zip Code)

 

Registrant's telephone number, including area code: (713) 623-0060

 


 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No__.

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X No      .

 

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

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Small reporting company ☐

   

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes      No X .

 

Number of shares outstanding of the Registrant's Common Stock, par value $0.01 per share, on July 30, 2015: 21,714,004.

 



 

 
 

 

 

OMEGA PROTEIN CORPORATION

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 
   

Item 1. Financial Statements and Notes

 
   

Unaudited Condensed Consolidated Balance Sheet as of June 30, 2015 and December 31, 2014

3

Unaudited Condensed Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2015 and 2014

4

Unaudited Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2015 and 2014

5

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

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

24

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

41

 

 

Item 4. Controls and Procedures

42

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

42

 

 

Item 1A. Risk Factors

42

 

 

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

43

 

 

Item 3. Defaults Upon Senior Securities

43

 

 

Item 4. Mine Safety Disclosures

43

   

Item 5. Other Information

43

   

Item 6. Exhibits

44

   

Signatures

45

 

 
2

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands, except par value amounts)

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements and Notes

   

   

June 30,

2015

   

December 31,

2014

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 1,047     $ 1,430  

Receivables, net

    57,030       36,621  

Inventories

    101,737       97,513  

Deferred tax asset, net

    1,844       1,871  

Prepaid expenses and other current assets

    6,706       4,936  

Total current assets

    168,364       142,371  

Other assets, net

    2,345       2,309  

Property, plant and equipment, net

    179,630       169,932  

Goodwill

    42,049       42,501  

Other intangible assets, net

    21,776       23,002  

Total assets

  $ 414,164     $ 380,115  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

Current liabilities:

               

Current maturities of long-term debt

  $ 16,956     $ 14,741  

Accounts payable

    12,844       21,047  

Accrued liabilities

    30,059       23,216  

Total current liabilities

    59,859       59,004  

Long-term debt, net of current maturities

    42,098       20,486  

Deferred tax liability, net

    25,114       25,949  

Pension liabilities, net

    4,722       5,375  

Other long-term liabilities

    4,506       3,419  

Total liabilities

    136,299       114,233  

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; 21,786,026 and 21,587,751 shares issued and 21,711,004 and 21,527,319 shares outstanding at June 30, 2015 and December 31, 2014, respectively

    212       210  

Capital in excess of par value

    143,849       141,855  

Retained earnings

    145,741       135,268  

Treasury stock, at cost – 75,022 and 60,432 shares at June 30, 2015 and December 31, 2014, respectively

    (753 )     (595 )

Accumulated other comprehensive loss

    (11,184 )     (10,856 )

Total stockholders’ equity

    277,865       265,882  

Total liabilities and stockholders’ equity

  $ 414,164     $ 380,115  

 

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

 

 
3

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(In thousands, except per share amounts)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

201 5

   

201 4

   

201 5

   

201 4

 

Revenues

  $ 93,176     $ 71,913     $ 164,799     $ 135,413  

Cost of sales

    67,345       51,489       124,173       94,496  

Gross profit

    25,831       20,424       40,626       40,917  
                                 

Selling, general, and administrative expense

    9,997       6,526       19,413       12,619  

Research and development expense

    770       544       1,544       1,028  

Loss related to plant closure

    649       2,616       1,287       3,939  

Loss (gain) on disposal of assets

    27       (14 )     334       233  

Operating income

    14,388       10,752       18,048       23,098  

Interest income

          5       4       13  

Interest expense

    (465 )     (135 )     (827 )     (382 )

Gain (loss) on foreign currency

    83             (462 )      

Other expense, net

    (94 )     (118 )     (204 )     (174 )

Income before income taxes

    13,912       10,504       16,559       22,555  
                                 

Provision for income taxes

    5,108       3,871       6,086       7,951  

Net income

    8,804       6,633       10,473       14,604  
                                 

Other comprehensive income (loss):

                               

Foreign currency translation adjustment net of tax (expense) benefit of ($180), $0, $706 and $0, respectively

    334             (1,311 )      

Energy swap adjustment, net of tax (expense) benefit of ($354), $10, ($319) and $20, respectively

    657       (19 )     593       (37 )

Pension benefits adjustment, net of tax expense of $105, $80, $210 and $160, respectively

    195       148       390       297  

Comprehensive income

  $ 9,990     $ 6,762     $ 10,145     $ 14,864  

Basic earnings per share (See Note 13)

  $ 0.41     $ 0.32     $ 0.48     $ 0.70  

Weighted average common shares outstanding

    21,111       20,428       21,059       20,392  

Diluted earnings per share (See Note 13)

  $ 0.40     $ 0.31     $ 0.47     $ 0.68  

Weighted average common shares and potential common share equivalents outstanding

    21,573       21,105       21,522       21,062  

 

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

 

 
4

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

 

    Six Months Ended  
    June 30,  
   

2015

   

2014

 

Cash flows from operating activities:

               

Net income

  $ 10,473     $ 14,604  

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

               

Depreciation and amortization

    11,911       10,335  

Loss related to plant closure

          1,956  

Loss (gain) on disposal of assets

    334       233  

Provisions for losses on receivables

    24       24  

Share based compensation

    999       944  

Deferred income taxes

    (16 )     1,110  

Unrealized loss on foreign currency fluctuations, net

    462        

Changes in assets and liabilities:

               

Receivables

    (20,710 )     (10,188 )

Inventories

    (4,625 )     14,271  

Prepaid expenses and other current assets

    (2,154 )     (1,724 )

Other assets

    (732 )     1,679  

Accounts payable

    (8,536 )     (1,306 )

Accrued liabilities

    7,326       (1,718 )

Pension liability, net

    (263 )     (482 )

Other long term liabilities

    1,245       (2 )

Net cash (used in) provided by operating activities

    (4,262 )     29,736  

Cash flows from investing activities:

               

Proceeds from disposition of assets

    36       193  

Capital expenditures

    (21,030 )     (23,268 )

Net cash used in investing activities

    (20,994 )     (23,075 )

Cash flows from financing activities:

               

Principal payments of long-term debt

    (3,793 )     (1,851 )

Proceeds from long-term debt

    27,827        

Purchase treasury stock at cost

    (158 )     (57 )

Proceeds from stock options exercised

    846       946  

Excess tax benefit of stock options exercised

    151       456  

Net cash (used in) provided by financing activities

    24,873       (506 )

Net increase (decrease) in cash and cash equivalents

    (383 )     6,155  

Cash and cash equivalents at beginning of year

    1,430       34,059  

Cash and cash equivalents at end of period

  $ 1,047     $ 40,214  

 

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

 

 
5

 

 

OMEGA PROTEIN CORPORATION  

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1.

SIGNIFICANT ACCOUNTING POLICIES

   SUMMARY OF OPERATIONS AND BASIS OF PRESENTATION

 

Business Description

 

Omega Protein Corporation (the “Company”) is a nutritional products company that develops, produces and delivers healthy products throughout the world to improve the nutritional integrity of foods, dietary supplements and animal feeds. The Company operates through two industry segments: animal nutrition and human nutrition.

 

The animal nutrition segment is comprised primarily of two subsidiaries: Omega Protein, Inc. (“Omega Protein”) and Omega Shipyard, Inc. (“Omega Shipyard”). Omega Protein, the Company’s principal operating subsidiary, is the successor to a business conducted since 1913. Omega Protein produces and markets a variety of products produced from menhaden (a herring-like species of fish found in commercial quantities in the U.S. coastal waters of the Atlantic Ocean and Gulf of Mexico), including regular grade and value-added specialty fish meals, crude and refined fish oils and fish solubles. Omega Protein’s fish meal products are primarily used as a protein ingredient in animal feed for swine, aquaculture and household pets. Fish oil is utilized primarily for animal and aquaculture feeds, as well as additives to human food products and dietary supplements. Omega Protein’s fish solubles are sold primarily to livestock feed manufacturers, aquaculture feed manufacturers and for use as an organic fertilizer. Omega Protein’s business is seasonal in nature and generally has higher revenues during the third quarter of each fiscal year. A portion of Omega Protein’s production is transferred to the human nutrition segment where it is further processed and sold. Omega Shipyard owns and operates a drydock facility in Moss Point, Mississippi that is used to provide shoreside maintenance for Omega Protein’s fishing fleet and, subject to outside demand and excess capacity, occasionally for third-party vessels.

 

The human nutrition segment, which operates under the names Nutegrity and Bioriginal, has three primary product lines: protein products, specialty oils and essential fatty acids and other nutraceutical ingredients. Nutegrity is comprised primarily of three subsidiaries: Cyvex Nutrition, Inc. (“Cyvex”), InCon Processing, L.L.C. (“InCon”) and Wisconsin Specialty Protein, L.L.C. (“WSP”). Cyvex, acquired by the Company in December 2010, is located in Irvine, California and is an ingredient provider in the nutraceutical industry. InCon, acquired by the Company in September 2011, is located in Batavia, Illinois and is a specialty processor that utilizes molecular distillation technology to concentrate Omega-3 fish oils and, subject to outside demand and excess capacity, a variety of other compound products for third-party tolling customers. WSP, acquired by the Company in February 2013, is a manufacturer and marketer of specialty dairy proteins and other related products headquartered in Madison, Wisconsin and operates a production facility in Reedsburg, Wisconsin.

 

Bioriginal Food & Science Corp. (“Bioriginal”), acquired by the Company in September 2014 and headquartered in Saskatoon, Canada with additional operations in the Netherlands, is a supplier of plant and marine based specialty oils and essential fatty acids to the food and nutraceutical industries. See Note 2 – Acquisition of Bioriginal Food & Science Corp. for additional information related to the Company’s acquisition of Bioriginal.

 

Basis of Presentation

 

These interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally provided have been omitted. The interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014. 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 June 30, 2015, and the results of its operations for the three month and six month periods ended June 30, 2015 and 2014 and its cash flows for the six month periods ended June 30, 2015 and 2014. Quarterly operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

 

Consolidation

 

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

 

 
6

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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 effect on the financial statements.

 

As noted in the March 31, 2015 Quarterly Report on Form 10-Q, the Company revised the December 31, 2014 unaudited consolidated balance sheet to correct for the classification of $0.4 million of accounts payable to other long-term liabilities.  This revision was not considered to be material, individually or in the aggregate, to previously issued financial statements. The revisions had no effect on the results of operations (net or comprehensive income) or financial condition (stockholders’ equity).  

 

 

Revenue Recognition

 

The Company derives revenue principally from the sales of a variety of protein and oil products derived from menhaden. In addition and as a result of its acquisitions of Cyvex, InCon, WSP and Bioriginal, the Company’s revenues include sales of dietary supplements and food ingredients and products. The Company recognizes revenue for the sale of its products when price is established, collectability is reasonably assured and risk and rewards of ownership of its products and title are transferred to the customer.

 

Shipping and Handling

 

Amounts billed to customers associated with shipping and handling are included in revenues and the related costs are included in cost of sales.

 

Inventories

 

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

 

Any costs incurred during abnormal downtime related to activity at Omega Protein’s plants are charged to expense as incurred.

 

Energy Swap Agreements

 

The Company does not enter into financial instruments for trading or speculative purposes. Omega Protein entered into energy swap agreements to manage portions of its cash flow exposure related to the volatility of natural gas, diesel and fuel oil energy prices for its fish meal and fish oil production operations. The swaps effectively fix pricing for the quantities listed below during the consumption periods. The fair values of outstanding derivative instruments are summarized as follows:

 

Energy Swap

 

Consumption Period

 

Quantity

   

Price Per Unit

   

Energy Swap Asset/(Liability) as of

June 30,

2015

   

Deferred Tax Asset/(Liability) as of

June 30,

2015

 
                       

(in thousands)

 

Diesel - NYMEX Heating Oil Swap

 

July - November, 2015

 

1,899,911 Gallons

    $ 2.45     $ (1,293 )   $ 453  

Natural Gas - NYMEX Natural Gas Swap

 

July – October, 2015

 

142,908 MMBTUs

    $ 3.26       (100 )     35  

Propane – Natural Gas Liquids Swap

 

July - November, 2015

 

1,472,720 Gallons

    $ 0.71       (353 )     123  

Diesel - NYMEX Heating Oil Swap

 

May - November, 2016

 

2,050,679 Gallons

    $ 2.30       (500 )     175  

Natural Gas - NYMEX Natural Gas Swap

 

April – October, 2016

 

250,000 MMBTUs

    $ 3.18       (5 )     2  

Propane – Natural Gas Liquids Swap

 

June - November, 2016

 

1,902,590 Gallons

    $ 0.58       (58 )     20  
                        $ (2,309 )   $ 808  

 

 
7

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Energy Swap

 

Consumption Period

 

Quantity

   

Price Per Unit

   

Energy Swap Asset/(Liability) as of

December 31, 2014

   

Deferred Tax Asset/(Liability) as of

December 31, 2014

 
                       

(in thousands)

 

Diesel - NYMEX Heating Oil Swap

 

May - November, 2015

 

2,333,848 Gallons

    $ 2.75     $ (2,097 )   $ 734  

Natural Gas - NYMEX Natural Gas Swap

 

April – October, 2015

 

114,000 MMBTUs

    $ 4.09       (125 )     44  

Propane – Natural Gas Liquids Swap

 

June - November, 2015

 

1,024,800 Gallons

    $ 0.86       (346 )     121  

Diesel - NYMEX Heating Oil Swap

 

May - November, 2016

 

1,333,464 Gallons

    $ 2.50       (679 )     238  

Propane – Natural Gas Liquids Swap

 

June - November, 2016

 

341,600 Gallons

    $ 0.67       (41 )     14  
                        $ (3,288 )   $ 1,151  

 

As of June 30, 2015, Omega Protein has recorded a long-term liability of $0.6 million, net of the current portion included in other current liabilities of $1.7 million, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax asset of $0.8 million associated therewith. As of December 31, 2014, Omega Protein has recorded a long-term liability of $0.7 million net of the current portion included in other current liabilities of $2.6 million to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax asset of $1.2 million associated therewith. The effective portion of the change in fair value from inception to June 30, 2015 is recorded in “accumulated other comprehensive loss” in the Company’s unaudited condensed consolidated financial statements. The following table illustrates the changes recorded, net of tax, in accumulated other comprehensive loss resulting from the energy swap agreements.

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2015

   

2014

   

2015

   

2014

 
    (in thousands)  

Beginning balance

  $ (2,201 )   $ 161     $ (2,137 )   $ 179  

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

    557       (90 )     557       (90 )

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

    100       71       36       53  

Balance as of June 30,

  $ (1,544 )   $ 142     $ (1,544 )   $ 142  

 

The $1.5 million reported in accumulated other comprehensive loss as of June 30, 2015 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 $1.2 million.

 

The aggregate fair value of derivative instruments in gross liability positions as of June 30, 2015 and December 31, 2014 was $2.4 million and $3.3 million, respectively. These amounts represent the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted.

 

 
8

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

As of June 30, 2015 (in thousands)

 

Gross Amounts of Recognized Assets (Liabilities)

   

Gross Amounts of Assets (Liabilities)Offset

   

Net Amounts of Assets (Liabilities) Presented in the Balance Sheet

 

Energy swap derivatives – liability position

  $ (2,448 )   $ 139     $ (2,309 )

 

 

As of December 31, 2014 (in thousands)

 

Gross Amounts of Recognized Assets (Liabilities)

   

Gross Amounts of Assets (Liabilities)Offset

   

Net Amounts of Assets (Liabilities) Presented in the Balance Sheet

 

Energy swap derivatives – liability position

  $ (3,288 )   $ -     $ (3,288 )

 

If, at any time, the swaps are determined to be ineffective 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 a gain or loss in cost of sales for the applicable period. For the three months ended June 30, 2015 and 2014, the Company recognized a gain of $0.5 million and $0 million, respectively, to cost of sales resulting from transactions associated with the ineffectiveness of diesel energy swaps. For the six months ended June 30, 2015 and 2014, the Company recognized a gain of $0.1 million and $0 million, respectively, to cost of sales resulting from transactions associated with the ineffectiveness of diesel energy swaps. The fair value of all outstanding derivatives is determined using a model with inputs that are observable in the market or can be derived from or corroborated by observable data (level 2).

 

Plant Closure

 

Property, plant and equipment impairments related to the closure of Cameron, Louisiana plant are made in accordance with the impairment of long-lived assets policy. Employee severance related charges have been recognized to the extent that the amount is probable, measurable and no-future service is expected or for those still employed, recognized pro-rata over the remaining service period. Ongoing clean-up and dismantlement costs will be recognized as incurred unless obligated and measureable by a contractual commitment. See Note 3 – Plant Closure for additional information related to the charges incurred.

 

Acquisitions, Goodwill and Other Intangible Assets

 

All of the Company’s goodwill and other intangible assets are the result of acquisitions in the human nutrition segment. This segment is comprised of three reporting units, 1) InCon and Cyvex, 2) WSP and 3) Bioriginal. The Company has recorded goodwill and certain other identifiable intangible assets that are more fully explained in Note 2 – Acquisition of Bioriginal Food & Science Corp. and Note 9 – Goodwill and Other Intangible Assets.

 

Accumulated Other Comprehensive Loss

 

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

 

Changes in Accumulated Other Comprehensive Loss by Component

For the Six Months Ended June 30, 2015 (in thousands)

 

   

Gains and Losses

On Cash Flow

Hedges

     

Defined Benefit

Pension Items

     

Foreign currency

Translation

adjustment

   

Total

 

Balance as of December 31, 2014

  $ (2,137 )     $ (7,804 )     $ (915 )   $ (10,856 )

Other comprehensive loss before reclassifications

    36                 (1,311 )     (1,275 )

Amounts reclassified from accumulated other comprehensive loss

    557  

(a)

    390  

(b)

          947  

Net current-period other comprehensive income

    593         390         (1,311 )     (328 )

Balance as of June 30, 2015

  $ (1,544 )     $ (7,414 )     $ (2,226 )   $ (11,184 )

 

 
9

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Changes in Accumulated Other Comprehensive Loss by Component

For the Six Months Ended June 30, 2014 (in thousands)

 

   

Gains and Losses

On Cash Flow

Hedges

     

Defined Benefit

Pension Items

     

Total

 

Balance as of December 31, 2013

  $ 179       $ (6,387 )     $ (6,208 )

Other comprehensive loss before reclassifications

    53                 53  

Amounts reclassified from accumulated other comprehensive loss

    (90 )

(a)

    297  

(b)

    207  

Net current-period other comprehensive income

    (37 )       297         260  

Balance as of June 30, 2014

  $ 142       $ (6,090 )     $ (5,948 )

 

 

(a)

This accumulated other comprehensive income component is reclassified to the unallocated inventory cost pool in the period when the energy consumption takes place.

 

(b)

This accumulated other comprehensive income component is included in the computation of net periodic pension costs as amortization of actuarial loss which are explained in more detail in Note 15 to the consolidated financial statements in Item 8 of the Company’s Form 10-K for the fiscal year ended December 31, 2014.

 

Recently Issued Accounting Standards

 

In May 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate N et Asset Value Per Share (or It s Equivalent) .  The amendments remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The new standard is effective in annual periods beginning after December 15, 2015 and interim periods within those annual periods. Early adoption is permitted. The Company’s adoption of FASB ASU No. 2015-07 is not expected to have a material impact on the Company’s consolidated results of operations, financial position and related disclosures.     

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest- Imputation of Interest (Subtopic 835-30) .  The amendments require that debt issuance costs related to recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The new standard is effective in annual periods beginning after December 15, 2015 and interim periods within those annual periods. Early adoption is permitted. The Company’s adoption of FASB ASU No. 2015-03 is not expected to have a material impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) .  The amendments (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (4) provide a scope exception from consolidation guidance for reporting entities with interest in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The new standard is effective in annual periods beginning after December 15, 2015 and interim periods within those annual periods. Early adoption is permitted. The Company’s adoption of FASB ASU No. 2015-02 is not expected to have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

 
10

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

In January 2015, the FASB issued ASU 2015-01, Income Statement- Extraordinary and Unusual Items (Subtopic 225-20) .  The update eliminates from GAAP the concept of extraordinary items. Eliminating the concept of extraordinary items will save time and reduce costs for preparers because they will not have to assess whether a particular event or transaction event is extraordinary. This alleviates uncertainty for preparers, auditors, and regulators because auditors and regulators no longer will need to evaluate whether a preparer treated an unusual and/or infrequent item appropriately. The new standard is effective in annual periods beginning after December 15, 2015 and interim periods within those annual periods. Early adoption is permitted. The Company’s adoption of FASB ASU No. 2015-01 is not expected to have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging: Determining whether the Host Contract in a Hybrid Financial Statement Issued in the Form of a Share is More Akin to Debt or Equity .  This ASU amended the Derivatives and Hedging Accounting Standards Codification to eliminate the use of different methods in practice and thereby reduce existing diversity under GAAP in the accounting for hybrid financial instruments used in the form of a share. The new standard is effective in annual periods beginning on or after December 15, 2015 with early adoption permitted. The Company’s adoption of FASB ASU No. 2014-16 is not expected to have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements- Going Concern (Subtopic 205-40). The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in the U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The guidance is effective for annual periods ending after December 15, 2016 and for annual periods thereafter. Early adoption is permitted.  The Company does not expect this ASU to have a material impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

In June 2014, the FASB issued ASU No. 2014-12, Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.   A performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition under Accounting Standards Codification (ASC) 718, Compensation — Stock Compensation . As a result, the target is not reflected in the estimation of the award's grant date fair value. Compensation cost would be recognized over the required service period, if it is probable that the performance condition will be achieved.  The guidance is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. Early adoption is permitted.  The Company does not expect this ASU to have a material impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers .  This ASU amends the existing accounting standards for revenue recognition and is based on the principle that revenue should be recognized to depict the transfer of goods or services to a customer at an amount that reflects the consideration a company expects to receive in exchange for those goods or services.  The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. The Company is currently evaluating the potential impact of these changes on the consolidated results of operations, financial position and related disclosures.

 

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . This ASU changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity's operations and financial results. The new standard is effective in annual periods beginning on or after December 15, 2014 with early adoption permitted. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The Company’s adoption of FASB ASU No. 2014-08 effective January 1, 2015 did not have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

Foreign Currency Translations

 

All amounts are expressed in U.S. dollars unless otherwise indicated. The U.S. dollar is the functional currency of Bioriginal’s Canadian-based subsidiaries (“Bioriginal Canada”). Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Revenue and expenses are translated at average rates in effect in the period of the transaction. Foreign exchange gains and losses are included in the unaudited condensed consolidated statement of comprehensive income.

 

 
11

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

The Euro is the functional currency of Bioriginal’s Netherlands-based subsidiaries (“Bioriginal Europe”). The operations of these subsidiaries are considered self-sustaining and their financial statements are translated into U.S. dollars using the current rate method. Under this method, all assets and liabilities are translated to U.S. dollars at exchange rates in effect at the balance sheet date and all revenue and expenses are translated at rates in effect at the time of the transactions. Exchange gains and losses arising from this translation, representing the net unrealized foreign currency translation gain (loss) on the Company's net investment in its self-sustaining subsidiaries, are recorded in the accumulated other comprehensive income (loss) component of shareholders' equity. Adjustments to the accumulated other comprehensive income (loss) account are not recorded in the unaudited condensed consolidated statement of comprehensive income until realized through a reduction in the Company's net investment in such operations.

 

Stock-Based Compensation

 

Stock Options  

 

The Company has issued non-qualified stock options under its incentive plans. The options generally vested in equal installments over three years and expire in ten years. As of and for the quarters ended June 30, 2015 and 2014, all stock options were vested and no stock-based compensation costs related to stock options was incurred.

 

Restricted Stock  

 

The Company has issued shares of restricted stock under the 2006 Incentive Plan. Shares of restricted stock have generally vested on the third anniversary of the grant date or in equal installments over three years except for shares of restricted stock granted to non-employee directors which vest six months after the grant date. Non-vested shares are generally forfeited upon the termination of employment or service as a director. Holders of shares of restricted stock are entitled to all rights of a stockholder of the Company, including the right to vote the shares and receive any dividends or other distributions. The non-vested shares are considered participating securities and the Company has calculated earnings per share using the two-class method. See Note 13 – Reconciliation of Basic and Diluted Per Share Data.

 

During the six month periods ended June 30, 2015 and 2014, the Company issued 107,083 and 117,885 shares of restricted stock, respectively, under the 2015 Long Term Incentive Plan and the 2006 Incentive Plan to employees and non-employee directors. The Company’s compensation expense related to restricted stock, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income, was approximately $0.5 million and $0.4 million ($0.3 million and $0.3 million after tax) for the three months ended June 30, 2015 and 2014, respectively, and approximately $1.0 million and $0.7 million ($0.6 million and $0.5 million after tax) for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, there was approximately $4.2 million ($2.8 million after tax) of unrecognized compensation expense related to non-vested restricted stock that is expected to be recognized over a weighted-average period of 1.3 years, of which $1.3 million ($0.9 million after-tax) of compensation expense is expected to be recognized during the remainder of fiscal year 2015.

   

On February 6, 2014, the Company adopted the 2014 Cash Incentive Performance Unit Plan and on February 26, 2015, the Company adopted the 2015 Cash Incentive Performance Unit Plan. The value of the units under the plans will be determined by reference to the performance of the Company’s common stock during the relevant performance period compared to the performance of the Russell 2000 Index member companies (the “Peer Group”) during that same period. One third of the Performance Units granted will be earned at the end of each calendar year of the performance period and will be valued for the calendar year based on the Total Shareholder Return (“TSR”) of the Company compared to the TSR of the Peer Group. The performance units contain a service provision of approximately 3 years and are liability-classified awards included in other long-term liabilities which are adjusted to fair value on a quarterly basis.

 

The Company’s compensation expense related to performance units, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income, was approximately $0.3 million and $0.1 million ($0.2 million and $0.1 million after tax) for the three months ended June 30, 2015 and 2014, respectively, and approximately $0.7 million and $0.2 million ($0.4 million and $0.1 million after tax) for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, there was approximately $2.5 million ($1.6 million after tax) of unrecognized compensation expense related to performance units that is expected to be recognized over a weighted-average period of 2.2 years, of which $0.6 million ($0.4 million after-tax) of compensation expense is expected to be recognized during the remainder of fiscal year 2015.

 

 
12

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 2. ACQUISITION OF BIORIGINAL FOOD & SCIENCE CORP.

 

A. Description of the Transaction

 

In September 2014, the Company acquired all of the issued and outstanding equity of Bioriginal pursuant to the terms of a Share Purchase Agreement (“Purchase Agreement”) and Bioriginal became a wholly owned subsidiary of the Company.  Bioriginal is a leading supplier of plant and marine based specialty oils and essential fatty acids to the food and nutraceutical industries across North America, Europe and Asia. Bioriginal is included as part of the Company’s human nutrition segment.

 

B. Recording of Assets Acquired and Liabilities Assumed

 

In connection with its acquisition of Bioriginal, the Company paid an aggregate purchase price of $70.5 million, plus an estimated working capital adjustment of $0.7 million, to the sellers as follows: (i) $46.5 million in cash to the sellers, (ii) assumption of approximately $21.5 million of Bioriginal’s indebtedness, and (iii) issuance of 238,377 shares of restricted common stock of the Company valued at approximately $3.2 million (based on a 30-day average closing price) to certain sellers (the “Management Sellers”). The restrictions on the shares will terminate, with certain exceptions, on the third anniversary of the closing date and are subject to the terms and conditions of the Purchase Agreement; see Note - 1 Significant Accounting Policies Summary of Operations and Basis of Presentation for more information on Restricted Stock. The Purchase Agreement also provides for a performance-based earn-out amount of up to a maximum that, as of December 31, 2014, was $7.1 million Canadian dollars to be paid in September 2017 to the Management Sellers for achieving or exceeding certain adjusted EBITDA targets for Bioriginal during calendar years 2014 through 2016; see Note 12 Commitments and Contingencies for additional information. During the six months ended June 30, 2015, the Company received $0.1 million related to the finalization of the closing working capital adjustment.

 

The Company incurred approximately $2.8 million in pretax transaction costs directly related to the acquisition that were expensed and included in selling, general and administrative expenses in the consolidated statement of comprehensive income for the year ended December 31, 2014. The acquisition costs consisted primarily of legal, advisory, valuation, and other consulting fees. The transaction has been accounted for using the acquisition method of accounting which requires, among other things, that all assets acquired and liabilities assumed from acquisitions be recognized at their fair values as of the acquisition date. Any excess of the purchase price over the fair values of the net assets acquired are recorded as goodwill. The following table shows the allocation of the purchase price:  

 

Cash

  $ 93  

Accounts receivable

    15,072  

Inventories

    20,309  

Other current assets, net including prepaid expenses

    1,820  

Property, plant, and equipment

    3,026  

Identifiable intangible assets (a)

    16,987  

Liabilities assumed

    (38,288 )

Total identifiable net assets

    19,019  

Goodwill

    27,462  

Total consideration

  $ 46,481  

 

 

(a)

See Note 9 – Goodwill and Other Intangible Assets for weighted average lives.

 

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of Bioriginal includes the following:

 

● the expected synergies and other benefits that the Company believes may result from combining the operations of Bioriginal with the operations of the Company’s human nutrition segment,

● any intangible assets that do not qualify for separate recognition, and

● the value of the going-concern element of Bioriginal’s existing business (the higher rate of return on the assembled collection of net assets versus if the Company had acquired all of the net assets separately).

 

 
13

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

See Note 9 - Goodwill and Other Intangible Assets, for more information about goodwill and other intangible assets.

 

C. Unaudited Pro Forma Financial Information

 

The unaudited financial information in the table below summarizes the combined results of operations of the Company and Biorginial on a pro forma basis, as though the companies had been combined as of January 1, 2014. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had actually taken place on January 1, 2014 and is not intended to be a projection of future results or trends.  

                                                                       

    Revenue     Net income  
    (in thousands)  

2014 supplemental pro forma from April 1, 2014 – June 30, 2014

  $ 102,612     $ 6,344  

2014 supplemental pro forma from January 1, 2014 – June 30, 2014

  $ 192,021     $ 15,234  

 

NOTE 3. PLANT CLOSURE

 

In December 2013, the Company effectively closed its menhaden fish processing plant located in Cameron, Louisiana and re-deployed certain vessels from that facility to the Company’s other Gulf Coast facilities located in Abbeville, Louisiana and Moss Point, Mississippi. In conjunction with the closure, the following charges were incurred in the Company’s unaudited condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2015 and from December 2013 to June 30, 2015:

   

Three Months Ended

June 30, 2015

   

Three Months Ended

June 30, 2014

   

Six Months Ended

June 30, 2015

   

Six Months Ended

June 30, 2014

   

December 2013

to

June 30, 2015

 
   

(in thousands)

 

Impairment of property, plant and equipment

  $     $ 1,647     $     $ 1,739     $ 7,922  

Write-off material and supplies inventory

                      17       150  

Employee severance costs

          26             240       732  

Estimated decommissioning costs

                            250  

Other ongoing closure costs not attributable to future production

    649       943       1,287       1,943       5,887  

Total loss related to plant closure

  $ 649     $ 2,616     $ 1,287     $ 3,939     $ 14,941  

 

In addition to the above recognized losses, the Company expects that it may have additional losses related to ongoing costs not attributable to future production such as site costs, clean-up and disassembly.

 

NOTE 4. RECEIVABLES, NET

 

R eceivables are summarized as follows:

 

   

June 30,

2015

   

December 31,

2014

 
   

(in thousands)

 

Trade

  $ 54,813     $ 29,534  

Insurance

    1,344       1,711  

Income tax

    1,115       5,442  

Other

    151       370  

Total accounts receivable

    57,423       37,057  

Less allowance for doubtful accounts

    (393 )     (436 )

Receivables, net

  $ 57,030     $ 36,621  

 

 
14

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 5. INVENTORY

 

The major classes of inventory are summarized as follows:

 

   

June 30,

2015

   

December 31,

2014

   

June 30,

2014

 
    (in thousands)  

Fish meal

  $ 28,570     $ 28,400     $ 17,577  

Fish oil

    12,792       19,300       14,271  

Fish solubles

    471       683       1,252  

Nutraceutical products

    5,864       4,635       4,862  

Bioriginal products

    21,927       26,219        

Dairy protein products

    5,332       2,783       2,332  

Unallocated inventory cost pool (including off-season costs)

    17,411       6,854       30,293  

Other materials and supplies

    9,370       8,639       9,273  

Total inventory

  $ 101,737     $ 97,513     $ 79,860  

 

Inventory is stated at the lower of cost or market. The elements of the June 30, 2015 unallocated inventory cost pool include Omega Protein’s plant and vessel related labor, utilities, rent, repairs and depreciation, which are allocated to 2015 fishing season production.

 

NOTE 6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets are summarized below:

 

   

June 30,

2015

   

December 31,

2014

 
    (in thousands)  

Prepaid insurance

  $ 4,590     $ 2,322  

Product deposits

          998  

Selling expenses

    156       156  

Fair value of derivative instruments - energy swaps, current portion

    89        

Leases

    261       168  

Other prepaids and expenses

    1,610       1,292  

Total prepaid expenses and other current assets

  $ 6,706     $ 4,936  

                    

Amounts included in prepaid expenses and other current assets consist primarily of prepaid operating expenses including insurance, rents, and selling expenses. Prepaid selling expenses are expensed in those periods in which the related revenue is recognized.

 

NOTE 7. OTHER ASSETS

 

Other assets are summarized as follows:

 

   

June 30,

2015

   

December 31,

2014

 
    (in thousands)  

Fish nets, net of accumulated amortization of $3,326 and $2,694

  $ 1,032     $ 1,195  

Insurance receivable

    735       498  

Title XI debt issuance costs

    231       246  

Other debt issuance costs

    241       264  

Deposits and other

    106       106  

Total other assets, net

  $ 2,345     $ 2,309  

 

Amortization expense for fishing nets amounted to approximately $0.3 million for the three months ended June 30, 2015 and 2014 and $0.6 million for the six months ended June 30, 2015 and 2014.

 

 
15

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

As of June 30, 2015 and December 31, 2014, insurance receivables primarily relates to Jones Act claims for employees aboard its vessels. This estimated amount is recorded gross of estimated claims which may be due to claimants and is included in accrued insurance liabilities.

 

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

 

NOTE 8. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are summarized as follows:

 

   

June 30,

2015

   

December 31,

2014

 
    (in thousands)  

Land

  $ 9,359     $ 9,326  

Plant assets

    191,302       188,498  

Fishing vessels

    119,493       111,379  

Furniture and fixtures

    8,102       7,792  

Construction in progress

    23,651       15,893  

Total property and equipment

    351,907       332,888  

Less accumulated depreciation and impairment

    (172,277 )     (162,956 )

Property, plant and equipment, net

  $ 179,630     $ 169,932  

 

Depreciation expense for the three months ended June 30, 2015 and 2014 was $5.2 million and $4.6 million, respectively, and $10.3 million and $9.3 million for the six months ended June 30, 2015 and 2014, respectively.

 

The Company capitalizes interest as part of the acquisition cost of a qualifying asset. Interest is capitalized only during the period of time required to complete and prepare the asset for its intended use. For the three months ended June 30, 2015 and 2014, the Company capitalized interest of approximately $0.2 million and $0.2 million, respectively. For the six months ended June 30, 2015 and 2014, the Company capitalized interest of approximately $0.3 million and $0.4 million, respectively.

 

NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill is measured as the excess of the cost of an acquisition over the sum of the amounts assigned to the fair value of tangible and intangible assets acquired less liabilities assumed. All of the Company’s goodwill and other intangible assets are the result of acquisitions in the human nutrition segment.

 

Goodwill is tested annually for impairment of value, and whenever an event occurs or circumstances change that would more likely than not indicate the carrying amount of the asset is impaired. Determining whether an indicator of impairment has occurred during an interim period involves a significant amount of judgment.  During the interim periods, qualitative factors such as deterioration in general economic conditions, changes in the market for an entity’s products or services, declines in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods, among others, are evaluated to determine if a triggering event which would result in a potential impairment has incurred.

 

During the second quarter of 2015, the Company completed its first annual impairment testing of goodwill and indefinite life intangible assets related to its acquisition of Bioriginal in September 2014.   As of June 30, 2015, the calculated fair value of Bioriginal’s trade name exceeds its $3.8 million carrying value by 7% and the calculated fair value of goodwill and other indefinite life intangible assets exceed their $26.6 million carrying values by 13%. Key assumptions in the fair value calculation include sales volumes and prices, the portion of sales attributable to trade names, the cost of available raw materials and the discount rate.

 

 
16

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

As of December 31, 2014, the carrying value of InCon and Cyvex’s trade secrets and goodwill exceeded their calculated fair values by $0.6 million and $4.1 million, respectively, due primarily to recent operating results and the Company revising its forward looking cash flow forecast associated with this reporting unit. Fair value was determined by utilizing market and income approaches. As a result, a $4.7 million impairment expense was recognized during the year ended December 31, 2014. Key assumptions in the fair value calculation include future fish oil and nutraceutical sales volumes and prices, tolling revenue, the portion of sales attributable to trade secrets, production costs and the discount rate. 

 

As of December 31, 2014, the calculated fair value of WSP’s trade secrets exceeds its $1.1 million carrying value by 100% or more. The calculated fair value of goodwill exceeds its carrying values by less than 1%. Key assumptions in the fair value calculation include dairy protein product sales volumes and prices, the portion of sales attributable to the brand name, the cost of availability of raw materials and the discount rate. 

 

It should be noted that the assessments of goodwill and indefinitely lived intangible assets are based on assumptions that require speculation and are highly subjective given the early stage and transitional nature of the businesses and the use of other reasonable, but different, assumptions could provide significantly different fair values and potentially impairments. The Company’s annual quantitative tests have assumed increasing cash flows over the next several years, based on anticipated sales growth and improved profitability. Even though for the six months ended June 30, 2015, the WSP and InCon and Cyvex reporting units have not achieved the assumed results, the Company’s long-term outlook on these businesses remains consistent with the previous forecast. However, considering the level of sensitivity with respect to the key assumptions, if future cash flow expectations decline sufficiently, the estimated fair values would be reduced and could potentially result in a material impairment in a subsequent period.

 

The following table summarizes the changes in the carrying amount of goodwill resulting from the Company’s acquisitions of Bioriginal, WSP, Cyvex and InCon (in thousands):

 

   

Bioriginal

   

WSP

   

Cyvex and

InCon

   

Total

 

January 1, 2015

  $ 27,045       11,614       3,842     $ 42,501  

Foreign currency translation adjustment

    (452 )                 (452 )

June 30, 2015

  $ 26,593       11,614       3,842     $ 42,049  

 

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

 

 

   

June 30,

2015

   

December 31,

2014

   

Weighted

Average

Life (years)

 

Carrying value of intangible assets subject to amortization:

                       

Customer relationships and non-competes

  $ 19,625     $ 19,625          

Less accumulated amortization

    (3,325 )     (2,344 )     10  

Total intangible assets subject to amortization, net

  $ 16,300     $ 17,281          

Foreign currency translation adjustment

    (382 )     (191 )        

Total intangible assets subject to foreign currency translation adjustment, net

  $ 15,918     $ 17,090          

Indefinite life intangible assets – trade names/secrets and other

    5,858       5,912          

Total intangible assets

  $ 21,776     $ 23,002          

 

Amortization expense of the Company’s intangible assets for the three months ended June 30, 2015 and 2014 was approximately $0.5 million and $0.2 million, respectively, and for the six months ended June 30, 2015 and 2014 was approximately $1.0 million and $0.3 million, respectively. Estimated future amortization expense related to intangible assets is as follows (in thousands):

 

Remainder of 2015

  $ 991  

2016

    1,971  

2017

    1,971  
2018     1,971  

Thereafter

    9,396  

Total estimated future amortization expense

  $ 16,300  

 

 
17

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

The Company’s goodwill and other intangible assets are more fully explained in Note 10 to the consolidated financial statements in Item 8 of the Company’s Form 10-K for the fiscal year ended December 31, 2014.

 

NOTE 10. NOTES PAYABLE AND LONG-TERM DEBT

 

A summary of the Company's long-term debt consisted of the following:

 

   

June 30,

   

December 31,

 
   

2015

   

2014

 
   

(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 5.7% to 7.0%

  $ 19,818     $ 21,111  

Amounts due on Loan Agreement in March 2017, interest at a Base Rate or LIBOR plus an applicable margin (1.69% to 3.25% and 1.84% at June 30, 2015 and December 31, 2014, respectively)

    25,000       2,000  

ING Commercial Finance B.V., interest at EURIBOR plus an applicable rate (1.70% and 1.76% at June 30, 2015 and December 31, 2014, respectively)

    2,196       2,367  

HSBC credit facility, matures March 2019, interest at HSBC prime rate plus an applicable rate (4.5% at June 30, 2015 and December 31, 2014)

    12,040       9,749  

Total debt

    59,054       35,227  

Less current maturities

    (16,956 )     (14,741 )

Long-term debt

  $ 42,098     $ 20,486  

 

The estimated fair value of the Company’s total debt at June 30, 2015 and December 31, 2014, based on quoted market prices available to the Company for issuance of similar debt with similar terms (level 2), was $60.7 million and $36.9 million, respectively.

 

The Title XI loans are secured by certain liens on the Company’s fishing vessels and mortgages on the Company’s Reedville, Virginia and Abbeville, Louisiana plants.

 

In June 2011, pursuant to the Title XI program, the United States Department of Commerce Fisheries Finance Program (the “FFP”) approved a financing application made by the Company in the amount of $10 million (the “Approval Letter”) which expires on June 20, 2016. To date, the Company has not borrowed any amounts under the Approval Letter and its ability to do so has been adversely affected by an EPA notice that the Company’s Omega Protein subsidiary is ineligible, as a result of its previous convictions under the Clean Water Act, for receipt of government contracts or benefits in certain cases. See “Risk Factors - If our Omega Protein subsidiary fails to comply with the terms of its probation under a plea agreement entered into in June 2013, we could be subject to criminal prosecution” in the Company’s Form 10-K for the year ended December 31, 2014 for further detail on this EPA notice. As of June 30, 2015, the Company had approximately $19.8 million of borrowings outstanding under Title XI and was in compliance with all of the covenants contained therein.

 

In March 2012, the Company entered into an Amended and Restated Loan Agreement (the “Loan Agreement”) with Wells Fargo Bank, National Association, as administrative agent (the “Agent”) for the lenders (currently Wells Fargo Bank, National Association and JP Morgan Chase Bank, N.A.) (collectively, the “Lenders”) pursuant to which the Lenders agreed to extend credit to the Company in the form of loans (each a “Loan” and collectively, the “Loans”) on a revolving basis of up to $60 million (the “Commitment”). In September 2014, the Company and the Lenders amended the Loan Agreement to (i) permit the acquisition of Bioriginal by the Company, (ii) permit certain existing indebtedness of Bioriginal and the related liens, (iii) add certain collateral under the Loan Agreement relating to Bioriginal, and (iv) increase the commitment of the Lenders under the Loan Agreement by $10 million to a total of $70 million. The Loan Agreement also requires the Company to comply with various affirmative and negative covenants affecting the Company’s businesses and operations, including various financial covenants.

 

 
18

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

All Loans and all other obligations outstanding under the Loan Agreement are payable in full on March 21, 2017. As of June 30, 2015 and December 31, 2014, the Company had $25.0 million and $2.0 million, respectively, outstanding under the Loan Agreement and approximately $3.5 million in letters of credit. As of June 30, 2015, the Company was in compliance with all financial covenants under the Loan Agreement. The Company has no off-balance sheet arrangements other than normal operating leases and standby letters of credit.

 

On June 6, 2010, Bioriginal Europe entered into a credit facility with ING Bank N.V. which provides borrowings up to 250,000 Euro.  Under the credit facility, interest is paid at 2.97% plus the EURIBOR rate (currently 2.98%).  The credit facility is secured by Bioriginal Europe’s equipment. The facility contains cross default provisions and other covenants.   As of June 30, 2015, there were no outstanding borrowings under the credit facility.

 

In March 2015, Bioriginal Europe extended the terms of its credit facility with ING Commercial Finance B.V. which provides borrowings up to an amount based on accounts receivable and inventory balances, and matures on March 31, 2018.  Advances are repayable on demand and bear interest payable monthly at 1.75% + EURIBOR (currently 1.70%).  The credit facility is secured by accounts receivable and inventory of Bioriginal Europe to a maximum of 85% of accounts receivable and 60% of inventory.  The credit facility contains cross default provisions and other covenants.  As of June 30, 2015, $2.2 million was outstanding under this credit facility, which is included in current maturities.

 

On April 15, 2014, Bioriginal Canada entered into a credit facility with HSBC Bank of Canada (the “Bioriginal Credit Facility”) which provides borrowings up to $20 million Canadian dollars and matures on March 15, 2019, subject to HSBC’s right to terminate the facility in its sole discretion. Under the Bioriginal Credit Facility, Bioriginal Canada has an operating line of credit for which interest is paid at HSBC prime rate plus 1.25% (currently 4.5%) and is secured by Bioriginal Canada’s accounts receivable and inventory and is payable on demand. Additionally, there is a separate maximum of $4.2 million related to letters of credit. At June 30, 2015, Bioriginal has issued $4.2 million in letters of credit in support of product purchases from a foreign supplier. Generally these letters of credit are insured by Export Development Canada and are not considered to be drawn under this credit facility. As of June 30, 2015, $12.0 million was outstanding under these subsections of the credit facility, which is included in current maturities.

 

The Company’s notes payable and long-term debt are more fully explained in Note 11 to the consolidated financial statements in Item 8 of the Company’s Form 10-K for the fiscal year ended December 31, 2014.

 

NOTE 11. ACCRUED LIABILITIES

 

 

Accrued liabilities are summarized as follows:

 

   

June 30,

   

December 31,

 
   

2015

   

2014

 
   

(in thousands)

 

Insurance

  $ 5,780     $ 5,998  

Reserve for plant closure costs

    327       456  

Salary and benefits

    11,377       7,273  

Trade creditors

    7,549       5,045  

Taxes, other than income tax

    1,055       222  

Income tax

    1,540        

Energy swap liability, current portion

    1,835       2,568  

Deferred revenue

    412       1,400  

Accrued interest

    184       246  

Other

          8  

Total accrued liabilities

  $ 30,059     $ 23,216  

 

Deferred revenue represents payments primarily received from international customers related to revenues which were not recognized until the subsequent period due to revenue recognition criteria.

 

 
19

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 12. COMMITMENTS AND CONTINGENCIES

 

Bioriginal Contingency

 

In September 2014, the Company acquired all of the outstanding equity of Bioriginal pursuant to the terms of a share purchase agreement. A portion of the equity of Bioriginal was indirectly held by the Management Sellers, who continue to be employed by Bioriginal and share in the management of Bioriginal’s business. Bioriginal is now a wholly owned subsidiary of the Company.

 

In addition to the acquisition date cash purchase price and restricted stock, the Management Sellers may also earn additional amounts based on the annual adjusted EBITDA of Bioriginal’s business during each of the calendar years 2014 through 2016. For each calendar year, if the adjusted EBITDA meets or exceeds agreed upon targets for the calendar year, the payout ranging from $1.2 million Canadian dollars to $2.9 million Canadian dollars will be earned, subject to certain forfeitures based on termination of Management Sellers’ employment. The maximum total payment for all three years is $7.1 million Canadian dollars.

 

The earn-out payments in Canadian dollars, if any, will be estimated on a quarterly basis and paid in September 2017. The Company will record the estimated contractual obligation as compensation expense during each year as it is deemed probable that such amount will be payable. As of June 30, 2015 and December 31, 2014, the Company recorded a $0.9 million and $0.4 million liability, respectively, related to this provision of the agreement. The threshold for a $1.2 million Canadian payment was achieved for 2014.

 

Legal Contingencies

 

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

 

Regulatory Matters

 

The Company is subject to various possible claims and lawsuits regarding environmental matters. Management believes that costs, if any, related to these matters will not have a material adverse effect on the results of operations, cash flows or financial position of the Company.

 

NOTE 13. RECONCILIATION OF BASIC AND DILUTED PER SHARE DATA (in thousands except per share date)

 

Basic earnings per share is calculated by dividing net income allocated to common shares outstanding by the weighted average number of shares of common stock outstanding. Diluted earnings per share assumes the exercise of stock options provided the effect is not anti-dilutive.

 

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

 

Three Months Ended June 30:

 

201 5

   

201 4

 

Allocation of earnings:

                               

Net income

  $ 8,804             $ 6,633          

Income allocated to participating securities

    (234 )             (171 )        

Income allocated to common shares outstanding

  $ 8,570             $ 6,462          
                                 

Weighted average common shares outstanding

    21,111               20,428          
                                 

Basic earnings per share

            0.41               0.32  
                                 

Stock options assumed exercised

    462               677          

Weighted average diluted common shares and potential common share equivalents outstanding

    21,573               21,105          
                                 

Diluted earnings per share

            0.40               0.31  

 

 
20

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Six Months Ended June 30:

 

2015

   

201 4

 

Allocation of earnings:

                               

Net income

  $ 10,473             $ 14,604          

Income allocated to participating securities

    (277 )             (364 )        

Income allocated to common shares outstanding

  $ 10,196             $ 14,240          
                                 

Weighted average common shares outstanding

    21,059               20,392          
                                 

Basic earnings per share

            0.48               0.70  
                                 

Stock options assumed exercised

    463               670          

Weighted average diluted common shares and potential common share equivalents outstanding

    21,522               21,062          
                                 

Diluted earnings per share

            0.47               0.68  

 

Options to purchase the following number of shares of common stock (in thousands) were outstanding during the three and six months ended June 30, 2015 and 2014 but were excluded from the computation of diluted earnings per share because the adjusted exercise prices of the options based upon the assumed proceeds were greater than the average market price of the shares during that period.

 

 

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
 

2015

   

2014

   

2015

   

2014

 
  125     130     125     130  

 

NOTE 14. COMPONENTS OF NET PERIODIC BENEFIT COST

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(in thousands)

   

(in thousands)

 

Service cost

  $     $     $     $  

Interest cost

    230       274       460       548  

Expected return on plan assets

    (276 )     (298 )     (552 )     (596 )

Amortization of prior service costs

                       

Amortization of net loss

    300       229       600       458  

Net periodic pension cost

  $ 254     $ 205     $ 508     $ 410  

 

For the six months ended June 30, 2015 and 2014, the Company contributed approximately $0.6 million and $0.8 million, respectively, to the Company’s pension plan. The Company expects to make contributions of $0.6 million to the pension plan during the remainder of 2015.

 

In 2002, the Board of Directors authorized a plan to freeze the Company’s pension plan in accordance with ERISA rules and regulations so that new employees, after July 31, 2002, are not eligible to participate in the pension plan and further benefits no longer accrue for existing participants.

 

 
21

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 15. INDUSTRY SEGMENTS

 

The Company reports in two segments, animal nutrition and human nutrition. These segments are managed separately and information on each segment is provided to the chief operating decision makers as they make decisions about the Company’s overall resource allocation and assess performance.

 

The animal nutrition segment is primarily comprised of the Company’s fishing related assets. These assets produce fish meal, oil and solubles that are sold primarily to animal nutrition customers. A portion of the Company’s fish oil is also partially refined and transferred at cost to the human nutrition segment where it is further refined and concentrated for sale to the human nutrition market. The human nutrition segment is comprised of assets used to produce, procure, market and sell product to human nutrition markets.

 

The tables below present information about reported segments for three months ended June 30, 2015 and 2014 (in thousands). It should be noted that all cash and cash equivalent balances have been included in the identifiable assets of the unallocated segment.

 

2015

 

Animal

Nutrition

   

Human

Nutrition

   

Unallocated

   

Total

 

Revenue (1)

  $ 56,871     $ 36,305     $     $ 93,176  

Cost of sales

    36,007       31,338             67,345  

Gross profit

    20,864       4,967             25,831  

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

    536       5,087       5,144       10,767  

Loss related to plant closure

    649                   649  

Other (gains) and losses

    27                   27  

Operating income

  $ 19,652     $ (120 )   $ (5,144 )   $ 14,388  

Depreciation and amortization

  $ 4,376     $ 1,528     $ 129     $ 6,033  

Identifiable assets

  $ 243,720     $ 168,570     $ 1,874     $ 414,164  

Capital expenditures

  $ 8,376     $ 1,382     $ 712     $ 10,470  

 

(1) Excludes revenue from internal customers of $0.6 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

2014

 

Animal

Nutrition

   

Human

Nutrition

   

Unallocated

   

Total

 

Revenue (2)

  $ 65,264     $ 6,649     $     $ 71,913  

Cost of sales

    45,501       5,988             51,489  

Gross profit

    19,763       661             20,424  

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

    636       2,067       4,367       7,070  

Loss related to plant closure

    2,616                   2,616  

Other (gains) and losses

    (14 )                 (14 )

Operating income

  $ 16,525     $ (1,406 )   $ (4,367 )   $ 10,752  

Depreciation and amortization

  $ 4,374     $ 699     $ 45     $ 5,118  

Identifiable assets

  $ 224,416     $ 76,734     $ 41,156     $ 342,306  

Capital expenditures

  $ 5,761     $ 4,692     $     $ 10,453  

 

(2) Excludes revenue from internal customers of $0.7 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

 
22

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

The tables below present information about reported segments for the six months ended June 30, 2015 and 2014 (in thousands).

 

2015

 

Animal

Nutrition

   

Human

Nutrition

   

Unallocated

   

Total

 

Revenue ( 3 )

  $ 93,700     $ 71,099     $     $ 164,799  

Cost of sales

    62,290       61,883             124,173  

Gross profit

    31,410       9,216             40,626  

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

    1,093       10,116       9,748       20,957  

Loss related to plant closure

    1,287                   1,287  

Other (gains) and losses

    334                   334  

Operating income (loss)

  $