Omega Protein Corporation
OMEGA PROTEIN CORP (Form: 10-Q, Received: 08/03/2016 16:05:57)

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, 2016

 

OR

 

[ ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period From __________ to __________.

 

Commission file number: 001-14003

 

OMEGA PROTEIN CORPORATION

(Exact name of Registrant as specified in its charter)

 

State of Nevada 

76-0562134

(State or other jurisdiction of  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 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 29, 2016: 22,305,073.

 



 

 
 

 

 

OMEGA PROTEIN CORPORATION

TABLE OF CONTENTS

   

PART I.

  FINANCIAL INFORMATION  
       

Item 1.

  Financial Statements and Notes  
       
  Unaudited Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 3
       
  Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015 4
       
  Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 5
       
  Notes to Unaudited Condensed Consolidated Financial Statements 6
       

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations  21
       

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk 31
       

Item 4.

  Controls and Procedures 31
       
       
       

PART II.

  OTHER INFORMATION  
       

Item 1.

  Legal Proceedings 32
       

Item 1A.

  Risk Factors 32
       

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds 33
       

Item 3.

  Defaults Upon Senior Securities 33
       

Item 4.

  Mine Safety Disclosures 33
       

Item 5.

  Other Information 33
       

Item 6.

  Exhibits 34
       

Signatures

     35

 

 

 
2

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET S

(In thousands, except par value amounts)

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements and Notes

 

 

   

June 30,

2016

   

December 31,

2015

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 6,404     $ 661  

Receivables, net

    55,215       40,489  

Inventories

    106,989       119,994  

Deferred tax asset, net

    2,496       3,422  

Prepaid expenses and other current assets

    6,096       4,496  

Total current assets

    177,200       169,062  

Property, plant and equipment, net

    179,862       176,089  

Goodwill

    26,597       38,127  

Other intangible assets, net

    19,162       20,107  

Other assets, net

    5,665       3,818  

Total assets

  $ 408,486     $ 407,203  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

Current liabilities:

               

Current maturities of long-term debt

  $ 1,807     $ 1,214  

Accounts payable

    10,786       15,876  

Accrued liabilities

    41,752       33,254  

Total current liabilities

    54,345       50,344  

Long-term debt, net of current maturities

    4,201       22,882  

Deferred tax liability, net

    26,109       27,844  

Pension liabilities, net

    5,845       6,048  

Other long-term liabilities

    4,316       4,915  

Total liabilities

    94,816       112,033  
                 

Commitments and contingencies

               

Stockholders’ equity:

               

Preferred stock, $0.01 par value; 10,000,000 authorized shares; none issued

           

Common Stock, $0.01 par value; 80,000,000 authorized shares; 22,463,801 and 22,371,179 shares issued and 22,297,073 and   22,221,027 shares outstanding at June 30, 2016 and December 31, 2015, respectively

    221       220  

Capital in excess of par value

    152,814       151,250  

Retained earnings

    173,286       159,243  

Treasury stock, at cost – 166,728 and 150,152 shares at June 30, 2016 and December 31, 2015, respectively

    (2,863 )     (2,505 )

Accumulated other comprehensive loss

    (9,788 )     (13,038 )

Total stockholders’ equity

    313,670       295,170  

Total liabilities and stockholders’ equity

  $ 408,486     $ 407,203  

   

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

 

 
3

 

     

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT S OF COMPREHENSIVE INCOME

(In thousands, except per share amounts)

   

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

201 6

   

201 5

   

201 6

   

201 5

 

Revenues

  $ 112,650     $ 93,176     $ 197,493     $ 164,799  

Cost of sales

    79,252       67,345       139,276       124,173  

Gross profit

    33,398       25,831       58,217       40,626  
                                 

Selling, general, and administrative expense

    11,106       9,997       20,039       19,413  

Research and development expense

    713       770       1,349       1,544  

Impairment of goodwill and other intangible assets

    11,614             11,614        

Loss related to plant closure

    1,023       649       1,665       1,287  

(Gain) loss on disposal of assets

    (31 )     27       (66 )     334  

Operating income

    8,973       14,388       23,616       18,048  

Interest expense

    (134 )     (465 )     (279 )     (823 )

Gain (loss) on foreign currency

    73       83       (1,358 )     (462 )

Other income (expense), net

    116       (94 )     37       (204 )

Income before income taxes

    9,028       13,912       22,016       16,559  
                                 

Provision for income taxes

    3,365       5,108       7,973       6,086  

Net income

    5,663       8,804       14,043       10,473  
                                 

Other comprehensive income (loss):

                               

Foreign currency translation adjustment net of tax (expense) benefit of ($194), ($180), ($584) and $706, respectively

    360       334       1,085       (1,311 )

Energy swap adjustment, net of tax expense of $863, $354, $927 and $319, respectively

    1,603       657       1,721       593  

Pension benefits adjustment, net of tax expense of $120, $105, $239 and $210, respectively

    222       195       444       390  

Comprehensive income

  $ 7,848     $ 9,990     $ 17,293     $ 10,145  
                                 

Basic earnings per share (See Note 14)

  $ 0.25     $ 0.41     $ 0.63     $ 0.48  
                                 

Weighted average common shares outstanding

    21,885       21,111       21,873       21,059  
                                 

Diluted earnings per share (See Note 14)

  $ 0.25     $ 0.40     $ 0.62     $ 0.47  
                                 

Weighted average common shares and potential common share equivalents outstanding

    22,180       21,573       22,174       21,522  

 

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

 

 
4

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT S OF CASH FLOWS

(Dollars in thousands)

                                              

    Six Months Ended  
    June 3 0 ,  
   

2016

   

2015

 

Cash flows from operating activities:

               

Net income

  $ 14,043     $ 10,473  

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

               

Depreciation and amortization

    12,599       11,911  

Loss related to plant closures

    1,986        

Loss (gain) on disposal of assets

    (66 )     334  

Impairment of goodwill and other intangible assets

    11,614        

Provisions for losses on receivables

    29       24  

Share based compensation

    1,071       999  

Deferred income taxes

    (1,747 )     (16 )

Unrealized loss on foreign currency fluctuations, net

    1,358       462  

Changes in assets and liabilities:

               

Receivables

    (14,930 )     (20,710 )

Inventories

    13,091       (4,625 )

Prepaid expenses and other current assets

    (1,596 )     (2,154 )

Other assets

    (2,117 )     (732 )

Accounts payable

    (5,271 )     (8,536 )

Accrued liabilities

    11,989       7,326  

Pension liability, net

    241       (263 )

Other long term liabilities

    (390 )     1,245  

Net cash provided by (used in) operating activities

    41,904       (4,262 )

Cash flows from investing activities:

               

Capital expenditures

    (18,272 )     (21,030 )

Proceeds from disposition of assets

    85       36  

Net cash used in investing activities

    (18,187 )     (20,994 )

Cash flows from financing activities:

               

Principal payments of long-term debt

    (24,500 )     (3,793 )

Proceeds from long-term debt

    6,392       27,827  

Treasury stock repurchase

    (358 )     (158 )

Proceeds from equity compensation transactions

    283       846  

Excess tax benefit of equity compensation transactions

    211       151  

Net cash (used in) provided by financing activities

    (17,972 )     24,873  

Net increase (decrease) in cash and cash equivalents

    5,745       (383 )

Translation effect on cash

    (2 )      

Cash and cash equivalents at beginning of year

    661       1,430  

Cash and cash equivalents at end of period

  $ 6,404     $ 1,047  

     

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 products throughout the world to improve the nutritional integrity of foods, dietary supplements and animal feeds. The Company operates through two industry segments: animal nutrition and human nutrition.

 

The animal nutrition segment is comprised primarily of two subsidiaries: Omega Protein, Inc. (“Omega Protein”) and Omega Shipyard, Inc. (“Omega Shipyard”). Omega Protein, the Company’s principal operating subsidiary, is the successor to a business conducted since 1913. Omega Protein produces and markets a variety of products produced from menhaden (a herring-like species of fish found in commercial quantities in the U.S. coastal waters of the Atlantic Ocean and Gulf of Mexico), including specialty fish meal, crude and refined fish oils and fish solubles. Omega Protein’s fish meal products are primarily used as a protein ingredient in animal feed for swine, aquaculture and household pets. Fish oil is used primarily for animal and aquaculture feeds, as well as additives to human food products and dietary supplements. Omega Protein’s fish solubles are sold primarily to bait manufactures 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.

 

The human nutrition segment operates under the “tera’s ® ” branded product and “Bioriginal” names. Bioriginal has three primary product lines: specialty oils, protein products and other nutraceutical ingredients. Bioriginal is comprised primarily of four subsidiaries: Bioriginal Food & Science Corp. (“Bioriginal Food & Science”), Wisconsin Specialty Protein, L.L.C. (“WSP”), Cyvex Nutrition, Inc. (“Cyvex”) and InCon Processing, L.L.C. (“InCon”). Bioriginal Food & Science, acquired by the Company in September 2014 and headquartered in Saskatoon, Canada with additional operations in the Netherlands, is a supplier of plant and marine based specialty oils to the food and nutraceutical industries. WSP, acquired by the Company in February 2013, is a manufacturer and marketer of specialty dairy proteins and other related products headquartered in Madison, Wisconsin and operates a production facility in Reedsburg, Wisconsin. Cyvex is located in Irvine, California and is a supplier for the food and nutraceutical industries. InCon is located in Batavia, Illinois and is a specialty processor that utilizes molecular distillation technology to purify and concentrate Omega-3 fish oils and, subject to outside demand and excess capacity, a variety of other compound products for third-party tolling customers. In March 2016, as part of its strategy to focus on non-concentrated omega-3 oils instead of concentrated omega-3 oils, the Company decided to exit its Batavia, Illinois oil concentration facility and relocate certain assets from this facility to other Company facilities. Subsequent to that decision and during the second quarter of 2016 the Company received a non-binding offer to purchase certain assets at the Batavia facility and began negotiations with a potential buyer to sell those assets. As of August 3, 2016, those negotiations are still in progress. For additional information related to the closure of the Batavia facility, see Note 2 – Plant Closures.

 

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, 2015. 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, 2016, and the results of its operations for the three month and six month periods ended June 30, 2016 and 2015 and its cash flows for the six month periods ended June 30, 2016 and 2015. Quarterly operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

 

 

 
6

 

     

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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, 2016 (in thousands)

 

   

Gains and Losses

On Cash Flow

Hedges

     

Defined Benefit

Pension Items

     

Foreign Currency

Translation

Adjustment

   

Total

 

Balance as of December 31, 2015

  $ (2,012 )     $ (8,335 )     $ (2,691 )   $ (13,038 )

Other comprehensive gain (loss) before reclassifications

    1,180                 1,085       2,265  

Amounts reclassified from accumulated other comprehensive loss

    541  

(a)

    444  

(b)

          985  

Net current-period other comprehensive income

    1,721         444         1,085       3,250  

Balance as of June 30, 2016

  $ (291 )     $ (7,891 )     $ (1,606 )   $ (9,788 )

 

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 gain (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 )

 

 

(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, 2015.

 

Recently Issued Accounting Standards

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13,  Financial Instruments – Credit Losses.   ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial instruments and changes the loss impairment methodology. ASU No. 2016-13 will be effective for us as of January 1, 2020 using a modified retrospective adoption method. The impact of the adoption of ASU 2016-13 is not expected to have a significant impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

On March 30, 2016, the FASB issued ASU 2016-09,  Compensation - Stock Compensation.   ASU 2016-09 was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. ASU 2016-09 covers accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU No. 2016-09 will be effective for us as of January 1, 2017. The Company is currently reviewing the effect of ASU No. 2016-09 on the Company’s consolidated results of operations, financial position and related disclosures.

 

In February 2016, the FASB issued ASU 2016-02, Leases , which is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. ASU 2016-02 will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, including interim periods within those fiscal years. The Company is currently assessing the potential impact of ASU 2016-02 on the Company’s consolidated results of operations, financial position and related disclosures.

 

 

 
7

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Foreign Currency Translations

 

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

 

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

 

NOTE 2. PLANT CLOSURES

 

Batavia Plant

 

As part of our strategic review and as a result of operating results that did not meet expectations, we re-assessed our business strategy to produce and sell concentrated menhaden fish oils. During this assessment, a reduction in efforts was instituted and the Company determined that the carrying values of certain assets located at our facility in Batavia, Illinois were no longer recoverable. In March, the Company decided to exit this facility and relocate certain assets from this facility to other Company facilities. Subsequent to that decision and during the second quarter of 2016 the Company received a non-binding offer to purchase certain assets at the Batavia facility and began negotiations with a potential buyer to sell those assets. As of August 3, 2016, those negotiations are still in progress. Under the accounting guidance of ASC 360, the Company determined that these negotiations represented a triggering event and re-assessed the carrying value of those assets. The Company determined that the carrying value of those assets exceeded their fair value by approximately $1.2 million and recorded a charge to reduce their carrying value.

 

The following table shows all charges related to the plant closure that have been recorded in the Company’s unaudited condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2016 and from December 1, 2015 to June 30, 2016:

     

   

Three Months Ended

June 30, 2016

   

Six Months Ended

June 30, 2016

   

December 1, 2015 to

June 30, 2016

 
    (in thousands)  

Impairment of property, plant and equipment

  $ 1,190     $ 1,200     $ 5,358  

Write-off material and supplies inventory

          239       239  

Employee severance costs

    183       539       539  

Estimated decommissioning costs

                375  

Total loss related to plant closure

  $ 1,373     $ 1,978     $ 6,511  

 

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. To the extent we are unable to recover the remaining carrying value of the assets at the facility, we could have additional impairment charges. The remaining carrying value of these assets is $1.2 million. Of this $1.2 million in assets, approximately $0.7 million represents assets that the Company expects to relocate and use at other Company facilities.

 

 

 
8

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Cameron Plant

 

In December 2013, the Company effectively closed its menhaden fish processing plant located in Cameron, Louisiana and re-deployed certain vessels from that facility to the Company’s other Gulf Coast facilities located in Abbeville, Louisiana and Moss Point, Mississippi. In conjunction with the closure, the following charges were incurred in the Company’s unaudited condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2016 and 2015 and from December 2013 to June 30, 2016:

     

   

Three Months Ended

June 30, 2016

   

Three Months Ended

June 30, 2015

   

Six Months Ended

June 30, 2016

   

Six Months Ended

June 30, 2015

   

December 2013

to

June 30, 2016

 
    (in thousands)  

Impairment of property, plant and equipment

  $     $     $     $     $ 7,922  

Write-off material and supplies inventory

                            150  

Employee severance costs

                            732  

Estimated decommissioning costs

                            250  

Other ongoing closure costs not attributable to future production

    (350 )     649       (313 )     1,287       6,405  

Total loss related to plant closure

  $ (350 )   $ 649     $ (313 )   $ 1,287     $ 15,459  

 

In June 2016, the Company and its landlord agreed on the mutual termination of the lease for the Cameron facility pursuant to which the Company has no further ongoing lease payment or other obligations for the property. As a result of the termination of the lease, previously recognized accruals for ongoing contractual obligations were reversed and a gain was recognized during the three and six months ended June 30, 2016.

 

NOTE 3. INDUSTRY SEGMENTS

 

The Company evaluates and reviews its results of operations in two segments, animal nutrition and human nutrition. These segments are managed separately and information on each segment is used by the chief operating decision 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 products, including plant oils, dairy proteins, fish oils and nutraceuticals, to human nutrition markets.

 

The tables below present information about reported segments for the three months ended June 30, 2016 and 2015 (in thousands):

 

2016

 

Animal Nutrition

   

Human Nutrition

   

Unallocated

   

Total

 

Revenue (1)

  $ 81,602     $ 31,048     $     $ 112,650  

Cost of sales

    51,074       28,178             79,252  

Gross profit

    30,528       2,870             33,398  

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

    662       4,473       6,684       11,819  

Impairment of goodwill and other intangible assets

          11,614             11,614  

(Gain) loss related to plant closures

    (350 )     1,373             1,023  

Other (gains) and losses

    (31 )                 (31 )

Operating income

  $ 30,247     $ (14,590 )   $ (6,684 )   $ 8,973  

Depreciation and amortization

  $ 4,740     $ 1,453     $ 190     $ 6,383  

Identifiable assets

  $ 256,755     $ 140,937     $ 10,794     $ 408,486  

Capital expenditures

  $ 7,442     $ 429     $ 697     $ 8,568  

 

 

 
9

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

2015

 

Animal Nutrition

   

Human Nutrition

   

Unallocated

   

Total

 

Revenue ( 2 )

  $ 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 $0.4 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

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

 

The tables below present information about reported segments for the six months ended June 30, 2016 and 2015 (in thousands):

 

2016

 

Animal Nutrition

   

Human Nutrition

   

Unallocated

   

Total

 

Revenue ( 3 )

  $ 131,797     $ 65,696     $     $ 197,493  

Cost of sales

    80,823       58,453             139,276  

Gross profit

    50,974       7,243             58,217  

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

    1,148       8,609       11,631       21,388  

Impairment of goodwill and other intangible assets

          11,614             11,614  

(Gain) loss related to plant closures

    (313 )     1,978             1,665  

Other (gains) and losses

    (66 )                 (66 )

Operating income

  $ 50,205     $ (14,958 )   $ (11,631 )   $ 23,616  

Depreciation and amortization

  $ 9,410     $ 2,807     $ 382     $ 12,599  

Identifiable assets

  $ 256,755     $ 140,937     $ 10,794     $ 408,486  

Capital expenditures

  $ 15,904     $ 1,504     $ 864     $ 18,272  

 

2015

 

Animal Nutrition

   

Human Nutrition

   

Unallocated

   

Total

 

Revenue ( 4 )

  $ 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)

  $ 28,696     $ (900 )   $ (9,748 )   $ 18,048  

Depreciation and amortization

  $ 8,649     $ 3,027     $ 235     $ 11,911  

Identifiable assets

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

Capital expenditures

  $ 17,489     $ 2,333     $ 1,208     $ 21,030  

 

(3) Excludes revenue from internal customers of $0.5 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

(4) Excludes revenue from internal customers of $1.0 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

 

 
10

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

The tables below reconcile total segment operating income to total earnings from operations before income taxes (in thousands):

 

   

Three Months Ended June 30,

 
   

2016

   

2015

 

Operating income for reportable segments

  $ 8,973     $ 14,388  

Interest expense

    (134 )     (465 )

Gain on foreign currency

    73       83  

Other expense, net

    116       (94 )

Income before income taxes

  $ 9,028     $ 13,912  

 

   

Six Months Ended June 30,

 
   

2016

   

2015

 

Operating income for reportable segments

  $ 23,616     $ 18,048  

Interest expense

    (279 )     (823 )

Loss on foreign currency

    (1,358 )     (462 )

Other expense, net

    37       (204 )

Income before income taxes

  $ 22,016     $ 16,559  

 

NOTE 4 . GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

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

 

During the second quarter of 2016, the Company completed its annual impairment testing of goodwill and indefinite life intangible assets related to its acquisition of Bioriginal Food & Science in September 2014.   As of June 30, 2016, the calculated fair value of Bioriginal Food & Science’s trade name exceeded its $3.8 million carrying value by 21% and the calculated fair value of goodwill and other indefinite lived intangible assets exceeded their $26.6 million carrying values by 26%. At this time, the Company does not consider the carrying value of these assets to be at risk due to the level of anticipated profitability of Bioriginal Food & Science. Key assumptions in the fair value calculation include sales volumes and prices, the portion of sales attributable to trade names, the cost and availability of raw materials and the discount rate.

 

As of December 31, 2015, the Company completed its annual assessment of the WSP reporting unit’s goodwill for potential impairment. In that assessment, the Company estimated that the fair value of the reporting unit exceeded its carrying value by $2.5 million or 12%. Key assumptions and sensitivities related to that assessment 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, 2015. During the first six months of 2016, this reporting unit experienced gross profits and operating income lower than was assumed in the December 31, 2015 analysis. While dairy protein product sales grew, several relatively higher-margin products did not grow as rapidly as was anticipated in the forecast prepared as of December 31, 2015. As a result, the Company re-assessed and revised several key assumptions in its forecast for WSP. The revised assumptions included (i) lower sales growth rates, (ii) a change in the product mix that generally increased the portion of sales from relatively lower margin products, and (iii) a reduction in the long-term growth rate used in the terminal year. This resulted in a new forecast for WSP that was lower than the forecast prepared as of December 31, 2015. Based on (i) the modest excess of estimated fair value over carrying value at December 31, 2015, (ii) actual results that were less than forecast for the six months ended June 30, 2016, and (iii) a lower forecast, the Company determined that triggering events had occurred and there was sufficient evidence to indicate the need to perform an interim test for impairment of goodwill. The results of the interim test for impairment, which included the revised outlook for the business, indicated that the carrying amount of the reporting unit exceeded its fair value and the Company recorded a charge of $11.6 million to impair the goodwill for this reporting unit. The interim testing also concluded that the fair value of the reporting unit’s other indefinite-lived intangible assets (trade names) exceeded its $1.1 million carrying value by 39% and no impairment was necessary.

 

 

 
11

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

The following table summarizes the changes in the carrying amount of goodwill by reporting unit (in thousands):

 

   

Bioriginal Food

& Science

   

WSP

   

Total

 

January 1, 2016

  $ 26,513       11,614     $ 38,127  

Impairment

          (11,614 )     (11,614 )

Foreign currency translation adjustment

    84             84  

June 30, 2016

  $ 26,597           $ 26,597  

 

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

   

 

   

Balance at January 1, 2016

   

Reclassified

   

(1)

Amortization

   

Foreign currency translation adjustment

   

Balance at

June 30, 2016

 

Customer relationships and brand names, net of accumulated amortization of $4,230 and $5,237, respectively

  $ 14,851       362       (1,007 )     41     $ 14,247  

Indefinite life intangibles – trade names/secrets and other

    5,256       (362 )           21       4,915  

Total intangible assets

  $ 20,107             (1,007 )     62     $ 19,162  

 

 

(1)

Weighted average life of approximately 10 years.

 

Amortization expense of the Company’s intangible assets for the three months ended June 30, 2016 and 2015 was approximately $0.5 million and for the six months ended June 30, 2016 and 2015 was approximately $1.0 million. The table below shows estimated future amortization expense related to intangible assets (in thousands):

 

Remainder of 2016

  $ 1,010  

2017

    2,017  

2018

    2,017  

2019

    2,017  

Thereafter

    7,186  

Total estimated future amortization expense

  $ 14,247  

 

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, 2015.

 

 

 
12

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 5 . RECEIVABLES, NET

 

R eceivables, net are summarized below (in thousands):

 

 

    June 30, 2016     December 31, 2015  

Trade

  $ 50,052     $ 32,179  

Insurance

    4,318       6,769  

Income tax

    841       1,133  

Other

    601       976  

Total accounts receivable

    55,812       41,057  

Less allowance for doubtful accounts

    (597 )     (568 )

Receivables, net

  $ 55,215     $ 40,489  

 

NOTE 6 . INVENTORY

 

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

 

 

    June 30, 2016     December 31, 2015     June 30, 2015  

Fish meal

  $ 26,214     $ 37,308     $ 28,570  

Fish oil

    13,816       25,600       12,792  

Fish solubles

    201       696       471  

Unallocated inventory cost pool (including off-season costs)

    21,457       7,807       17,411  

Other nutraceutical products

    5,370       6,393       5,864  

Bioriginal Food & Science products

    21,382       24,024       21,927  

Dairy protein products

    7,870       8,447       5,332  

Other materials and supplies

    10,679       9,719       9,370  

Total inventory

  $ 106,989     $ 119,994     $ 101,737  

 

Inventory at June 30, 2016, December 31, 2015 and June 30, 2015 is stated at the lower of cost and net realizable value. The elements of the June 30, 2016 unallocated inventory cost pool include Omega Protein’s plant and vessel related labor, utilities, rent, repairs and depreciation, which are allocated to 2016 fishing season production.

 

NOTE 7 . PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets are summarized below (in thousands):

 

 

   

June 30, 2016

   

December 31, 2015

 

Prepaid insurance

  $ 3,894     $ 2,317  

Product deposits

    254       767  

Selling expenses

    171       50  

Leases

    510       119  

Energy swap

    157        

Other prepaids and expenses

    1,110       1,243  

Total prepaid expenses and other current assets

  $ 6,096     $ 4,496  

 

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.

 

 

 
13

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 8 . OTHER ASSETS , NET

 

Other assets, net are summarized below (in thousands):

 

 

   

June 30, 2016

    December 31, 2015  

Fish nets, net of accumulated amortization of $1,548 and $1,003

  $ 1,930     $ 1,193  

Insurance receivables

    2,205       1,369  

Debt issuance costs

    1,033       1,150  

Energy swap

    392        

Deposits and other

    105       106  

Total other assets, net

  $ 5,665     $ 3,818  

 

Amortization expense for fishing nets amounted to approximately $0.3 million for each of the three months ended June 30, 2016 and 2015 and $0.5 million and $0.6 million for the six months ended June 30, 2016 and 2015, respectively.

 

As of June 30, 2016 and December 31, 2015, insurance receivables primarily relates to Jones Act claims for employees aboard its vessels. This estimated amount is recorded gross of estimated claims which may be due to claimants and is included in accrued insurance liabilities.

 

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

 

NOTE 9 . PROPERTY, PLANT AND EQUIPMENT , NET

 

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

 

 

    June 30, 2016    

December 31, 2015

 

Land

  $ 9,407     $ 9,407  

Plant assets

    210,787       207,249  

Fishing vessels

    124,786       114,453  

Furniture and fixtures

    12,286       12,315  

Construction in progress

    15,549       13,793  

Total property and equipment

    372,815       357,217  

Less accumulated depreciation and impairment

    (192,953 )     (181,128 )

Property, plant and equipment, net

  $ 179,862     $ 176,089  

 

 

Depreciation expense was $5.5 million and $5.2 million for the three months ended June 30, 2016 and 2015, respectively, and $10.9 million and $10.3 million for the six months ended June 30, 2016 and 2015, 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, 2016 and 2015, the Company capitalized interest of less than $0.1 million and approximately $0.2 million, respectively. For the six months ended June 30, 2016 and 2015, the Company capitalized interest of approximately $0.1 million and $0.3 million, respectively.

 

 

 
14

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 10 . ENERGY SWAP AGREEMENTS

 

Energy Swap Agreements

 

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

 

Energy Swap

 

Consumption Period

 

Quantity

 

Price Per Unit

   

Energy Swap Asset/(Liability) as of

June 30, 2016

   

Deferred Tax

Asset/(Liability)

as of

June 30, 2016

 
                   

(in thousands)

 

Diesel - NYMEX Heating Oil Swap

 

July - November, 2016

 

1,844,378 Gallons

  $ 2.01     $ (909 )   $ 318  

Natural Gas - NYMEX Natural Gas Swap

 

July – October, 2016

 

250,284 MMBTUs

  $ 3.05       (31 )     11  

Propane – Natural Gas Liquids Swap

 

July - November, 2016

 

2,095,640 Gallons

  $ 0.53       4       (1 )

Diesel - NYMEX Heating Oil Swap

 

May - November, 2017

 

2,154,960 Gallons

  $ 1.50       242       (85 )

Natural Gas - NYMEX Natural Gas Swap

 

April – October, 2017

 

343,700 MMBTUs

  $ 2.82       87       (30 )

Propane – Natural Gas Liquids Swap

 

June - November, 2017

 

1,832,800 Gallons

  $ 0.43       196       (69 )

Diesel - NYMEX Heating Oil Swap

 

May - November, 2018

 

725,000 Gallons

  $ 1.67       (1 )      

Propane – Natural Gas Liquids Swap

 

June - November, 2018

 

368,000 Gallons

  $ 0.55       (8 )     3  
                    $ (420 )   $ 147  

 

Energy Swap

 

Consumption Period

 

Quantity

 

Price Per Unit

   

Energy Swap Asset/(Liability) as of

December 31, 2015

   

Deferred Tax

Asset/(Liability)

as of

December 31, 2015

 
                   

(in thousands)

 

Diesel - NYMEX Heating Oil Swap

 

May - November, 2016

 

2,418,679 Gallons

  $ 2.23     $ (2,319 )   $ 812  

Natural Gas - NYMEX Natural Gas Swap

 

April – October, 2016

 

374,850 MMBTUs

  $ 3.05       (207 )     72  

Propane – Natural Gas Liquids Swap

 

June - November, 2016

 

1,902,590 Gallons

  $ 0.58       (322 )     113  

Diesel - NYMEX Heating Oil Swap

 

May - November, 2017

 

716,560 Gallons

  $ 1.69       (165 )     58  

Natural Gas - NYMEX Natural Gas Swap

 

April – October, 2017

 

187,400 MMBTUs

  $ 2.97       (45 )     15  
                    $ (3,058 )   $ 1,070  

 

As of June 30, 2016, Omega Protein has recorded a prepaid expense and other current asset of $0.2 million, a long-term asset of $0.4 million and an other current liability of $1.0 million, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax asset of $0.1 million associated therewith. As of December 31, 2015, Omega Protein has recorded a long-term liability of $0.2 million and an other current liability of $2.9 million to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax asset of $1.1 million associated therewith. The effective portion of the change in fair value from inception to June 30, 2016 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 (in thousands).

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2016

   

2015

   

2016

   

2015

 

Beginning balance

  $ (1,894 )   $ (2,201 )   $ (2,012 )   $ (2,137 )

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

    541       557       541       557  

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

    1,062       100       1,180       36  

Balance as of June 30,

  $ (291 )   $ (1,544 )   $ (291 )   $ (1,544 )

 

The $0.3 million reported in accumulated other comprehensive loss as of June 30, 2016 will be reclassified to the unallocated inventory cost pool in the period when the energy consumption takes place. The amount of comprehensive loss to be reclassified, net of taxes, during the next 12 months is expected to be approximately $0.5 million.

 

 

 
15

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

The aggregate fair value of derivative instruments in gross liability positions as of June 30, 2016 and December 31, 2015 was $1.1 million and $3.1 million, respectively. The aggregate fair value of derivative instruments in gross asset positions as of June 30, 2016 and December 31, 2015 was $0.8 million and $0, respectively.

 

As of June 30, 2016 (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 – asset position

  $ 785     $ (235 )   $ 550  

Energy swap derivatives – liability position

  $ (1,082 )   $ 112     $ (970 )

   

As of December 31, 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

  $ (3,058 )   $ -     $ (3,058 )

 

If, at any time, the swaps are determined to be ineffective due to changes in the Company’s energy usage, price correlations or underlying hedge agreements or assumptions, the fair value of the portion of the energy swaps determined to be ineffective will be recognized as a gain or loss in cost of sales for the applicable period. For the three months ended June 30, 2016 and 2015, the Company recognized gains of $0 and $0.5 million, respectively, to cost of sales resulting from transactions associated with the ineffectiveness of diesel energy swaps. For the six months ended June 30, 2016 and 2015, the Company recognized a loss of less than $0.1 million and a gain of $0.1 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).

 

NOTE 11. NOTES PAYABLE AND LONG-TERM DEBT

 

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

 

   

June 30,

   

December 31,

 
   

2016

   

2015

 

Amounts due on Loan Agreement in August 2020, interest at a Base Rate, LIBOR, and CDOR plus an applicable margin (2.13% at June 30, 2016 and 1.49% to 2.70% at December 31, 2015)

  $ 4,201     $ 22,882  

ING Commercial Finance B.V., interest at EURIBOR plus an applicable rate (1.70% at June 30, 2016 and December 31, 2015)

    1,807       1,214  

Total debt

    6,008       24,096  

Less current maturities

    (1,807 )     (1,214 )

Long-term debt

  $ 4,201     $ 22,882  

 

The estimated fair value of the Company’s total debt at June 30, 2016 and December 31, 2015, based on quoted market prices available to the Company for issuance of similar debt with similar terms (level 2), approximated carrying value.

 

 

 
16

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

On August 20, 2015 (the “Closing Date”), the Company and certain subsidiaries entered into a Second Amended and Restated Loan Agreement (the “Loan Agreement”) with Wells Fargo Bank, National Association, as administrative agent (the “Agent”) for the lenders (currently Wells Fargo Bank, N.A., JP Morgan Chase Bank, N.A. and BMO Harris Bank, N.A.) (collectively, the “Lenders”) pursuant to which the Lenders agreed to extend credit to the Company in the form of loans (each a “Loan” and collectively, the “Loans”) on a revolving basis of up to $125.0 million in the aggregate (the “Commitment”), with $95.0 million of such Commitment allocated to Revolving A Loans to be made to the Company or Omega Protein in U.S. Dollars or Alternative Currencies (as such term is defined in the Loan Agreement) and $30.0 million of such Commitment allocated to Revolving B Loans to be made to the Company and certain subsidiaries, including Bioriginal Food & Science, in U.S. Dollars or Canadian Dollars. The Commitment includes a sub-facility for swingline loans up to an amount not to exceed $10.0 million, a sub-facility for standby letters of credit issued for the account of the Company or Omega Protein up to an amount not to exceed $20.0 million, a sub-facility for standby or commercial letters of credit issued for the account of Bioriginal Food & Science up to an amount not to exceed $7.5 million (subject to a temporary increase of $9.0 million), and an accordion feature that allows the Company to increase the amount of the Commitment up to an additional $75.0 million, subject to the further commitments of the Lenders and other customary conditions precedent. The Loan Agreement amended and restated the Company’s existing senior secured credit facility (the “Prior Loan Agreement”). The proceeds of the Loan Agreement were used to (a) refinance existing debt under the Prior Loan Agreement, (b) pay fees and expenses incurred in connection with refinancing the Prior Loan Agreement and entry into the Loan Agreement, (c) refinance certain debt owed to HSBC Bank Canada pursuant to an agreement that has been terminated, and (d) provide ongoing working capital and for other general corporate purposes of the Company and its subsidiaries.

 

All Loans and all other obligations outstanding under the Loan Agreement shall be payable in full in August 2020 . As of June 30, 2016 and December 31, 2015, the Company had $4.2 million and $22.9 million outstanding under the Loan Agreement and approximately $8.6 million and $7.8 million in standby letters of credit issued, respectively. As of June 30, 2016, the Company was in compliance with all financial covenants under the Loan Agreement. The Company has no off-balance sheet arrangements other than normal operating leases and standby letters of credit.

 

In March 2015, Bioriginal Food & Science Europe extended the terms of its credit facility with ING Commercial Finance B.V. which provides borrowings up to an amount based on accounts receivable and inventory balances, and matures on March 31, 2018.  Advances are repayable on demand and bear interest payable monthly at 1.75% + EURIBOR (currently 1.70%).  This credit facility is secured by accounts receivable and inventory of Bioriginal Food & Science Europe to a maximum of 85% of accounts receivable and 60% of inventory.  This credit facility contains cross default provisions and other covenants.  As of June 30, 2016 and December 31, 2015, Bioriginal Food & Science Europe had $1.8 million and $1.2 million outstanding under this credit facility, respectively, which is included in current maturities.

 

In June 2010, Bioriginal Food & Science Europe entered into a credit facility with ING Bank N.V. which provides borrowings up to 250,000 Euro and matures on November 16, 2016.  Under the credit facility, interest is paid at 2.70% plus the EURIBOR rate (currently 2.49%).  This credit facility is secured by Bioriginal Food & Science Europe’s equipment. This facility contains cross default provisions and other covenants.   As of June 30, 2016 and December 31, 2015, there were no outstanding borrowings under this credit facility.

  

The Company’s notes payable and long-term debt are more fully explained in Note 11 to the consolidated financial statements in Item 8 of the Company’s Form 10-K for the fiscal year ended December 31, 2015.

 

NOTE 12. ACCRUED LIABILITIES

   

Accrued liabilities are summarized below (in thousands):

 

   

June 30,

   

December 31,

 
   

2016

   

2015

 
                 

Insurance

  $ 8,621     $ 9,751  

Reserve for plant closure costs

    524       375  

Salary and benefits

    12,304       9,630  

Trade creditors

    8,377       7,085  

Taxes, other than income tax

    1,039       145  

Income tax

    8,015       3,199  

Energy swap liability, current portion

    970       2,849  

Deferred revenue

    1,624       99  

Accrued interest

    12       35  

Other

    266       86  

Total accrued liabilities

  $ 41,752     $ 33,254  

 

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.

 

 

 
17

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 13. COMMITMENTS AND CONTINGENCIES

 

Bioriginal Contingency

 

In September 2014, the Company acquired all of the outstanding equity of Bioriginal Food & Science pursuant to the terms of a share purchase agreement. A portion of the equity of Bioriginal Food & Science that was sold was indirectly held by the management, who continue to be employed by Bioriginal Food & Science and share in the management of Bioriginal Food & Science’s business.

 

In addition to the acquisition date cash purchase price and restricted stock, the management sellers may also earn additional amounts based on the annual adjusted EBITDA of Bioriginal Food & Science’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, the management sellers will be eligible for an earn-out payment ranging from $1.2 million to $2.9 million Canadian Dollars, subject to certain forfeitures based on termination of management sellers’ employment. Based on results for 2014 and 2015, the maximum total payment for all three years is $5.3 million Canadian dollars.

 

The earn-out payments are estimated on a quarterly basis and will be paid-out in September 2017. The Company records 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, 2016 and December 31, 2015, the outstanding liability associated with the earn-out was $2.0 million and $1.3 million, respectively.

 

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.

 

The Company has received a petition on probation filed by the U.S. Attorney’s Office for the Eastern District of Virginia and as a result of that petition has become aware of a criminal investigation being conducted by the U.S. Attorney’s Office for the Western District of Louisiana into the waste water discharge practices of the Abbeville, Louisiana facility of its Omega Protein subsidiary. The petition on probation seeks to revoke the subsidiary’s probation based on alleged Clean Act Water Violations. A hearing on the petition is expected to occur in September 2016. The Company is unable to determine its potential outcome or its effects on the Company’s probation status. As such, no liability has been recognized as of June 30, 2016 relating to this matter. In the event that Omega Protein is found to be not in compliance with the probation terms of the plea agreement and the court’s sentencing order, Omega Protein could be subject to additional criminal penalties or prosecution in the Eastern District of Virginia. In addition, if the United States Attorney in the Western District of Louisiana were to file new criminal charges regarding the waste water disposal operations of the Abbeville facility as a result of that office’s investigation, then Omega Protein could be subject to additional criminal penalties or prosecution in that district.       

 

NOTE 14. RECONCILIATION OF BASIC AND DILUTED PER SHARE DATA (in thousands except per share data)

 

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

 

 

 
18

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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

 

Three Months Ended June 30:

 

201 6

   

201 5

 

Allocation of earnings:

                               

Net income

  $ 5,663             $ 8,804          

Income allocated to participating securities

    (95 )             (234 )        

Income allocated to common shares outstanding

  $ 5,568             $ 8,570          
                                 

Weighted average common shares outstanding

    21,885               21,111          

Basic earnings per share

            0.25               0.41  
                                 

Stock options assumed exercised

    295               462          

Weighted average diluted common shares and potential common share equivalents outstanding

    22,180               21,573          

Diluted earnings per share

            0.25               0.40  

 

Six Months Ended June 30:

 

201 6

   

201 5

 

Allocation of earnings: