Note 1 - Significant Accounting Policies Summary of Operations and Basis of Presentation | 3 Months Ended |
Mar. 31, 2014 |
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 (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. |
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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 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. |
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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, 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. |
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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 March 31, 2014, and the results of its operations for the three month periods ended March 31, 2014 and 2013 and its cash flows for the three month periods ended March 31, 2014 and 2013. Quarterly operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. |
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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. For the three months ended March 31, 2013, the Company reclassified $0.8 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 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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| | Consumption | | | | Price | | | Energy Swap | | | Deferred Tax | |
Per | Asset/(Liability) | Asset/(Liability) |
| as of | as of |
| March 31, | March 31, |
Energy Swap | | Period | | Quantity | | Unit | | | 2014 | | | 2014 | |
Diesel - NYMEX Heating Oil Swap | | May – Nov., 2014 | | 1,998,916 Gallons | | $ | 2.91 | | | $ | 24,000 | | | $ | (8,400 | ) |
Natural Gas - NYMEX Natural Gas Swap | | Apr. – Oct., 2014 | | 307,374 MMBTUs | | $ | 3.67 | | | | 231,700 | | | | (81,100 | ) |
Propane – Natural Gas Liquids Swap | | May – Nov., 2014 | | 683,000 Gallons | | $ | 1.09 | | | | (8,000 | ) | | | 2,800 | |
| | | | | | | | | | $ | 247,700 | | | $ | (86,700 | ) |
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Energy Swap | | Consumption | | Quantity | | Price | | | Energy Swap | | | Deferred Tax | |
Period | Per | Asset/(Liability) | Asset/(Liability) |
| Unit | as of | as of |
| | December 31, | December 31, |
| | 2013 | 2013 |
Diesel - NYMEX Heating Oil Swap | | Oct. – Nov., 2013 | | 998,700 Gallons | | $ | 2.88 | | | $ | 131,400 | | | $ | (46,000 | ) |
Natural Gas - NYMEX Natural Gas Swap | | Apr. – Oct., 2014 | | 307,374 MMBTUs | | $ | 3.67 | | | | 143,200 | | | | (50,100 | ) |
| | | | | | | | | | $ | 274,600 | | | $ | (96,100 | ) |
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As of March 31, 2014 and December 31, 2013, Omega Protein has recorded a current asset in prepaid expenses of $0.3 million 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 March 31, 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. |
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| | (in thousands) | | | | | | | | | |
| | 2014 | | | 2013 | | | | | | | | | |
Balance at January 1, | | $ | 179 | | | $ | 28 | | | | | | | | | |
Net change associated with current period swap transactions, net of tax, | | | (18 | ) | | | 257 | | | | | | | | | |
Balance at March 31, | | $ | 161 | | | $ | 285 | | | | | | | | | |
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The $0.2 million reported in accumulated other comprehensive loss as of March 31, 2014 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 $0.2 million. |
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The aggregate fair value of derivative instruments in gross asset positions as of March 31, 2014 and December 31, 2013 was $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 $28,000 and $0, respectively, of liabilities included in master netting arrangements with those same counterparties. |
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As of March 31, 2014 (in thousands) | | Gross | | | Gross | | | Net Amounts | | | | | |
Amounts of | Amounts of | of Assets | | | | |
Recognized | Assets | (Liabilities) | | | | |
Assets | (Liabilities) | Presented in | | | | |
(Liabilities) | Offset | the Balance | | | | |
| | Sheet | | | | |
Energy swap derivatives – asset position | | $ | 276 | | | $ | (28 | ) | | $ | 248 | | | | | |
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As of December 31, 2013 (in thousands) | | Gross | | | Gross | | | Net Amounts | | | | | |
Amounts of | Amounts of | of Assets | | | | |
Recognized | Assets | (Liabilities) | | | | |
Assets | (Liabilities) | Presented in | | | | |
(Liabilities) | Offset | the Balance | | | | |
| | Sheet | | | | |
Energy swap derivatives – asset position | | $ | 275 | | | $ | - | | | $ | 275 | | | | | |
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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 three months ended March 31, 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. |
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Plant Closure |
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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. |
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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 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. |
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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 Three Months Ended March 31, 2014 (in thousands) |
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| | Gains and Losses | | | | Defined Benefit | | | | Total | | | |
On Cash Flow | Pension Items | | |
Hedges | | | |
Beginning balance December 31, 2013 | | $ | 179 | | | | $ | (6,387 | ) | | | $ | (6,208 | ) | | |
Other comprehensive loss before reclassifications | | | (18 | ) | | | | — | | | | | (18 | ) | | |
Amounts reclassified from accumulated other comprehensive loss | | | — | | (a) | | | 149 | | (b) | | | 149 | | | |
Net current-period other comprehensive income | | | (18 | ) | | | | 149 | | | | | 131 | | | |
Ending balance March 31, 2014 | | $ | 161 | | | | $ | (6,238 | ) | | | $ | (6,077 | ) | | |
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Changes in Accumulated Other Comprehensive Loss by Component |
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For the Three Months Ended March 31, 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 | | | 257 | | | | | — | | | | | 257 | | | |
Amounts reclassified from accumulated other comprehensive loss | | | — | | (a) | | | 251 | | (b) | | | 251 | | | |
Net current-period other comprehensive income | | | 257 | | | | | 251 | | | | | 508 | | | |
Ending balance March 31, 2013 | | $ | 285 | | | | $ | (9,701 | ) | | | $ | (9,416 | ) | | |
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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 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. | | | | | | | | | | | | | | |
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Recently Issued Accounting Standards |
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In April 2014, the Financial Accounting Standards Board (the "FASB") issued an Accounting Standards Update ("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. |
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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’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. |
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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 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. |
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Net income for the three months ended March 31, 2013 includes $0.2 million ($0.1 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 March 31, 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. |
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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 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. |
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During the three month periods ended March 31, 2014 and 2013, the Company issued 92,545 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 was approximately $0.3 million ($0.2 million after tax) for the three months ended March 31, 2014 and 2013, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of March 31, 2014, there was approximately $2.1 million ($1.4 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 1.3 years, of which $1.0 million ($0.6 million after-tax) of compensation expense is expected to be recognized during the remainder of fiscal year 2014. |
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Performance Units |
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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. |
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The Company’s compensation expense related to performance units was approximately $0.1 million for the three months ended March 31, 2014, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of March 31, 2014, there was approximately $1.3 million of unrecognized compensation cost related to performance units that is expected to be recognized over the next 2.75 years, of which $0.4 million of compensation expense is expected to be recognized during the remainder of fiscal year 2014. |