Omega Protein Corporation
OMEGA PROTEIN CORP (Form: 10-Q, Received: 08/06/2014 16:08:07)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________

   

FORM 10-Q

 

[ X ]

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

  SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

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, 2014: 21,090,048.

 



 

 
 

 

 

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, 2014  and December 31, 2013

3
 

Unaudited Condensed Consolidated Statement of Comprehensive Income  for the three months and six months ended June 30, 2014 and 2013

4
 

Unaudited Condensed Consolidated Statement of Cash Flows for the  six months ended June 30, 2014 and 2013

5
  Notes to Unaudited Condensed Consolidated Financial Statements 6
     
Item 2.  Management’s Discussion and Analysis of Financial Condition and  Results of Operations 22
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
     
Item 4. Controls and Procedures 38
     
     
PART II. OTHER INFORMATION  
     
  Item 1. Legal Proceedings      38
     
  Item 1A. Risk Factors      38
     
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds     38
     
  Item 3. Defaults Upon Senior Securities      39
     
  Item 4. Mine Safety Disclosures      39
     
  Item 5. Other Information      39
     
  Item 6. Exhibits     39
     
Signatures 40

 

 

 
2

 

 

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements and Notes

   

   

June 30,

2014

   

December 31,

2013

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 40,214     $ 34,059  

Receivables, net

    31,304       21,140  

Inventories

    79,860       94,339  

Deferred tax asset, net

    904       1,062  

Prepaid expenses and other current assets

    5,582       3,915  

Total current assets

    157,864       154,515  

Other assets, net

    2,815       5,234  

Property, plant and equipment, net

    154,431       144,113  

Goodwill

    19,600       19,600  

Other intangible assets, net

    7,596       7,932  

Total assets

  $ 342,306     $ 331,394  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Current maturities of long-term debt

  $ 2,564     $ 3,112  

Accounts payable

    4,074       5,380  

Accrued liabilities

    25,910       29,145  

Total current liabilities

    32,548       37,637  

Long-term debt, net of current maturities

    19,827       21,130  

Deferred tax liability, net

    20,375       19,351  

Pension liabilities, net

    3,246       4,117  

Other long-term liabilities

    2,142       1,929  

Total liabilities

    78,138       84,164  
                 

Commitments and contingencies

               

Stockholders’ equity:

               

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

           

Common Stock, $0.01 par value; 80,000,000 authorized shares; 21,099,066 and 20,804,189 shares issued and 21,094,443 and 20,804,189 shares outstanding at June 30, 2014 and December 31, 2013, respectively

    205       203  

Capital in excess of par value

    138,557       136,428  

Retained earnings

    131,411       116,807  

Treasury stock, at cost – 4,623 shares

    (57 )      

Accumulated other comprehensive loss

    (5,948 )     (6,208 )

Total stockholders’ equity

    264,168       247,230  

Total liabilities and stockholders’ equity

  $ 342,306     $ 331,394  

 

 

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

 

 

 
3

 

   

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(In thousands, except per share amounts)

 

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

201 4

   

201 3

   

201 4

   

201 3

 

Revenues

  $ 71,913     $ 41,777     $ 135,413     $ 90,700  

Cost of sales

    51,489       28,494       94,496       65,320  

Gross profit

    20,424       13,283       40,917       25,380  
                                 

Selling, general, and administrative expense

    6,526       6,030       12,619       12,473  

Research and development expense

    544       565       1,028       1,120  

Loss related to plant closure

    2,616             3,939        

Loss (gain) on disposal of assets

    (14 )     (2 )     233       374  

Operating income

    10,752       6,690       23,098       11,413  

Interest income

    5       2       13       10  

Interest expense

    (135 )     (481 )     (382 )     (873 )

Other expense, net

    (118 )     (98 )     (174 )     (181 )

Income before income taxes

    10,504       6,113       22,555       10,369  

Provision for income taxes

    3,871       2,123       7,951       3,534  

Net income

    6,633       3,990       14,604       6,835  
                                 

Other comprehensive income (loss):

                               

Energy swap adjustment, net of tax benefit of $10, $195, $20 and $56, respectively

    (19 )     (363 )     (37 )     (106 )

Pension benefits adjustment, net of tax expense of $80, $135, $160 and $270, respectively

    148       251       297       502  

Comprehensive income

  $ 6,762     $ 3,878     $ 14,864     $ 7,231  

Basic earnings per share (See Note 13)

  $ 0.32     $ 0.20     $ 0.70     $ 0.34  

Weighted average common shares outstanding

    20,428       19,779       20,392       19,623  

Diluted earnings per share (See Note 13)

  $ 0.31     $ 0.19     $ 0.68     $ 0.33  

Weighted average common shares and potential common share equivalents outstanding

    21,105       20,581       21,062       20,399  

 

 

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,

 
   

2014

   

2013

 

Cash flows from operating activities:

               

Net income

  $ 14,604     $ 6,835  

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

               

Depreciation and amortization

    10,335       10,253  

Loss on plant closure

    1,956        

Loss (gain) on disposal of assets

    233       374  

Provisions for losses on receivables

    24       24  

Share based compensation

    944       891  

Deferred income taxes

    1,110       1,409  

Changes in assets and liabilities:

               

Receivables

    (10,188 )     (2,671 )

Inventories

    14,271       (15,763 )

Prepaid expenses and other current assets

    (1,724 )     (1,515 )

Other assets

    1,679       5,874  

Accounts payable

    (1,306 )     (301 )

Accrued liabilities

    (1,718 )     (2,536 )

Pension liability, net

    (482 )     (246 )

Other long term liabilities

    (2 )     30  

Net cash provided by operating activities

    29,736       2,658  

Cash flows from investing activities:

               

Proceeds from disposition of assets

    193       161  

Acquisition of Wisconsin Specialty Protein, net of cash acquired

          (26,779 )

Capital expenditures

    (23,268 )     (12,897 )

Net cash used in investing activities

    (23,075 )     (39,515 )

Cash flows from financing activities:

               

Principal payments of long-term debt

    (1,851 )     (1,569 )

Principal payments of capital lease obligation

          (309 )

Purchase treasury stock at cost

    (57 )      

Proceeds from stock options exercised

    946       3,048  

Excess tax benefit of stock options exercised

    456       1,147  

Net cash provided by (used in) financing activities

    (506 )     2,317  

Net increase (decrease) in cash and cash equivalents

    6,155       (34,540 )

Cash and cash equivalents at beginning of year

    34,059       55,998  

Cash and cash equivalents at end of period

  $ 40,214     $ 21,458  

 

   

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

 

 

 
5

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

 SUMMARY OF OPERATIONS AND BASIS OF PRESENTATION

 

Business Description

 

Omega Protein Corporation (the “Company”) is a nutritional 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, which operates under the name Nutegrity, has three primary product lines: protein products, Omega-3 fish oil ingredients and other nutraceutical ingredients. Nutegrity is comprised primarily of three subsidiaries: Cyvex Nutrition, Inc. (“Cyvex”), InCon Processing, L.L.C. (“InCon”) and Wisconsin Specialty Protein, L.L.C. (“WSP”). Cyvex, acquired by the Company in December 2010, is located in Irvine, California and 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 processor that utilizes molecular distillation technology to concentrate Omega-3 fish oils and, subject to outside demand and excess capacity, a variety of other compound products for third-party tolling customers. WSP, acquired by the Company in February 2013, is a manufacturer and marketer of specialty dairy and other 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, 2013. 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, 2014, and the results of its operations for the three month and six month periods ended June 30, 2014 and 2013 and its cash flows for the six month periods ended June 30, 2014 and 2013. Quarterly operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

 

Consolidation

 

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

 

 

 
6

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Financial Statement Preparation

 

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

 

Certain amounts applicable to the prior periods have been reclassified to conform to the classifications currently followed. For the six months ended June 30, 2013, the Company reclassified $0.3 million of cash flows from investing activities to cash flows from operating activities related to accrued capital expenditures.  This revision was not considered to be material, individually or in the aggregate, to previously issued financial statements. The revisions had no effect on the results of operations (net or comprehensive income) or financial condition (stockholders’ equity).  

 

Revenue Recognition

 

The Company derives revenue principally from the sales of a variety of protein and oil products derived from menhaden. In addition and as a result of its acquisitions of Cyvex, InCon 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 risk and rewards of ownership of its products and title are transferred to the customer.

 

Shipping and Handling

 

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

 

Inventories

 

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

 

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

 

Energy Swap Agreements

 

The Company does not enter into financial instruments for trading or speculative purposes. Omega Protein 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.

 

                  (in thousands)  

Energy Swap

 

Consumption

Period

 

Quantity

 

Price Per Unit

   

Energy Swap

Asset/(Liability) as of

June 30, 2014

   

Deferred Tax

Asset/(Liability) as of

June 30, 2014

 

Diesel - NYMEX Heating Oil Swap

 

July – Nov., 2014

 

1,440,569

Gallons

  $ 2.92     $ 94     $ (33 )

Natural Gas - NYMEX Natural Gas Swap

 

July – Oct., 2014

 

223,750

MMBTUs

  $ 3.79       143       (50 )

Propane – Natural Gas Liquids Swap

 

July – Nov., 2014

 

583,000

Gallons

  $ 1.09       (18 )     6  

Natural Gas - NYMEX Natural Gas Swap

 

Apr. – Oct., 2015

 

114,000

MMBTUs

  $ 4.09              
                    $ 219     $ (77 )

 

 

 
7

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

                           
                  (in thousands)  

Energy Swap

 

Consumption 

Period

 

Quantity

 

Price Per Unit

   

Energy Swap 

Asset/(Liability) as of

December 31, 2013

   

Deferred Tax 

Asset/(Liability) as of

December 31, 2013

 

Diesel - NYMEX Heating Oil Swap

 

Oct. – Nov., 2013

 

998,700 Gallons

  $ 2.88     $ 132     $ (46 )

Natural Gas - NYMEX Natural Gas Swap

 

Apr. – Oct., 2014

 

307,374 MMBTUs

  $ 3.67       143       (50 )
                    $ 275     $ (96 )

 

As of June 30, 2014 and December 31, 2013, Omega Protein has recorded a current asset in prepaid expenses of $0.2 and $0.3, million, respectively, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax liability of $0.1 million associated therewith. The effective portion of the change in fair value from inception to June 30, 2014 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 loss resulting from the energy swap agreements (in thousands).

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2014

   

2013

   

2014

   

2013

 

Beginning balance

  $ 161     $ 285     $ 179     $ 28  

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

    (90 )     (16 )     (90 )     (16 )

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

    71       (347 )     53       (90 )

Ending balance

  $ 142     $ (78 )   $ 142     $ (78 )

 

The $0.1 million reported in accumulated other comprehensive loss as of June 30, 2014 will be reclassified to inventory 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 $0.1 million.

 

The aggregate fair value of derivative instruments in gross asset positions as of June 30, 2014 and December 31, 2013 was $0.2 and $0.3 million. 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 $29,000 and $0, respectively, of liabilities included in master netting arrangements with those same counterparties.

 

As of June 30, 2014 (in thousands)

 

Gross

Amounts of

Recognized

Assets

(Liabilities)

   

Gross

Amounts of

Assets

(Liabilities)

Offset

   

Net Amounts

of Assets

(Liabilities)

Presented in

the Balance

Sheet

 

Energy swap derivatives – asset position

  $ 248     $ (29 )   $ 219  

 

As of December 31, 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

  $ 275     $ -     $ 275  

 

 

 
8

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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, the Company included an expense of $0.1 million in cost of sales resulting from transactions associated with the ineffectiveness of diesel energy swaps. See Note 16 – Fair Value Disclosures for additional information.

 

Plant Closure

 

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

 

Acquisitions, Goodwill and Other Intangible Assets

 

 

All of the Company’s goodwill and other intangible assets are the result of acquisitions in the human nutrition segment. This segment is comprised of two reporting units, 1) InCon and Cyvex and 2) WSP. 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 9 – Goodwill and Other Intangible Assets.

 

Accumulated Other Comprehensive Loss

 

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

 

Changes in Accumulated Other Comprehensive Loss by Component 

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

 

   

Gains and Losses

On Cash Flow

Hedges

     

Defined Benefit

Pension Items

     

Total

 

Beginning balance December 31, 2013

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

Other comprehensive loss before reclassifications

    53                 53  

Amounts reclassified from accumulated other comprehensive loss

    (90 )

(a)

    297  

(b)

    207  

Net current-period other comprehensive income

    (37 )       297         260  

Ending balance June 30, 2014

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

 

Changes in Accumulated Other Comprehensive Loss by Component

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 )

(a)

    502  

(b)

    486  

Net current-period other comprehensive income

    (106 )       502         396  

Ending balance June 30, 2013

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

 

 

(a)

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

     
  (b) This accumulated other comprehensive income component is included in the computation of net periodic pension costs as amortization of actuarial loss which are explained in more detail in Note 16 to the consolidated financial statements in Item 8 of the Company’s Form 10-K for the fiscal year ended December 31, 2013.

 

 

 
9

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Recently Issued Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers .  This ASU amends the existing accounting standards for revenue recognition and is based on the principle that revenue should be recognized to depict the transfer of goods or services to a customer at an amount that reflects the consideration a company expects to receive in exchange for those goods or services.  The Company is required to adopt this ASU on January 1, 2017.  The Company does not expect this ASU to have a material impact on its Company’s consolidated results of operations, financial position and related disclosures.

 

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

 

In July 2013, the FASB issued ASU No. 2013-11 which amended the Income Taxes Topic of the Accounting Standards Codification to eliminate a diversity in practice for the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses or tax credit carryforwards exist. The amendment requires that the unrecognized tax benefit be presented as a reduction of the deferred tax assets associated with the carryforwards except in certain circumstances when it would be reflected as a liability. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2013. The Company’s adoption of FASB ASU No. 2013-11 effective January 1, 2014 did not have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

 

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 in Item 8 of the Company’s Form 10-K for the fiscal year ended December 31, 2013. The Company has issued non-qualified stock options under its stock incentive plans. The options generally vested in equal installments over three years and expire in ten years.

 

Net income for the three months ended June 30, 2013 includes $0.2 million ($0.1 million after-tax), respectively, of stock-based compensation costs related to stock options. Net income for the six months ended June 30, 2013 includes $0.3 million ($0.2 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, 2014 there was $0 of unrecognized compensation costs related to non-vested stock options that is expected to be recognized during the remainder of fiscal year 2014.

 

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

 

 

 
10

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

During the six month periods ended June 30, 2014 and 2013, the Company issued 117,885 and 25,000 shares of restricted stock, respectively, under the 2006 Incentive Plan to employees and non-employee directors. The Company’s compensation expense related to restricted stock, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income, was approximately $0.4 million and $0.3 million ($0.3 million and $0.2 million after tax) for the three months ended June 30, 2014 and 2013, respectively. The Company’s compensation expense related to restricted stock was approximately $0.7 million and $0.5 million ($0.5 million and $0.3 million after tax) for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, there was approximately $2.0 million ($1.3 million after tax) of unrecognized compensation expense related to non-vested restricted stock that is expected to be recognized over a weighted-average period of 1.0 years, of which $0.9 million ($0.6 million after-tax) of compensation expense is expected to be recognized during the remainder of fiscal year 2014.

 

Performance Units  

 

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

 

The Company’s compensation expense related to performance units was approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2014, respectively, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of June 30, 2014, there was approximately $1.4 million of unrecognized compensation cost related to performance units that is expected to be recognized over the next 2.5 years, of which $0.3 million of compensation expense is expected to be recognized during the remainder of fiscal year 2014.

 

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

 

A. Description of the Transaction

 

In February 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 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. WSP is included as part of the Company’s human nutrition segment.

 

B. Recording of Assets Acquired and Liabilities Assumed

 

The Company paid an aggregate cash purchase price for the equity of WSP of $26.5 million plus $0.6 million representing WSP’s excess working capital on the closing date and reimbursable capital expenditures, utilizing cash on hand.

 

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 consolidated statement of comprehensive income for the year ended December 31, 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.

 

     

      (in thousands)  

Cash

  $ 403  

Other current assets, net including receivables, prepaid and inventory

    2,515  

Property, plant, and equipment, net

    14,095  

Identifiable intangible assets (a)

    4,448  

Liabilities assumed

    (5,996 )

Total identifiable net assets

    15,465  

Goodwill

    11,614  

Total consideration

  $ 27,079  

 

 

(a)

See Note 9 – 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 Nutegrity, the Company’s human nutrition segment,

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

the value of the going-concern element of 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 9 - Goodwill and Other Intangible Assets, for more information about goodwill and other intangible assets.

 

C. Unaudited Pro Forma Financial Information

 

     The unaudited financial information in the table below summarizes the combined results of operations of the Company and WSP on a pro forma basis, as though the companies had been combined as of January 1, 2013. 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, 2013 and is not intended to be a projection of future results or trends.                        

                                                                                                                                  

    Revenue     Net income (loss)  
    (in thousands)  

WSP from February 27, 2013 – June 30, 2013

  $ 3,254     $ (37 )

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

  $ 92,768     $ 6,838  

 

NOTE 3. PLANT CLOSURE

 

In December 2013, the Company effectively closed its menhaden fish processing plant located in Cameron, Louisiana and re-deployed certain vessels from that facility to the Company’s other Gulf Coast facilities located in Abbeville, Louisiana and Moss Point, Mississippi. In conjunction with the closure, the following charges were incurred in the Company’s consolidated statements of comprehensive income for the three and six months ended June 30, 2014 and cumulative to date:

 

     

Three Months

Ended

June 30, 2014

     

Six Months

Ended

June 30, 2014

     

Cumulative to

Date

 
     

(in thousands)

 

Impairment of property, plant and equipment

  $ 1,647     $ 1,739     $ 6,535  

Write-off material and supplies inventory

          17       114  

Employee severance costs

    26       240       585  

Estimated decommissioning costs

                250  

Other ongoing closure costs not attributable to future production

    943       1,943       3,052  

Total loss related to plant closure

  $ 2,616     $ 3,939     $ 10,536  

 

In addition to the above recognized losses, the Company expects that it may have additional losses related to additional impairment of property, plant and equipment, ongoing employee severance expenses and ongoing costs not attributable to future production such as clean-up and disassembly.

 

 

 
12

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 4. RECEIVABLES, NET

 

R eceivables as of June 30, 2014 and December 31, 2013 are summarized as follows:

     

   

June 30,

2014

   

December 31,

2013

 
    (in thousands)  

Trade

  $ 29,106     $ 18,689  

Insurance

    1,718       1,806  

Income tax

    803       714  

Other

    40       310  

Total accounts receivable

    31,667       21,519  

Less allowance for doubtful accounts

    (363 )     (379 )

Receivables, net

  $ 31,304     $ 21,140  

 

NOTE 5. INVENTORY

 

The major classes of inventory as of June 30, 2014, December 31, 2013 and June 30, 2013 are summarized as follows:

   

     

June 30,2014

      December 31, 2013       June 30, 2013  
      (in thousands)  

Fish meal

  $ 17,577     $ 30,119     $ 16,176  

Fish oil

    14,271       41,081       23,312  

Fish solubles

    1,252       2,599       1,055  

Nutraceutical products

    4,862       3,650       3,828  

Dairy protein products

    2,332       1,355       1,520  

Unallocated inventory cost pool (including off-season costs)

    30,293       6,655       26,658  

Other materials and supplies

    9,273       8,880       10,795  

Total inventory

  $ 79,860     $ 94,339     $ 83,344  

 

Inventory at June 30, 2014, December 31, 2013 and June 30, 2013 is stated at the lower of cost or market. The elements of June 30, 2014 unallocated inventory cost pool include Omega Protein’s plant and vessel related labor, utilities, rent, repairs and depreciation, which are allocated to inventories produced through the 2014 fishing season.

 

NOTE 6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets as of June 30, 2014 and December 31, 2013 are summarized below:

        

   

June 30,

2014

   

December 31,

2013

 
    (in thousands)  

Prepaid insurance

  $ 4,561     $ 2,422  

Selling expenses

    193       869  

Fair market value of energy swaps, current portion

    218       275  

Whey process filters

    139       38  

Leases

    101       53  

Other prepaids and expenses

    370       258  

Total prepaid expenses and other current assets

  $ 5,582     $ 3,915  

 

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 16 – Fair Value Disclosures for additional information). Prepaid selling expenses are expensed in those periods in which the related revenue is recognized.

 

 

 
13

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 7. OTHER ASSETS

 

Other assets as of June 30, 2014 and December 31, 2013 are summarized as follows:

                 

     

June 30,

2014

     

December 31,

2013

 
      (in thousands)  

Fish nets, net of accumulated amortization of $2,034 and $2,610

  $ 1,415     $ 1,517  

Insurance receivable

    785       3,048  

Title XI debt issuance costs

    256       272  

Other debt issuance costs

    253       299  

Deposits and other

    106       98  

Total other assets, net

  $ 2,815     $ 5,234  

 

Amortization expense for fishing nets amounted to approximately $0.3 million for the three months ended June 30, 2014 and 2013 and $0.7 million for the six months ended June 30, 2014 and 2013.

 

As of June 30, 2014 and December 31, 2013, insurance receivables primarily relates to Jones Act claims for employees aboard its vessels. This estimated amount is recorded gross of estimated claims which may be due to claimants and is included in accrued insurance liabilities.

 

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

 

NOTE 8. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment as of June 30, 2014 and December 31, 2013 are summarized as follows:

 

                                                                                                                                                                                                

     

June 30,

2014

     

December 31,

2013

 
      (in thousands)  

Land

  $ 7,457     $ 7,457  

Plant assets

    161,761       159,337  

Fishing vessels

    110,452       101,745  

Furniture and fixtures

    7,090       7,091  

Construction in progress

    26,409       16,846  

Total property and equipment

    313,169       292,476  

Less accumulated depreciation and impairment

    (158,738 )     (148,363 )

Property, plant and equipment, net

  $ 154,431     $ 144,113  

 

 

Depreciation expense for the three months ended June 30, 2014 and 2013 was $4.6 million and $4.7 million, respectively, and $9.3 million and $9.3 million for the six months ended June 30, 2014 and 2013, respectively.

 

The Company capitalizes interest as part of the acquisition cost of a qualifying asset. Interest is capitalized only during the period of time required to complete and prepare the asset for its intended use. For the three months ended June 30, 2014 and 2013, the Company capitalized interest of approximately $0.2 million and $26,000, respectively. For the six months ended June 30, 2014 and 2013, the Company capitalized interest of approximately $0.4 million and $0.1 million, respectively.

 

In December 2013, the Company closed its Cameron, Louisiana menhaden processing plant and re-deployed some of its harvesting and processing assets to the three remaining menhaden processing plants. As a result of the closure, the Company recognized a cumulative $6.5 million in impairment of its fixed assets that it does not plan to use in future operations. For more information see Note 3 – Plant Closure.

 

 

 
14

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

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

 

As of the December 31, 2013, the results of the annual quantitative tests did not result in any impairment of goodwill because the fair values of each of the reporting units exceeded their respective carrying values. Specifically, our two reporting units, InCon/Cyvex and WSP, each had calculated fair values that were 21% in excess of their carrying values.  Additionally, the calculated fair value of InCon’s trade secrets exceeded its carrying value by 5%.  Key assumptions in the fair value calculations include discount rates and future sales volumes, prices and production costs.  It should be noted that these assumptions are highly subjective given the early stage and transitional nature of the businesses, and the use of different assumptions could produce significantly different fair values and, potentially, impairments.

 

Our annual quantitative tests have assumed increasing cash flows over the next several years, based on anticipated sales growth and improved profitability; through the six months ended June 30, 2014, the two reporting units have not achieved the assumed results.  If future cash flow expectations decline sufficiently, the estimated fair values could be reduced and potentially result in a material impairment in a subsequent period.

 

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

 

   

WSP

   

Cyvex and

Incon

   

Total

 

January 1, 2014

  $ 11,614       7,986     $ 19,600  

Acquisitions

                 

June 30, 2014

  $ 11,614       7,986     $ 19,600  

 

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

 

 

   

June 30,

2014

   

December 31,

2013

   

Weighted

Average

Life (years)

 

Carrying value of intangible assets subject to amortization:

                       

Customer relationships and non-competes

  $ 5,930     $ 5,930          

Less accumulated amortization

    (949 )     (613 )     10  

Total intangible assets subject to amortization, net

  $ 4,981     $ 5,317          

Indefinite life intangible assets – trade names/secrets and other

    2,615       2,615          

Total intangible assets

  $ 7,596     $ 7,932          

 

Amortization expense of the Company’s intangible assets for the three months ended June 30, 2014 and 2013 was approximately $0.2 million and for the six months ended June 30, 2014 and 2013 was approximately $0.3 million. Estimated future amortization expense related to intangible assets is as follows (in thousands):

 

Remainder of 2014

  $ 329  

2015

    655  

2016

    654  

2017

    654  

Thereafter

    2,689  

Total estimated future amortization expense

  $ 4,981  

 

The Company’s goodwill and other intangible assets 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, 2013.

 

 

 
15

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 10. NOTES PAYABLE AND LONG-TERM DEBT

 

At June 30, 2014 and December 31, 2013, the Company's long-term debt consisted of the following:

 

   

June 30,

   

December 31,

 
   

2014

   

2013

 
   

(in thousands)

 

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

               

Amounts due in installments through 2025, interest from 5.7% to 7.0%

  $ 22,381     $ 24,211  

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

    10       31  

Total debt

    22,391       24,242  

Less current maturities

    (2,564 )     (3,112 )

Long-term debt

  $ 19,827     $ 21,130  

 

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

 

In June 2011, pursuant to the Title XI program, the United States Department of Commerce Fisheries Finance Program (the “FFP”) approved a financing application made by the Company in the amount of $10.0 million (the “Approval Letter”) which expires on June 20, 2016. To date, the Company has not borrowed any amounts under the Approval Letter and its ability to do so may be adversely affected by an EPA notice that the Company’s Omega Protein subsidiary is ineligible, as a result of its previous convictions under the Clean Water Act, for receipt of government contracts or benefits in certain cases. See “Risk Factors - If our Omega Protein subsidiary fails to comply with the terms of its probation under a plea agreement entered into in June 2013, we could be subject to criminal prosecution” in the Company’s Form 10-K for the year ended December 31, 2013 for further detail on this EPA notice. As of June 30, 2014, the Company had approximately $22.4 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”).

 

All Loans and all other obligations outstanding under the Loan Agreement are payable in full on March 21, 2017. As of June 30, 2014 and December 31, 2013, the Company had no amounts outstanding under the $60 million Loan Agreement and approximately $3.5 million in letters of credit. As of June 30, 2014, 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 12 to the consolidated financial statements in Item 8 of the Company’s Form 10-K for the fiscal year ended December 31, 2013.

 

 

 
16

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 11. ACCRUED LIABILITIES

 

 

Accrued liabilities as of June 30, 2014 and December 31, 2013 are summarized as follows:

 

   

June 30,

   

December 31,

 
   

2014

   

2013

 
   

(in thousands)

 

Insurance

  $ 5,405     $ 7,222  

Reserve for plant closure costs

    478       595  

Salary and benefits

    9,240       9,423  

Trade creditors

    6,825       5,100  

Taxes, other than income tax

    1,035       64  

Income tax

    1,427       4,132  

Deferred revenue

    1,147       2,362  

Accrued interest

    190       200  

Other

    163       47  

Total accrued liabilities

  $ 25,910     $ 29,145  

 

As of June 30, 2014 and December 31, 2013, deferred revenue represents payments primarily received from international customers related to revenues which were not recognized until the subsequent period due to revenue recognition criteria.

 

NOTE 12. COMMITMENTS AND CONTINGENCIES

 

InCon Contingency

 

In September 2011, the Company acquired all of the outstanding equity of InCon 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”), some 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 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 of a Seller. For the six months ended June 30, 2014 and year ended December 31, 2013, the Company has not recorded an annual earn-out estimate.

 

Legal Contingencies

 

The Company has been named in a lawsuit filed in federal court in the Southern District of Mississippi in connection with the death of an employee at the Company’s Moss Point, Mississippi plant in April 2012. The lawsuit alleges that the Company intentionally caused the employee’s death, a claim that the Company emphatically denies. The Company believes that the claim is covered by the state’s workers compensation statute which provides that worker compensation benefits are the exclusive remedy for a work-related injury or death under these circumstances. The Company has filed a motion for summary judgment asking the court to dismiss the claim. If the court does not grant the Company’s motion, the case is currently set for trial in October 2014. The Company intends to contest the claim vigorously.

 

Regulatory Matters

 

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

 

 

 
17

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

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

 

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

 

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

 

Three Months Ended June 30:

 

2014

   

2013

 

Allocation of earnings:

                               

Net income

  $ 6,633             $ 3,990          

Income allocated to participating securities

    (171 )             (88 )        

Income allocated to common shares outstanding

  $ 6,462             $ 3,902          
                                 

Weighted average common shares outstanding

    20,428               19,779          

Basic earnings per share

            0.32               0.20  

Stock options assumed exercised

    677               802          

Weighted average diluted common shares and potential common share equivalents outstanding

    21,105               20,581          
                                 

Diluted earnings per share

            0.31               0.19  

 

Six Months Ended June 30:

 

2014

   

2013

 

Allocation of earnings:

                               

Net income

  $ 14,604             $ 6,835          

Income allocated to participating securities

    (364 )             (149 )        

Income allocated to common shares outstanding

  $ 14,240             $ 6,686          
                                 

Weighted average common shares outstanding

    20,392               19,623          

Basic earnings per share

            0.70               0.34  

Stock options assumed exercised

    670               776          

Weighted average diluted common shares and potential common share equivalents outstanding

    21,062               20,399          

Diluted earnings per share

            0.68               0.33  

 

Options to purchase the following number of shares of common stock (in thousands) were outstanding during the three and six months ended June 30, 2014 and 2013 but were excluded from the computation of diluted earnings per share because the adjusted exercise prices of the options based upon the assumed proceeds were greater than the average market price of the shares during that period.

 

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 

2014

   

2013

   

2014

   

2013

 
  130       135       130       1,311  

 

 

 
18

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

NOTE 14. COMPONENTS OF NET PERIODIC BENEFIT COST

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2014

   

2013

   

2014

   

2013

 
   

(in thousands)

   

(in thousands)

 

Service cost

  $     $     $     $  

Interest cost

    274       248       548       496  

Expected return on plan assets

    (298 )     (253 )     (596 )     (506 )

Amortization of prior service costs

                       

Amortization of net loss

    229       386       458       772  

Net periodic pension cost

  $ 205     $ 381     $ 410     $ 762  

 

For the six months ended June 30, 2014 and 2013, the Company contributed approximately $0.8 million and $0.7 million, respectively, to the Company’s pension plan. The Company expects to make contributions of $1.1 million to the pension plan during the remainder of 2014.

 

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 15. INDUSTRY SEGMENTS

 

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

 

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

 

The tables below present information about reported segments for three months ended June 30, 2014 and 2013 (in thousands). It should be noted that all cash and cash equivalent balances have been included in the identifiable assets of the unallocated segment.

 

June 30 , 201 4

 

Animal Nutrition

   

Human Nutrition

   

Unallocated

   

Total

 

Revenue (1)

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

Cost of sales

    45,501       5,988             51,489  

Gross profit

    19,763       661             20,424  

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

    636       2,067       4,367       7,070  

Loss related to plant closure

    2,616                   2,616  

Other (gains) and losses

    (14 )                 (14 )

Operating income (loss)

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

Depreciation and amortization

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

Identifiable assets

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

Capital expenditures

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

 

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

 

 

 
19

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

June 30, 2013

 

Animal

Nutrition

   

Human

Nutrition (2)

   

Unallocated

   

Total

 

Revenue (3)

  $ 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 (loss)

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

Depreciation and amortization

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

Identifiable assets

  $ 227,462     $ 57,861     $ 23,002     $ 308,325  

Capital expenditures

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

 

(2) Includes revenues and related expenses for WSP.

 

(3) 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.

 

 

The tables below present information about reported segments for the six months ended June 30, 2014 and 2013 (in thousands).

 

June 30 , 201 4

 

Animal

Nutrition

   

Human

Nutrition

   

Unallocated

   

Total

 

Revenue ( 4 )

  $ 120,534     $ 14,879     $     $ 135,413  

Cost of sales

    81,668       12,828             94,496  

Gross profit

    38,866       2,051             40,917  

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

    1,189       3,988       8,470       13,647  

Loss related to plant closure

    3,939                   3,939  

Other (gains) and losses

    42       191             233  

Operating income (loss)

  $ 33,696     $ (2,128 )   $ (8,470 )   $ 23,098  

Depreciation and amortization

  $ 8,742     $ 1,400     $ 193     $ 10,335  

Identifiable assets

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

Capital expenditures

  $ 10,358     $ 12,901     $ 9     $ 23,268  

 

(4) Excludes revenue from internal customers of $1.4 million for fish oil that was transferred from the animal nutrition segment to the human nutrition segment at cost.

 

June 30 , 2013

 

Animal

Nutrition

   

Human

Nutrition ( 5 )

   

Unallocated

   

Total

 

Revenue ( 6 )

  $ 76,790     $ 13,910     $     $ 90,700  

Cost of sales

    53,880       11,440             65,320  

Gross profit

    22,910       2,470             25,380  

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

    1,290       3,157       9,146       13,593  

Other (gains) and losses

    374                   374  

Operating income (loss)

  $ 21,246     $ (687 )   $ (9,146 )   $ 11,413  

Depreciation and amortization

  $ 8,821     $ 1,070     $ 362     $ 10,253  

Identifiable assets

  $ 227,462     $ 57,861     $ 23,002     $ 308,325  

Capital expenditures

  $ 12,046     $ 613     $ 238     $ 12,897  

 

(5) Includes revenues and related expenses for WSP from February 27, 2013 through June 30, 2013.

 

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

 

 

 

 
20

 

 

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

A reconciliation of total segment operating income to total earnings from operations before income taxes for the three and six months ended June 30, 2014 and 2013 is as follows (in thousands):

 

    Three Months Ended June 30,  
    201 4     2013  

Operating income for reportable segments

  $ 10,752     $ 6,690  

Interest income

    5       2  

Interest expense

    (135 )     (481 )

Other expense, net

    (118 )     (98 )

Income before income taxes

  $ 10,504     $ 6,113  

 

    Six Months Ended June 30,  
    201 4     2013  

Operating income for reportable segments

  $ 23,098     $ 11,413  

Interest income

    13       10  

Interest expense

    (382 )     (873 )

Other expense, net

    (174 )     (181 )

Income before income taxes

  $ 22,555     $ 10,369  

 

NOTE 16. FAIR VALUE DISCLOSURES

 

The following disclosures of the estimated fair value of financial instruments are made in accordance with the requirements of FASB ASC 825-10-50, Disclosure About Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies.

 

The carrying values and respective fair values of the Company’s long-term debt are presented below (in thousands). The fair value of the Company’s long-term debt is estimated based on the quoted market prices available to the Company for issuance of similar debt with similar terms at June 30, 2014 and December 31, 2013.

 

   

June 30,

   

December 31,

 
   

2014

   

2013

 

Long-term Debt (Level 2):

      </