Omega Protein Corporation
OMEGA PROTEIN CORP (Form: 10-Q, Received: 11/02/2016 16:07:34)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________

 

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 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

 

  (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 October 28, 2016: 22,437,960.

 



 

 
 

 

 

OMEGA PROTEIN CORPORATION

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 
   

Item 1. Financial Statements and Notes

 
   

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2016  and December 31, 2015

  3
   

Unaudited Condensed Consolidated Statements of Comprehensive Income  for the three and nine months ended September 30, 2016 and 2015

  4
   

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 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

23 
   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

33

   

Item 4. Controls and Procedures

33

   

PART II. OTHER INFORMATION

 
   

Item 1. Legal Proceedings

34

   

Item 1A. Risk Factors

34

   

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

35

   

Item 3. Defaults Upon Senior Securities

36

   

Item 4. Mine Safety Disclosures

36

   

Item 5. Other Information

36

   

Item 6. Exhibits

36

   

Signatures

37

 

 
2

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements and Notes

 

 

   

September 30,

2016

   

December 31,

2015

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 34,235     $ 661  

Receivables, net

    46,998       40,489  

Inventories

    111,868       119,994  

Deferred tax asset, net

    3,305       3,422  

Assets held for sale

    500        

Prepaid expenses and other current assets

    4,587       4,496  

Total current assets

    201,493       169,062  

Property, plant and equipment, net

    182,695       176,089  

Goodwill

    26,643       38,127  

Other intangible assets, net

    18,683       20,107  

Other assets, net

    5,639       3,818  

Total assets

  $ 435,153     $ 407,203  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

Current liabilities:

               

Current maturities of long-term debt

  $ 1,497     $ 1,214  

Accounts payable

    11,401       15,876  

Accrued liabilities

    50,423       33,254  

Total current liabilities

    63,321       50,344  

Long-term debt, net of current maturities

    3,526       22,882  

Deferred tax liability, net

    28,333       27,844  

Pension liabilities, net

    5,706       6,048  

Other long-term liabilities

    2,909       4,915  

Total liabilities

    103,795       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; 22,605,003 and 22,371,179 shares issued and 22,437,960 and 22,221,027 shares outstanding at September 30, 2016 and December 31, 2015, respectively

    222       220  

Capital in excess of par value

    155,263       151,250  

Retained earnings

    187,839       159,243  

Treasury stock, at cost – 167,043 and 150,152 shares at September 30, 2016 and December 31, 2015, respectively

    (2,871 )     (2,505 )

Accumulated other comprehensive loss

    (9,095 )     (13,038 )

Total stockholders’ equity

    331,358       295,170  

Total liabilities and stockholders’ equity

  $ 435,153     $ 407,203  

 

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

 

 
3

 

   

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share amounts)

   

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Revenues

  $ 108,753     $ 112,216     $ 306,246     $ 277,015  

Cost of sales

    75,706       77,023       214,982       201,196  

Gross profit

    33,047       35,193       91,264       75,819  
                                 

Selling, general, and administrative expense

    9,793       11,659       29,832       31,072  

Research and development expense

    605       751       1,954       2,295  

Impairment of goodwill and other intangible assets

          3,960       11,614       3,960  

Loss related to plant closures

    663       630       2,328       1,917  

(Gain) loss on disposal of assets

    (17 )     949       (83 )     1,283  

Operating income

    22,003       17,244       45,619       35,292  

Interest expense

    (108 )     (369 )     (387 )     (1,192 )

Gain (loss) on foreign currency

    159       (808 )     (1,199 )     (1,270 )

Other expense, net

    (221 )     (137 )     (184 )     (341 )

Income before income taxes

    21,833       15,930       43,849       32,489  
                                 

Provision for income taxes

    7,280       5,356       15,253       11,442  

Net income

    14,553       10,574       28,596       21,047  
                                 

Other comprehensive income (loss):

                               

Foreign currency translation adjustment net of tax (expense) benefit of $31, ($36), ($553) and $670, respectively

    (58 )     66       1,027       (1,245 )

Energy swap adjustment, net of tax (expense) benefit of ($285), $45, ($1,212) and ($274), respectively

    530       (84 )     2,251       509  

Pension benefits adjustment, net of tax expense of $119, $105, $358 and $315, respectively

    221       195       665       585  

Comprehensive income

  $ 15,246     $ 10,751     $ 32,539     $ 20,896  
                                 

Basic earnings per share (See Note 14)

  $ 0.65     $ 0.48     $ 1.28     $ 0.97  
                                 

Weighted average common shares outstanding

    21,935       21,399       21,894       21,173  
                                 

Diluted earnings per share (See Note 14)

  $ 0.64     $ 0.47     $ 1.27     $ 0.95  
                                 

Weighted average common shares and potential common share equivalents outstanding

    22,232       21,797       22,194       21,626  

 

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

 

 
4

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

                       

   

Nine Months Ended 

September 30,

 
   

2016

   

2015

 

Cash flows from operating activities:

               

Net income

  $ 28,596     $ 21,047  

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

               

Depreciation and amortization

    19,149       18,125  

Loss related to plant closures

    2,131        

Loss (gain) on disposal of assets

    (83 )     1,283  

Impairment of goodwill and other intangible assets

    11,614       3,960  

Provisions for losses on receivables

    29       36  

Share based compensation

    1,809       1,722  

Deferred income taxes

    (624 )     (1,508 )

Unrealized loss on foreign currency fluctuations, net

    1,199       1,270  

Changes in assets and liabilities:

               

Receivables

    (6,681 )     (7,359 )

Inventories

    7,675       (24,446 )

Prepaid expenses and other current assets

    (85 )     (528 )

Other assets

    (2,546 )     (2,265 )

Accounts payable

    (4,680 )     (3,805 )

Accrued liabilities

    21,086       23,673  

Pension liability, net

    323       (532 )

Other long term liabilities

    (1,797 )     1,863  

Net cash provided by operating activities

    77,115       32,536  

Cash flows from investing activities:

               

Capital expenditures

    (26,383 )     (29,086 )

Proceeds from disposition of assets

    107       55  

Net cash used in investing activities

    (26,276 )     (29,031 )

Cash flows from financing activities:

               

Principal payments of long-term debt

    (25,485 )     (41,701 )

Proceeds from long-term debt

    6,376       33,151  

Debt issuance costs

          (970 )

Treasury stock repurchase

    (367 )     (158 )

Proceeds from equity compensation transactions

    1,342       4,463  

Excess tax benefit of equity compensation transactions

    865       1,063  

Net cash (used in) provided by financing activities

    (17,269 )     (4,152 )

Net increase (decrease) in cash and cash equivalents

    33,570       (647 )

Translation effect on cash

    4        

Cash and cash equivalents at beginning of year

    661       1,430  

Cash and cash equivalents at end of period

  $ 34,235     $ 783  

 

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 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.

 

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 utilized 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. In September 2016, the Company entered into an agreement to sell most of the assets of InCon, and that sale closed in October 2016. For additional information on the sale of these assets, see Note 17 – Subsequent Event, and 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 yearend condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s consolidated financial position as of September 30, 2016, and the results of its operations for the three month and nine month periods ended September 30, 2016 and 2015 and its cash flows for the nine month periods ended September 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 Nine Months Ended September 30, 2016 (in thousands)

 

   

Gains and Losses

On Cash Flow

Hedges

     

Defined Benefit

Pension Items

     

Foreign Currency

Translation

Adjustment

   

Total

 

Balance as of December 31, 2015

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

Other comprehensive gain (loss) before reclassifications

    1,018                 1,027       2,045  

Amounts reclassified from accumulated other comprehensive loss

    1,233  

(a)

    665  

(b)

          1,898  

Net current-period other comprehensive income

    2,251         665         1,027       3,943  

Balance as of September 30, 2016

  $ 239       $ (7,670 )     $ (1,664 )   $ (9,095 )

 

Changes in Accumulated Other Comprehensive Loss by Component 

For the Nine Months Ended September 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

    (1,167 )               (1,245 )     (2,412 )

Amounts reclassified from accumulated other comprehensive loss

    1,676  

(a)

    585  

(b)

          2,261  

Net current-period other comprehensive income

    509         585         (1,245 )     (151 )

Balance as of September 30, 2015

  $ (1,628 )     $ (7,219 )     $ (2,160 )   $ (11,007 )

 

 

(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 August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments . This ASU is intended to clarify  the presentation of cash receipts and payments in specific situations. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early application is permitted. The Company is currently reviewing the effect of ASU No. 2016-15 on the Company’s consolidated results of operations, financial position and related disclosures.

 

In June 2016, the 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 the Company 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.

 

 
7

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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.

 

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, sales efforts were reduced and the Company determined that the carrying values of certain assets located at our facility in Batavia, Illinois were no longer recoverable. In March 2016, the Company decided to exit this facility. During the second quarter of 2016 the Company received a non-binding offer to purchase substantially all of the assets at the Batavia facility and began negotiations with a potential buyer to sell those assets. The assets are presented on the unaudited condensed consolidated balance sheet as assets held for sale. 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. In September 2016, the Company entered into an agreement to sell substantially all of the assets of InCon at the Batavia facility, and that sale closed on October 3, 2016. As a result of negotiations in conjunction with entering into the sale agreement, the Company determined that the fair value of the remaining assets subject to the agreement exceeded their carrying value by approximately $0.5 million and recorded a charge to reduce their carrying value. The charge primarily relates to assets which were not included in the non-binding offer originally received in the second quarter. For additional information on the sale of these assets, see Note 17 – Subsequent Event.

 

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 nine months ended September 30, 2016 and from December 1, 2015 to September 30, 2016:

     

   

Three Months Ended

September 30, 2016

   

Nine Months Ended 

September 30, 2016

   

December 2015 to 

September 30, 2016

 
    (in thousands)  

Impairment of property, plant and equipment

  $ 534     $ 1,734     $ 5,892  

Write-off material and supplies inventory

    336       575       575  

Employee severance costs

    138       677       677  

Estimated decommissioning costs

    (375 )     (375 )      

Other closure costs

    30       30       30  

Total loss related to plant closure

  $ 663     $ 2,641     $ 7,174  

 

 
8

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Pursuant to the sale agreement, the Company has no further obligation for the property. As a result, previously recognized accruals for estimate decommissioning costs were reversed and a gain was recognized during the three month ended September 30, 2016.

 

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 nine months ended September 30, 2016 and 2015 and from December 2013 to September 30, 2016:

     

   

Three Months Ended

September 30, 2016

   

Three Months Ended

September 30, 2015

   

Nine Months Ended

September 30, 2016

   

Nine Months Ended

September 30, 2015

   

December 2013

to

September 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

          630       (313 )     1,917       6,405  

Total loss (gain) related to plant closure

  $     $ 630     $ (313 )   $ 1,917     $ 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 nine months ended September 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 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.

 

 
9

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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

 

2016

 

Animal

Nutrition

   

Human

Nutrition

   

Unallocated

   

Total

 

Revenue (1)

  $ 77,658     $ 31,095     $     $ 108,753  

Cost of sales

    48,532       27,174             75,706  

Gross profit

    29,126       3,921             33,047  

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

    559       3,719       6,120       10,398  

(Gain) loss related to plant closures

          663             663  

Other (gains) and losses

    (17 )                 (17 )

Operating income (loss)

  $ 28,584     $ (461 )   $ (6,120 )   $ 22,003  

Depreciation and amortization

  $ 4,978     $ 1,383     $ 189     $ 6,550  

Identifiable assets

  $ 257,009     $ 139,709     $ 38,435     $ 435,153  

Capital expenditures

  $ 6,798     $ 95     $ 1,218     $ 8,111  

 

2015

 

Animal

Nutrition

   

Human

Nutrition

   

Unallocated

   

Total

 

Revenue (2)

  $ 73,169     $ 39,047     $     $ 112,216  

Cost of sales

    44,449       32,574             77,023  

Gross profit

    28,720       6,473             35,193  

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

    767       5,170       6,473       12,410  

Impairment of goodwill and other intangible assets

          3,960             3,960  

Loss related to plant closure

    630                   630  

Other (gains) and losses

    (19 )     968             949  

Operating income (loss)

  $ 27,342     $ (3,625 )   $ (6,473 )   $ 17,244  

Depreciation and amortization

  $ 4,575     $ 1,510     $ 129     $ 6,214  

Identifiable assets

  $ 244,791     $ 170,801     $ 1,523     $ 417,115  

Capital expenditures

  $ 5,846     $ 1,218     $ 992     $ 8,056  

 

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

 

(2) Excludes revenue from internal customers of $0.8 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

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

 

2016

 

Animal

Nutrition

   

Human

Nutrition

   

Unallocated

   

Total

 

Revenue (3)

  $ 209,455     $ 96,791     $     $ 306,246  

Cost of sales

    129,355       85,627             214,982  

Gross profit

    80,100       11,164             91,264  

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

    1,707       12,328       17,751       31,786  

Impairment of goodwill and other intangible assets

          11,614             11,614  

(Gain) loss related to plant closures

    (313 )     2,641             2,328  

Other (gains) and losses

    (83 )                 (83 )

Operating income (loss)

  $ 78,789     $ (15,419 )   $ (17,751 )   $ 45,619  

Depreciation and amortization

  $ 14,388     $ 4,190     $ 571     $ 19,149  

Identifiable assets

  $ 257,009     $ 139,709     $ 38,435     $ 435,153  

Capital expenditures

  $ 22,702     $ 1,599     $ 2,082     $ 26,383  

 

 
10

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

2015

 

Animal

Nutrition

   

Human

Nutrition

   

Unallocated

   

Total

 

Revenue (4)

  $ 166,869     $ 110,146     $     $ 277,015  

Cost of sales

    106,739       94,457             201,196  

Gross profit

    60,130       15,689             75,819  

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

    1,860       15,286       16,221       33,367  

Impairment of goodwill and other intangible assets

          3,960             3,960  

Loss related to plant closure

    1,917                   1,917  

Other (gains) and losses

    315       968             1,283  

Operating income (loss)

  $ 56,038     $ (4,525 )   $ (16,221 )   $ 35,292  

Depreciation and amortization

  $ 13,224     $ 4,537     $ 364     $ 18,125  

Identifiable assets

  $ 244,791     $ 170,801     $ 1,523     $ 417,115  

Capital expenditures

  $ 23,335     $ 3,551     $ 2,200     $ 29,086  

 

(3) 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.

 

(4) Excludes revenue from internal customers of $1.8 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

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

 

   

Three Months Ended September 30,

 
   

2016

   

2015

 

Operating income for reportable segments

  $ 22,003     $ 17,244  

Interest expense

    (108 )     (369 )

Gain (loss) on foreign currency

    159       (808 )

Other expense, net

    (221 )     (137 )

Income before income taxes

  $ 21,833     $ 15,930  

 

   

Nine Months Ended September 30,

 
   

2016

   

2015

 

Operating income for reportable segments

  $ 45,619     $ 35,292  

Interest expense

    (387 )     (1,192 )

Gain (loss) on foreign currency

    (1,199 )     (1,270 )

Other expense, net

    (184 )     (341 )

Income before income taxes

  $ 43,849     $ 32,489  

 

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.

 

 
11

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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%. The Company does not currently consider the carrying value of these assets to be at risk due to the level of anticipated profitability of Bioriginal Food & Science. Key assumptions in the fair value calculation include sales volumes and prices, the portion of sales attributable to trade names, the cost and availability of raw materials and the discount rate. During the third quarter of 2016, this reporting unit experienced gross profits and operating income lower than assumed in the June 30, 2016 analysis.  However, the Company’s long-term outlook on this business remains consistent with the previous forecast and the Company determined that an interim assessment for impairment is not necessary for the Bioriginal Food & Science reporting unit. In future quarters, the Company will continue to monitor events and circumstances related to Bioriginal Food & Science for any indicators that the carrying value, including goodwill, is greater than the fair value of this reporting unit.  Considering the level of sensitivity with respect to 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.

 

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. However, as a result of actual performance being below original forecasts, changes in the mix of products sold and changes in retail customer behavior in the marketplace for the trade name, the Company determined the trade name for the reporting unit is no longer considered an indefinite-lived asset and began amortizing it in during the quarter ended September 30, 2016.

 

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

    130             130  

September 30, 2016

  $ 26,643           $ 26,643  

 

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

 

 

   

Balance at

January 1, 2016

   

Reclassified

   

Amortization

   

Foreign

currency

translation

adjustment

   

Balance at

September 30,

2016

 

Customer relationships and brand names, net of accumulated amortization of $4,230 and $5,755, respectively

  $ 14,851       1,489       (1,525 )     78     $ 14,893  

Indefinite life intangibles – trade names/secrets and other

    5,256       (1,489 )           23       3,790  

Total intangible assets

  $ 20,107             (1,525 )     101     $ 18,683  

 

 
12

 

   

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Amortization expense of the Company’s intangible assets for the three months ended September 30, 2016 and 2015 was approximately $0.5 million and for the nine months ended September 30, 2016 and 2015 was approximately $1.5 million. The table below shows estimated future amortization expense related to intangible assets (in thousands):

 

Remainder of 2016

  $ 518  

2017

    2,074  

2018

    2,074  

2019

    2,074  

Thereafter

    8,153  

Total estimated future amortization expense

  $ 14,893  

 

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.

 

NOTE 5. RECEIVABLES, NET

 

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

 

 

   

September 30,

2016

   

December 31,

2015

 

Trade

  $ 42,255     $ 32,179  

Insurance

    4,319       6,769  

Income tax

    477       1,133  

Other

    532       976  

Total accounts receivable

    47,583       41,057  

Less allowance for doubtful accounts

    (585 )     (568 )

Receivables, net

  $ 46,998     $ 40,489  

 

NOTE 6. INVENTORY

 

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

 

 

   

September 30,

2016

   

December 31,

2015

   

September 30,

2015

 

Fish meal

  $ 38,683     $ 37,308     $ 52,644  

Fish oil

    25,960       25,600       22,106  

Fish solubles

    567       696       831  

Unallocated inventory cost pool (including off-season costs)

    575       7,807       (2,828 )

Other nutraceutical products

    4,038       6,393       5,756  

Bioriginal Food & Science products

    22,944       24,024       25,387  

Dairy protein products

    8,416       8,447       7,605  

Other materials and supplies

    10,685       9,719       10,125  

Total inventory

  $ 111,868     $ 119,994     $ 121,626  

 

Inventory at September 30, 2016, December 31, 2015 and September 30, 2015 is stated at the lower of cost and net realizable value. The elements of the September 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. The unallocated inventory cost pool may temporarily have a negative balance late in the fishing season due to differences in the timing of costs and production.

 

 
13

 

   

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

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

 

 

   

September 30,

2016

   

December 31, 

2015

 

Prepaid insurance

  $ 2,772     $ 2,317  

Product deposits

          767  

Selling expenses

    155       50  

Leases

    400       119  

Energy swap

    289        

Other prepaids and expenses

    971       1,243  

Total prepaid expenses and other current assets

  $ 4,587     $ 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.

 

NOTE 8. OTHER ASSETS, NET

 

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

 

 

   

September 30,

2016

   

December 31,

2015

 

Fish nets, net of accumulated amortization of $1,785 and $1,003

  $ 1,649     $ 1,193  

Insurance receivables

    2,642       1,369  

Debt issuance costs

    920       1,150  

Energy swap

    232        

Deposits and other

    196       106  

Total other assets, net

  $ 5,639     $ 3,818  

 

Amortization expense for fishing nets amounted to approximately $0.3 million for each of the three months ended September 30, 2016 and 2015 and $0.8 million and $0.9 million for the nine months ended September 30, 2016 and 2015, respectively.

 

As of September 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):

 

 

   

September 30,

2016

   

December 31,

2015

 

Land

  $ 9,407     $ 9,407  

Plant assets

    205,230       207,249  

Fishing vessels

    124,781       114,453  

Furniture and fixtures

    12,286       12,315  

Construction in progress

    19,466       13,793  

Total property and equipment

    371,170       357,217  

Less accumulated depreciation and impairment

    (188,475 )     (181,128 )

Property, plant and equipment, net

  $ 182,695     $ 176,089  

 

 
14

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Depreciation expense was $5.8 million and $5.3 million for the three months ended September 30, 2016 and 2015, respectively, and $16.7 million and $15.6 million for the nine months ended September 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 September 30, 2016 and 2015, the Company capitalized interest of less than $0.1 million and approximately $0.2 million, respectively. For the nine months ended September 30, 2016 and 2015, the Company capitalized interest of approximately $0.1 million and $0.5 million, respectively.

 

NOTE 10. ENERGY SWAP AGREEMENTS

 

Energy Swap Agreements

 

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

 

Energy Swap

Consumption Period

 

Quantity

 

Price

Per

Unit

   

Energy Swap

Asset/(Liability)

as of

September 30,

2016

   

Deferred Tax

Asset/(Liability)

as of

September 30,

2016

 
                 

(in thousands)

 

Diesel - NYMEX Heating Oil Swap

Oct. - November, 2016

 

527,160 Gallons

  $ 1.99     $ (235 )   $ 82  

Natural Gas - NYMEX Natural Gas Swap

Oct. – October, 2016

 

49,132 MMBTUs

  $ 3.05       (4 )     1  

Propane – Natural Gas Liquids Swap

Oct. - November, 2016

 

600,260 Gallons

  $ 0.52       3       (1 )

Diesel - NYMEX Heating Oil Swap

May - November, 2017

 

2,732,960 Gallons

  $ 1.47       263       (92 )

Natural Gas - NYMEX Natural Gas Swap

April – October, 2017

 

343,700 MMBTUs

  $ 2.82       65       (23 )

Propane – Natural Gas Liquids Swap

June - November, 2017

 

2,566,800 Gallons

  $ 0.45       227       (79 )

Diesel - NYMEX Heating Oil Swap

May - November, 2018

 

1,800,000 Gallons

  $ 1.65       48       (17 )

Natural Gas - NYMEX Natural Gas Swap

April – October, 2018

 

125,400 MMBTUs

  $ 2.81       (5 )     2  

Propane – Natural Gas Liquids Swap

June - November, 2018

 

1,102,000 Gallons

  $ 0.54       6       (2 )
                  $ 368     $ (129 )

 

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  

 

 
15

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

As of September 30, 2016, Omega Protein has recorded a prepaid expense and other current asset of $0.3 million, a long-term asset of $0.2 million and an other current liability of $0.1 million, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax liability 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 September 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 income (loss) resulting from the energy swap agreements (in thousands).

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Beginning balance

  $ (291 )   $ (1,544 )   $ (2,012 )   $ (2,137 )

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

    692       1,119       1,233       1,676  

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

    (162 )     (1,203 )     1,018       (1,167 )

Balance as of September 30,

  $ 239     $ (1,628 )   $ 239     $ (1,628 )

 

The $0.2 million reported in accumulated other comprehensive loss as of September 30, 2016 will be reclassified to the unallocated inventory cost pool in the period when the energy consumption takes place. The amount of comprehensive income to be reclassified, net of taxes, during the next 12 months is expected to be approximately $0.1 million.

 

The aggregate fair value of derivative instruments in gross liability positions as of September 30, 2016 and December 31, 2015 was $0.3 million and $3.1 million, respectively. The aggregate fair value of derivative instruments in gross asset positions as of September 30, 2016 and December 31, 2015 was $0.7 million and $0, respectively.

 

As of September 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

  $ 653     $ (132 )   $ 521  

Energy swap derivatives – liability position

  $ (297 )   $ 144     $ (153 )

 

 

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 )

 

 
16

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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 September 30, 2016 and 2015, the Company recognized a loss of less than $0.1 million and $0 million, respectively, to cost of sales resulting from transactions associated with the ineffectiveness of diesel energy swaps. For the nine months ended September 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):

 

   

September 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 September 30, 2016 and 1.49% to 2.70% at December 31, 2015)

  $ 3,526     $ 22,882  

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

    1,497       1,214  

Total debt

    5,023       24,096  

Less current maturities

    (1,497 )     (1,214 )

Long-term debt

  $ 3,526     $ 22,882  

 

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

 

On August 20, 2015 (the “Closing Date”), the Company and certain subsidiaries entered into a Second Amended and Restated Loan Agreement (the “Loan Agreement”) with Wells Fargo Bank, National Association, as administrative agent (the “Agent”) for the lenders (currently Wells Fargo Bank, N.A., JP Morgan Chase Bank, N.A. and BMO Harris Bank, N.A.) (collectively, the “Lenders”) pursuant to which the Lenders agreed to extend credit to the Company in the form of loans (each a “Loan” and collectively, the “Loans”) on a revolving basis of up to $125.0 million in the aggregate (the “Commitment”), with $95.0 million of such Commitment allocated to Revolving A Loans to be made to the Company or Omega Protein in U.S. Dollars or Alternative Currencies (as such term is defined in the Loan Agreement) and $30.0 million of such Commitment allocated to Revolving B Loans to be made to the Company and certain subsidiaries, including Bioriginal Food & Science, in U.S. Dollars or Canadian Dollars. The Commitment includes a sub-facility for swingline loans up to an amount not to exceed $10.0 million, a sub-facility for standby letters of credit issued for the account of the Company or Omega Protein up to an amount not to exceed $20.0 million, a sub-facility for standby or commercial letters of credit issued for the account of Bioriginal Food & Science up to an amount not to exceed $7.5 million, and an accordion feature that allows the Company to increase the amount of the Commitment up to an additional $75.0 million, subject to the further commitments of the Lenders and other customary conditions precedent. The Loan Agreement amended and restated the Company’s existing senior secured credit facility (the “Prior Loan Agreement”). The proceeds of the Loan Agreement were 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 September 30, 2016 and December 31, 2015, the Company had $3.5 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 September 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.

 

 
17

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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 September 30, 2016 and December 31, 2015, Bioriginal Food & Science Europe had $1.5 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 September 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):

 

   

September 30,

   

December 31,

 
   

2016

   

2015

 
                 

Insurance

  $ 9,457     $ 9,751  

Salary and benefits

    19,303       9,630  

Trade creditors

    6,960       7,085  

Taxes, other than income tax

    1,548       145  

Income tax

    8,948       3,199  

Deferred revenue

    1,810       99  

Bioriginal earn-out

    1,597        

Energy swap liability, current portion

    153       2,849  

Reserve for plant closure costs

    378       375  

Accrued interest

    12       35  

Other

    257       86  

Total accrued liabilities

  $ 50,423     $ 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.

 

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 September 30, 2016 and December 31, 2015, the outstanding liability associated with the earn-out was $1.6 million and $1.3 million, respectively. 

 

 
18

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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, except as noted in the Company’s report on Form 10-K for the period ended December 31, 2015 or in this Report on Form 10-Q.

 

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, except as noted in the Company’s Annual Report on Form 10-K or this Report on form 10-Q.

 

In June 2013, Omega Protein, the Company’s principal subsidiary, entered into a plea agreement with the United States Attorney’s Office for the Eastern District of Virginia, in which the subsidiary pled guilty to two felony counts under the Clean Water Act in order to resolve an investigation related to the fishing vessels and operations of its Reedville, Virginia facility. In connection with that plea agreement, Omega Protein paid a fine of $5.5 million, and made a $2.0 million contribution to an environmental fund. The plea agreement and the terms of the court’s sentencing order imposed a three-year period of probation that was scheduled to end in June 2016.

 

In June 2016, the Company 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 became 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 Water Act Violations. A hearing on the petition was originally scheduled for September 2016 and was rescheduled to December 2016. 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.

 

Since the receipt of the petition, the Company has initiated its own investigation and has been cooperating with the U.S Attorney’s Office for the Western District of Louisiana. The Company has reviewed and is continuing to review its Abbeville facility’s waste water handling operations to determine compliance with applicable laws and regulations and has been in discussions with the United State Attorney’s Office regarding the investigation. Based on preliminary findings and information to date, the Company believes that it is probable that a liability has been incurred and some financial fine or penalty in connection with the Abbeville facility’s wastewater discharges practices may be imposed. However, the Company cannot reasonably estimate the amount of any such fine or penalty. The Company is also unable to determine the effect of this matter on Omega Protein’s probation status. As such, no liability has been recognized as of September 30, 2016 relating to this matter. 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. Depending on the specific details of the disposition, it is possible that the disposition could have a material adverse effect on the Company’s business, results of operations or financial condition.

 

Omega Protein could also experience increased compliance costs, or material adverse alterations to the conduct of its normal course operations, in connection with these matters.

 

In addition, the prior convictions under the Clean Water Act have adversely affected Omega Protein’s ability to secure government contracts with the United States, and secure future loans under the Department of Commerce NFMS Title XI loan program in connection with the affected facility. The subsidiary has received notice from the EPA that it is ineligible, as a result of the convictions under the Clean Water Act, for receipt of government contracts, loans or benefits if any part of the work will be performed, or the loan collateral will be located, at the facility where the offense occurred.

 

 
19

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

In October 2016, the Company received a Civil Investigative Demand from the U.S. Department of Justice requesting information in connection with a False Claims Act investigation. The government’s investigation concerns whether there has been or is a violation of the False Claims Act in connection with Omega Protein’s May 2010 certification to the U.S. Department of Commerce that Omega Protein’s Reedville, Virginia facility was in compliance with federal environmental laws in order to obtain a loan guarantee under the Department of Commerce’s Title XI loan program. That Title XI loan was repaid in full in November 2015 and the Company and its subsidiaries currently have no Title XI indebtedness outstanding. The Company is collecting the requested information and intends to deliver appropriately responsive materials to the Department of Justice. The Company cannot predict the outcome of the investigation or the effect of the findings of the investigation on the Company, but it is possible that the foregoing matter could result in a material adverse effect on the Company’s business, reputation, results of operation and financial condition.

 

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

 

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

 

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

 

Three Months Ended September 30:

 

2016

   

2015

 

Allocation of earnings:

                               

Net income

  $ 14,553             $ 10,574          

Income allocated to participating securities

    (257 )             (289 )        

Income allocated to common shares outstanding

  $ 14,296             $ 10,285          
                                 

Weighted average common shares outstanding

    21,935               21,399          
                                 

Basic earnings per share

          $ 0.65             $ 0.48  
                                 

Stock options assumed exercised

    297