Omega Protein Corporation
OMEGA PROTEIN CORP (Form: 10-Q, Received: 08/06/2013 16:25:37)

 



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________

 

 

FORM 10-Q

 

[ Y ]

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

 

SECURITIES EXCHANGE ACT OF 1934  

   
 

For the quarterly period ended June 30, 2013  

   
 

OR  

   

[ ]  

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

 

SECURITIES EXCHANGE ACT OF 1934  

       

For the Transition Period From __________ to __________.

 

Commission file number: 001-14003

 

OMEGA PROTEIN CORPORATION

(Exact name of Registrant as specified in its charter)

 

State of Nevada  

76-0562134  

(State or other jurisdiction of  

(I.R.S. Employer  

incorporation or organization)  

Identification No.)  

   

2105 City West Blvd., Suite 500  

 

Houston, Texas  

77042-2838  

(Address of principal executive offices)  

(Zip Code)  

 

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

_________________

 

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

Yes X No__.

 

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

Yes X No ___ .

 

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

 

       

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Small reporting company ☐

 

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

Yes      No X .

 

Number of shares outstanding of the Registrant's Common Stock, par value $0.01 per share, on July 31, 2013: 20,628,646.

 

 
 

 

 

OMEGA PROTEIN CORPORATION

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  

 
     
Item 1.

Financial Statements and Notes  

 
     
 

Unaudited Condensed Consolidated Balance Sheet as of June 30, 2013 and December 31, 2012  

3  

     
 

Unaudited Condensed Consolidated Statement of Comprehensive Income for the three months and six months ended June 30, 2013 and 2012  

4
     
 

Unaudited Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2013 and 2012  

5  

     
  Notes to Unaudited Condensed Consolidated Financial Statements

6  

     
Item 2.

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

25  

     
Item 3.

Quantitative and Qualitative Disclosures About Market Risk  

41

     
Item 4. Controls and Procedures

41

     
     

PART II. OTHER INFORMATION  

 
     
Item 1. Legal Proceedings

41  

     
Item 1A.

Risk Factors  

42
     
Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds  

43
     
Item 3. Defaults Upon Senior Securities 43
     
Item 4. Mine Safety Disclosures 43
     
Item 5. Other Information

43  

     
Item 6. Exhibits 43
     
Signatures

45  

   

 
2

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements and Notes

 

 

   

June 30,

2013  

   

December 31,

2012  

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 21,458     $ 55,998  

Receivables, net

    21,186       17,267  

Inventories

    83,344       66,659  

Deferred tax asset, net

    298       1,165  

Prepaid expenses and other current assets

    4,844       3,430  

Total current assets

    131,130       144,519  

Other assets, net

    4,300       10,789  

Property, plant and equipment, net

    144,762       127,640  

Goodwill

    19,128       7,986  

Other intangible assets, net

    9,005       4,362  

Total assets

  $ 308,325     $ 295,296  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Current maturities of long-term debt

  $ 3,025     $ 3,058  

Current portion of capital lease obligation

    121       268  

Accounts payable

    3,435       3,000  

Accrued liabilities

    29,083       31,741  

Total current liabilities

    35,664       38,067  

Long-term debt, net of current maturities

    22,706       24,242  

Capital lease obligation, net of current portion

    4,884        

Deferred tax liability, net

    16,279       15,794  

Pension liabilities, net

    9,078       9,826  

Other long-term liabilities

    1,794       1,764  

Total liabilities

    90,405       89,693  
                 

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; 20,595,610 and 19,883,940 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively

    201       195  

Capital in excess of par value

    134,120       129,040  

Retained earnings

    93,127       86,292  

Accumulated other comprehensive loss

    (9,528 )     (9,924 )

Total stockholders’ equity

    217,920       205,603  

Total liabilities and stockholders’ equity

  $ 308,325     $ 295,296  

 

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

 

 
3

 

   

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(In thousands, except per share amounts)

 

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2013

   

2012

   

2013

   

2012

 

Revenues

  $ 41,777     $ 47,448     $ 90,700     $ 88,536  

Cost of sales

    28,494       40,601       65,320       72,797  

Gross profit

    13,283       6,847       25,380       15,739  
                                 

Selling, general, and administrative expense

    6,030       5,443       12,473       10,728  

Research and development expense

    565       518       1,120       1,119  

Charges related to U.S. Attorney investigation

          70             303  

Loss (gain) on disposal of assets

    (2 )     (3,385 )     374       (3,782 )

Operating income

    6,690       4,201       11,413       7,371  

Interest income

    2       3       10       10  

Interest expense

    (481 )     (301 )     (873 )     (697 )

Other expense, net

    (98 )     (102 )     (181 )     (188 )

Income before income taxes

    6,113       3,801       10,369       6,496  
                                 

Provision for income taxes

    2,123       1,291       3,534       2,156  

Net income

    3,990       2,510       6,835       4,340  
                                 

Other comprehensive income (loss):

                               

Energy swap adjustment, net of tax benefit of $195, $556, $56 and $162, respectively

    (363 )     (1,031 )     (106 )     (300 )

Pension benefits adjustment, net of tax expense of $135, $132, $270 and $265, respectively

    251       245       502       492  

Comprehensive income

  $ 3,878     $ 1,724     $ 7,231     $ 4,532  
                                 

Basic earnings per share

  $ 0.20     $ 0.13     $ 0.34     $ 0.22  
                                 

Weighted average common shares outstanding

    20,225       19,613       20,061       19,604  
                                 

Diluted earnings per share

  $ 0.19     $ 0.13     $ 0.33     $ 0.22  
                                 

Weighted average common shares and potential common share equivalents outstanding

    21,027       20,019       20,837       20,049  

 

 

 

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

 

 
4

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

 

   

Six Months Ended

June 30,  

 
   

2013

   

2012

 

Cash flows from operating activities:

               

Net income

  $ 6,835     $ 4,340  

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

               

Depreciation and amortization

    10,253       8,798  

Loss (gain) on disposal of assets

    374       (3,782 )

Provisions for losses on receivables

    24       24  

Share based compensation

    891       1,796  

Deferred income taxes

    1,409       1,531  

Changes in assets and liabilities:

               

Receivables

    (2,671 )     (12,819 )

Inventories

    (15,763 )     (18,653 )

Prepaid expenses and other current assets

    (1,515 )     (5,497 )

Other assets

    5,874       (3,652 )

Accounts payable

    (301 )     (354 )

Accrued liabilities

    (2,873 )     11,349  

Pension liability, net

    (246 )     (511 )

Other long term liabilities

    30       62  

Net cash provided by (used in) operating activities

    2,321       (17,368 )

Cash flows from investing activities:

               

Proceeds from disposition of assets

    161       5,811  

Acquisition of InCon, purchase price adjustment

          181  

Acquisition of Wisconsin Specialty Protein, net of cash acquired

    (26,779 )      

Capital expenditures

    (12,560 )     (16,510 )

Net cash used in investing activities

    (39,178 )     (10,518 )

Cash flows from financing activities:

               

Principal payments of long-term debt

    (1,569 )     (1,469 )

Principal payments of capital lease obligation

    (309 )     (243 )

Debt issuance costs

          (389 )

Proceeds from stock options exercised

    3,048       437  

Excess tax benefit of stock options exercised

    1,147       34  

Net cash provided by (used in) financing activities

    2,317       (1,630 )

Net decrease in cash and cash equivalents

    (34,540 )     (29,516 )

Cash and cash equivalents at beginning of year

    55,998       51,391  

Cash and cash equivalents at end of period

  $ 21,458     $ 21,875  

 

 

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

 

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

 

The human nutrition segment is comprised primarily of three subsidiaries: Cyvex Nutrition, Inc. (“Cyvex”), InCon Processing, L.L.C. (“InCon”) and Wisconsin Specialty Protein, L.L.C. (“WSP”). Cyvex was acquired by the Company in December 2010, is located in Irvine, California and participates in the nutraceutical industry as an ingredient provider. InCon, acquired by the Company in September 2011, is located in Batavia, Illinois and is a specialty toll processor that utilizes molecular distillation technology to concentrate a variety of compound products, including Omega-3 fish oils. WSP, acquired by the Company on February 27, 2013, is a manufacturer and marketer of specialty dairy protein products headquartered in Madison, Wisconsin and operates a production facility in Reedsburg, Wisconsin. See Note 2 – Acquisition of Wisconsin Specialty Protein, L.L.C. for additional information related to the Company’s acquisition of WSP.

 

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, 2012. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

In the opinion of management the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s consolidated financial position as of June 30, 2013, and the results of its operations for the three and six month periods ended June 30, 2013 and 2012 and its cash flows for the six month periods ended June 30, 2013 and 2012. Operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

 

Consolidation

 

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

 

Financial Statement Preparation

 

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

   

 
6

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

Certain amounts applicable to the prior periods have been reclassified to conform to the classifications currently followed. Specifically, charges related to the U.S. Attorney investigation were reclassified from selling, general and administrative expenses to “Charges related to U.S. Attorney investigation” in the unaudited condensed consolidated statement of comprehensive income for the three and six months ended June 30, 2012. Such reclassifications do not affect current assets, net cash provided by operating activities, operating income, net income, earnings or stockholders’ equity.

 

The presentation of our unaudited condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2012 was revised to classify $2.4 million and $3.8 million, respectively, of shipping and handling related costs that were previously netted against revenue to cost of sales.  These revisions were not considered to be material, individually or in the aggregate, to previously issued financial statements. These revisions had no effect on the results of operations (net or comprehensive income), financial condition (stockholders’ equity), or cash flows in any period presented or in any previously issued financial statements.

 

Revenue Recognition

 

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

 

Shipping and Handling

 

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

 

Inventories

 

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

 

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

 

Energy Swap Agreements

 

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

 

Energy swap balances at June 30, 2013:

 

Energy Swap

 

Consumption Period

 

Quantity

 

Price

Per

Unit

   

Energy Swap Asset/(Liability) as of

June 30, 2013

   

Deferred Tax Asset/(Liability) as of

June 30, 2013

 

Diesel - NYMEX Heating Oil Swap

 

July - November, 2013

 

1,467,800 Gallons

  $ 2.88     $ (21,500 )   $ 7,500  

Natural Gas - NYMEX Natural Gas Swap

 

July – October, 2013

 

289,900 MMBTUs

  $ 3.88       (77,500 )     27,100  

Fuel Oil – No.6 1.0% NY-Platts Swap

 

July - November, 2013

 

817,900 Gallons

  $ 2.24       (21,600 )     7,600  
                    $ (120,600 )   $ 42,200  

 

 

 
7

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

Energy swap balances at December 31, 2012:

 

Energy Swap

 

Consumption Period

 

Quantity

 

Price

Per

Unit

   

Energy Swap Asset (Liability) as of

December 31, 2012

   

Deferred Tax Asset (Liability) as of

December 31, 2012

 

Diesel - NYMEX Heating Oil Swap

 

May - November, 2013

 

1,359,782 Gallons

  $ 2.82     $ 244,800     $ (53,800 )

Natural Gas - NYMEX Natural Gas Swap

 

April – October, 2013

 

381,150 MMBTUs

  $ 3.94       (149,600 )     52,300  

Fuel Oil – No.6 1.0% NY-Platts Swap

 

May - November, 2013

 

676,200 Gallons

  $ 2.26       39,000       (13,600 )
                    $ 134,200     $ (15,100 )

 

As of June 30, 2013 and December 31, 2012, Omega Protein has included in (accrued liabilities) prepaid expenses and other current assets ($120,600) and $134,200, respectively, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax asset (liability) of $42,200 and ($15,100), respectively, associated therewith. The effective portion of the change in fair value from inception to June 30, 2013 is recorded in “accumulated other comprehensive loss” in the Company’s consolidated financial statements. The following table illustrates the changes recorded, net of tax, in accumulated other comprehensive income (loss) resulting from the energy swap agreements (in thousands).

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2013

   

2012

   

2013

   

2012

 

Beginning balance

  $ 285     $ 311     $ 28     $ (420 )

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

    (16 )     261       (16 )     261  

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

    (347 )     (1,292 )     (90 )     (561 )

Ending balance

  $ (78 )   $ (720 )   $ (78 )   $ (720 )

 

 The $78,000 reported in accumulated other comprehensive loss as of June 30, 2013 will be reclassified to the unallocated inventory cost pool in the period when the energy consumption takes place. The amount to be reclassified, net of taxes, during the next 12 months is expected to be approximately $78,000.

 

The aggregate fair value of derivative instruments in net asset positions as of June 30, 2013 and December 31, 2012 was $90,000 and $0.3 million, respectively. These amounts represent the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted. This exposure could be reduced by up to $36,000 and $0.2 million, respectively, of liabilities included in master netting arrangements with those same counterparties.

 

The aggregate fair value of derivative instruments in net liability positions as of June 30, 2013 and December 31, 2012 was $188,000 and $0, respectively. These amounts represent the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted. This exposure could be reduced by up to $13,000 and $0, respectively, of assets included in master netting arrangements with those same counterparties.

 

As of June 30, 2013 (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

  $ 90     $ (36 )   $ 54  

Energy swap derivatives – liability position

  $ (188 )   $ 13     $ (175 )

 

 

 
8

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

As of December 31, 2012 (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

  $ 295     $ (161 )   $ 134  

 

If, at any time, the swaps are determined to be ineffective, in whole or in part, due to changes in the Company’s energy usage or underlying hedge agreements or assumptions, the fair value of the portion of the energy swaps determined to be ineffective will be recognized as a gain or loss in cost of sales for the applicable period. For the six months ended June 30, 2013 and 2012, the Company recognized a charge of $0.1 and $0, respectively, to cost of sales resulting from transactions associated with the prior ineffectiveness of diesel energy swaps. See Note 17 – Fair Value Disclosures for additional information.

 

Acquisitions, Goodwill and Other Intangible Assets

 

 

All of the Company’s goodwill and other intangible assets are the result of acquisitions in the human nutrition segment. This segment is comprised of three reporting units, Cyvex, InCon and WSP. On February 27, 2013, the Company purchased all of the equity interests in WSP. In the third quarter of 2011 and the fourth quarter of 2010, the Company completed its acquisitions of InCon Processing, L.L.C., a Delaware limited liability company, and Cyvex Nutrition, Inc., a California corporation, respectively. All three acquisitions were accounted for as cash transactions using the acquisition method of accounting. Accordingly, the Company has recorded goodwill and certain other identifiable intangible assets that are more fully explained in Note 2 – Acquisition of Wisconsin Specialty Protein, L.L.C. and Note 8 – Goodwill and Other Intangible Assets.

 

Construction Contract

 

Omega Shipyard engaged in a single fixed price construction contract with a third party that was completed in the fourth quarter of 2012.  The contract provided for revenue to be billed as milestones were attained based on the total estimated construction cost. The Company recognized revenue and expenses related to the contract on a percentage of completion basis based on a ratio of costs incurred to date bore to total projected costs.

 

During the quarter ended June 30, 2012, Omega Shipyard revised its total estimated construction costs such that the Company expected to have gross loss upon completion.  As a result, gross profit recognized on the contract in previous quarters was reversed and the full extent of the expected loss was recognized during the quarter ended June 30, 2012.  For the three and six months ended June 30, 2012, the Company incurred gross losses of $0.6 million and $0.3 million, respectively, with respect to the construction contract.    

 

Accumulated Other Comprehensive Loss

 

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

 

Changes in Accumulated Other Comprehensive Loss by Component (a)

For the Six Months Ended June 30, 2013 (in thousands)

 

   

Gains and Losses

On Cash Flow

Hedges

     

Defined Benefit

Pension Items

     

Total

 

Beginning balance December 31, 2012

  $ 28       $ (9,952 )     $ (9,924 )

Other comprehensive loss before reclassifications

    (90 )               (90 )

Amounts reclassified from accumulated other comprehensive loss

    (16 )

(b)

    502  

(c)

    486  

Net current-period other comprehensive income

    (106 )       502         396  

Ending balance June 30, 2013

  $ (78 )     $ (9,450 )     $ (9,528 )
 

(a)

All amounts are net of tax. Amounts in parentheses indicate losses.

 

(b)  

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

 

(c)  

This accumulated other comprehensive income component is included in the computation of net periodic pension costs as amortization of actuarial gains which are explained in more detail in Note 16 to the consolidated financial statements of the Company’s Form 10-K for the fiscal year ended December 31, 2012.

 

 
9

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

Recently Issued Accounting Standards

 

On February 5, 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The standard requires companies to present, either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The standard is effective prospectively for public entities for fiscal years, and interim periods within those years, beginning after December 12, 2012, which corresponds to the Company’s first fiscal quarter beginning January 1, 2013. The Company’s adoption of FASB ASU No. 2013-02, effective January 1, 2013, did not have an impact on the Company’s consolidated results of operations or financial position.

 

In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The standard limits the scope of balance sheet offsetting disclosures, contained in the new guidance issue in December 2011 discussed below, to recognized derivative instruments, repurchase agreements and securities borrowing and lending transactions. Effective for annual and interim periods beginning on or after January 1, 2013, the Company’s adoption of FASB ASU No. 2013-01 effective January 1, 2013 did not have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

In July 2012, the FASB issued ASU No. 2012-02 regarding subsequent measurement guidance for long-lived intangibles. This guidance is meant to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, which corresponds to the Company’s first fiscal quarter beginning January 1, 2013. The Company’s adoption of FASB ASU No. 2012-02 effective January 1, 2013 did not have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The standard requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendments in this update will enhance disclosures required by U.S. GAAP by requiring improved information about financial instruments and derivative instruments to help reconcile differences in the offsetting requirements under U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company’s adoption of FASB ASU No. 2011-11 effective January 1, 2013 did not have an impact on the Company’s consolidated results of operations or financial position.

 

Stock-Based Compensation

 

Stock Options  

 

The Company has a stock-based compensation plan, which is described in more detail in Note 16 to the consolidated financial statements of the Company’s Form 10-K for the fiscal year ended December 31, 2012. The Company has issued non-qualified stock options under its stock incentive plans. The options generally vest in equal installments over three years and expire in ten years. Non-vested options are generally forfeited upon termination of employment.

 

Net income for the three months ended June 30, 2013 and 2012 includes $0.2 million and $0.7 million ($0.1 million and $0.5 million after-tax), respectively, of stock-based compensation costs related to stock options. Net income for the six months ended June 30, 2013 and 2012 includes $0.3 million and $1.5 million ($0.2 million and $1.0 million after-tax), respectively, of stock-based compensation costs related to stock options. The stock-based compensation costs related to stock options are recorded primarily in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of June 30, 2013 there was $0.3 million ($0.2 million after-tax) of total unrecognized compensation costs related to non-vested stock options that is expected to be recognized over a weighted-average period of 0.4 years, of which $0.3 million ($0.2 million after-tax) of total stock option compensation is expected to be recognized during the remainder of fiscal year 2013.

   

 
10

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

Restricted Stock  

 

The Company has issued shares of restricted stock under the 2006 Incentive Plan. Shares of restricted stock generally vest on the third anniversary of the grant date. Non-vested shares are generally forfeited upon the termination of employment. Holders of shares of restricted stock are entitled to all rights of a stockholder of the Company, including the right to vote the shares and receive any dividends or other distributions. The shares are considered issued and outstanding on the date granted and are included in the basic earnings per share calculation.

 

During the six month periods ended June 30, 2013 and 2012, the Company issued 25,000 shares of restricted stock for each period under the 2006 Incentive Plan. The Company’s compensation expense related to restricted stock was approximately $0.3 million and $0.1 million ($0.2 million and $0.1 million after tax) for the three months ended June 30, 2013 and 2012, respectively, and $0.5 million and $0.3 million ($0.3 million and $0.2 million after tax) for the six months ended June 30, 2013 and 2012, respectively, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of June 30, 2013, there was approximately $2.0 million ($1.3 million after tax) of unrecognized compensation cost related to non-vested restricted stock that is expected to be recognized over a weighted-average period of 1.9 years, of which $0.5 million ($0.3 million after-tax) of total restricted stock compensation is expected to be recognized during the remainder of fiscal year 2013.

 

NOTE 2. ACQUISITION OF WISCONSIN SPECIALTY PROTEIN, L.L.C.

 

A. Description of the Transaction

 

On February 27, 2013, the Company acquired 100% of the outstanding equity interest of WSP, a Wisconsin limited liability company, in a cash transaction pursuant to the terms of an agreement and plan of merger. WSP is now a wholly owned subsidiary of the Company. WSP produces and markets a variety of value-added whey protein ingredients for the food and nutritional supplement industries, including organic and other specialty protein products, using processes applicable to a variety of nutritional dairy ingredients. The Company believes the acquisition of WSP will enhance its presence in the specialty proteins markets and advance its goal of providing sustainable, value-added nutrition ingredients. WSP is included as part of the Company’s human nutrition segment.

 

B. Recording of Assets Acquired and Liabilities Assumed

 

At closing, the Company paid an aggregate cash purchase price for the equity of WSP of $26.5 million plus $0.7 million representing WSP’s estimated excess working capital on the closing date and reimbursable capital expenditures, utilizing cash on hand. The working capital portion of the purchase price is subject to a post-closing adjustment to account for differences between estimated working capital and actual working capital of WSP as of the closing date.

 

The Company incurred approximately $0.8 million in pretax transaction costs directly related to the acquisition that were expensed and included in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income for the six month period ended June 30, 2013. The acquisition costs consisted primarily of legal, advisory, valuation, and other consulting fees. The transaction has been accounted for using the acquisition method of accounting which requires, among other things, that all assets acquired and liabilities assumed from acquisitions be recognized at their fair values as of the acquisition date. Any excess of the purchase price over the fair values of the net assets acquired are recorded as goodwill. The following table summarizes the fair values of the WSP assets and acquired liabilities assumed.

 

   

Amounts recognized as of acquisition date

 
   

(in thousands)

 

Cash

  $ 403  

Other current assets, net including receivables, prepaid and inventory

    2,618  

Property, plant, and equipment, net

    14,095  

Identifiable intangible assets (a)

    4,920  

Liabilities assumed

    (5,996 )

Total identifiable net assets

    16,040  

Goodwill

    11,142  

Total consideration, prior to final working capital adjustment

  $ 27,182  

 

 

(a)

See Note 8 – Goodwill and Other Intangible Assets for weighted average lives.

 

 

 
11

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

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

 

the expected synergies and other benefits that the Company believes will result from combining the operations of WSP with the operations of the Company’s human nutrition segment, including Cyvex and InCon,

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

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

 

The Company does not amortize goodwill or indefinite-lived intangible assets but performs tests for impairment annually, or when indications of potential impairment exist, utilizing a fair value approach at the reporting unit level. See Note 8 - Goodwill and Other Intangible Assets, for more information about goodwill and other intangible assets.

 

WSP’s results of operations are included in the Company’s unaudited condensed consolidated statement of comprehensive income beginning on February 27, 2013. Revenues generated by WSP included in the unaudited condensed consolidated statement of comprehensive income from February 27, 2013 through June 30, 2013 were approximately $3.3 million. Net loss for the same period was approximately $38,000.

 

C. Unaudited Pro Forma Financial Information

 

The unaudited financial information in the table below summarizes the combined results of operations of the Company and WSP on a pro forma basis, as though the companies had been combined as of January 1, 2012. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had actually taken place on January 1, 2012 and is not intended to be a projection of future results or trends.  

                                                                                                                                 

    Revenue     Net income  
    (in thousands)  

2013 supplemental pro forma from January 1, 2013 – June 30, 2013

  $ 92,768     $ 6,838  

2012 supplemental pro forma from April 1, 2012 – June 30, 2012

  $ 50,249     $ 2,753  

2012 supplemental pro forma from January 1, 2012 – June 30, 2012

  $ 94,305     $ 4,863  

 

NOTE 3. RECEIVABLES, NET

 

R eceivables as of June 30, 2013 and December 31, 2012 are summarized as follows:  

    

   

June 30,

2013

   

December 31,

2012

 
    (in thousands)  

Trade

  $ 18,146     $ 11,513  

Insurance

    1,768       4,980  

Income tax

    1,591       871  

Other

    38       236  

Total accounts receivable

    21,543       17,600  

Less allowance for doubtful accounts

    (357 )     (333 )

Receivables, net

  $ 21,186     $ 17,267  

 

As of December 31, 2012, the insurance receivable includes approximately $3.4 million related to the salvage costs and other related claims incurred by the Company associated with the sinking of the F/V Sandy Point in May 2011. Of that amount, approximately $3.1 million was received in June 2013 in final settlement of the receivable.

 

 
12

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

NOTE 4. INVENTORY

 

The major classes of inventory as of June 30, 2013, December 31, 2012 and June 30, 2012 are summarized as follows:

 

   

June 30,

2013

   

December 31,

2012

   

June 30,

2 012

 
     

(in thousands)

 

Fish meal

  $ 16,176     $ 26,511     $ 38,414  

Fish oil

    23,312       17,352       9,196  

Fish solubles

    1,055       1,391       1,304  

Nutraceutical products

    3,828       4,181       3,826  

Whey protein products

    1,520              

Unallocated inventory cost pool (including off-season costs)

    26,658       7,403       20,484  

Other materials and supplies

    10,795       9,821       10,322  

Total inventory

  $ 83,344     $ 66,659     $ 83,546  

 

Inventory at June 30, 2013, December 31, 2012 and June 30, 2012 is stated at the lower of cost or market. The elements of June 30, 2013 unallocated inventory cost pool include Omega Protein’s plant and vessel related labor, utilities, rent, repairs and depreciation, to be allocated to inventories produced through the 2013 fishing season.

 

NOTE 5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets as of June 30, 2013 and December 31, 2012 are summarized below:

     

   

June 30,

2013

   

December 31,

2012

 
    (in thousands)  

Prepaid insurance

  $ 4,026     $ 2,554  

Selling expenses

    229       436  

Fair market value of energy swaps, current portion

    54       134  

Whey process filters

    115        

Leases

    95       118  

Other prepaid expenses

    325       188  

Total prepaid expenses and other current assets

  $ 4,844     $ 3,430  

 

Amounts included in prepaid expenses and other current assets consist primarily of prepaid operating expenses including insurance, rents, and selling expenses. Energy swap assets are valued at each reporting date at their fair value (see Note 17 – Fair Value Disclosures for additional information). Prepaid selling expenses are expensed in those periods in which the related revenue is recognized.

 

NOTE 6. OTHER ASSETS

 

Other assets as of June 30, 2013 and December 31, 2012 are summarized as follows:

 

   

June 30,

2013

   

December 31,

2012

 
    (in thousands)  

Fish nets, net of accumulated amortization of $1,902 and $1,243

  $ 1,928     $ 1,432  

Insurance receivable, net of allowance for doubtful accounts

    1,639       8,572  

Title XI debt issuance costs

    287       302  

Other debt issuance costs

    345       391  

Deposits and other

    101       92  

Total other assets, net

  $ 4,300     $ 10,789  

 

Amortization expense for fishing nets amounted to approximately $0.3 million and $0.3 million for the three months ended June 30, 2013 and 2012, respectively, and $0.7 million and $0.6 million for the six months ended June 30, 2013 and 2012, respectively.

 

 

 
13

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

As of June 30, 2013 and December 31, 2012, the insurance receivable of $1.6 million and $8.6 million, respectively, 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 unit’s 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, net of allowance for doubtful accounts. As of June 30, 2013 and December 31, 2012, there was no allowance for doubtful insurance receivable accounts.

 

NOTE 7. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment as of June 30, 2013 and December 31, 2012 are summarized as follows:

 

   

June 30,

2013

   

December 31,

2012

 
   

(in thousands)

 

Land

  $ 7,457     $ 7,229  

Plant assets

    165,956       148,451  

Fishing vessels

    110,907       103,754  

Furniture and fixtures

    7,415       7,225  

Construction in progress

    9,484       11,214  

Total property and equipment

    301,219       277,873  

Less accumulated depreciation and impairment

    (156,457 )     (150,233 )

Property, plant and equipment, net

  $ 144,762     $ 127,640  

 

 

Depreciation expense for the three months ended June 30, 2013 and 2012 was $4.7 million and $4.0 million, respectively, and $9.3 million and $7.9 million for the six months ended June 30, 2013 and 2012, 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 month periods ended June 30, 2013 and 2012, the Company capitalized interest of approximately $26,000 and $212,100, respectively. For the six month periods ended June 30, 2013 and 2012, the Company capitalized interest of approximately $118,800 and $398,100 respectively.

 

NOTE 8. 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. The determination of the fair value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.

 

All of the Company’s goodwill and other intangible assets are the result of acquisitions in the human nutrition segment. The following table summarizes the changes in the carrying amount of goodwill resulting from the Company’s acquisitions (in thousands):

 

   

WSP

   

Cyvex

   

InCon

   

Total

 

January 1, 2013

  $       7,050     $ 936     $ 7,986  

Acquisitions (1)

    11,142                   11,142  

June 30, 2013

  $ 11,142       7,050     $ 936     $ 19,128  

(1) On February 27, 2013, the Company acquired WSP, and the allocation of the purchase price over the fair value of the tangible and intangible assets acquired resulted in $11.1 million of goodwill.

   

 
14

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

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

 

   

June 30,

2013

   

December 31,

2012

   

Weighted

Average

Life (years)

 

Carrying value of intangible assets subject to amortization:

                       

Customer relationships and non-competes, net

  $ 5,652     $ 2,609       10  

Total intangible assets subject to amortization, net

  $ 5,652     $ 2,609          

Indefinite life intangible assets – trade names/secrets and other

    3,353       1,753          

Total intangible assets, other than goodwill

  $ 9,005     $ 4,362          

 

Amortization expense of the Company’s intangible assets for the three months ended June 30, 2013 and 2012 was approximately $0.2 million and $0.1 million, respectively, and $0.3 million and $0.2 million for the six months ended June 30, 2013 and 2012, respectively. Estimated future amortization expense related to intangible assets is as follows (in thousands):

 

Remainder of 2013

  $ 335  

2014

    663  

2015

    655  

2016

    654  

Thereafter

    3,345  

Total estimated future amortization expense

  $ 5,652  

 

The Company’s goodwill and other intangible assets are more fully explained in Note 10 to the consolidated financial statements of the Company’s Form 10-K for the fiscal year ended December 31, 2012.

 

NOTE 9. NOTES PAYABLE AND LONG-TERM DEBT

 

At June 30, 2013 and December 31, 2012, the Company's long-term debt consisted of the following:

 

   

June 30,

2013  

   

December 31,

2012  

 
   

(in thousands)  

 

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

               

Amounts due in installments through 2025, interest from 5.7% to 7.6%  

  $ 25,680     $ 27,228  

Amounts due in installments through 2014, interest at Eurodollar rates plus 0.5% (0.7% at June 30, 2013 and December 31, 2012)  

    51       72  

Total debt  

    25,731       27,300  

Less current maturities  

    (3,025 )     (3,058 )

Long-term debt  

  $ 22,706     $ 24,242  

 

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

 

In June 2011, pursuant to the Title XI program, the United States Department of Commerce Fisheries Finance Program (the “FFP”) approved a financing application made by the Company in the amount of $10.0 million (the “Approval Letter”). To date, the Company has not submitted any financing requests under the Approval Letter. As of June 30, 2013, the Company had approximately $25.7 million of borrowings outstanding under Title XI and was in compliance with all of the covenants contained therein.

 

In March 2012, the Company entered into an Amended and Restated Loan Agreement (the “Loan Agreement”) with Wells Fargo Bank, National Association, as administrative agent (the “Agent”) for the lenders (currently Wells Fargo Bank, National Association and JP Morgan Chase Bank, N.A.) (collectively, the “Lenders”) pursuant to which the Lenders agreed to extend credit to the Company in the form of loans (each a “Loan” and collectively, the “Loans”) on a revolving basis of up to $60.0 million (the “Commitment”).

 

 

 
15

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

All Loans and all other obligations outstanding under the Loan Agreement are payable in full on March 21, 2017. As of June 30, 2013 and December 31, 2012, the Company had no amounts outstanding under the $60 million Loan Agreement and approximately $3.9 million and $3.1 million, respectively, in letters of credit. As of June 30, 2013, 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.

 

The Company’s notes payable and long-term debt are more fully explained in Note 11 to the consolidated financial statements of the Company’s Form 10-K for the fiscal year ended December 31, 2012.

 

NOTE 10. CAPITAL LEASE OBLIGATIONS

 

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

 

Total remaining 2013 minimum lease payments

  $ 8  

Less amount representing interest

     

Present value of minimum payments

  $ 8  

 

 

On February 27, 2013, the Company acquired 100% of the outstanding equity interest of WSP, a Wisconsin limited liability company, in a cash transaction pursuant to the terms of an agreement and plan of merger. WSP is now a wholly owned subsidiary of the Company. The acquisition agreement included provisions for the Company to assume a capital lease agreement to lease real property. The lease agreement matures on January 1, 2016. Following is a summary of the future minimum payments under the capitalized lease agreement (in thousands):

 

Remainder of 2013

  $ 184  

2014

    369  

2015

    369  

2016

    4,681  

Total minimum lease payments

    5,603  

Less amount representing interest

    (606 )

Present value of minimum payments

    4,997  

Less current portion of capital lease obligation

    (113 )

Long-term capital lease obligation

  $ 4,884  

 

As of June 30, 2013 and December 31, 2012, assets recorded under capital lease obligations are included in Property, Plant and Equipment, net as follows (in thousands):

   

June 30,

2013

   

December 31,

2012

 

Land

  $ 220     $  

Plant

    5,480        

Fishing vessels and marine equipment, at cost

    2,076       2,076  

Less accumulated depreciation

    (2,167 )     (1,886 )

Property, plant and equipment, net

  $ 5,609     $ 190  

 

NOTE 11. ACCRUED LIABILITIES

 

 

Accrued liabilities as of June 30, 2013 and December 31, 2012 are summarized as follows:

 

   

June 30,

   

December 31,

 
   

2013

   

2012

 
   

(in thousands)

 

Insurance

  $ 5,335     $ 12,307  

Reserve for U.S. Attorney investigation

    7,538       7,655  

Salary and benefits

    7,707       4,989  

Trade creditors

    5,527       3,914  

Taxes, other than federal income tax

    974       42  

Deferred revenue

    1,402       2,060  

Energy swaps

    175        

Contractual obligations

    170       470  

Accrued interest

    200       225  

Other

    55       79  

Total accrued liabilities

  $ 29,083     $ 31,741  

 

 

 
16

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

As of June 30, 2013 and December 31, 2012, deferred revenue was $1.4 million and $2.1 million, respectively, representing payments received from international customers related to revenues which were not recognized until the subsequent period.

 

See Note 12.  Commitments and Contingencies – Regulatory Matters for information on the U.S. Attorney’s Office investigation reserve.

 

NOTE 12. COMMITMENTS AND CONTINGENCIES

 

Purchase Obligation

 

In May 2012, the Company entered into a contract to purchase renewable diesel oil (“RDO”) beginning in July 2012 through the 2013 fishing season. The RDO will be utilized in one of the Company’s four fish processing plants. The contract is priced at a discount to prevailing market prices of the BTU equivalent of Platts NY Harbor 2.2% Sulfur No.6 Oil as delivery is made throughout the fishing seasons. During the second quarter of 2013, the contract was modified and as of June 30, 2013, approximately 1.6 million gallons are still committed under the contract, subject to certain force majeure provisions.

 

InCon Contingency

 

  In September 2011, the Company acquired all of the outstanding equity of InCon Processing, L.L.C., (“InCon”), a Delaware limited liability company, in a cash transaction pursuant to the terms of an equity purchase agreement. The equity of InCon was indirectly held by four individuals (the “Sellers”), three of whom continue to be employed by InCon and share in the management of InCon’s business. InCon is now a wholly owned subsidiary of the Company.

 

In addition to the acquisition date cash purchase price, the Sellers may also earn additional amounts based on the annual earnings before interest, taxes, depreciation, and amortization (“EBITDA”) of InCon’s toll processing and specialty product business during calendar years 2012 through 2016. The Company and the Sellers amended the earn-out terms on April 25, 2013 by lowering the earn-out by 35% of the original formula in 2013 and all future years. The annual earn-out provisions (as amended) are determined based on a percentage of InCon’s EBITDA, adjusted for certain product sales and costs, which percentage ranges from 3.25% of the first $3.0 million of EBITDA to 19.5% of EBITDA in excess of $12.0 million.

 

The annual earn-out payments, if any, will be estimated on a quarterly basis and paid subsequent to year end. The Company will record the estimated contractual obligation as compensation expense during each year as it is deemed probable that such amount will be payable. In addition, the earn-out payments are subject to certain reductions associated with future InCon capital expenditures and forfeitures based on termination of employment. For the six month periods ended June 30, 2013 and 2012, the Company has not recorded an annual earn-out estimate.

 

Legal Contingencies

 

On May 18, 2011, the Company’s fishing vessel, F/V Sandy Point, was involved in a collision with a commercial cargo vessel, Eurus London. As a result of the collision, the Company’s vessel sank and three Company crew members died. The Company has filed a limitation action under maritime law to limit its potential liability for the incident to $50,000, the value of the sunken vessel, in the U.S. District Court for the Southern District of Mississippi. Representatives of the three deceased crewmembers, as well as certain other crewmembers, filed lawsuits against the Company. All claims in the matter have been settled. All claims arising from the incident have been or are expected to be covered by the Company’s insurance program, subject to customary deductibles, which are not expected to have a material adverse effect on the Company’s business, financial results or results of operations.

 

 

 
17

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

In conjunction with the sinking of the vessel, the Company recorded a net insurance receivable of approximately $5.9 million related primarily to costs expended salvaging the sunken vessel from the Mississippi ship channel and other claims and a net receivable of $1.8 million related to the insurance value of the vessel. The $1.8 million receivable related to the vessel value was received in 2011. An additional $5.7 million related to the salvage of the vessel has been received from the Company’s primary insurance carrier, including $0.1 million in 2012. As of June 30, 2013, the Company had completed the settlement of the vessel and salvage receivables with its insurance providers.

 

Regulatory Matters

 

The Company is subject to various possible claims and lawsuits regarding environmental matters. Except as noted below, 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.

 

In April 2010, the Company received a request for information from the EPA concerning its bail wastewater practices used in its fishing operations at its Reedville facility. In February 2011, the U.S. Coast Guard conducted inspections at the Company’s Reedville facility regarding the Reedville vessels’ bilge water discharge practices. Based on these inquiries, both agencies commenced investigations of the Company’s bail waste water and bilge water practices at its Reedville facility.

 

In June 2013, the Company’s subsidiary, Omega Protein, Inc., resolved both the U.S. Coast Guard and EPA investigations by entering into a plea agreement with the United States Attorney’s Office for the Eastern District of Virginia. Pursuant to terms of the plea agreement, the Company’s subsidiary pled guilty to two Clean Water Act violations. The plea agreement required the subsidiary to pay a $5.5 million fine, be placed on a three year term of probation, and implement an environmental compliance program. In addition to the $5.5 million fine, the subsidiary was required to make a $2 million contribution to the National Fish and Wildlife Foundation to fund projects in Virginia related to the protection of the environmental health of the Chesapeake Bay. The plea agreement was approved by the U.S. District Court for the Eastern District of Virginia in June 2013 and the subsidiary paid both the $5.5 million fine and the $2.0 million contribution in July 2013.

 

The Company had requested a waiver from the Coast Guard for its Gulf of Mexico fleet regarding the use of certain vessel equipment applicable to “ocean-going vessels” (as defined by Coast Guard regulations) that operate beyond the 12 nautical mile limit and in April 2013 the Coast Guard granted the Company a partial waiver for its 2013 fishing season only that allows the Company to travel, but not fish, outside 12 nautical miles of shore. The Company has a pending waiver request with the Coast Guard to allow its vessels to fish beyond the 12 nautical mile limit. If the Coast Guard does not grant this waiver, the Company will have to continue restricting its 2013 fishing to within 12 nautical miles of shore or install additional equipment on its vessels which will result in additional expense.

 

NOTE 13. RELATED PARTY TRANSACTIONS

 

In September 2011, the Company acquired all of the outstanding equity of InCon Processing, L.L.C., (“InCon”), a Delaware limited liability company, in a cash transaction pursuant to the terms of an equity purchase agreement. The equity of InCon was indirectly held by four individuals (the “Sellers”), three of whom continue to be employed by InCon and share in the management of InCon’s business. During the six months ended June 30, 2012, the Company received a payment from the Sellers of $0.2 million to account for a final working capital adjustment in conjunction with the acquisition.

 

The Sellers own and operate privately held businesses with which InCon continues to provide toll distillation services and pilot plant runs, primarily InCon Process Systems and InCon Industries. InCon recorded revenue from these related parties for the three months ended June 30, 2013 and 2012 of approximately $359,300 and $1,400, respectively, and $359,500 and $6,600, respectively, for the six months ended June 30, 2013 and 2012. Purchases from these same related parties for the three months ended June 30, 2013 and 2012 were approximately $2,700 and $2,500, respectively, and $11,100 and $2,500, respectively, for the six months ended June 30, 2013 and 2012.

   

 
18

 

   

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

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

 

   

Earnings

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Data

 

Three Months Ended June 30, 2013

                       

Net earnings

  $ 3,990                
                         
                         

Basic earnings per common share:

                       

Earnings available to common shareholders

  $ 3,990       20,225     $ 0.20  
                         
                         

Effect of dilutive securities:

                       

Stock options assumed exercised

          802          
                         

Diluted earnings per common share:

                       

Earnings available to common shareholders plus stock options assumed exercised

  $ 3,990       21,027     $ 0.19  

   

Earnings

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Data

 

Three Months Ended June 30, 2012

                       

Net Earnings

  $ 2,510                
                         
                         

Basic earnings per common share:

                       

Earnings available to common shareholders

  $ 2,510       19,613     $ 0.13  
                         
                         

Effect of dilutive securities:

                       

Stock options assumed exercised

          406          
                         

Diluted earnings per common share:

                       

Earnings available to common shareholders plus stock options assumed exercised

  $ 2,510       20,019     $ 0.13  

 

 

   

Earnings

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Data

 

Six Months Ended June 30, 2013

                       

Net earnings

  $ 6,835                
                         

Basic earnings per common share:

                       

Earnings available to common shareholders

  $ 6,835       20,061     $ 0.34  
                         

Effect of dilutive securities:

                       

Stock options assumed exercised

          776          
                         

Diluted earnings per common share:

                       

Earnings available to common shareholders plus stock options assumed exercised

  $ 6,835       20,837     $ 0.33  

   

Earnings

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Data

 

Six Months Ended June 30, 2012

                       

Net earnings

  $ 4,340                
                         

Basic earnings per common share:

                       

Earnings available to common shareholders

  $ 4,340       19,604     $ 0.22  
                         

Effect of dilutive securities:

                       

Stock options assumed exercised

          445          
                         

Diluted earnings per common share:

                       

Earnings available to common shareholders plus stock options assumed exercised

  $ 4,340       20,049     $ 0.22  

 

 

 
19

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

Options to purchase 135,000 and 157,500 shares of common stock were outstanding during the three and six months ended June 30, 2013, but were not included in the computation of diluted earnings per share because the adjusted exercise prices of the options based upon the assumed proceeds were greater than the average market price of the shares during that period.

 

Options to purchase 1,311,000 and 1,266,000 shares of common stock were outstanding during the three and six months ended June 30, 2012, respectively, but were not included in the computation of diluted earnings per share because the adjusted exercise prices of the options based upon the assumed proceeds were greater than the average market price of the shares during that period.

 

NOTE 15. COMPONENTS OF NET PERIODIC BENEFIT COST

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2013

   

2012

   

2013

   

2012

 
   

(in thousands)

   

(in thousands)

 

Service cost

  $     $     $     $  

Interest cost

    248       274       496       548  

Expected return on plan assets

    (253 )     (326 )     (506 )     (652 )

Amortization of prior service costs

                       

Amortization of net loss

    386       379       772       759  
                                 

Net periodic pension cost

  $ 381     $ 327     $ 762     $ 655  

 

For the six months ended June 30, 2013 and 2012, the Company contributed approximately $0.7 million and $0.9 million, respectively, to the Company’s pension plan. The Company expects to make contributions of $1.0 million to the pension plan during the remainder of 2013.

 

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

 

NOTE 16. INDUSTRY SEGMENTS

 

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

 

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

   

 
20

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

 

The tables below present information about reported segments for the three months ended June 30, 2013 and 2012 (in thousands).

 

June 30, 2013  

 

Animal Nutrition

   

Human

Nutrition (1)

   

Unallocated  

   

Total  

 

Revenue (2)  

  $ 34,453     $ 7,324     $     $ 41,777  

Cost of sales

    22,786       5,708             28,494  

Gross profit

    11,667       1,616             13,283  

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

    662       1,861       4,072       6,595  

Other (gains) and losses

    (2 )                 (2 )

Operating income

  $ 11,007     $ (245 )   $ (4,072 )   $ 6,690  

Depreciation and amortization

  $ 4,472     $ 632     $ 172     $ 5,276  

Identifiable assets

  $ 248,656     $ 58,125     $ 1,544     $ 308,325  

Capital expenditures

  $ 5,741     $ 324     $ 119     $ 6,184  

 

(1) Includes revenues and related expenses for WSP.

 

(2) Excludes revenue from internal customers of $0.4 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

 

June 30, 2012  

 

Animal Nutrition

   

Human Nutrition

   

Unallocated  

   

Total  

 

Revenue (3)  

  $ 42,467     $ 4,981     $     $ 47,448  

Cost of sales

    36,782       3,819             40,601  

Gross profit

    5,685       1,162             6,847  

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

    556       927       4,478       5,961  

Charges related to U.S. Attorney investigation

    70                   70  

Other (gains) and losses

    (3,385 )                 (3,385 )

Operating income

  $ 8,444     $ 235     $ (4,478 )   $ 4,201  

Depreciation and amortization

  $ 4,018     $ 319     $ 134     $ 4,471  

Identifiable assets

  $ 263,276     $ 27,690     $ 1,786     $ 292,752  

Capital expenditures

  $ 7,260     $ 685     $ 249     $ 8,194  

 

(3) 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.

 

   The tables below present information about reported segments for the six months ended June 30, 2013 and 2012 (in thousands).

 

June 30, 2013