Note 1 - Significant Accounting Policies Summary of Operations and Basis of Presentation | 9 Months Ended |
Sep. 30, 2013 |
Accounting Policies [Abstract] | ' |
Significant Accounting Policies [Text Block] | ' |
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES |
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SUMMARY OF OPERATIONS AND BASIS OF PRESENTATION |
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Business Description |
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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. |
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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. |
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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 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 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. |
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Basis of Presentation |
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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. |
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In the opinion of management the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s consolidated financial position as of September 30, 2013, and the results of its operations for the three and nine month periods ended September 30, 2013 and 2012 and its cash flows for the nine month periods ended September 30, 2013 and 2012. Operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. |
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Consolidation |
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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. |
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Financial Statement Preparation |
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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. |
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Certain amounts applicable to the prior periods have been reclassified to conform to the classifications currently followed. Specifically, the presentation of our unaudited condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2012 was revised to classify $6.2 million and $10 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. |
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Additionally, for the nine months ended September 30, 2012, the Company reclassified $0.7 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). |
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Revenue Recognition |
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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. |
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Shipping and Handling |
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Amounts billed to customers associated with shipping and handling are included in revenues and the related costs are included in cost of sales. |
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Inventories |
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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. |
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Any costs incurred during abnormal downtime related to activity at Omega Protein’s plants are charged to expense as incurred. |
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Energy Swap Agreements |
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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. |
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Energy swap balances at September 30, 2013: |
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Energy Swap | | | Consumption Period | | | Quantity | | | Price | | | Energy Swap Asset/(Liability) as of | | | Deferred Tax Asset/(Liability) as of | |
Per | 30-Sep-13 | 30-Sep-13 |
Unit | | |
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Diesel - NYMEX Heating Oil Swap | | | Oct. – Nov., 2013 | | | 377,431 Gallons | | | $ | 2.88 | | | $ | 34,800 | | | $ | (12,200 | ) |
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Natural Gas - NYMEX Natural Gas Swap | | | Oct., 2013 | | | 43,000 MMBTUs | | | $ | 3.88 | | | | (16,400 | ) | | | 5,700 | |
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Fuel Oil – No.6 1.0% NY-Platts Swap | | | Oct. – Nov., 2013 | | | 233,184 Gallons | | | $ | 2.24 | | | | 11,400 | | | | (3,900 | ) |
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Natural Gas - NYMEX Natural Gas Swap | | | Apr. – Oct., 2014 | | | 111,749 MMBTUs | | | $ | 3.79 | | | | 5,200 | | | | (1,800 | ) |
| | | | | | | | | | | | | $ | 35,000 | | | $ | (12,200 | ) |
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Energy swap balances at December 31, 2012: |
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Energy Swap | | | Consumption Period | | | Quantity | | | Price | | | Energy Swap Asset (Liability) as of | | | Deferred Tax Asset (Liability) as of | | | |
Per | 31-Dec-12 | 31-Dec-12 | | |
Unit | | | | |
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Diesel - NYMEX Heating Oil Swap | | | May - November, 2013 | | | 1,359,782 Gallons | | | $ | 2.82 | | | $ | 244,800 | | | $ | (53,800 | ) | | |
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Natural Gas - NYMEX Natural Gas Swap | | | April – October, 2013 | | | 381,150 MMBTUs | | | $ | 3.94 | | | | (149,600 | ) | | | 52,300 | | | |
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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 | ) | | |
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As of September 30, 2013 and December 31, 2012, Omega Protein has recorded a long-term asset of $1,000 and $0, respectively, net of the current portion included in prepaid expenses and other current assets of $34,000 and $134,200, respectively, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax liability of $12,200 and $15,100, respectively, associated therewith. The effective portion of the change in fair value from inception to September 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). |
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| | Three Months Ended | | | Nine Months Ended | | | | | | |
September 30, | September 30, | | | | | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | | | | | | |
Beginning balance | | $ | (78 | ) | | $ | (720 | ) | | $ | 28 | | | $ | (420 | ) | | | | | |
Net (gain) loss, net of tax, reclassified to unallocated inventory cost pool | | | (92 | ) | | | 116 | | | | (108 | ) | | | 377 | | | | | | |
Net change associated with current period swap transactions, net of tax | | | 193 | | | | 895 | | | | 103 | | | | 334 | | | | | | |
Ending balance | | $ | 23 | | | $ | 291 | | | $ | 23 | | | $ | 291 | | | | | | |
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The $22,700 reported in accumulated other comprehensive loss as of September 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 $22,100. |
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The aggregate fair value of derivative instruments in gross asset positions as of September 30, 2013 and December 31, 2012 was $58,000 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 $5,000 and $0.2 million, respectively, of liabilities included in master netting arrangements with those same counterparties. |
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The aggregate fair value of derivative instruments in gross liability positions as of September 30, 2013 and December 31, 2012 was $24,000 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 $6,000 and $0, respectively, of assets included in master netting arrangements with those same counterparties. |
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As of September 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 | | $ | 58 | | | $ | (5 | ) | | $ | 53 | | | | | | | | | | |
Energy swap derivatives – liability position | | $ | (24 | ) | | $ | 6 | | | $ | (18 | ) | | | | | | | | | |
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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 | | | | | | | | | | |
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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 nine months ended September 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 16 – Fair Value Disclosures for additional information. |
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Acquisitions, Goodwill and Other Intangible Assets |
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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, the Company completed its acquisition of InCon Processing, L.L.C., a Delaware limited liability company. In the fourth quarter of 2010, the Company completed its acquisition of Cyvex Nutrition, Inc., a California corporation. 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. |
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Construction Contract |
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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. |
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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. The Company reassessed these estimates on a quarterly basis. For the three and nine months ended September 30, 2012, the Company incurred gross losses of $0.1 million and $0.5 million, respectively, with respect to the construction contract. There were no third party construction contracts during 2013. |
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Accumulated Other Comprehensive Loss |
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The components of accumulated other comprehensive (loss) gain, net of tax, included in stockholders’ equity are as follows: |
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Changes in Accumulated Other Comprehensive Loss by Component |
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For the Nine Months Ended September 30, 2013 (in thousands) |
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| | Gains and Losses | | | | Defined Benefit | | | | Total | | | | | | | | |
On Cash Flow | Pension Items | | | | | | | |
Hedges | | | | | | | | |
Beginning balance December 31, 2012 | | $ | 28 | | | | $ | (9,952 | ) | | | $ | (9,924 | ) | | | | | | | |
Other comprehensive loss before reclassifications | | | 103 | | | | | — | | | | | 103 | | | | | | | | |
Amounts reclassified from accumulated other comprehensive loss | | | (108 | ) | (a) | | | 753 | | (b) | | | 645 | | | | | | | | |
Net current-period other comprehensive income | | | (5 | ) | | | | 753 | | | | | 748 | | | | | | | | |
Ending balance September 30, 2013 | | $ | 23 | | | | $ | (9,199 | ) | | | $ | (9,176 | ) | | | | | | | |
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| (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 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. | | | | | | | | | | | | | | | | | | | |
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Recently Issued Accounting Standards |
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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 is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements. |
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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. |
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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. |
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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. |
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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. |
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Stock-Based Compensation |
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Stock Options |
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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. |
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Net income for the three months ended September 30, 2013 and 2012 includes $0.2 million and $0.8 million ($0.1 million and $0.5 million after-tax), respectively, of stock-based compensation costs related to stock options. Net income for the nine months ended September 30, 2013 and 2012 includes $0.5 million and $2.3 million ($0.3 million and $1.5 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 September 30, 2013 there was $0.1 million ($0.1 million after-tax) of total unrecognized compensation costs related to non-vested stock options that is expected to be recognized during the remainder of fiscal year 2013. |
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Restricted Stock |
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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 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. |
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During the nine month periods ended September 30, 2013 and 2012, the Company issued 58,036 and 25,000 shares of restricted stock for each period, respectively, under the 2006 Incentive Plan to employees and non-employee directors. The Company’s compensation expense related to restricted stock was approximately $0.4 million and $0.1 million ($0.3 million and $0.1 million after tax) for the three months ended September 30, 2013 and 2012, respectively, and $1.0 million and $0.4 million ($0.6 million and $0.3 million after tax) for the nine months ended September 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 September 30, 2013, there was approximately $1.9 million ($1.2 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 1.6 years, of which $0.4 million ($0.3 million after-tax) of total restricted stock compensation is expected to be recognized during the remainder of fiscal year 2013. |