Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s MD&A contained in the Form 10-K for the fiscal year ended December 31, 2015 (the “2015 Form 10-K”), and in conjunction with the consolidated financial statements included in this report and in the 2015 Form 10-K.
Forward-looking statements in this Form 10-Q, future filings by the Company with the Securities and Exchange Commission (the “Commission” or “SEC”), the Company’s press releases and oral statements by authorized officers of the Company are intended to be subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainty. The Company believes that forward-looking statements made by it are based on reasonable expectations; however, no assurances can be given that actual results will not differ materially from those contained in such forward-looking statements. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include the words “estimate,” “project,” “anticipate,” “expect,” “predict,” “assume,” “believe,” “could,” “would,” “hope,” “may,” or similar expressions. In evaluating those statements, you should carefully consider the information above as well as the risks outlined in Item 1A. Risk Factors in our 2015 Form 10-K and this Form 10-Q.
General
Omega Protein Corporation is a nutritional products company that develops, produces and delivers nutritious products throughout the world to improve the nutritional integrity of foods, dietary supplements and animal feeds. As used herein, the term the “Company” refers to Omega Protein Corporation and its consolidated subsidiaries, as applicable. The Company’s principal executive offices are located at 2105 City West Boulevard, Suite 500, Houston, Texas 77042-2838 (Telephone: (713) 623-0060).
The Company operates in two primary industry segments: animal nutrition and human nutrition.
The Company’s animal nutrition segment is comprised primarily of two subsidiaries: Omega Protein, Inc. (“Omega Protein”) and Omega Shipyard, Inc. (“Omega Shipyard”). Omega Protein, the Company’s principal operating subsidiary, is predominantly dedicated to the production of animal nutrition products and operates in the menhaden harvesting and processing business and is the successor to a business conducted since 1913. Omega Protein currently operates a total of three menhaden processing plants in the states of Louisiana, Mississippi and Virginia. The Company also operates a Health and Science Center in Reedville, Virginia, which provides 100-metric tons per day of fish oil input capacity for the Company’s food, industrial and feed grade oils. A portion of Omega Protein’s production is transferred to its human nutrition segment. Omega Shipyard owns and operates a drydock facility in Moss Point, Mississippi that is used to provide shoreside maintenance for Omega Protein’s fishing fleet.
Prior to December 31, 2015, the Company’s human nutrition segment operated under the names Nutegrity and Bioriginal Food & Science Corp. (“Bioriginal Food & Science”). Nutegrity was comprised primarily of three subsidiaries: Cyvex Nutrition, Inc. (“Cyvex”), InCon Processing, L.L.C. (“InCon”) and Wisconsin Specialty Protein, L.L.C. (“WSP”). Subsequent to December 31, 2015, the Company combined the Nutegrity and Bioriginal Food & Science names into one name and does business under the name “Bioriginal” which includes all of the human nutrition businesses except the tera’s
®
branded products.
Bioriginal has three primary product lines: protein products, specialty oils and other nutraceutical ingredients. 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 an ingredient supplier for the food and nutraceutical industries. InCon is located in Batavia, Illinois and was 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 substantially all 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 to the unaudited condensed consolidated financial statements in Item 1, and for additional information related to the closure of the Batavia facility, see Note 2 – Plant Closures.
The Company also operates a technical center in Houston, Texas, the Omega Protein Technology and Innovation Center, which has food science application labs as well as analytical, sensory, lipids research and pilot plant capabilities.
OMEGA PROTEIN CORPORATION
For financial information about the Company’s industry segments for the three and nine months ended September 30, 2016 and 2015, see Note 3 – Industry Segments to the unaudited condensed consolidated financial statements in Item 1.
Company Overview
Revenues Composition.
The following table sets forth the Company’s revenues by product (in millions) and the approximate percentage of total revenues represented thereby, for the indicated periods:
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Revenues
|
|
|
Percent
|
|
|
Revenues
|
|
|
Percent
|
|
Animal Nutrition Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fish Meal
|
|
$
|
56.4
|
|
|
|
51.9
|
%
|
|
$
|
49.0
|
|
|
|
43.7
|
%
|
Fish Oil
|
|
|
14.7
|
|
|
|
13.5
|
|
|
|
16.8
|
|
|
|
15.0
|
|
Refined Fish Oil
|
|
|
6.3
|
|
|
|
5.8
|
|
|
|
6.0
|
|
|
|
5.3
|
|
Fish Solubles and Other
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
1.4
|
|
|
|
1.2
|
|
Human Nutrition Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty oils
|
|
|
24.6
|
|
|
|
22.6
|
|
|
|
32.1
|
|
|
|
28.6
|
|
Dairy protein products
|
|
|
3.3
|
|
|
|
3.0
|
|
|
|
3.5
|
|
|
|
3.1
|
|
Other nutraceutical ingredients
|
|
|
3.2
|
|
|
|
2.9
|
|
|
|
3.4
|
|
|
|
3.1
|
|
Total
|
|
$
|
108.8
|
|
|
|
100.0
|
%
|
|
$
|
112.2
|
|
|
|
100.0
|
%
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Revenues
|
|
|
Percent
|
|
|
Revenues
|
|
|
Percent
|
|
Animal Nutrition Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fish Meal
|
|
$
|
133.2
|
|
|
|
43.6
|
%
|
|
$
|
107.9
|
|
|
|
39.1
|
%
|
Fish Oil
|
|
|
54.9
|
|
|
|
17.9
|
|
|
|
37.2
|
|
|
|
13.4
|
|
Refined Fish Oil
|
|
|
19.1
|
|
|
|
6.2
|
|
|
|
18.4
|
|
|
|
6.6
|
|
Fish Solubles and Other
|
|
|
2.2
|
|
|
|
0.7
|
|
|
|
3.4
|
|
|
|
1.2
|
|
Human Nutrition Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty oils
|
|
|
75.9
|
|
|
|
24.8
|
|
|
|
90.3
|
|
|
|
32.5
|
|
Dairy protein products
|
|
|
12.9
|
|
|
|
4.2
|
|
|
|
9.9
|
|
|
|
3.6
|
|
Other nutraceutical ingredients
|
|
|
8.0
|
|
|
|
2.6
|
|
|
|
9.9
|
|
|
|
3.6
|
|
Total
|
|
$
|
306.2
|
|
|
|
100.0
|
%
|
|
$
|
277.0
|
|
|
|
100.0
|
%
|
The following table sets forth the Company’s revenues by geography (in millions) and the approximate percentage of total revenues represented thereby, for the indicated periods:
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Revenues
|
|
|
Percent
|
|
|
Revenues
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. - Domestic Revenues
|
|
$
|
48.5
|
|
|
|
44.6
|
%
|
|
$
|
63.1
|
|
|
|
56.2
|
%
|
Export Revenues
|
|
|
60.3
|
|
|
|
55.4
|
|
|
|
49.1
|
|
|
|
43.8
|
|
Total
|
|
$
|
108.8
|
|
|
|
100.0
|
%
|
|
$
|
112.2
|
|
|
|
100.0
|
%
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Revenues
|
|
|
Percent
|
|
|
Revenues
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. - Domestic Revenues
|
|
$
|
157.0
|
|
|
|
51.3
|
%
|
|
$
|
175.0
|
|
|
|
63.2
|
%
|
Export Revenues
|
|
|
149.2
|
|
|
|
48.7
|
|
|
|
102.0
|
|
|
|
36.8
|
|
Total
|
|
$
|
306.2
|
|
|
|
100.0
|
%
|
|
$
|
277.0
|
|
|
|
100.0
|
%
|
OMEGA PROTEIN CORPORATION
Animal Nutrition Products
2016 Fishing Information.
At September 30, 2016, Omega Protein owned a fleet of 36 vessels and 27 spotter aircraft for use in its fishing operations and also leased additional aircraft where necessary to facilitate operations. During the 2016 fishing season in the Gulf of Mexico, which runs from mid-April through October, Omega Protein is operating 20 fishing and carry vessels and 21 spotter aircraft. The fishing area in the Gulf is generally located along the Gulf Coast, with a concentration off the Louisiana and Mississippi coasts. The fishing season along the Atlantic coast began in May and can extend into early December. During the 2016 season, Omega Protein is operating 8 fishing vessels and 7 independently-owned spotter aircraft along the Mid-Atlantic coast. The remaining fleet of fishing vessels and spotter aircraft are not routinely operated during the fishing season and are back-up to the active fleet, used for other transportation purposes, inactive, or in the process of refurbishment in the Company’s shipyard. Historical fish catch and production results at the end of the third quarter for the past five years are as follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
2011 to 2015
5-Year Avg.
|
|
Fish catch in short tons as of September 30,
|
|
|
393,621
|
|
|
|
465,287
|
|
|
|
345,455
|
|
|
|
383,299
|
|
|
|
512,474
|
|
|
|
444,208
|
|
Fish meal, oil and solubles production in tons (excludes refined)
|
|
|
148,910
|
|
|
|
157,049
|
|
|
|
121,571
|
|
|
|
152,822
|
|
|
|
171,256
|
|
|
|
155,879
|
|
Total yield
|
|
|
37.8
|
%
|
|
|
33.8
|
%
|
|
|
35.2
|
%
|
|
|
39.9
|
%
|
|
|
33.4
|
%
|
|
|
35.1
|
%
|
Oil yield
|
|
|
10.4
|
%
|
|
|
6.6
|
%
|
|
|
8.3
|
%
|
|
|
12.1
|
%
|
|
|
5.8
|
%
|
|
|
7.7
|
%
|
The Company cautions that because of the volatility of fish catch generally, partial year catch numbers are not indicative of results that may be expected for a full year. In addition, the results of the 2016 fishing season depend in large part on the volume of fish caught and the total yield associated with the catch. Total yields through September 30, 2016 increased by 12.1% compared to total yields in the same period in the 2015 fishing season and were higher by 7.8% compared to Omega Protein’s five-year total yield average during the same period, primarily due to higher fish oil yields. Omega Protein’s oil yields for the 2016 fishing season through September 30, 2016 have been above average and were higher by 57.1% compared to those in the same period of the 2015 fishing season and were higher by 34.8% compared to Omega Protein’s five-year oil yield average. Omega Protein believes that fish oil yields are influenced by multiple factors, including but not limited to, fish diet, weather, water temperature and nutrient content, fish population and age of fish, but such possible relationships and inter-relationships are not generally well understood.
Sales Contracts.
Omega Protein generally sells most of its products on up to a twelve-month forward contract basis with the balance sold on a spot basis through purchase orders or under longer-term forward contracts. Omega Protein’s sales contracts generally contain force majeure and other production allocation provisions. Historically, fish meal and fish oil sold on a forward contract basis have fluctuated from year to year based upon perceived market availability and forward price expectations. As of September 30, 2016, Omega Protein has sold forward on a contract basis approximately 26,000 short tons (1 short ton = 2,000 pounds) of fish meal and 9,000 metric tons (1 metric ton = 2,204.6 pounds) of fish oil for 2016, contingent on 2016 production and product availability. Of these 2016 forward sales, the majority was contracted during 2016. As a basis of comparison, as of September 30, 2015, Omega Protein had sold forward on a contract basis approximately 35,000 short tons of fish meal and 3,000 metric tons of fish oil for 2015.
Omega Protein’s annual revenues are highly dependent on pricing, annual fish catch, production yields and inventories. Inventory is generally carried over from one year to the next year and Omega Protein determines the level of inventory to be carried over based on existing contracts, prevailing market prices of the products and anticipated customer usage and demand during the off-season. Thus, production volumes do not necessarily correlate with sales volumes in the same year and sales volumes will fluctuate from quarter to quarter. Omega Protein’s fish meal products have a useable life of approximately one year from the date of production. Practically, however, Omega Protein attempts to empty its warehouses of the previous season’s products by May or June of the new fishing season. Omega Protein’s crude fish oil products do not lose efficacy unless exposed to oxygen and, therefore, their storage life typically is longer than that of fish meal.
Results of Operations
The following discussion segregates the financial results of our two industry segments: animal nutrition and human nutrition. For a discussion of our segments, see Note 3 - Industry Segments to the unaudited condensed consolidated financial statements in Item 1.
OMEGA PROTEIN CORPORATION
Interim Results for the Third Quarters ended September 30, 2016 and 2015
Animal Nutrition
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Increase
(Decrease)
|
|
|
|
(in millions)
|
|
Revenues
|
|
$
|
77.7
|
|
|
$
|
73.2
|
|
|
$
|
4.5
|
|
Cost of sales
|
|
|
48.6
|
|
|
|
44.5
|
|
|
|
4.1
|
|
Gross profit
|
|
|
29.1
|
|
|
|
28.7
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
(including research and development)
|
|
|
0.5
|
|
|
|
0.8
|
|
|
|
(0.3
|
)
|
Loss related to plant closures
|
|
|
—
|
|
|
|
0.6
|
|
|
|
(0.6
|
)
|
Operating income
|
|
$
|
28.6
|
|
|
$
|
27.3
|
|
|
$
|
1.3
|
|
Revenues
. Animal nutrition revenues increased $4.5 million, or 6.1%, from $73.2 million for the three months ended September 30, 2015 (the “Comparable Quarter”) to $77.7 million for the three months ended September 30, 2016 (the “Current Quarter”). The increase in animal nutrition revenues was primarily due to increased sales volumes of 15.6% for the Company’s fish meal and increased sales prices of 4.4% for the Company’s fish oil, partially offset by decreased sales prices of 0.7% for the Company’s fish meal and decreased sales volumes of 11.0% for the Company’s fish oil. Considering fish meal, fish oil and fish solubles sales activities in total, the Company experienced a $3.8 million increase in revenues due to the increase in sales volumes and a $0.7 million increase in revenues caused by increased sales prices, when comparing the Current Quarter and Comparable Quarter. The increase in fish meal sales volumes and decrease in fish oil sales volumes are primarily due to the timing of contracts.
Cost of sales
. Animal nutrition cost of sales, including depreciation and amortization, for the Current Quarter was $48.6 million, an increase of $4.1 million, or 9.2%, as compared to the Comparable Quarter. Cost of sales as a percentage of revenues was 62.5% for the Current Quarter compared to 60.7% for the Comparable Quarter. The increase in cost of sales as a percentage of revenues was primarily the result of increased cost per unit of sales of 4.2% during the Current Quarter compared to the Comparable Quarter, due to lower fish catch and production in the 2016 fishing season compared to the 2015 fishing season.
Gross profit
. Animal nutrition gross profit increased $0.4 million, or 1.4%, from $28.7 million for the Comparable Quarter to $29.1 million for the Current Quarter primarily due to the increases in sales volumes. Gross profit as a percentage of revenue was 37.5% for the Current Quarter compared to 39.3% for the Comparable Quarter. The decrease in gross profit as a percentage of revenue was primarily due to the increased cost per unit of sales as discussed above.
Selling, general and administrative expenses
. Animal nutrition selling, general and administrative expenses decreased $0.3 million to $0.5 million for the Current Quarter compared to the Comparable Quarter. The decrease is primarily due to reduced labor expenses.
Loss related to plant closures.
The Company recognized an ongoing loss on closure of approximately $0.6 million in the Comparable Quarter related to the closure of the Cameron, Louisiana fish processing plant. No such loss was recognized during the Current Quarter.
Human Nutrition
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Increase
(Decrease)
|
|
|
|
(in millions)
|
|
Revenues
|
|
$
|
31.1
|
|
|
$
|
39.0
|
|
|
$
|
(7.9
|
)
|
Cost of sales
|
|
|
27.2
|
|
|
|
32.5
|
|
|
|
(5.3
|
)
|
Gross profit
|
|
|
3.9
|
|
|
|
6.5
|
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
(including research and development)
|
|
|
3.7
|
|
|
|
5.2
|
|
|
|
(1.5
|
)
|
Impairment of goodwill and other intangible
assets
|
|
|
—
|
|
|
|
4.9
|
|
|
|
(4.9
|
)
|
Loss related to plant closures
|
|
|
0.7
|
|
|
|
—
|
|
|
|
0.7
|
|
Operating income (loss)
|
|
$
|
(0.5
|
)
|
|
$
|
(3.6
|
)
|
|
$
|
3.1
|
|
OMEGA PROTEIN CORPORATION
Revenues
. Human nutrition revenues decreased $7.9 million, or 20.4%, from $39.0 million for the Comparable Quarter to $31.1 million for the Current Quarter, primarily due to decreases in sales of specialty oils, including coconut oils. Specialty oils revenues decreased by $7.5 million to $24.6 million (including $0.9 million from menhaden omega-3 concentrates and tolling) in the Current Quarter from $32.1 million (including $1.3 million from menhaden omega-3 concentrates and tolling) in the Comparable Quarter. The decrease in specialty oils revenues was primarily due to decreased sales of coconut oil. Protein products revenues decreased by $0.2 million to $3.3 million during the Current Quarter from $3.5 million during the Comparable Quarter. Other nutraceutical ingredients revenues decreased by $0.3 million to $3.2 million during the Current Quarter compared to $3.5 million during the Comparable Quarter.
Cost of sales
. Human nutrition cost of sales, including depreciation and amortization, for the Current Quarter was $27.2 million, a $5.3 million, or 16.6%, decrease compared to the Comparable Quarter. Human nutrition cost of sales as a percentage of revenue increased from 83.4% for the Comparable Quarter to 87.4% for the Current Quarter. Specialty oils cost of sales was $21.0 million (including $1.0 million from menhaden omega-3 concentrates and tolling) and $26.9 million (including $2.0 million from menhaden omega-3 concentrates and tolling) during the Current Quarter and Comparable Quarter, respectively.
Protein products cost of sales was $4.3 million for the Current Quarter compared to $3.5 million during the Comparable Quarter. Other nutraceutical ingredients cost of sales was $1.9 million during the Current Quarter compared to $2.1 million for the Comparable Quarter. The decreases in specialty oils and other nutraceutical ingredients cost of sales were mainly attributed to changes in sales. The increase in protein products cost of sales was partially attributed to a $0.4 million write-down of protein products inventory.
Gross profit
. Human nutrition gross profit decreased $2.6 million, or 39.4%, from $6.5 million for the Comparable Quarter to $3.9 million for the Current Quarter. Gross profit as a percentage of revenue was 12.6% for the Current Quarter as compared to 16.6% for the Comparable Quarter. The decrease in gross profit as a percentage of revenue was due primarily to corresponding decreases in specialty oils and protein products.
Selling, general and administrative expenses
. Human nutrition selling, general and administrative expenses decreased $1.5 million, or 28.1%, from $5.2 million for the Comparable Quarter to $3.7 million for the Current Quarter. The decrease is due to decreased Bioriginal Food & Science earn-out and other miscellaneous expenses.
Impairment of goodwill and other intangible assets
. Human nutrition impairment and other expenses was $4.9 million for the Comparable Quarter primarily due to impairment charges of $4.0 million related to the excess of carrying value over fair value for goodwill and certain other indefinite lived intangible assets at the InCon and Cyvex reporting unit. Additionally, WSP had an asset impairment charge of approximately $0.9 million recognized in the Comparable Quarter. No such impairment expenses were recognized during the Current Quarter.
Loss related to plant closures
. As a result of the closing of the Batavia, Illinois oil concentration facility, the Company recognized a loss of $0.7 million in the Current Quarter primarily related to an additional impairment of property, plant and equipment. No such charge was recognized during the Comparable Quarter.
Unallocated
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Increase
(Decrease)
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
(including research and development)
|
|
$
|
6.1
|
|
|
$
|
6.5
|
|
|
$
|
(0.4
|
)
|
Selling, general and administrative expenses (including research and development)
. Unallocated selling, general and administrative expenses decreased $0.4 million, or 5.5%, from $6.5 million for the Comparable Quarter to $6.1 million for the Current Quarter. The decrease is primarily due to reduced labor expenses.
Other non-segmented results of operation
Interest expense
. Interest expense decreased $0.3 million from $0.4 million for the Comparable Quarter to $0.1 million for the Current Quarter. The decrease in interest expense is primarily due to the decreased total debt balance and applicable interest rates for the Current Quarter compared to the Comparable Quarter. Capitalized interest, which offsets interest expense, was less than $0.1 million and $0.2 million for the Current Quarter and Comparable Quarter, respectively.
OMEGA PROTEIN CORPORATION
Gain
(loss)
on foreign currency
. The Company recorded a $0.2 million gain and a $0.8 million loss on foreign currency for the Current Quarter and Comparable Quarter, respectively, due to fluctuations in the Canadian dollar exchange rate and working capital balances at Bioriginal Food & Science’s Canadian operations.
Provision for income taxes.
The Company recorded a $7.3 million provision for income taxes for the Current Quarter representing an effective tax rate of 33.3% for income taxes compared to 33.6% for the Comparable Quarter. The statutory tax rate of 35% for U.S. federal taxes was in effect for each of the Current and Comparable Quarters.
Interim Results for the Nine Months ended September 30, 2016 and 2015
Animal Nutrition
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Increase
(Decrease)
|
|
|
|
(in millions)
|
|
Revenues
|
|
$
|
209.5
|
|
|
$
|
166.9
|
|
|
$
|
42.6
|
|
Cost of sales
|
|
|
129.4
|
|
|
|
106.8
|
|
|
|
22.6
|
|
Gross profit
|
|
|
80.1
|
|
|
|
60.1
|
|
|
|
20.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
(including research and development)
|
|
|
1.7
|
|
|
|
1.9
|
|
|
|
(0.2
|
)
|
(Gain) loss related to plant closures
|
|
|
(0.3
|
)
|
|
|
1.9
|
|
|
|
(2.2
|
)
|
Other (gains) and losses
|
|
|
(0.1
|
)
|
|
|
0.3
|
|
|
|
(0.4
|
)
|
Operating income
|
|
$
|
78.8
|
|
|
$
|
56.0
|
|
|
$
|
22.8
|
|
Revenues
. Animal nutrition revenues increased $42.6 million, or 25.5%, from $166.9 million for the nine months ended September 30, 2015 (the “Comparable Period”) to $209.5 million for the nine months ended September 30, 2016 (the “Current Period”). The increase in animal nutrition revenues was primarily due to increased sales volumes of 29.0% and 50.1% for the Company’s fish meal and fish oil, respectively, partially offset by decreased sales prices of 4.2% and 11.3% for the Company’s fish meal and fish oil, respectively. Considering fish meal, fish oil and fish solubles sales activities in total, the Company experienced a $57.1 million increase in revenues due to the increase in sales volumes partially offset by a $14.5 million decrease in revenues caused by decreased sales prices, when comparing the Current Period and Comparable Period. The increase in fish meal and fish oil sales volumes is primarily due to the timing of contracts and increased level of inventory at the beginning of 2016 due to increased production during the 2015 fishing season compared to the 2014 fishing season. The decrease in fish oil sales prices during the Current Period as compared to the Comparable Period is mainly a reflection of prevailing market conditions and prices when underlying sales contracts were executed, as well as a change in product mix related to a larger relative volume of unrefined fish oil sales.
Cost of sales
. Animal nutrition cost of sales, including depreciation and amortization, for the Current Period was $129.4 million, an increase of $22.6 million, or 21.2%, as compared to the Comparable Period. Cost of sales as a percentage of revenues was 61.8% for the Current Period compared to 64.0% for the Comparable Period. The decrease in cost of sales as a percentage of revenues was primarily the result of decreased cost per unit of sales of 6.5% during the Current Period compared to the Comparable Period, due to lower cost per unit for beginning of period inventory.
Gross profit
. Animal nutrition gross profit increased $20.0 million, or 33.2%, from $60.1 million for the Comparable Period to $80.1 million for the Current Period due largely to the increase in sales volumes. Gross profit as a percentage of revenue was 38.2% for the Current Period compared to 36.0% for the Comparable Period. The increase in gross profit as a percentage of revenue was primarily due to the decreased cost per unit of sales as discussed above.
Selling, general and administrative expenses
. Animal nutrition selling, general and administrative expenses decreased $0.2 million to $1.7 million for the Current Period compared to the Comparable Period. The decrease is primarily due to reduced labor expenses.
OMEGA PROTEIN CORPORATION
(Gain) loss related to plant closures.
The gain related to plant closures for the Current Period of $0.3 million is due to the early termination of the Cameron, Louisiana fish processing plant lease and the corresponding reversal of various accruals related to the former lease. The Company recognized an ongoing loss on closure of approximately $1.9 million in the Comparable Period primarily related to the relocation of certain assets at the Cameron facility and other closure costs not related to future inventory production.
Human Nutrition
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Increase
(Decrease)
|
|
|
|
(in millions)
|
|
Revenues
|
|
$
|
96.8
|
|
|
$
|
110.1
|
|
|
$
|
(13.3
|
)
|
Cost of sales
|
|
|
85.6
|
|
|
|
94.4
|
|
|
|
(8.8
|
)
|
Gross profit
|
|
|
11.2
|
|
|
|
15.7
|
|
|
|
(4.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
(including research and development)
|
|
|
12.3
|
|
|
|
15.3
|
|
|
|
(3.0
|
)
|
Impairment of goodwill and other intangible
assets
|
|
|
11.6
|
|
|
|
4.9
|
|
|
|
6.7
|
|
Loss related to plant closures
|
|
|
2.7
|
|
|
|
—
|
|
|
|
2.7
|
|
Operating income (loss)
|
|
$
|
(15.4
|
)
|
|
$
|
(4.5
|
)
|
|
$
|
(10.9
|
)
|
Revenues
. Human nutrition revenues decreased $13.3 million, or 12.1%, from $110.1 million for the Comparable Period to $96.8 million for the Current Period, due to decreases in sales of specialty oils and other nutraceuticals ingredients, partially offset by increases in sales of protein products. Specialty oils revenues decreased by $14.4 million to $75.9 million (including $2.2 million from menhaden omega-3 concentrates and tolling) in the Current Period from $90.3 million (including $4.2 million from menhaden omega-3 concentrates and tolling) in the Comparable Period. The decrease in specialty oils revenues was primarily due to decreased sales of coconut oil. Protein products revenues increased by $3.0 million to $12.9 million during the Current Period from $9.9 million during the Comparable Period. The increase in revenues from protein products was primarily due to higher sales of bulk ingredients. Other nutraceutical ingredients revenues decreased by $1.9 million to $8.0 million during the Current Period compared to $9.9 million during the Comparable Period.
Cost of sales
. Human nutrition cost of sales, including depreciation and amortization, for the Current Period was $85.6 million, an $8.8 million, or 9.3%, decrease compared to the Comparable Period. Human nutrition cost of sales as a percentage of revenue increased from 85.8% for the Comparable Period to 88.5% for the Current Period. Specialty oils cost of sales was $66.8 million (including $3.6 million from menhaden omega-3 concentrates and tolling) and $78.2 million (including $6.3 million from menhaden omega-3 concentrates and tolling) during the Current Period and Comparable Period, respectively.
Protein products cost of sales was $13.7 million for the Current Period compared to $10.0 million during the Comparable Period. Other nutraceutical ingredients cost of sales was $5.1 million during the Current Period compared to $6.2 million for the Comparable Period. The increase in protein products cost of sales and decreases in specialty oils and other nutraceutical ingredients cost of sales were mainly attributed to changes in sales. The increase in protein products cost of sales was partially attributed to a $1.0 million write-down of protein products inventory.
Gross profit
. Human nutrition gross profit decreased $4.5 million, or 28.8%, from $15.7 million for the Comparable Period to $11.2 million for the Current Period. Gross profit as a percentage of revenue was 11.5% for the Current Period as compared to 14.2% for the Comparable Period. The decrease in gross profit as a percentage of revenue was primarily due to corresponding decreases in specialty oils and protein products.
Selling, general and administrative expenses
. Human nutrition selling, general and administrative expenses decreased $3.0 million, or 19.4%, from $15.3 million for the Comparable Period to $12.3 million for the Current Period. The decrease is primarily due to decreased Bioriginal Food & Science earn-out, labor and other miscellaneous expenses.
Impairment of goodwill and other intangible assets
. Human nutrition impairment and other expenses was $11.6 million for the Current Period due to impairment charges related to the excess of carrying value over fair value for goodwill and certain other indefinite lived intangible assets of the WSP reporting unit. Human nutrition impairment and other expenses was $4.9 million for the Comparable Period primarily due to impairment charges of $4.0 million related to the excess of carrying value over fair value for goodwill and certain other indefinite lived intangible assets at the InCon and Cyvex reporting unit. Additionally, WSP had an asset impairment charge of approximately $0.9 million recognized in the Comparable Period.
OMEGA PROTEIN CORPORATION
Loss related to plant closures
. As a result of the closing of the Batavia, Illinois oil concentration facility, the Company recognized a loss of $2.7 million in the Current Period related primarily to the impairment of property, plant and equipment, inventory write-downs and employee severances. No such charge was recognized during the Comparable Period.
Unallocated
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Increase
(Decrease)
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
(including research and development)
|
|
$
|
17.7
|
|
|
$
|
16.2
|
|
|
$
|
1.5
|
|
Selling, general and administrative expenses (including research and development)
. Unallocated selling, general and administrative expenses increased $1.5 million, or 9.4%, from $16.2 million for the Comparable Period to $17.7 million for the Current Period. The increase is primarily due to increased professional fees for services as a result of the Company’s proxy contest as well as other miscellaneous expenses.
Other non-segmented results of operation
Interest expense
. Interest expense decreased $0.8 million from $1.2 million for the Comparable Period to $0.4 million for the Current Period. The decrease in interest expense is primarily due to the decreased total debt balance and applicable interest rates for the Current Period compared to the Comparable Period. Capitalized interest, which offsets interest expense, was $0.1 million and $0.5 million for the Current Period and Comparable Period, respectively.
Loss on foreign currency
. The Company recorded a $1.2 million and a $1.3 million loss on foreign currency in the Current Period and Comparable Period, respectively, due to fluctuations in the Canadian dollar exchange rate and working capital balances at Bioriginal Food & Science’s Canadian operations.
Provision for income taxes.
The Company recorded a $15.3 million provision for income taxes for the Current Period representing an effective tax rate of 34.8% for income taxes compared to 35.2% for the Comparable Period. The decrease in the effective tax rate is primarily the result of lower non-deductible expenses. The statutory tax rate of 35% for U.S. federal taxes was in effect for each of the Current and Comparable Periods.
Seasonal and Quarterly Results
Omega Protein’s menhaden harvesting and processing business is seasonal in nature. Omega Protein generally has higher sales during the third quarter of each fiscal year due to increased product availability and customer demand. Additionally, due to differences in gross profit margins for Omega Protein’s various products, any variation in the mix of product sales between quarters may result in significant variations of total gross profit margins. These margins may also be affected by changes in costs from year to year and month to month, which includes variations in production yields. Similarly, from time to time Omega Protein defers sales of inventory, which may affect comparable period comparisons. As a result, the Company’s quarterly operating results have fluctuated in the past and may fluctuate in the future.
Liquidity and Capital Resources
The Company’s primary sources of liquidity and capital resources have been cash flows from operations and bank credit facilities. These sources of cash flows have been used for operations, capital expenditures, payment of long-term debt, business acquisitions and the purchase and retirement of shares of the Company’s common stock.
At September 30, 2016, the Company had an unrestricted cash balance of $34.2 million, an increase of $33.5 million from December 31, 2015. Omega Protein’s annual revenues and its resulting liquidity are highly dependent on annual fish catch, production yields, selling prices for its products and inventories available for sale. Omega Protein’s average selling price for its animal nutrition products for the nine months ended September 30, 2016 was consistent with the average selling price for the year ended December 31, 2015. Omega Protein’s average per unit cost of sales for its animal nutrition ingredients for the nine months ended September 30, 2016 was 2% lower than its average per unit cost of sales for the year ended December 31, 2015.
OMEGA PROTEIN CORPORATION
The aggregate amount of the Company’s outstanding indebtedness as of September 30, 2016 was $5.0 million compared to $24.1 million as of December 31, 2015. The Company will be required to use a portion of its cash flows to pay principal and interest on its debt, which will reduce the amount of money the Company has for operations, capital expenditures, expansion, acquisitions or general corporate or other business activities. In addition, the covenants contained in the Company’s debt agreements limit its ability to borrow money in the future for acquisitions, capital expenditures or to meet the Company’s operating expenses or other general corporate obligations. See “Item 1A. Risk Factors - The Company has a moderate amount of indebtedness, which may adversely affect its ability to operate its business, remain in compliance with debt covenants and make payments on its debt” in the Company’s 2015 Form 10-K.
As of September 30, 2016, the Company has contracted through energy swap derivatives or physical contracts a portion of its estimated 2016, 2017 and 2018 energy use.
The Company may be subject to potential fines and penalties in connection with a petition on probation filed by the U.S. Attorney’s Office for the Eastern District of Virginia, a criminal investigation in the Western District of Louisiana regarding the waste water practices of Omega Protein’s Abbeville facility, and a U.S. Department of Justice investigation regarding whether there has been or is a violation of the False Claims Act in connection with an Omega Protein Title XI loan received in May 2010. The Company is not able to estimate the amounts of these potential fines and penalties for any of these matters, but if such fines or penalties were to be sufficiently large, the discharge of such obligations could have a material adverse effect on the Company’s liquidity. For more information, see Item 1A. Risk Factors.
Source of Capital: Operations
Net operating activities provided cash of $77.1 million and $32.5 million during the nine months ended September 30, 2016 and 2015, respectively. The increase in operating cash flow is primarily attributable to increased net income from the sale of animal nutrition segment inventory as a result of increased fish catch in 2015 as compared to 2014 as well as increased fish oil yields in 2016.
Source of Capital: Debt
Net financing activities used cash of $17.3 million and $4.2 million during the nine months ended September 30, 2016 and 2015, respectively. The nine months ended September 30, 2016 included $2.2 million in proceeds and tax effects received from stock options exercised, $0.4 million used for stock repurchases relating to employee returns of restricted stock to the Company in satisfaction of withholding taxes, $25.5 million in debt principal payments and $6.4 million in debt principal borrowings. The nine months ended September 30, 2015 included $5.5 million in proceeds and tax effects received from stock options exercised, $0.2 million used for stock repurchases relating to employee returns of restricted stock to the Company in satisfaction of withholding taxes,
$1.0 million in debt issuance costs related to the refinancing of credit facilities, $41.7 million in debt principal payments and $33.2 million in debt principal borrowings.
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.
OMEGA PROTEIN CORPORATION
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.
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.
Use of Capital: Capital Investments
The Company’s investing activities consist mainly of capital expenditures for equipment purchases, replacements, vessel refurbishments, plant expansions, fish oil refining processes and technology. The Company made capital expenditures of approximately $26.3 million and $29.1 million, including $0.1 million and $0.5 million of capitalized interest, for the nine month periods ended September 30, 2016 and 2015, respectively. The Company anticipates investing an additional $12 million to $16 million in capital expenditures during the remainder of 2016, excluding capitalized interest, primarily for the expansion of production capabilities, refurbishment of vessels and plant assets, regulatory and environmental requirements and for the improvement of certain equipment. Additional investment opportunities or requirements may arise during the year, which could cause capital expenditures to exceed this range.
Use of Capital: Financing
In May 2016, the Company announced a share repurchase program of up to $40 million over the next 3 years. The Company is not obligated under the program to acquire any particular number of shares and can suspend or terminate the program at any time. Although no shares were repurchased during the nine months ended September 30, 2016, it is possible that the share repurchase program could impact financing cash flows during the remainder of 2016.
Use of Capital: Contractual Obligations
The following tables aggregate information about the Company’s contractual cash obligations and other commercial commitments (in thousands) as of September 30, 2016:
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
Less than
|
|
|
1 to 3
|
|
|
4 to 5
|
|
|
After 5
|
|
Contractual Cash Obligations
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
5,023
|
|
|
$
|
1,497
|
|
|
$
|
—
|
|
|
$
|
3,526
|
|
|
$
|
—
|
|
Interest on debt
|
|
|
332
|
|
|
|
100
|
|
|
|
163
|
|
|
|
69
|
|
|
|
—
|
|
Operating lease obligations
|
|
|
9,450
|
|
|
|
2,711
|
|
|
|
4,794
|
|
|
|
1,473
|
|
|
|
472
|
|
Pension funding
(1)
|
|
|
5,103
|
|
|
|
560
|
|
|
|
1,625
|
|
|
|
1,800
|
|
|
|
1,118
|
|
Total Contractual Obligations
|
|
$
|
19,908
|
|
|
$
|
4,868
|
|
|
$
|
6,582
|
|
|
$
|
6,868
|
|
|
$
|
1,590
|
|
|
(1)
|
Represents estimated future contributions to the plan based on the expected return on plan assets and assumptions regarding discount rates
|
OMEGA PROTEIN CORPORATION
The Company believes that the existing cash, cash equivalents, cash flow from operations and funds available through the Loan Agreement described above will be sufficient to meet its working capital and capital expenditure requirements through the next twelve months.
Critical Accounting Policies and Estimates
The methods, estimates and judgments used in applying the Company’s critical accounting policies have a significant impact on the results reported in the Consolidated Financial Statements. The SEC has defined the critical accounting policies as the ones that are most important to the portrayal of the Company’s financial condition and operating results, and requires the Company to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are highly uncertain at the time of estimation. Based on this definition, the Company’s most critical policies include: valuation of inventory (Notes 1 and 6 to the consolidated financial statements in Item 8 of the Company’s 2015 Form 10-K), valuation of losses related to Jones Act and worker’s compensation insurance claims (Note 1 to the consolidated financial statements in Item 8 of the Company’s 2015 Form 10-K), valuation of income and deferred taxes (Notes 1 and 13 to the consolidated financial statements in Item 8 of the Company’s 2015 Form 10-K), valuation of property, plant and equipment including impairments (Note 9 to the consolidated financial statements in Item 8 of the Company’s 2015 Form 10-K), valuation of pension plan obligations (Notes 1 and 15 to the consolidated financial statements in Item 8 of the Company’s 2015 Form 10-K), energy swap valuations (Notes 1 to the consolidated financial statements in Item 8 of the Company’s 2015 Form 10-K) and the valuation of goodwill and other intangible assets (Notes 1 and 10 to the consolidated financial statements in Item 8 of the Company’s 2015 Form 10-K).
For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies or methodologies regarding estimates and judgements.