MARINE PRODUCTS CORP - Annual Report: 2005 (Form 10-K)
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
(Mark
One)
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|
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[X]
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Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
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|
[ ]
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Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
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FOR
THE
FISCAL YEAR ENDED DECEMBER 31, 2005
Commission
File No. 1-16263
MARINE
PRODUCTS CORPORATION
|
Delaware
(State
of Incorporation)
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58-2572419
(I.R.S.
Employer Identification
No.)
|
2170
PIEDMONT ROAD, NE
ATLANTA,
GEORGIA 30324
(404)
321-7910
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
COMMON
STOCK, $0.10 PAR VALUE
|
Name
of each exchange on which registered
NEW
YORK STOCK EXCHANGE
|
Securities
registered pursuant to section 12(g) of the Act:
NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. [
] Yes [X] No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
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. [X]
Yes [
] No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Larger
accelerated filer [ ] Accelerated
filer [X] Non-accelerated
filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
The
aggregate market value of Marine Products Corporation Common Stock held by
non-affiliates on June 30, 2005, the last business day of the registrant’s most
recent second fiscal quarter, was $186,474,675 based on the closing price on
the
New York Stock Exchange on June 30, 2005 of $14.55 per share.
Marine
Products Corporation had 38,044,485 shares of Common Stock outstanding as of
February 24, 2006.
Documents
Incorporated by Reference
Portions
of the Proxy Statement for the 2006 Annual Meeting of Stockholders of Marine
Products Corporation are incorporated by reference into Part III, Items 10
through 14 of this report.
1
PART
I
References
in this document to “we,” “our,” “us,” “Marine Products,” or “the Company” mean
Marine Products Corporation (“MPC”) and its subsidiaries, Chaparral Boats, Inc.
(“Chaparral”) and Robalo Acquisition Company LLC (“Robalo”), collectively or
individually, except where the context indicates otherwise.
Forward-Looking
Statements
Certain
statements made in this report that are not historical facts are
“forward-looking statements” under the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements may include, without limitation,
statements that relate to our business strategy, plans and objectives, and
our
beliefs and expectations regarding future demand for our products and services
and other events and conditions that may influence our performance in the
future.
The
words
“may,” “should,” “will,” “expect,” “believe,” “anticipate,” “intend,” “plan,”
“believe,” “seek,” “project,” “estimate,” and similar expressions used in this
document that do not relate to historical facts are intended to identify
forward-looking statements. Such statements are based on certain assumptions
and
analyses made by our management in light of its experience and its perception
of
historical trends, current conditions, expected future developments and other
factors it believes to be appropriate. The
forward-looking statements include, without limitation, statements that we
do
not currently anticipate that any material expenditure will be required to
continue to comply with existing environmental or safety regulations; our
ability to execute stated business and financial strategies in the future to
better manage our Company; management’s belief that the Company’s net sales and
profits will not increase in 2006 at the same rate as in prior years;
management’s belief that the Company may incur increased advertising and other
selling, general and administrative expenses in the future; expectations about
the amount of contributions to the defined benefit pension plan and capital
expenditures during 2006 and the purpose of those capital expenditures; the
adequacy of the Company’s capital resources; and the effect of various recent
accounting pronouncements on the Company, its operating results and financial
condition. These
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of Marine
Products Corporation to be materially different from any future results,
performance or achievements expressed or implied in such forward-looking
statements. These risks involve the outcome of current and future litigation,
the impact of interest rates, economic conditions, fuel costs and weather on
our
business, our dependence on a network of independent boat dealers, the
possibility of defaults by our dealers in their obligations to third-party
dealer floor plan lenders, and our reliance on third party suppliers. We caution
you that such statements are only predictions and not guarantees of future
performance and that actual results, developments and business decisions may
differ from those envisioned by the forward-looking statements. See “Risk
Factors” on page 9 for a discussion of factors that may cause actual results to
differ from our projections.
Item
1. Business
Marine
Products manufactures fiberglass motorized boats distributed and marketed
through its independent dealer network. Marine Products’ product offerings
include Chaparral sterndrive and inboard pleasure boats and Robalo outboard
sport fishing boats.
Organization
Marine
Products is a Delaware corporation, incorporated on August 31, 2000, in
connection with a spin-off from RPC, Inc. (NYSE: RES) (“RPC”). Effective
February 28, 2001, RPC accomplished the spin-off by contributing 100 percent
of
the issued and outstanding stock of Chaparral to Marine Products, a newly formed
wholly-owned subsidiary of RPC, and then distributing the common stock of Marine
Products to RPC stockholders. As part of the transaction, RPC’s stockholders
received 0.6 shares of Marine Products common stock for every one share of
RPC
common stock owned as of February 16, 2001, the record date for the spin-off,
with fractional shares being settled in cash.
Overview
Marine
Products designs, manufactures and sells recreational fiberglass powerboats
in
the sportboat, deckboat, cruiser, and sport fishing markets. The Company sells
its products to a network of 148 domestic and 24 international independent
authorized dealers. Marine Products’ mission is to enhance its customers’
boating experience by providing them with high quality, innovative powerboats.
The Company intends to remain a leading manufacturer of recreational powerboats
for sale to a broad range of consumers worldwide.
2
The
Company manufactures Chaparral sterndrive and inboard-powered sportboats,
deckboats, and cruisers. The most recent available industry statistics [source:
Statistical Surveys, Inc. report dated September 30, 2005] indicate that
Chaparral is the third largest manufacturer of 18 to 35 foot sterndrive boats
in
the United States. Chaparral was founded in 1965 in Ft. Lauderdale, Florida.
Chaparral’s first boat was a 15-foot tri-hull design with a retail price of less
than $1,000. Over time the Company grew by offering exceptional quality and
consumer value. In 1976, Chaparral moved to Nashville, Georgia, where a
manufacturing facility of a former boat manufacturing company was available
for
purchase. This provided Chaparral an opportunity to obtain additional
manufacturing space and access to a trained work force. With over 40 years
of
boatbuilding experience, Chaparral continues to improve the design and
manufacturing of its product offerings to meet the growing needs of
discriminating recreational boaters.
Marine
Products also manufactures and sells Robalo sport fishing boats, which are
powered by outboard engines and designed primarily for salt-water sport fishing.
Robalo was founded in 1969 and its first boat was a 19-foot center console
salt-water fishing boat, among the first of this type of boat to have an
“unsinkable” hull. The Company’s ownership of Robalo results from the
acquisition, in June 2001, of certain operating and intangible assets of Robalo,
formerly a segment of the U.S. Marine division of Brunswick Corporation.
Since
the
acquisition by Marine Products, Robalo has expanded its product offerings to
include a total of 11 models ranging from 19 to 29 feet in length. Net sales
of
Robalo products accounted for approximately nine percent of consolidated 2005
net sales. The Company believes that Robalo’s share of the outboard sport
fishing boat market is approximately one percent.
Products
Marine
Products offers a comprehensive range of motorized recreational boats. Marine
Products distinguishes itself by offering a wide range of products to the family
recreational market and cruiser market through its Chaparral brand, and to
the
sport fishing market through its Robalo brand.
The
following table provides a brief description of our product lines and their
particular market focus:
|
Product
Line
|
Number
of
Models
|
Overall
Length
|
Approximate
Retail
Price
Range
|
Description
|
|
Chaparral
- SSi
Sportboats
|
15
|
18′-28′
|
$20,000
- $140,000
|
Fiberglass
bowriders and closed deck runabouts. Encompasses affordable, entry-level
to mid-range and larger sportboats. Marketed as high value runabouts
for
family groups.
|
|
Chaparral
- Sunesta Deckboats
|
6
|
21′-28′
|
$38,000
- $82,000
|
Fiberglass
deck boats. Encompasses affordable, entry-level to mid-range deck
boats.
Marketed as high value family pleasure boats with the handling of
a
runabout, the style of a sportboat and the roominess of a cruiser.
|
|
Chaparral
- Signature Cruisers
|
7
|
24′-35′
|
$60,000
- $311,000
|
Fiberglass,
accommodation-focused cruisers. Marketed to experienced boat owners
through trade magazines and boat show exhibitions.
|
|
Robalo
- Sport
Fishing Boats
|
11
|
19′-29′
|
$30,000
- $208,000
|
Sport
fishing boats for large freshwater lakes or saltwater use. Marketed
to
experienced fishermen.
|
Manufacturing
Marine
Products’ manufacturing facilities are located in Nashville, Georgia and
Valdosta, Georgia. Marine Products utilizes seven different plants to, among
other things, manufacture interiors, design new models, create fiberglass hulls
and decks, and assemble various end products. Quality control is conducted
throughout the manufacturing process. Chaparral and Robalo are ISO 9001: 2000
certified. ISO 9001: 2000 is an international designation of design,
manufacturing, and customer service processes. ISO 9001: 2000 surpasses previous
ISO designations. Management believes Chaparral is the third largest stern-drive
boat manufacturing brand to hold the ISO 9001: 2000 certification. When fully
assembled and inspected, the boats are loaded onto either company-owned trailers
or third-party marine transport trailers for delivery to dealers.
3
The
manufacturing process begins with the design of a product to meet dealer and
customer needs. Plugs are constructed in the research and development phase
from
designs. Plugs are used to create a mold from which prototype boats can be
built. Adjustments are made to the plug design until acceptable parameters
are
met. The final plug is used to create the necessary number of production molds.
Molds are used to produce the fiberglass hulls and decks. Fiberglass components
are made by applying the outside finish or gel coat to the mold, then numerous
layers of fiberglass and resin are applied during the lamination process over
the gel coat. After curing, the hulls and deck are removed from the molds and
are trimmed and prepared for final assembly, which includes the installation
of
electrical and plumbing systems, engines, upholstery, accessories and graphics.
Suppliers
Marine
Products’ two most significant components used in manufacturing its boats, based
on cost, are engines and fiberglass. For each of these, there is currently
an
adequate supply available in the market. Marine Products has not experienced
any
material shortages in any of these products. Temporary shortages, when they
do
occur, usually involve manufacturers switching model mixes or introducing new
product lines. Marine Products obtains most of its fiberglass from a leading
domestic supplier. Marine Products believes that there are several alternative
suppliers if this supplier fails to provide adequate quality or quantities
at
acceptable prices.
Marine
Products does not manufacture the engines installed in its boats. Engines are
generally specified by the dealers at the time of ordering, usually on the
basis
of anticipated customer preferences or actual customer orders. Sterndrive
engines for the Chaparral brand are purchased through the American Boatbuilders
Association (“ABA”), which has entered into engine supply arrangements with
Mercury Marine and Volvo Penta, the two currently existing suppliers of
sterndrive engines. These arrangements contain incentives and discount
provisions, which may reduce the cost of the engines purchased, if specified
purchase volumes are met during specified periods of time. Although no minimum
purchases are required, Marine Products expects to continue purchasing
sterndrive engines through the ABA on a voluntary basis in order to receive
volume-based purchase discounts. Marine Products does not have a long-term
supply contract with the ABA. Marine Products has engine supply contracts for
its Robalo product line with Honda and Yamaha. These engine supply arrangements
were not negotiated through the ABA. In the event of a sudden interruption
in
the supply of engines from these suppliers, our sales and profitability could
be
negatively impacted. See “Growth Strategies” below.
Marine
Products uses other raw materials in its manufacturing processes. Among these
are stainless steel and resins made from feedstocks. During 2005 the price
of
these raw materials increased significantly. See “Inflation” below.
Sales
and Distribution
Sales
are
made through approximately 136 Chaparral dealers and 34 Robalo dealers located
in markets throughout the United States. Twenty-two of these dealers sell both
brands. Dealers market directly to consumers at boat show exhibitions and in
the
dealers’ showrooms. Marine Products also has 24 international dealers. Most of
our dealers inventory and sell boat brands manufactured by other companies,
including some that compete directly with our brands. The territories served
by
any dealer are not exclusive to the dealer; however, Marine Products uses
discretion in establishing relationships with new dealers in an effort to
protect the mutual interests of the existing dealers and the Company. Marine
Products’ seven independent field sales representatives call upon existing
dealers and develop new dealer relationships. The field sales representatives
are directed by a National Sales Coordinator, who is responsible for developing
a full dealer distribution network for the Company’s products. The marketing of
boats to retail customers is primarily the responsibility of the dealer. Marine
Products supports dealer marketing efforts by supplementing local advertising,
sales and marketing follow up in boating magazines, and participation in
selected regional, national, and international boat show exhibitions. No single
dealer accounts for more than 10 percent of sales.
Marine
Products continues to seek new dealers in many areas throughout the U.S.,
Europe, South America, Asia, Russia and the Middle East. In general, Marine
Products requires payment in full before it will ship a boat overseas.
Consequently, there is no credit risk associated with its international sales
or
risk related to foreign currency fluctuation. Marine Products believes
international sales could produce additional sales growth. Due in part to U.S.
dollar weakness, sales to international dealers increased in 2005 compared
to
2004 and was approximately 15 percent of total sales.
Marine
Products’ sales orders are indicators of strong interest from its dealers.
Historically, dealers have in most cases taken delivery of all their orders.
The
Company attempts to ensure that its dealers do not accept an excessive amount
of
inventory by monitoring their inventory levels. Knowledge of inventory levels
at
the individual dealers facilitates production scheduling with very short lead
times in order to maintain flexibility, in the event that adjustments need
to be
made to dealer shipments. In the past, Marine Products has been able to resell
any boat for which the order has been cancelled. To date, order delays have
not
had a material effect on Marine Products.
4
Most
of
Marine Products’ domestic shipments are made pursuant to “floor plan financing”
programs in which Marine Products’ subsidiaries participate on behalf of their
dealers with two major third-party financing institutions. Under these
arrangements, a dealer establishes lines of credit with one or more of these
third-party lenders for the purchase of boat inventory for sales to retail
customers in their show room or during boat show exhibitions. When a dealer
purchases and takes delivery of a boat pursuant to a floor plan financing
arrangement, it draws against its line of credit and the lender pays the invoice
cost of the boat directly to Marine Products, generally, within 10 business
days. When the dealer in turn sells the boat to a retail customer, the dealer
repays the lender, thereby restoring its available credit line. Each dealer’s
floor plan credit facilities are secured by the dealer’s inventory, letters of
credit, and perhaps other personal and real property. Most dealers maintain
financing arrangements with more than one lender. In connection with the
dealer’s floor plan financing arrangements with qualified lenders, Marine
Products or its subsidiaries have agreed to repurchase any of its boats, up
to
specified limits, which the lender repossesses from a dealer and returns to
Marine Products in a “like new” condition. In the event that a dealer defaults
under a credit line, the lender may then invoke the manufacturers’ repurchase
agreement with respect to that dealer. In that event, all repurchase agreements
of all manufacturers supplying a defaulting dealer are generally invoked
regardless of the boat or boats with respect to which the dealer has defaulted.
As of December 31, 2005, Marine Products’ aggregate obligation to repurchase
boats under these floor plan financing programs described above was
approximately $4.0 million. Unlike Marine Products’ obligation to repurchase
boats repossessed by lenders, Marine Products is under no obligation to
repurchase boats directly from dealers. Marine Products does not sponsor
financing programs to the consumer; any consumer financing promotions for
Chaparral or Robalo boats would be the responsibility of the dealer.
Marine
Products’ dealer sales incentive programs are variously designed to promote
early replenishment of the stock in dealer inventories depleted throughout
the
prime spring and summer selling seasons, promote the sales of older models
in
dealer inventory and particular models during specified periods. These programs
help to stabilize Marine Products’ manufacturing between the peak and off-peak
periods, and promote sales of certain models. For the 2006 model year (which
commenced July 1, 2005), Marine Products offered its dealers several sales
incentive programs based on dollar volumes and timing of dealer purchases.
Programs offered include sales discounts, inventory reduction rebates, and
payment of floor plan financing interest charged by qualified floor plan
providers to dealers generally through April 1, 2006. After the interest payment
programs end, interest costs revert to the dealer at rates set by the lender.
A
dealer makes periodic curtailment payments (principal payments) on outstanding
obligations against its dealer inventory as set forth in the floor plan
financing agreements between the dealer and their particular lender.
These
various sales incentives and promotions have resulted in relatively level
month-to-month production and sales. Similar sales incentive and promotion
programs have been in effect during the past several years, and Marine Products
expects to continue to offer these types of programs in the future.
The
sales
order backlog was approximately 1,900 boats with estimated net sales of
approximately $81 million as of December 31, 2005. This represents an
approximate 15 week backlog based on recent production levels. As of December
31, 2004, the sales order backlog was approximately 2,023 boats with estimated
net sales of approximately $75 million. The Company typically does not
manufacture a significant number of boats for its own inventory mainly by
monitoring various criteria discussed earlier in order to retain the flexibility
to manufacture boats in response to recent indicators of demand. The Company
occasionally manufactures boats for its own inventory because the number of
boats required for immediate shipment is not always the most efficient number
of
boats to produce in a given production schedule.
Research
and Development
Essentially
the same technologies and processes are used to produce fiberglass boats by
all
boat manufacturers. The most common method is open-face molding. This is usually
a labor-intensive, manual process whereby employees hand spray and apply
fiberglass and resin in layers on open molds to create boat hulls, decks and
other smaller fiberglass components. This process can result in inconsistencies
in the size and weight of parts, which may lead to higher warranty costs. A
single open-face mold is typically capable of producing approximately three
hulls per week.
Chaparral
has been a leading innovator in the recreational boating industry. One of
Chaparral’s most innovative designs is the full-length “Extended V-Plane”
running surface. Typically, sterndrive boats have a several foot gap on the
bottom rear of the hull where the engine enters the water. With Chaparral’s
design, the running surface extends the full length to the rear of the boat.
The
benefit of this innovation is more deck space, better planing performance and
a
more comfortable ride. All of Chaparral’s models have the “Extended V-Plane”
running surface. Although the basic hull designs are similar, the Company
introduces a variety of new models each year and periodically replaces, updates
or discontinues existing models.
5
Robalo’s
hulls utilize the Hydro LiftTM
hull
design. This variable dead rise hull design provides a smooth ride in rough
conditions. It increases the maximum speed obtainable by a given engine
horsepower and weight of the boat. Robalo’s current models utilize the Hydro
LiftTM
design
and we plan to continue to provide this design on Robalo models.
In
support of its new product development efforts, Marine Products incurred
research and development costs of $1.9 million in 2005, $1.7 million in 2004
and
$1.1 million in 2003.
Industry
Overview
For
2005,
the recreational boating industry accounted for less than one percent of the
United States gross domestic product. The recreational marine market is a mature
market, with 2004 (latest data available to us) retail expenditures of
approximately $33 billion spent on new and used boats, motors and engines,
trailers, accessories and other associated costs as estimated by the National
Marine Manufacturers Association (“NMMA”). Also according to the NMMA, the most
recent data available indicate that sales to dealers of traditional powerboats
increased seven percent during the nine months ended September 30, 2005 compared
to the same period in the prior year. Pleasure boats compete for consumers’ free
time with all other leisure activities, from computers and video games to other
outdoor sports. One of the greatest obstacles to continued growth for the
recreational boating industry is consumers’ diminishing leisure time.
The
NMMA
conducts various surveys of pleasure boat industry trends, and the most recent
surveys indicate that 69 million people in the United States participate in
recreational boating. There are currently over 17 million boats owned in the
United States, including outboard, inboard, sterndrive, sailboats, personal
watercraft, and miscellaneous (canoes, rowboats, etc.). Marine Products competes
in the sterndrive and inboard boating category with its three lines of Chaparral
boats, and in the outboard boating category with its Robalo sport fishing boats.
More than 90 percent of the Company’s models are sterndrive boats.
Industry
sales of sterndrive boats in the United States during 2005 totaling 58,161
(source: Info-Link Technologies, Inc.), accounted for approximately 42 percent
of the total new fiberglass powerboats sold that were between 18 and 35 feet
in
hull length. Sales of sterndrive boats had an estimated total retail value
of
$2.9 billion, or an average retail price per boat of approximately $50,000.
Management believes that the five largest states for boat sales are California,
Michigan, Florida, Minnesota and Texas. Marine Products has dealers in each
of
these states.
The
U.S.
domestic recreational boating industry includes sales in the segments of new
and
used boats, motors and engines, trailers, and other boat accessories. New
fiberglass boat market segment with hull lengths of 18 to 35 feet, represented
$6.3 billion in retail sales during 2005. This is the market segment in which
Marine Products competes. The table below reflects the estimated sales within
this segment by category for 2005 and 2004, ranked by 2005 retail sales (source:
Info-Link Technologies, Inc.):
|
2005
|
2004
|
|||
|
Boats
|
Sales
($ B)
|
Boats
|
Sales
($ B)
|
|
|
Sterndrive
Boats
|
58,161
|
$
2.9
|
58,823
|
$
2.8
|
|
Outboard
Boats
|
62,469
|
2.3
|
62,499
|
2.0
|
|
Inboard
Boats
|
13,995
|
1.0
|
13,237
|
0.9
|
|
Jet
Boats
|
4,169
|
0.1
|
3,559
|
0.1
|
|
TOTAL
|
138,794
|
$
6.3
|
138,118
|
$
5.8
|
Chaparral’s
products are categorized as sterndrive and inboard boats and Robalo’s products
are categorized as outboard boats.
The
recreational boat manufacturing market remains highly fragmented. With the
exception of Brunswick Corporation and Genmar Holdings, Inc., which have
acquired a number of recreational boat manufacturing operations, there has
been
very little consolidation in the industry. We estimate that the boat
manufacturing industry includes over 150 sterndrive manufacturers and over
600
outboard boat manufacturers, largely small, privately held companies with
varying degrees of professional management and manufacturing skill. According
to
estimates provided by Statistical Surveys, Inc., during the nine months ended
September 30, 2005 (latest information available), the top five sterndrive
manufacturers have a market share of approximately 53 percent. Chaparral’s
market share during the period was 8.18 percent, which represents a decline
of
0.18 percentage points compared to the same period in 2004. This decline is
attributable to Chaparral’s declining
market
share of boats that are 18 to 20 feet in length, although its market share
in
boats that are 21 to 35 feet in length increased during the same period. We
attribute this decline in overall market share to Chaparral’s strategy
of
designing, building, and selling larger boats which carry higher average selling
prices, as well as the strategy of certain
6
other
manufacturers who are designing smaller boats which are manufactured in offshore
manufacturing facilities and sold in the domestic market at a lower price,
thereby increasing the overall market share of these
manufacturers.
Several
factors influence sales trends in the recreational boating industry, including
general economic growth, consumer confidence, household incomes, weather, tax
laws, demographics and consumers’ leisure time. Interest rates and fuel prices
can have a direct impact on boat sales, as well as various trends at the local,
regional and national level. Competition from other leisure and recreational
activities, such as vacation properties and travel, can also affect sales of
recreational boats.
Management
believes Marine Products is well positioned to take advantage of the following
conditions, which continue to characterize the industry:
•
labor-intensive manufacturing processes that remain largely unautomated;
•
increasingly strict environmental standards derived from governmental
regulations and customer sensitivities;
•
a lack of focus on coordinated customer service and support by dealers and
manufacturers; and
•
a high degree of fragmentation and competition among the more than 150
sterndrive recreational boat manufacturers.
Growth
Strategies
Recreational
boating is a mature industry. According to Info-Link Technologies,
Inc., sales of sterndrive boats were comparable in 2003 and 2005, with a
slight increase experienced in 2004. During this time, Marine Products
has experienced a compound annual growth rate of approximately eight
percent in the number of boats sold. Marine Products has grown its boat sales
and net sales primarily through increasing market share and by expanding the
number of models and product lines. Chaparral has grown its sterndrive market
share in the 18 to 35 feet length category from 4.75 percent in fiscal 1996
to
8.18 percent during the nine months ended September 2005 (the most recent
information provided to us by Statistical Surveys, Inc.). The Company continues
to expand its product offerings in the outboard boat market, the largest boat
market not previously served by the Company’s products, and by improvement of
existing models and expansion into larger boats within its sterndrive and
inboard offerings.
Marine
Products’ operating strategy emphasizes innovative designs and manufacturing
processes, by producing a high quality product while lowering manufacturing
costs through increased efficiencies in our facilities. In addition, we seek
opportunities to leverage our buying power through economies of scale.
Management believes its membership in the ABA positions Marine Products as
a
significant third party customer of major suppliers of sterndrive engines.
Marine Products’ Chaparral subsidiary is a founding member of the ABA, which
collectively represents 13 independent boat manufacturers that have formed
a
buying group to pool their purchasing power in order to gain improved pricing
on
engines, fiberglass, resin and many other components. Marine Products intends
to
continue seeking the most advantageous purchasing arrangements from its
suppliers.
Our
marketing strategy seeks to increase market share by enabling Marine Products
to
expand its presence by building dedicated sales, marketing and distribution
systems. Marine Products has a distribution network of approximately 172 dealers
located throughout the United States and internationally. Our strategy is to
increase selectively the quantity of our dealers, and work to improve the
quality and effectiveness of our entire dealer network. Marine Products seeks
to
capitalize on its strong dealer network by educating its dealers on the sales
and servicing of our products and helping them provide more comprehensive
customer service, with the goal of increasing customer satisfaction, customer
retention and future sales. Marine Products provides promotional and incentive
programs to help its dealers increase product sales. Marine Products intends
to
continue to strengthen its dealer network and build brand loyalty with both
dealers and customers.
As
part
of Marine Products’ overall strategy, Marine Products will also consider making
strategic acquisitions in order to complement existing product lines, expand
its
geographic presence in the marketplace and strengthen its capabilities.
Competition
The
recreational boat industry is highly fragmented, resulting in intense
competition for customers, dealers and boat show exhibition space. There is
significant competition both within markets we currently serve and in new
markets that we may enter. Marine Products’ brands compete with several large
national or regional manufacturers that have substantial financial, marketing
and other resources. However, we believe that our corporate infrastructure
and
marketing and sales capabilities, in addition to our cost structure and our
nationwide presence, enable us to compete effectively against these
7
companies.
In each of our markets, Marine Products competes on the basis of responsiveness
to customer needs, the quality and range of models offered, and the competitive
pricing of those models. Additionally, Marine Products faces general competition
from all other recreational businesses seeking to attract consumers’ leisure
time and discretionary spending dollars.
According
to Statistical Surveys, Inc., the following is a list of the top ten (largest
to
smallest) sterndrive boat manufacturers in the United States based on unit
sales
for the nine months ended September 30, 2005 (the most current information
available to us). Several of these manufacturers are part of larger integrated
boat building companies and are marked with asterisks. According to Info-Link
Technologies, Inc., the companies set forth below represent approximately 71
percent of all United States retail sterndrive boat registrations during the
twelve months ended December 31, 2005.
| 1. |
Sea
Ray*
|
| 2. |
Bayliner*
|
| 3. |
Chaparral
|
| 4. |
Crownline
|
| 5. |
Four
Winns **
|
| 6. |
Glastron
**
|
| 7. |
Stingray
|
| 8. |
Larson**
|
| 9. |
Cobalt
|
| 10. |
Rinker
|
The
outboard engine powered market has a large breadth and depth, accounting for
almost 45 percent of all boats sold. Robalo’s share of the outboard sport
fishing boat market during the nine months ended September 30, 2005 was
approximately one percent. Primary competitors for Robalo include Sea-Pro,*
Grady-White, Mako, Boston Whaler* and Hydra Sports**.
| * |
a
subsidiary of Brunswick Corporation
|
| ** |
a
subsidiary of Genmar Holdings, Inc.
|
Environmental
and Regulatory Matters
Certain
materials used in boat manufacturing, including the resins used to make the
decks and hulls, are toxic, flammable, corrosive, or reactive and are classified
by the federal and state governments as “hazardous materials.” Control of these
substances is regulated by the Environmental Protection Agency (“EPA”) and state
pollution control agencies, which require reports and inspect facilities to
monitor compliance with their regulations. The Occupational Safety and Health
Administration (“OSHA”) standards limit the amount of emissions to which an
employee may be exposed without the need for respiratory protection or upgraded
plant ventilation. Marine Products’ manufacturing facilities are regularly
inspected by OSHA and by state and local inspection agencies and departments.
Marine Products believes that its facilities comply in all material aspects
with
these regulations. Although capital expenditures related to compliance with
environmental laws are expected to increase during the coming years, we do
not
currently anticipate that any material expenditure will be required to continue
to comply with existing environmental or safety regulations in connection with
its existing manufacturing facilities.
Recreational
powerboats sold in the United States must be manufactured to meet the standards
of certification required by the United States Coast Guard. In addition, boats
manufactured for sale in the European Community must be certified to meet the
European Community’s imported manufactured products standards. These
certifications specify standards for the design and construction of powerboats.
All boats sold by Marine Products meet these standards. In addition, safety
of
recreational boats is subject to federal regulation under the Boat Safety Act
of
1971. The Boat Safety Act requires boat manufacturers to recall products for
replacement of parts or components that have demonstrated defects affecting
safety. While Marine Products has instituted recalls for defective component
parts produced by other manufacturers, there has never been a safety related
recall resulting from Marine Products’ design or manufacturing process. None of
the recalls has had a material adverse effect on Marine Products.
Employees
As
of
December 31, 2005, Marine Products had approximately 1,100 employees, of whom
six were management and 46 administrative. None of Marine Products’ employees is
party to a collective bargaining agreement. Marine Products’ entire workforce is
currently employed in the United States and Marine Products believes that its
relations with its employees are good.
8
Proprietary
Matters
Marine
Products owns a number of trademarks and trade names that it believes are
important to its business. Except for the Chaparral, Robalo and Wahoo!
trademarks, however, Marine Products is not dependent upon any single trademark
or trade name or group of trademarks or trade names. The Chaparral, Robalo
and
Wahoo! trademarks are currently registered in the United States. The current
duration for such registration ranges from seven to 15 years but each
registration may be renewed an unlimited number of times.
Several
of Chaparral’s designs are protected under the U.S. Copyright Office’s Vessel
Hull Design Protection Act. This law grants an owner of an original vessel
hull
design certain exclusive rights. Protection is offered for hull designs that
are
made available to the public for purchase provided that the application is
made
within two years of the hull design being made public. As of December 31, 2005,
there were 14 Chaparral hull designs registered under the Vessel Hull Design
Protection Act. There were no Robalo hull designs registered as of December
31,
2005.
Seasonality
Marine
Products’ quarterly operating results are affected by weather and general
economic conditions. Quarterly operating results for the second quarter have
historically recorded the highest sales volume for the year. The results for
any
quarter are not necessarily indicative of results to be expected in any future
period.
Inflation
Recently,
the Company has experienced an increase in certain material and component costs.
The Company responded to this increase in costs by instituting price increases
to its dealers effective January 1, 2005, and instituting an additional price
increase for the 2006 model year which began on July 1, 2005. These price
increases did not fully absorb the increased material costs during 2005 and
therefore negatively impacted the gross margin percent. We anticipate, with
continued high commodity prices, energy prices and petroleum based products
that
the price of materials will continue to increase. If the prices of these raw
materials and components continue to increase, or the prices of other factors
of
production increase, Marine Products will attempt to increase its product prices
to offset its increased costs. No assurance can be given, however, that the
Company will be able to adequately increase its product prices in response
to
inflation or estimate the impact on future sales of increasing our product
prices.
New
boat
buyers typically finance their purchases. Higher inflation typically results
in
higher interest rates that could translate into an increased cost of boat
ownership. Prospective buyers may choose to delay their purchases or buy a
less
expensive boat. The recent increases in interest rates may have had a negative
impact on our 2005 sales, and if interest rates remain at current levels or
increase further, our future sales and profits may be negatively
impacted.
Availability
of Filings
Marine
Products makes available free of charge on its website,
www.marineproductscorp.com, the annual report on Form 10-K, quarterly reports
on
Form 10-Q, current reports on Form 8-K, and all amendments to those reports
on
the same day as they are filed with the Securities and Exchange Commission.
Item
1A. Risk Factors
Economic
Conditions and Consumer Confidence Levels Affect Marine Products’ Sales because
Marine Products’ Products are Purchased with Discretionary Income
During
an
economic recession or when an economic recession is perceived as a threat,
Marine Products will be adversely affected as consumers have less discretionary
income or are more apt to save their discretionary income rather than spend
it.
During times of global political uncertainty, such as the current threats in
the
Middle East, Marine Products will be negatively affected to the extent consumers
delay large discretionary purchases pending the resolution of those
uncertainties.
Interest
Rates and Fuel Prices Affect Marine Products’ Sales
The
Company’s products are often financed by our dealers and the retail boat
consumers. Higher interest rates increase the borrowing costs and, accordingly,
the cost of doing business for dealers and the cost of boat purchases for
consumers. Fuel costs can represent a large portion of the costs to operate
our
products. Therefore, higher interest rates and fuel costs can adversely affect
consumers’ decisions relating to recreational boating purchases.
9
Marine
Products’ Dependence On Its Network Of Independent Boat Dealers May Affect Its
Growth Plans And Sales
Virtually
all of Marine Products’ sales are derived from its network of independent boat
dealers. Marine Products has no long-term agreements with these dealers.
Competition for dealers among recreational powerboat manufacturers continues
to
increase based on the quality of available products, the price and value of
the
products, and attention to customer service. We face intense competition from
other recreational powerboat manufacturers in attracting and retaining
independent boat dealers. The number of independent boat dealers supporting
the
Chaparral and Robalo trade names and the quality of their marketing and
servicing efforts are essential to Marine Products’ ability to generate sales. A
deterioration in the number or quality of Marine Products’ network of
independent boat dealers would have a material adverse effect on its boat sales.
Marine Products’ inability to attract new dealers and retain those dealers, or
its inability to increase sales with existing dealers, could substantially
impair its ability to execute its growth plans.
Although
Marine Products’ management believes that the quality of its products and
services in the recreational boating market should permit it to maintain its
relationship with its dealers and its market position, there can be no assurance
that Marine Products will be able to sustain its current sales levels. In
addition, independent dealers in the recreational boating industry have
experienced significant consolidation in recent years, which could result in
the
loss of one or more of Marine Products’ dealers in the future if the surviving
entity in any such consolidation purchases similar products from a Marine
Products competitor. See “Growth Strategies” above.
Marine
Products’ Sales Are Affected By Weather Conditions
Marine
Products’ business is subject to weather patterns that may adversely affect its
sales. For example, drought conditions, or merely reduced rainfall levels,
or
excessive rain, may close area boating locations or render boating dangerous
or
inconvenient, thereby curtailing customer demand for our products. In addition,
unseasonably cool weather and prolonged winter conditions may lead to a shorter
selling season in some locations. Hurricanes and other storms could cause
disruptions of our operations or damage to our boat inventories and docking
facilities, as was the case during the 2005 hurricane season when several
boating markets were adversely affected.
Marine
Products Has Potential Liability for Personal Injury and Property Damage Claims
The
products we sell or service may expose Marine Products to potential liabilities
for personal injury or property damage claims relating to the use of those
products. Historically, the resolution of product liability claims has not
materially affected Marine Products’ business. Marine Products maintains product
liability insurance that it believes to be adequate. However, there can be
no
assurance that Marine Products will not experience legal claims in excess of
its
insurance coverage or that claims will be covered by insurance. Furthermore,
any
significant claims against Marine Products could result in negative publicity,
which could cause Marine Products’ sales to decline.
Because
Marine Products Relies On Third Party Suppliers, Marine Products May Be Unable
To Obtain Adequate Raw Materials and Components
Marine
Products is dependent on third party suppliers to provide raw materials and
components essential to the construction of its various powerboats. Especially
critical are the availability and cost of marine engines and commodity raw
materials used in the manufacture of Marine Products’ boats. While Marine
Products’ management believes that supplier relationships currently in place are
sufficient to provide the materials necessary to meet present production
demands, there can be no assurance that these relationships will continue or
that the quantity or quality of materials available from these suppliers will
be
sufficient to meet Marine Products’ future needs, irrespective of whether Marine
Products successfully implements its growth and acquisition strategies.
Disruptions in current supplier relationships or the inability of Marine
Products to continue to purchase construction materials in sufficient quantities
and of sufficient quality at acceptable prices to meet ongoing production
schedules could cause a decrease in sales or a sharp increase in the cost of
goods sold. Additionally, because of this dependence, the volatility in
commodity raw materials or current or future price increases in construction
materials or the inability of Marine Products’ management to purchase
construction materials required to complete its growth and acquisition
strategies could cause a reduction in Marine Products’ profit margins or reduce
the number of powerboats Marine Products may be able to produce for sale.
Marine
Products May Be Unable To Identify, Complete or Successfully Integrate
Acquisitions
Marine
Products intends to pursue acquisitions and form strategic alliances that will
enable Marine Products to acquire complementary skills and capabilities, offer
new products, expand its customer base, and obtain other competitive advantages.
There can be no assurance, however, that Marine Products will be able to
successfully identify suitable acquisition candidates or strategic partners,
obtain financing on satisfactory terms, complete acquisitions or strategic
alliances, integrate acquired operations into its existing operations, or expand
into new markets. Once integrated, acquired operations may not achieve
anticipated levels of sales or profitability, or otherwise perform as expected.
Acquisitions also involve special risks, including risks associated with
unanticipated problems, liabilities and contingencies, diversion of
10
management
resources, and possible adverse effects on earnings and earnings per share
resulting from increased interest costs, the issuance of additional securities,
and difficulties related to the integration of the acquired business. The
failure to integrate acquisitions successfully may divert management’s attention
from Marine Products’ existing operations and may damage Marine Products’
relationships with its key customers and suppliers.
Marine
Products’ Success Will Depend On Its Key Personnel, and The Loss Of Any Key
Personnel May Affect Its Powerboat Sales
Marine
Products’ success will depend to a significant extent on the continued service
of key management personnel. The loss or interruption of the services of any
senior management personnel or the inability to attract and retain other
qualified management, sales, marketing and technical employees could disrupt
Marine Products’ operations and cause a decrease in its sales and profit
margins.
Marine
Products’ Ability to Attract and Retain Qualified Employees Is Crucial To Its
Results of Operations and Future Growth
Marine
Products relies on the existence of an available hourly workforce to manufacture
its products. As with many businesses, we are challenged to find qualified
employees. There are no assurances that Marine Products will be able to attract
and retain qualified employees to meet current and/or future growth needs.
If
Marine Products Is Unable to Comply With Environmental and Other Regulatory
Requirements, Its Business May Be Exposed to Liability and Fines
Marine
Products’ operations are subject to extensive regulation, supervision, and
licensing under various federal, state, and local statutes, ordinances, and
regulations. While Marine Products believes that it maintains all requisite
licenses and permits and is in compliance with all applicable federal, state
and
local regulations, there can be no assurance that Marine Products will be able
to continue to maintain all requisite licenses and permits. The failure to
satisfy these and other regulatory requirements could cause Marine Products
to
incur fines or penalties or could increase the cost of operations. The adoption
of additional laws, rules and regulations could also increase Marine Products’
costs.
As
with
boat construction in general, our manufacturing processes involve the use,
handling, storage and contracting for recycling or disposal of hazardous or
toxic substances or wastes. Accordingly, we are subject to regulations regarding
these substances, and the misuse or mishandling of such substances could expose
Marine Products to liability or fines.
Additionally,
certain states have required or are considering requiring a license in order
to
operate a recreational boat. While such licensing requirements are not expected
to be unduly restrictive, regulations may discourage potential first-time
buyers, thereby reducing future sales.
Marine
Products’ Stock
Price Has Been Volatile
Historically,
the market price of common stock of companies engaged in the boat manufacturing
industry has been highly volatile. Likewise, the market price of our common
stock has varied significantly in the past. In addition, the availability of
Marine Products common stock to the investing public is limited to the extent
that shares are not sold by the executive officers, directors and their
affiliates, which could negatively impact the trading price of Marine Products’
common stock, increase volatility and affect the ability of minority
stockholders to sell their shares. Future sales by executive officers, directors
and their affiliates of all or a substantial portion of their shares could
also
negatively affect the trading price of Marine Products’ common
stock.
Marine
Products’ Management Has a Substantial Ownership Interest; Public Stockholders
May Have No Effective Voice In Marine Products’ Management
The
Company has elected the “Controlled Corporation” exemption under Rule 303A of
the New York Stock Exchange (“NYSE”) Company Guide. The Company is a “Controlled
Corporation” because a group that includes the Company’s Chairman of the Board,
R. Randall Rollins and his brother, Gary W. Rollins, who is also a director
of
the Company, and certain companies under their control, controls in excess
of
fifty percent of the Company’s voting power. As a “Controlled Corporation”, the
Company need not comply with certain NYSE rules including those requiring a
majority of independent directors.
Marine
Products’ executive officers, directors and their affiliates hold directly or
through indirect beneficial ownership, in the aggregate, approximately 67
percent of Marine Products’ outstanding shares of common stock. As a result,
these stockholders effectively control the operations of Marine Products,
including the election of directors and approval of significant corporate
transactions such as acquisitions. This concentration of ownership could also
have the effect of delaying or preventing a third party from acquiring control
of Marine Products at a premium.
11
Provisions
in Marine Products’ Certificate of Incorporation and Bylaws May Inhibit a
Takeover of Marine Products
Marine
Products’ certificate of incorporation, bylaws and other documents contain
provisions including advance notice requirements for shareholder proposals
and
staggered terms of office for the Board of Directors. These provisions may
make
a tender offer, change in control or takeover attempt that is opposed by Marine
Products’ Board of Directors more difficult or expensive.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
Marine
Products’ corporate offices are located in Atlanta, Georgia. These offices are
currently shared with RPC and are leased. The monthly rent paid is allocated
between Marine Products and RPC. Under this arrangement, Marine Products pays
approximately $3,800 per month in rent. Marine Products may cancel this
arrangement at any time after giving a 30 day notice.
Chaparral
owns and maintains approximately 1,065,500 square feet of space utilized for
manufacturing, research and development, warehouse, and sales office and
operations in Nashville, Georgia. In addition, the Company leases 83,000 square
feet of manufacturing space at the Robalo facility in Valdosta, Georgia, under
a
long-term arrangement expiring in 2014. Marine Products’ total square footage
under roof is allocated as follows: manufacturing — 795,000, research and
development — 67,500, warehousing — 201,000, office and other — 85,000.
Item
3. Legal Proceedings
Marine
Products is involved in litigation from time to time in the ordinary course
of
its business. Marine Products does not believe that the ultimate outcome of
such
litigation will have a material adverse effect on its liquidity, financial
condition or results of operations.
Item
4. Submission of Matters to a Vote of Security Holders
There
were no matters submitted to a vote of security holders during the fourth
quarter of 2005.
Item
4A. Executive Officers of the Registrant
Each
of
the executive officers of Marine Products was elected by the Board of Directors
to serve until the Board of Directors’ meeting immediately following the next
annual meeting of stockholders or until his or her earlier removal by the Board
of Directors or his or her resignation. The following table lists the executive
officers of Marine Products and their ages, offices, and date first elected
to
office.
|
Name
and Office with Registrant
|
Age
|
Date
First Elected
to
Present Office
|
|
R.
Randall Rollins (1)
|
74
|
2/28/01
|
|
Chairman
of the Board
|
||
|
Richard
A. Hubbell (2)
|
61
|
2/28/01
|
|
President
and Chief
Executive Officer
|
||
|
James
A. Lane, Jr. (3)
|
63
|
2/28/01
|
|
Executive
Vice President and President
of Chaparral Boats, Inc.
|
||
|
Linda
H. Graham (4)
|
69
|
2/28/01
|
|
Vice
President and Secretary
|
||
|
Ben
M. Palmer (5)
|
45
|
2/28/01
|
|
Vice
President, Chief
Financial Officer and Treasurer
|
12
| (1) |
R.
Randall Rollins began working for Rollins, Inc. in 1949. At the time
of
the spin-off of RPC from Rollins, in 1984, Mr. Rollins was elected
Chairman of the Board and Chief Executive Officer of RPC. He remains
Chairman of RPC and held the position of Chief Executive Officer
of RPC
until April 22, 2003. He has served as Chairman of the Board of Marine
Products since February 2001 and Chairman of the Board of Rollins,
Inc.
(consumer services) since October 1991. He is also a director of
Dover
Downs Gaming and Entertainment, Inc. and Dover Motorsports, Inc.
He served
as a director of SunTrust Banks, Inc. and SunTrust Banks of Georgia
until
April 2004.
|
| (2) |
Richard
A. Hubbell has been the President and Chief Executive Officer of
Marine
Products since it was spun-off in February 2001. He has also been
the
President of RPC since 1987 and its Chief Executive Officer since
April
22, 2003. Mr. Hubbell serves on the Board of Directors for both of
these
companies.
|
| (3) |
James
A. Lane, Jr., has held the position of President of Chaparral Boats
(formerly a subsidiary of RPC) since 1976. Mr. Lane has been Executive
Vice President and Director of Marine Products since it was spun
off in
2001. He is also a director of RPC and has served in that capacity
since
1987.
|
| (4) |
Linda
H. Graham has been Vice President and Secretary of Marine Products
since
it was spun-off in 2001, and Vice President and Secretary of RPC
since
1987. Ms. Graham serves on the Board of Directors for both of these
companies.
|
| (5) |
Ben
M. Palmer has been Vice President, Chief Financial Officer and Treasurer
of Marine Products since it was spun-off in 2001 and has served the
same
roles at RPC since 1996.
|
13
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
During
the second quarter of 2005, the Company transferred the listing of its common
shares for trading to the New York Stock Exchange under ticker symbol “MPX”. All
share and dividends per share data disclosed below have been restated for the
three-for-two stock split effective March 10, 2005. At February 24, 2006, there
were 38,044,485 shares of common stock outstanding.
At
the
close of business on February 24, 2006, there were approximately 4,300 holders
of record of common stock. The high and low prices of Marine Products’ common
stock and dividends paid for each quarter in the years ended December 31, 2005
and 2004 were as follows:
|
2005
|
2004
|
|||||
|
Quarter
|
High
|
Low
|
Dividends
|
High
|
Low
|
Dividends
|
|
First
|
$
21.40
|
$
15.94
|
$0.040
|
$
10.00
|
$
8.07
|
$0.027
|
|
Second
|
17.52
|
11.90
|
0.040
|
13.13
|
9.15
|
0.027
|
|
Third
|
15.10
|
10.55
|
0.040
|
12.57
|
10.20
|
0.027
|
|
Fourth
|
$
12.80
|
$9.25
|
$0.040
|
$
19.31
|
$11.57
|
$0.027
|
The
Company has paid cash dividends since the second quarter of 2002. At the January
25, 2005 Board of Directors’ Meeting, the Board approved an increase in the cash
dividend, from $0.027 to $0.04. At the January 24, 2006 Board of Directors’
Meeting, the Board approved an increase in the cash dividend, from $0.04 to
$0.05. The Company expects to continue to pay cash dividends to common
stockholders, subject to the earnings and financial condition of the Company
and
other relevant factors.
Issuer
Purchases of Equity Securities
Shares
repurchased in the fourth quarter of 2005 are outlined below.
|
Period
|
Total
Number
of
Shares
(or Units)
Purchased
|
Average
Price
Paid
Per
Share
(or Unit)
|
Total
number of Shares (or Units) Purchased as Part of
Publicly
Announced Plans or Programs
|
Maximum
Number
(or
Approximate Dollar Value)
of
Shares (or Units) that May Yet be
Purchased Under the Plans or Programs
|
||||
|
October
1, 2005 to October 31, 2005
|
43,730
|
$
|
10.38
|
43,730
|
2,772,367
|
|||
|
November
1, 2005 to November 30, 2005
|
49,583
|
9.97
|
49,583
|
2,722,784
|
||||
|
December
1, 2005 to December 31, 2005
|
16,318
|
10.03
|
16,318
|
2,706,466
|
||||
|
Totals
|
109,631
|
$
|
10.14
|
109,631
|
2,706,466
|
The
Company’s Board of Directors announced stock buyback programs on April 25, 2001
authorizing the repurchase of 2,250,000 shares in the open market and on
September 14, 2005 authorizing the repurchase of an additional 3,000,000 shares.
A total of 2,543,534 shares have been repurchased pursuant to these programs
through December 31, 2005. The programs have no predetermined expiration dates.
14
Item
6. Selected Financial Data
The
following table summarizes certain selected combined financial data of Marine
Products and Chaparral including data for periods prior to the February 28,
2001
spin-off from RPC, Inc. The historical information may not be indicative of
Marine Products’ future results of operations. The information set forth below
should be read in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the Consolidated Financial
Statements and the notes thereto included elsewhere in this document.
All
earnings per share, shares outstanding and dividends per share have been
restated for the three-for-two stock split effective March 10, 2005 and for
the
three-for-two stock split effective March 10, 2004.
|
Years
Ended December 31,
|
||||||||||||||||
|
(In
thousands, except share, per share and employee data)
|
||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
Statement
of Income Data:
|
||||||||||||||||
|
Net
sales
|
$
|
272,057
|
$
|
252,418
|
$
|
193,980
|
$
|
162,682
|
$
|
134,689
|
||||||
|
Cost
of goods sold
|
202,936
|
186,832
|
143,663
|
125,282
|
105,344
|
|||||||||||
|
Gross
profit
|
69,121
|
65,586
|
50,317
|
37,400
|
29,345
|
|||||||||||
|
Selling,
general and administrative expenses
|
33,557
|
29,810
|
23,015
|
18,018
|
16,223
|
|||||||||||
|
Operating
income
|
35,564
|
35,776
|
27,302
|
19,382
|
13,122
|
|||||||||||
|
Interest
income
|
1,330
|
590
|
501
|
600
|
689
|
|||||||||||
|
Income
before income taxes
|
36,894
|
36,366
|
27,803
|
19,982
|
13,811
|
|||||||||||
|
Income
tax provision
|
10,671
|
12,623
|
9,731
|
7,593
|
5,248
|
|||||||||||
|
Net
income
|
$
|
26,223
|
$
|
23,743
|
$
|
18,072
|
$
|
12,389
|
$
|
8,563
|
||||||
|
Earnings
per share: (a)
|
||||||||||||||||
|
Basic
|
$
|
0.69
|
$
|
0.62
|
$
|
0.47
|
$
|
0.32
|
$
|
0.23
|
||||||
|
Diluted
|
$
|
0.65
|
$
|
0.58
|
$
|
0.45
|
$
|
0.31
|
$
|
0.22
|
||||||
|
Dividends
paid per share
|
$
|
0.16
|
$
|
0.11
|
$
|
0.07
|
$
|
0.03
|
$
|
0.03
|
||||||
|
Other
Financial and Operating Data:
|
||||||||||||||||
|
Gross
profit margin percent
|
25.4
|
%
|
26.0
|
%
|
25.9
|
%
|
23.0
|
%
|
21.8
|
%
|
||||||
|
Operating
margin percent
|
13.1
|
%
|
14.2
|
%
|
14.1
|
%
|
11.9
|
%
|
9.7
|
%
|
||||||
|
Net
cash provided by operating activities
|
$
|
19,366
|
$
|
29,405
|
$
|
17,828
|
$
|
11,696
|
$
|
10,231
|
||||||
|
Net
cash (used for) provided by investing activities
|
(2,023
|
)
|
(1,924
|
)
|
(4,432
|
)
|
2,860
|
(5,919
|
)
|
|||||||
|
Net
cash used for financing activities
|
26,356
|
7,110
|
4,432
|
2,229
|
456
|
|||||||||||
|
Capital
expenditures
|
$
|
1,118
|
$
|
2,838
|
$
|
3,707
|
$
|
3,800
|
$
|
5,456
|
||||||
|
Employees
at end of year
|
1,065
|
1,187
|
975
|
867
|
758
|
|||||||||||
|
Factory
and administrative space at end of year (square ft.)
|
1,149
|
1,146
|
1,128
|
898
|
898
|
|||||||||||
|
Balance
Sheet Data at end of year:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
37,602
|
$
|
46,615
|
$
|
26,244
|
$
|
17,280
|
$
|
4,953
|
||||||
|
Marketable
securities — current
|
1,323
|
132
|
1,402
|
1,929
|
5,478
|
|||||||||||
|
Marketable
securities — non-current
|
5,893
|
6,202
|
5,930
|
4,865
|
7,781
|
|||||||||||
|
Inventories
|
26,856
|
25,869
|
21,770
|
20,685
|
14,478
|
|||||||||||
|
Working
capital
|
61,341
|
61,989
|
45,984
|
33,390
|
20,311
|
|||||||||||
|
Property,
plant and equipment, net
|
17,252
|
18,362
|
17,761
|
16,216
|
14,230
|
|||||||||||
|
Total
assets
|
108,805
|
109,734
|
86,314
|
71,063
|
56,513
|
|||||||||||
|
Total
stockholders’ equity
|
$
|
87,688
|
$
|
87,372
|
$
|
69,966
|
$
|
56,833
|
$
|
46,345
|
||||||
(a) Earnings
per share for the year 2001 has been computed based on the outstanding shares
as
of the spin-off date adjusted for subsequent stock splits. These numbers have
not been audited.
15
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion is based upon and should be read in conjunction with
“Selected Financial Data”and “Financial Statements and Supplementary Data.” See
also “Forward-Looking Statements” on page 2.
Overview
Marine
Products Corporation, through our wholly-owned subsidiaries Chaparral and
Robalo, is a leading manufacturer of recreational fiberglass powerboats. Our
sales and profits are generated by selling the products that we manufacture
to a
network of independent dealers who in turn sell the products to retail
customers. These dealers are located throughout the continental United States
and in several international markets. Most of these dealers finance their
inventory through third-party floorplan lenders, who pay Marine Products upon
delivery of the products to the dealers.
We
manage
our company by focusing on the execution of the following business and financial
strategies:
| · |
Manufacturing
high-quality, stylish, and innovative powerboats for our dealers
and
retail customers,
|
| · |
Providing
to our independent dealer network appropriate incentives, training,
and
other support to enhance their success and their customers’
satisfaction, thereby facilitating their continued relationship with
us,
|
| · |
Managing
our production and dealer order backlog to maximize profitability
and
reduce risk in the event of a downturn in sales of our
products,
|
| · |
Maintaining
a flexible, variable cost structure which can be reduced quickly
in the
event of an industry downturn,
|
| · |
Focusing
on the competitive nature of the boating business and designing our
products and strategies in order to grow and maintain profitable
market
share,
|
| · |
Maximizing
shareholder return by optimizing the balance of cash invested in
the
Company’s
productive
assets, the payment of dividends to shareholders, and the repurchase
of
its common stock on the open
market,
|
| · |
Aligning
the interests of our management and
shareholders.
|
In
implementing these strategies and attempting to optimize our financial returns,
management closely monitors dealer orders and inventories, the production mix
of
its various models, and indications of near term demand such as consumer
confidence, interest rates, dealer orders placed at our annual dealer
conferences, and retail attendance and orders at annual winter boat show
exhibitions. We also consider trends related to certain key financial and other
data, including our market share, unit sales of our products, average selling
price per boat, and gross profit margins, among others, as indicators of the
success of our strategies. Marine Products’ financial
results
are affected by consumer confidence — because pleasure boating is a
discretionary expenditure, interest rates — because many retail customers
finance the purchase of their boats, and other socioeconomic and environmental
factors such as availability of leisure time, consumer preferences, demographics
and the weather.
Industry
trends during 2005 were highlighted by higher wholesale and retail powerboat
sales, although unit sales declined slightly, due to continued low interest
rates, an improving domestic economy, and the continuation of the shift in
consumer preferences towards safe recreational activities that take place close
to home. We believe that these sales increases moderated late in the third
quarter and during the fourth quarter. The severe hurricanes in the
Gulf of Mexico caused extensive damage to many geographical areas that are
popular for boating, sharp increases in the price of gasoline, and
impacted consumer confidence and discouraged consumers from boating. The
stronger industry conditions were reflected in Marine Products’ financial
results
during 2005, although we reduced production during the fourth quarter in order
to maintain dealer inventories and backlog at appropriate levels and reduce
risk
in the event of a continued demand uncertainty in the industry. Early in 2006,
we increased our production in response to attendance and sales at the winter
boat show season that was stronger than we originally anticipated.
The
results of our strategies and the improved industry conditions in early 2005
are
reflected in our 2005 financial results and operating statistics. We generated
record net sales and profits in 2005. Net sales of $272.0 million increased
7.8
percent compared to the prior year. Net sales increased due to a 6.9 percent
increase in the average gross selling price per boat, and an increase in parts
and accessories sales partially offset by a decrease in the number of boats
sold. Average selling price per boat increased in each of our four boat lines.
Gross profit as a percentage of net sales was 25.4 percent, lower than in the
prior year. Our gross profit margin declined in 2005, unlike the improvements
realized during several prior years. Although we continued to execute our
strategies of building larger, more profitable models and managing our
production for optimum efficiency, these improvements were offset primarily
by
increases in the costs of certain raw materials in 2005 and manufacturing
inefficiencies that resulted from lower production volumes during the
fourth quarter.
16
We
monitor our market share in the 18 to 35 foot sterndrive category as one
indicator of the success of our strategies and the market’s acceptance
of
our products. For the nine months ended September 30, 2005 (latest data
available to us), Chaparral’s market
share in
the 18 to 35 foot sterndrive category was 8.18 percent, a decline from our
market share in the same category for the twelve months ended December 31,
2004
of 8.27 percent. This decline was concentrated in the smaller 18 to 20 foot
size
boats in our market. We believe this was the result of two factors: the
execution of our stated strategy of selling larger, more profitable boats,
and
the strategy of certain of our competitors, who have built and sold a large
number of entry-level smaller boats which are constructed in offshore
manufacturing plants with lower cost labor. Although we will continue to monitor
our market share and believe it to be important, we also believe that maximizing
profitability takes precedence over growing our market share.
Outlook
Management
believes that net sales and profits will not increase in 2006 at the same rate
realized in prior years due to the sales decline in the fourth quarter of 2005
and the uncertain near term outlook at the beginning of 2006. This belief is
based on, among other things, reports of attendance and sales during the winter
2006 retail boat show exhibition season, which began in December 2005. Both
media reports of attendance and our sales results from these shows have been
approximately equal to, or slightly higher than, the prior year. Boat show
attendance has historically been positively correlated with retail boat sales
later in the selling season because consumers attend shows due to their interest
in recreational boating and make initial purchasing decisions at a boat show
exhibition. However, there can be no assurance that this relationship will
continue in 2006 or subsequent years. Pleasure boating is a discretionary
consumer activity, and can be negatively impacted by increasing interest rates,
rising fuel costs, and declines in consumer confidence due to a weakening
economy or other factors; therefore, an increase in interest rates or a decline
in consumer confidence could have a serious and immediate negative impact on
net
sales and profits. Although the general economy remains strong, in early 2006
we
believe that the hurricanes that occurred in late 2005 have negatively impacted
consumer sentiment regarding pleasure boating, due to continued media coverage
regarding the long term destruction in the Gulf Coast and predictions of a
bad
hurricane season in 2006. We believe that these factors make consumers uncertain
about the infrastructure that supports recreational boating and the future
availability and price of fuel although concerns about the price and
availability of fuel are not as serious in early 2006 as they were in the fourth
quarter of 2005. Over the past several years, Marine Products as well as other
manufacturers have been improving their customer service capabilities, marketing
strategies and sales promotions in order to attract more consumers to
recreational boating as well as improve consumers’ boating experiences.
Management believes that these efforts may result in increased advertising
and
other selling, general and administrative expenses in the future.
Our
ability to maintain or improve our net sales and profits in 2006 will depend
on
a number of factors, including interest rates, fuel costs, consumer confidence,
the continued acceptance of our products in the recreational boating market,
our
ability to compete in the competitive pleasure boating industry, and the costs
of certain of our raw materials.
Results
of Operations
All
share
data have been retroactively adjusted for the stock split effective March 10,
2005 and the stock split effective March 10, 2004.
|
($’s
in thousands)
|
2005
|
2004
|
2003
|
|
Total
number of boats sold
|
7,292
|
7,310
|
6,265
|
|
Average
gross selling price per boat
|
$37.3
|
$34.9
|
$
31.4
|
|
Net
sales
|
$272,057
|
$252,418
|
$193,980
|
|
Percentage
of cost of goods sold to net sales
|
74.6
%
|
74.0
%
|
74.1
%
|
|
Percentage
of selling, general and administrative expense to
net sales
|
12.3%
|
11.8%
|
11.9%
|
|
Operating
income
|
$35,564
|
$35,776
|
$27,302
|
|
Warranty
expense
|
$
4,929
|
$
4,789
|
$
3,646
|
17
Year
Ended December 31, 2005 Compared To Year Ended December 31,
2004
Net
Sales. Marine
Products’ net sales increased by $19.6 million or 7.8 percent in 2005 compared
to 2004. The increase was due to a 6.9 percent increase in the average gross
selling price per boat, and an increase in parts and accessories sales offset
by
a slight decrease in the number of boats sold. The increase in average gross
selling price per boat was due to higher sales of larger boats, in addition
to
overall price increases that were implemented for the 2006 model year, which
began in July 2005, as well as a price increase of approximately one percent
that took effect in January 2005 to offset the higher cost of materials. The
increase in parts and accessories sales was a result of high demand for
accessories ordered on base model boats and the higher numbers of boats sold
in
prior years that are still in operation and require routine maintenance and
repair.
Cost
of Goods Sold.
Cost
of
goods sold increased 8.6 percent in 2005 compared to 2004, slightly higher
than
the increase in net sales. As a percentage of net sales, cost of goods increased
slightly in 2005 compared to 2004, primarily
due to increases in the cost of certain materials and components. Also
contributing to the increase was higher transportation costs, primarily fuel,
in
2005 compared to 2004.
Selling,
General and Administrative Expenses. Selling,
general and administrative expenses increased 12.6 percent in 2005 compared
to
2004. The increase in selling, general and administrative expenses resulted
from
costs that vary with increased sales and profitability, such as incentive
compensation, sales commissions and warranty expense, in addition to increased
costs associated with public company compliance. Also contributing to the
increase were the costs associated with listing the Company shares for trading
on the New York Stock Exchange.
Marine
Products provides a five year transferable hull structural warranty on Chaparral
products against defects in material and workmanship and a 10 year transferable
structural hull warranty on Robalo products. A one year warranty on components
is provided as well. The engine manufacturer warrants engines included in the
boats. Warranty expense increased in 2005 due to increased sales and was 1.8
percent of net sales in 2005 and 1.9 percent of net sales in 2004. The expenses
decreased as a percentage of sales due to quality improvement initiatives
coupled with a focus on claims management processes.
Interest
Income.
Interest
income was $1.3 million in 2005 compared to $0.6 million in 2004. Marine
Products generates interest income from investment of its available cash
primarily in overnight and marketable securities. The increase in interest
income resulted primarily from higher percentage yields, consistent with recent
increases in short-term interest rates, partially offset by lower investable
cash balances.
Income
Tax Provision. The
lower
effective tax rate in 2005 of 28.9 percent compalred to 34.7 percent in 2004
resulted from the benefit of the new manufacturing deduction created by the
American Jobs Creation Act of 2004 and a contingency adjustment. The decrease
was also attributable to certain reductions in the tax provision resulting
from
the effect of these strategies reflected on prior year returns filed during
2005
and a tax benefit from a reduction in certain state tax liabilities.
Year
Ended December 31, 2004 Compared To Year Ended December 31, 2003
Net
Sales. Marine
Products’ net sales increased by $58.4 million or 30.1 percent in 2004 compared
to 2003. The increase was due to a 16.7 percent increase in the number of boats
sold, an 11.1 percent increase in the average gross selling price per boat,
and
an increase in parts and accessories sales. The increase in the number of boats
sold was realized in the Chaparral sportboat and deckboat lines, but included
increased boat sales in all product lines. The increase in average gross selling
price occurred among all product lines as well, but was highest in the Chaparral
sportboat line, which sold more large sportboats than in 2003, in addition
to
the overall price increases implemented for the 2005 model year that began
in
July 2004. In addition, the Company eliminated the lower-priced SS sportboat
in
2004. Increased sales of larger Robalo sport fishing boats and Chaparral
cruisers were also responsible for the average gross selling price increase
during 2004. The increase in parts and accessories sales was a result of the
increasing numbers of boats sold in prior years that are still in operation
and
require routine maintenance and repair.
Cost
of Goods Sold.
Cost
of
goods sold increased 30.0 percent in 2004 compared to 2003, consistent with
the
increase in net sales. As a percentage of net sales, cost of goods decreased
slightly from 2003 to 2004, because of leverage gained from higher production
volumes and an overall shift in model mix to larger boats which typically
generate higher gross margins. This was partially offset by a significant
increase in selected raw material costs, including stainless steel and resin
costs from 2003 to 2004.
Selling,
General and Administrative Expenses. Selling,
general and administrative expenses increased 29.5 percent in 2004 compared
to
2003. The increase in selling, general and administrative expenses resulted
from
costs that vary with increased sales and profitability, such as incentive
compensation, sales commissions and warranty expense, in addition to increased
costs associated with public company compliance. As a percentage of net sales,
these expenses did not vary materially.
18
Marine
Products provides a five year transferable hull structural warranty on Chaparral
products against defects in material and workmanship and a 10 year transferable
structural hull warranty on Robalo products. A one year warranty on components
is provided as well. The engine manufacturer warrants engines included in the
boats. Warranty expense was 1.9 percent of net sales in 2004 and 2003. Warranty
expense increased in 2004 due to increased sales.
Interest
Income.
Interest
income was $0.6 million in 2004 compared to $0.5 million in 2003. Marine
Products generates interest income from investment of its available cash
primarily in overnight and marketable securities. The increase in interest
income resulted primarily from higher investment returns in 2004 together with
a
higher balance of investable funds.
Income
Tax Provision.
The
effective tax rate was slightly lower at 34.7 percent in 2004 compared to 35.0
percent in 2003. The income tax provision of $12.6 million was 29.7 percent
higher than the income tax provision in 2003 as a result of higher income before
income taxes.
Liquidity
and Capital Resources
Cash
and Cash Flows
The
Company’s cash and cash equivalents were $37.6 million at December 31, 2005,
$46.6 million at December 31, 2004 and $26.2 million at December 31,
2003.
The
following table sets forth the historical cash flows for the twelve months
ended
December 31:
|
(in
thousands)
|
2005
|
2004
|
2003
|
|
Net
cash provided by operating activities
|
$19,366
|
$29,405
|
$17,828
|
|
Net
cash used for investing activities
|
2,023
|
1,924
|
4,432
|
|
Net
cash used for financing activities
|
$26,356
|
$7,110
|
$4,432
|
2005
Cash
provided by operating activities decreased by $10.0 million in 2005 compared
to
2004. Higher operating income in 2005 was offset by increased working capital
requirements primarily due to an increase in accounts receivable and decreases
in accounts payable, both resulting from timing differences.
Cash
used
for investing activities was comparable in 2005 and 2004 at approximately $2.0
million. The $1.7 million decrease in capital expenditures was offset by $0.9
million net purchases of marketable securities. Capital expenditures in 2004
included higher costs than in 2005 to expand manufacturing
facilities.
Cash
used
for financing activities increased $19.2 million in 2005 compared to 2004
primarily due to an increase of $17.7 million in cash amounts used to purchase
the Company’s common stock in the open market, and an increase from $0.027 to
$0.04 in quarterly dividends declared per common share.
2004
Cash
provided by operating activities increased during 2004 by $11.6 million compared
to 2003. The increase was due to higher operating income in 2004 compared to
2003, together with lower working capital requirements in 2004 primarily due
to
a decrease in accounts receivable together with increases in accounts payable,
caused by timing differences.
Cash
used
for investing activities decreased $2.5 million compared to 2003. This change
was caused by a $1 million net decrease in marketable securities in 2004
compared to 2003 due to a large number of current marketable securities coming
due in December 2004 that were not reinvested until early 2005. Capital
expenditures decreased slightly to $2.8 million in 2004 compared to $3.7 million
in 2003. In 2004, the capital expenditures were primarily for additions to
certain manufacturing plants and purchase of operating equipment. In 2003,
the
largest capital expenditures related to the completion of construction of the
administrative building at Chaparral’s Nashville, Georgia headquarters which was
begun in 2003, the purchase of operating equipment, and the purchase of
additional buildings for warehouse storage space.
Cash
used
for financing activities increased $2.7 million in 2004 compared to 2003. The
increase resulted from higher cash amounts used to purchase the Company’s common
stock in the open market, and an increase in dividends resulting from the
Company’s decision during the first quarter of 2004 to increase its quarterly
dividend from $0.018 per share to $0.027 per share.
19
Cash
Requirements
Management
expects that capital expenditures during 2006 will be approximately $4.0
million, and are projected to include investment towards enhancements to certain
manufacturing plants and the addition of a parts warehouse.
We
expect
that additional contributions to the defined benefit pension plan of
approximately $0.3 million will be required in 2006 to achieve the Company’s
funding objective.
At
the
January 24, 2006 Board of Directors’ meeting, the Board approved an increase in
the cash dividend per common share from $0.04 to $0.05. Based
on
the shares outstanding on December 31, 2005, the aggregate annual dividends
expected to be paid would be approximately $7.5 million. The
Company expects to continue to pay cash dividends to common stockholders,
subject to the earnings and financial condition of the Company and other
relevant factors.
The
Company has an agreement with two employees, which provides for a monthly
payment to each of the employees equal to 10 percent of profits (defined as
pretax income before goodwill amortization and certain allocated corporate
expenses).
The
Company has purchased a total of 2,543,534
shares
in the open market and as of December 31, 2005, can purchase 2,706,466
additional shares under the programs. Refer
to
Issuer Purchases of Equity Securities on page 14 for details regarding shares
purchased in the fourth quarter of 2005.
The
Company believes that the liquidity provided by its existing cash and cash
equivalents, overall capitalization and cash expected to be generated from
operations will provide sufficient capital to meet its requirements for at
least
the next twelve months
Contractual
Obligations
The
following table summarizes the Company’s contractual obligations as of December
31, 2005:
|
Payments
due by period
|
|||||
|
Contractual
Obligations
|
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5 years
|
|
Long-term
debt
|
$—
|
$—
|
$—
|
$—
|
$—
|
|
Capital
lease obligation
|
150,000
|
—
|
—
|
—
|
150,000
|
|
Operating
leases (1)
|
129,131
|
37,007
|
90,708
|
1,416
|
—
|
|
Purchase
obligations (2)
|
—
|
—
|
—
|
—
|
—
|
|
Other
long-term liabilities (3)
|
300,000
|
300,000
|
—
|
—
|
—
|
|
Total
|
$579,131
|
$337,007
|
$90,708
|
$1,416
|
$150,000
|
| (1) |
Operating
leases represent agreements for various office equipment.
|
| (2) |
As
part of the normal course of business the Company enters into purchase
commitments to manage its various operating needs. However, the Company
does not have any obligations that are non-cancelable or subject
to a
penalty if canceled.
|
| (3) |
Includes
expected cash payments for long-term liabilities reflected on the
balance
sheet where the timing of the payment is known. These amounts include
primarily known pension plan funding obligations. These amounts exclude
pension obligations with uncertain funding requirements and deferred
compensation liabilities.
|
Off
Balance Sheet Arrangements
To
assist
dealers in obtaining financing for the purchase of its boats for inventory,
the
Company has entered into agreements with various dealers and selected
third-party lenders to guarantee varying amounts of qualifying dealers’ debt
obligations. The Company’s obligation under these guarantees may become
effective in the case of default by one or more dealers. The agreements provide
for the lender to return all repossessed boats in “like new” condition to the
Company, in exchange for the Company’s assumption of specified percentages of
the dealers’ unpaid debt obligation on those boats. The maximum contractual
obligation and the amount outstanding under these agreements, which expire
in
2006 and 2007, was $4.0 million as of December 31, 2005. The Company has
recorded the estimated fair value of this guarantee; at December 31, 2005,
this
amount is immaterial and did not change from the prior year.
During
the fourth quarter of 2005, a dealer defaulted on its debt obligation to a
floor
plan lender related to approximately $5 million of boat inventory. Subsequent
to
year-end, the Company assisted the lender in coordinating the redistribution of these boats among existing and replacement
dealers.
Management estimates that the ultimate cost to the Company for these
transactions and the impact on sales will be immaterial.
20
Related
Party Transactions
In
conjunction with its spin-off from RPC in 2001, the Company and RPC entered
into
various agreements that define the companies’ relationship after the spin-off.
The
Transition Support Services Agreement provides for RPC to provide certain
services, including financial reporting and income tax administration,
acquisition assistance, etc., to Marine Products until the agreement is
terminated by either party. Marine Products reimbursed RPC for its estimated
allocable share of administrative costs incurred for services rendered on behalf
of Marine Products totaling $616,000 in 2005, $546,000 in 2004 and $496,000
in
2003. The Company’s directors are also directors of RPC and all of the executive
officers with the exception of Mr. Lane are employees of both the Company and
RPC. The Company paid $171,000 in 2003 to a division of RPC for the purchase,
installation and service of overhead cranes.
The
Employee Benefits Agreement provides for, among other things, the Company’s
employees to continue participating subsequent to the spin-off in two RPC
sponsored benefit plans, specifically, the defined contribution 401(k) plan
and
the defined benefit retirement income plan.
The
Tax
Sharing and Indemnification Agreement provides for, among other things, the
treatment of income tax matters for periods through the date of the spin-off
and
responsibility for any adjustments as a result of audit by any taxing authority.
The general terms provide for the indemnification for any tax detriment incurred
by one party caused by the other party’s action. In accordance with the
agreement, RPC transferred approximately $19,000 in 2004 to the Company related
to tax settlements.
Critical
Accounting Policies
The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require significant
judgment by management in selecting the appropriate assumptions for calculating
accounting estimates. These judgments are based on our historical experience,
terms of existing contracts, trends in the industry, and information available
from other outside sources, as appropriate. Senior management has discussed
the
development, selection and disclosure of its critical accounting estimates
with
the Audit Committee of our Board of Directors. The Company believes that, of
its
significant accounting policies, the following may involve a higher degree
of
judgment and complexity.
Sales
recognition - The Company sells its boats through its network of independent
dealers. Sales orders used to plan production are firm indications of interest
from dealers and are cancelable at any time, although very few orders are
cancelled after they have been placed. The Company recognizes sales when all
the
following conditions are met: (1) a fully executed sales agreement exists,
(2)
the price of the boat is established, (3) the dealer takes delivery of the
boat,
and (4) collectibility of the sales price is reasonably assured.
Sales
incentives and discounts - The Company records incentives as a reduction of
sales. Using historical trends, adjusted for current changes, the Company
estimates the amount of incentives that will be paid in the future on boats
sold
and accrues an estimated liability. The Company offers various incentives that
promote sales to dealers, and to a lesser extent, retail customers. These
incentives are designed to encourage timely replenishment of dealer inventories
after peak selling seasons, stabilize manufacturing volumes throughout the
year,
and improve production model mix. The dealer incentive programs are a
combination of annual volume commitment discounts, and additional discounts
at
time of invoice for those dealers who do not finance their inventory through
specified floor plan financing agreements. The annual dealer volume discounts
are based on July 1 through June 30 model year purchases. In addition, the
Company offers at various times other time-specific or model-specific
incentives. The retail incentive programs have historically been used during
off-peak selling seasons in addition to the winter boat exhibition shows.
The
factors that complicate the calculation of the cost of these incentives are
the
ability to forecast sales of the Company and individual dealers, the volume
and
timing of inventory financed by specific dealers, identification of which boats
have been sold subject to an incentive, and the estimated lag time between
sales
and payment of incentives. Settlement of the incentives generally occurs from
three to twelve months after the sale. The Company regularly analyzes the
historical incentive trends and makes adjustments to recorded liabilities for
changes in trends and terms of incentive programs. Total incentives as a
percentage of gross sales were 13.0 percent in 2005, 12.9 percent in 2004 and
12.5 percent in 2003. A 0.25 percentage point change in incentives as a
percentage of gross sales during 2005 would have increased or decreased net
sales, gross margin and operating income by approximately $0.8 million.
21
Warranty
costs -The Company records as part of selling, general and administrative
expense an experience based estimate of the future warranty costs to be incurred
when sales are recognized. The Company evaluates its warranty obligation on
a
model year basis. The Company provides warranties against manufacturing defects
for various components of the boats, primarily the fiberglass deck and hull,
with warranty periods extending up to 10 years. Warranty costs, if any, on
other
components of the boats are absorbed by the original component manufacturer.
Warranty costs can vary depending upon the size and number of components in
the
boats sold, the pre-sale warranty claims, and the desired level of customer
service. While we focus on high quality manufacturing programs and processes,
including actively monitoring the quality of our component suppliers and
managing the dealer and customer service warranty experience and reimbursements,
our estimated warranty obligation is based upon the warranty terms and our
enforcement of those terms, defects, repair costs, and the volume and mix of
boat sales. The estimate of warranty costs is regularly analyzed and is adjusted
based on the actual claims that occur. Warranty expense as a percentage of
net
sales was 1.8 percent in 2005, 1.9 percent for 2004 and 1.9 percent in 2003.
Warranty expense as a percentage of net sales has decreased in 2005 compared
to
2004 because of the benefit the Company expects to realize from recent quality
improvement initiatives coupled with a focus on claims management processes.
A
0.10 percentage point increase in the estimated warranty expense as a percentage
of net sales during 2005 would have increased selling, general and
administrative expenses and reduced operating income by approximately $0.3
million.
Income
taxes—
The
effective income tax rates were 28.9 percent in 2005, 34.7 percent in 2004,
and
35.0 percent in 2003. Our effective tax rates vary due to changes in estimates
of our future taxable income, fluctuations in the tax jurisdictions in which
our
earnings and deductions are realized, and favorable or unfavorable adjustments
to our estimated tax liabilities related to proposed or probable assessments.
As
a result, our effective tax rate may fluctuate significantly on a quarterly
or
annual basis.
We
establish a valuation allowance against the carrying value of deferred tax
assets when we determine that it is more likely than not that the asset will
not
be realized through future taxable income. Such amounts are charged to earnings
in the period in which we make such determination. Likewise, if we later
determine that it is more likely than not that the net deferred tax assets
would
be realized, we would reverse the applicable portion of the previously provided
valuation allowance. We have considered future market growth, forecasted
earnings, future taxable income, the mix of earnings in the jurisdictions in
which we operate, and prudent and feasible tax planning strategies in
determining the need for a valuation allowance.
We
calculate our current and deferred tax provision based on estimates and
assumptions that could differ from the actual results reflected in income tax
returns filed during the subsequent year. Adjustments based on filed returns
are
recorded when identified, which is generally in the third quarter of the
subsequent year for U.S. federal and state provisions. Deferred tax liabilities
and assets are determined based on the differences between the financial and
tax
bases of assets and liabilities using enacted tax rates in effect in the year
the differences are expected to reverse.
The
amount of income taxes we pay is subject to ongoing audits by federal, state
and
foreign tax authorities, which often result in proposed assessments. Our
estimate for the potential outcome for any uncertain tax issue is highly
judgmental. We believe we have adequately provided for any reasonably
foreseeable outcome related to these matters. However, our future results may
include favorable or unfavorable adjustments to our estimated tax liabilities
in
the period the assessments are made or resolved or when statutes of limitation
on potential assessments expire. Additionally, the jurisdictions in which our
earnings or deductions are realized may differ from our current estimates.
Impact
of Recent Accounting Pronouncements
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs—An
Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends
the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Among other provisions, the new rule
requires that items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs be recognized as current-period charges regardless
of whether they meet the criterion of “so abnormal” as stated in ARB
No. 43. Additionally, SFAS 151 requires that the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS 151 is effective for fiscal years
beginning after June 15, 2005. The Company plans to adopt SFAS 151 in the
first quarter of fiscal 2006, beginning on January 1, 2006. Adoption of
SFAS 151 is not expected to have a material impact on the Company’s
consolidated results of operations and financial condition.
22
In
December 2004, the FASB issued SFAS No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123,
“Accounting for Stock-Based Compensation,” (“SFAS 123”) and supersedes APB
Opinion No. 25, “Accounting
for Stock Issued to Employees.” SFAS 123R requires all share-based payments
to employees, including grants of employee stock options, to be recognized
in
the financial statements based on their fair values. The pro forma disclosures
previously permitted under SFAS 123 will no longer be an alternative to
financial statement recognition. Under SFAS 123R, the Company must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at date of adoption. The transition methods available
are the
modified prospective application and the modified retrospective application.
Under the modified retrospective application, prior periods may be
restated either as of the beginning of the year of adoption or for all
periods
presented. The modified prospective application requires that compensation
expense be recorded for all unvested stock options and restricted stock
at the
beginning of the first quarter of adoption of SFAS 123R, while the modified
retrospective application would record compensation expense for all unvested
stock options and restricted stock beginning with the first period restated.
SFAS No. 123R states that the requirement is to adopt the provisions in
the
first interim or annual period beginning after June 15, 2005. However,
the
Securities and Exchange Commission (“SEC”) issued a new rule that allows
companies to implement Statement No. 123R at the beginning of their next
fiscal
year, instead of the next reporting period, that begins after June 15,
2005. In
March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”)
regarding the interaction between SFAS 123R and certain SEC rules and
regulations and provides the staff’s view regarding the valuation of share-based
payment arrangements for public companies. In November 2005, the FASB issued
FASB Staff Position (“FSP”) FAS 123R-3, “Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards”
(“FAS 123R-3”). FAS 123R-3 provides for a practical transition
election related to accounting for the tax effects of share-based payment
awards
to employees. Companies may elect either the guidance in SFAS No. 123R
or this alternative transition method up to one year from the later of
its
initial adoption of SFAS No. 123R or the effective date of this FSP to
make this one time election.
The
Company will implement the provisions of SFAS 123R in the first quarter of
2006
using the modified prospective method. As
permitted by SFAS No. 123, the Company currently uses APB 25’s intrinsic
value method and recognizes no compensation cost for employee stock options.
The
Company currently utilizes a standard option pricing model (i.e., Black-Scholes)
to measure the fair value of stock options granted to employees and will
continue to use the Black-Scholes model for option valuation. Had we adopted
earlier, the impact of SFAS 123R would have approximated the impact of SFAS
No. 123 as described in the disclosure of pro forma net income and earnings
per share in Note 1 to our audited financial statements. SFAS No. 123R also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow. This requirement will reduce net operating cash flows and increase net
financing cash flows in periods after adoption. The Company cannot estimate
what those amounts will be in the future partly because the Company cannot
predict the stock prices when i) the employees exercise non-qualified options
or
ii) the restricted stock vests. Also, under the provision of SFAS 123R, unearned
compensation related to unvested restricted stock awards are not recorded.
Accordingly, any remaining unearned compensation related to unvested restricted
stock awards and the corresponding amount in paid-in capital will no longer
be
included in stockholders’ equity beginning January 1, 2006. Based on stock
options and restricted stock granted to employees through December 31,
2005, the Company expects that the adoption of SFAS 123R on January 1,
2006, will reduce first quarter net income by approximately $125,000. See
Note 10 for further information on the Company’s stock-based compensation
plans. The cumulative amount of excess tax deductions related to share-based
payment awards to employees computed in accordance with the provisions of SFAS
123R is approximately $874,000 as of December 31, 2005.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions” (“SFAS 153”). The amendments made by SFAS 153 are based on the
principle that exchanges of nonmonetary assets should be measured based on
the
fair value of the assets exchanged. Further, the amendments eliminate the narrow
exception for non-monetary exchanges of similar productive assets and replace
it
with a broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Previously, Opinion 29 required that the accounting for
an
exchange of a productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded
amount of the asset relinquished. By focusing the exception on exchanges that
lack commercial substance, SFAS 153 intends to produce financial reporting
that
more faithfully represents the economics of the transaction. SFAS 153 is
effective for the fiscal periods beginning after June 15, 2005 and the
provisions are to be applied prospectively. The Company has adopted the
provisions of SFAS 153 resulting in no material impact on its consolidated
results of operations and financial condition.
FASB
Staff Position (“FSP”) No. 109-1, “Application of FAS 109 to Tax Deduction
on Qualified Production Activities,” issued in December 2004 (“FSP 109-1”),
provides guidance on the application of FASB Statement No. 109, “Accounting
for Income Taxes,” (“SFAS 109”), to the tax deduction on qualified production
activities provided by the American Jobs Creation Act of 2004 (the “Jobs Act”).
The Jobs Act was enacted on October 22, 2004. FSP 109-1 is intended to
clarify that the
23
domestic
manufacturing deduction should be accounted for as a special deduction (rather
than a rate reduction) under SFAS 109. A special deduction is recognized
under
SFAS 109 as it is earned. During the fourth quarter, the Company completed
a
study to quantify the methodology and determine the deduction amount. The
provisions of FSP 109-1 generated an after-tax benefit of approximately $400,000
during 2005.
In
March
2005, the FASB issued FIN 47, “Accounting
for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143”
(“FIN 47”),
which requires
an entity to recognize a liability for the fair value of a conditional asset
retirement obligation when incurred if the liability’s fair
value can
be reasonably estimated. FIN 47 is effective for fiscal years ending after
December 15, 2005 and has been adopted by the Company in the fiscal year
ended December 31, 2005. Adoption of FIN 47 did not have a material impact
on the consolidated results of operations and financial condition of the
Company.
In
May
2005, the FASB has issued FASB Statement No. 154, “Accounting
Changes
and Error Corrections” (“SFAS 154”)
which replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No.
3,
“Reporting
Accounting Changes in Interim Financial Statements.” Among
other
changes, SFAS 154 requires that a voluntary change in accounting principle
or a
change required by a new accounting pronouncement that does not include specific
transition provisions be applied retrospectively with all prior period financial
statements presented based on the new accounting principle, unless it is
impracticable to do so. SFAS 154 also provides that (1) a change in method
of
depreciating or amortizing a long-lived nonfinancial asset be accounted for
as a
change in estimate (prospectively) that was effected by a change in accounting
principle, and (2) correction of errors in previously issued financial
statements should be termed a “restatement.”
SFAS 154 is
effective for accounting changes and correction of errors made in fiscal years
beginning after December 15, 2005 with early adoption permitted for accounting
changes and correction of errors made in fiscal years beginning after June
1,
2005. Accordingly,
the Company plans to adopt the provisions of SFAS 154 in the first quarter
of
fiscal 2006, beginning on January 1, 2006 and does not expect it to have a
material impact on its consolidated results of operations and financial
condition of the Company.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
Marine
Products does not utilize financial instruments for trading purposes and holds
no derivative financial instruments which could expose Marine Products to
significant market risk. Marine Products maintains an investment portfolio,
comprised of United States Government, corporate backed obligations, asset
backed securities and municipal debt securities, which is subject to interest
rate risk exposure. This risk is managed through conservative policies to invest
in high-quality obligations. Marine Products has performed an interest rate
sensitivity analysis using a duration model over the near term with a 10 percent
change in interest rates. Marine Products’ portfolio is not subject to material
interest rate risk exposure based on this analysis. Marine Products does not
expect any material changes in market risk exposures or how those risks are
managed.
24
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To
the
Stockholders of Marine Products Corporation:
The
management of Marine Products Corporation is responsible for establishing and
maintaining adequate internal control over financial reporting for the Company.
Marine Products Corporation maintains a system of internal accounting controls
designed to provide reasonable assurance, at a reasonable cost, that assets
are
safeguarded against loss or unauthorized use and that the financial records
are
adequate and can be relied upon to produce financial statements in accordance
with accounting principles generally accepted in the United States of America.
The internal control system is augmented by written policies and procedures,
an
internal audit program and the selection and training of qualified personnel.
This system includes policies that require adherence to ethical business
standards and compliance with all applicable laws and regulations.
There
are
inherent limitations to the effectiveness of any controls system. A controls
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the objectives of the controls system are met.
Also, no evaluation of controls can provide absolute assurance that all control
issues and any instances of fraud, if any, within the Company will be detected.
Further, the design of a controls system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. The Company intends to continually improve and refine its
internal controls.
Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operations of our internal
control over financial reporting, as of December 31, 2005 based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management’s assessment is that Marine Products Corporation maintained effective
internal control over financial reporting as of December 31, 2005.
The
independent registered public accounting firm, Grant Thornton LLP, has audited
the consolidated financial statements as of and for the year ended December
31,
2005, and has also issued their report on management’s assessment of the
Company’s internal control over financial reporting, included in this report on
page 26.
|
/s/
Richard A.
Hubbell
|
/s/
Ben M.
Palmer
|
||
|
Richard
A. Hubbell
President
and Chief Executive Officer
|
Ben
M. Palmer
Chief
Financial Officer and Treasurer
|
||
Atlanta,
Georgia
March
8,
2006
25
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Board
of Directors and Stockholders of
Marine
Products Corporation
We
have
audited management’s assessment included in Management’s Report on Internal
Control Over Financial Reporting included in Marine Products Corporation’s Form
10-K for 2005, that Marine Products Corporation (a Delaware Corporation)
maintained effective internal control over financial reporting as of December
31, 2005 based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Marine Products Corporation’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in
the
circumstances. We believe that our audit provides a reasonable basis for
our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(1)
pertain to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Marine Products Corporation maintained
effective internal control over financial reporting as of December 31, 2005,
is
fairly stated, in all material respects, based on criteria established in
Internal Control—Integrated Framework issued by the COSO. Also in our
opinion, Marine Products Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control—Integrated Framework issued by
the COSO.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Marine
Products Corporation and subsidiaries as of December 31, 2005 and 2004, and
the
related consolidated statements of income, stockholders’ equity, and cash flows
for each of the two years in the period ended December 31, 2005 and our report
dated March 8, 2006 expressed an unqualified opinion on those financial
statements.
/s/
Grant
Thornton LLP
Atlanta,
Georgia
March
8,
2006
26
Item
8. Financial Statements and Supplementary Data
|
CONSOLIDATED
BALANCE SHEETS
|
||
|
MARINE
PRODUCTS CORPORATION AND SUBSIDIARIES
|
||
|
(in
thousands except share information)
|
||
|
December
31,
|
2005
|
2004
|
|
ASSETS
|
||
|
Cash
and cash equivalents
|
$37,602
|
$46,615
|
|
Marketable
securities
|
1,323
|
132
|
|
Accounts
receivable, net
|
3,662
|
1,082
|
|
Inventories
|
26,856
|
25,869
|
|
Income
taxes receivable
|
2,528
|
1,160
|
|
Deferred
income taxes
|
3,079
|
3,006
|
|
Prepaid
expenses and other current assets
|
1,343
|
876
|
|
Current
assets
|
76,393
|
78,740
|
|
Property,
plant and equipment, net
|
17,252
|
18,362
|
|
Goodwill
and other intangibles, net
|
3,738
|
3,778
|
|
Marketable
securities
|
5,893
|
6,202
|
|
Deferred
income taxes
|
1,126
|
—
|
|
Other
assets
|
4,403
|
2,652
|
|
Total
assets
|
$108,805
|
$109,734
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||
|
Liabilities
|
||
|
Accounts
payable
|
$3,461
|
$3,750
|
|
Accrued
expenses and other liabilities
|
11,591
|
13,001
|
|
Current
liabilities
|
15,052
|
16,751
|
|
Pension
liabilities
|
4,923
|
2,977
|
|
Deferred
income taxes
|
—
|
925
|
|
Other
long-term liabilities
|
1,142
|
1,709
|
|
Total
liabilities
|
21,117
|
22,362
|
|
Commitments
and contingencies
|
||
|
Stockholders’
Equity
|
||
|
Preferred
stock, $0.10 par value, 1,000,000 shares authorized, none
issued
|
—
|
—
|
|
Common
stock, $0.10 par value, 74,000,000 shares authorized,
issued and outstanding - 37,697,925 shares in 2005, 38,942,501 shares
in
2004
|
3,770
|
3,894
|
|
Capital
in excess of par value
|
16,364
|
34,239
|
|
Retained
earnings
|
72,192
|
52,042
|
|
Deferred
compensation
|
(3,540)
|
(1,899)
|
|
Accumulated
other comprehensive loss
|
(1,098)
|
(904)
|
|
Total
stockholders’ equity
|
87,688
|
87,372
|
|
Total
liabilities and stockholders’ equity
|
$108,805
|
$109,734
|
The
accompanying notes are an integral part of these statements.
27
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|||
|
MARINE
PRODUCTS CORPORATION AND SUBSIDIARIES
|
|||
|
(in
thousands except per share data)
|
|||
|
Years
ended December 31,
|
2005
|
2004
|
2003
|
|
Net
sales
|
$272,057
|
$252,418
|
$193,980
|
|
Cost
of goods sold
|
202,936
|
186,832
|
143,663
|
|
Gross
profit
|
69,121
|
65,586
|
50,317
|
|
Selling,
general and administrative expenses
|
33,557
|
29,810
|
23,015
|
|
Operating
income
|
35,564
|
35,776
|
27,302
|
|
Interest
income
|
1,330
|
590
|
501
|
|
Income
before income taxes
|
36,894
|
36,366
|
27,803
|
|
Income
tax provision
|
10,671
|
12,623
|
9,731
|
|
Net
income
|
$26,223
|
$23,743
|
$18,072
|
|
EARNINGS
PER SHARE
|
|||
|
Basic
|
$0.69
|
$0.62
|
$0.47
|
|
Diluted
|
$0.65
|
$0.58
|
$0.45
|
|
Dividends
paid per share
|
$0.16
|
$0.11
|
$0.07
|
The
accompanying notes are an integral part of these statements.
28
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|||||||||
|
MARINE
PRODUCTS CORPORATION AND SUBSIDIARIES
|
|||||||||
|
(in
thousands)
|
|||||||||
|
Three
Years Ended
December
31, 2005
|
Comprehensive
Income
|
Common
Shares
|
Stock
Amount
|
Capital
in
Excess
of
Par
Value
|
Retained
Earnings
|
Deferred
Compensation
|
Accumulated
Other
Comprehensive
(Loss)
Income
|
Total
|
|
|
Balance,
December 31, 2002
|
38,523
|
$3,852
|
$36,138
|
$17,074
|
$(334)
|
$103
|
$56,833
|
||
|
Stock
issued for stock incentive plans, net
|
257
|
26
|
550
|
105
|
681
|
||||
|
Stock
purchased and retired
|
(226)
|
(23)
|
(2,248)
|
(2,271)
|
|||||
|
Net
income
|
$18,072
|
18,072
|
18,072
|
||||||
|
Minimum
pension liability adjustment, net of taxes of $288
|
(534)
|
(534)
|
(534)
|
||||||
|
Unrealized
loss on securities, net of taxes and reclassification adjustments
|
(78)
|
(78)
|
(78)
|
||||||
|
Comprehensive
income
|
$17,460
|
||||||||
|
Dividends
declared
|
(2,737)
|
(2,737)
|
|||||||
|
Effect
of stock splits
|
38
|
4
|
(4)
|
—
|
|||||
|
Balance,
December 31, 2003
|
38,592
|
3,859
|
34,436
|
32,409
|
(229)
|
(509)
|
69,966
|
||
|
Stock
issued for stock incentive plans, net
|
456
|
46
|
3,728
|
(1,670)
|
2,104
|
||||
|
Stock
purchased and retired
|
(244)
|
(24)
|
(3,912)
|
(3,936)
|
|||||
|
Net
income
|
$23,743
|
23,743
|
23,743
|
||||||
|
Minimum
pension liability adjustment, net of taxes of $162
|
(301)
|
(301)
|
(301)
|
||||||
|
Unrealized
loss on securities, net of taxes and reclassification adjustments
|
(94)
|
(94)
|
(94)
|
||||||
|
Comprehensive
income
|
$23,348
|
||||||||
|
Dividends
declared
|
(4,110)
|
(4,110)
|
|||||||
|
Effect
of stock splits
|
139
|
13
|
(13)
|
—
|
|||||
|
Balance,
December 31, 2004
|
38,943
|
3,894
|
34,239
|
52,042
|
(1,899)
|
(904)
|
87,372
|
||
|
Stock
issued for stock incentive plans, net
|
278
|
28
|
2,862
|
(1,641)
|
1,249
|
||||
|
Stock
purchased and retired
|
(1,608)
|
(161)
|
(20,728)
|
(20,889)
|
|||||
|
Net
income
|
$26,223
|
26,223
|
26,223
|
||||||
|
Minimum
pension liability adjustment, net of taxes of $146
|
(178)
|
(178)
|
(178)
|
||||||
|
Unrealized
loss on securities, net of taxes and reclassification adjustments
|
(16)
|
(16)
|
(16)
|
||||||
|
Comprehensive
income
|
$26,029
|
||||||||
|
Dividends
declared
|
(6,073)
|
(6,073)
|
|||||||
|
Effect
of stock splits
|
85
|
9
|
(9)
|
—
|
|||||
|
Balance,
December 31, 2005
|
37,698
|
$3,770
|
$16,364
|
$72,192
|
$(3,540)
|
$(1,098)
|
$87,688
|
||
The
accompanying notes are an integral part of these statements.
29
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||
|
MARINE
PRODUCTS CORPORATION AND SUBSIDIARIES
|
|||
|
(in
thousands)
|
|||
|
Years
ended December 31,
|
2005
|
2004
|
2003
|
|
OPERATING
ACTIVITIES
|
|||
|
Net
income
|
$26,223
|
$23,743
|
$18,072
|
|
Non-cash
charges (credits) to earnings:
|
|||
|
Depreciation,
amortization and other non-cash charges
|
3,018
|
2,532
|
2,306
|
|
Deferred
income tax (benefit) provision
|
(1,970)
|
(784)
|
1,029
|
|
(Increase)
decrease in assets:
|
|||
|
Accounts
receivable
|
(2,580)
|
2,888
|
(2,499)
|
|
Inventories
|
(987)
|
(4,099)
|
(1,085)
|
|
Prepaid
expenses and other current assets
|
(467)
|
(260)
|
1,007
|
|
Income
taxes receivable
|
(1,476)
|
787
|
(1,073)
|
|
Other
non-current assets
|
(1,751)
|
(1,187)
|
(679)
|
|
Increase
(decrease) in liabilities:
|
|||
|
Accounts
payable
|
(289)
|
1,153
|
(730)
|
|
Income
taxes payable
|
—
|
—
|
(1,066)
|
|
Other
accrued expenses
|
(1,410)
|
4,242
|
1,135
|
|
Other
long-term liabilities
|
1,055
|
390
|
1,411
|
|
Net
cash provided by operating activities
|
19,366
|
29,405
|
17,828
|
|
INVESTING
ACTIVITIES
|
|||
|
Capital
expenditures
|
(1,118)
|
(2,838)
|
(3,707)
|
|
Sale
(purchase) of marketable securities
|
(905)
|
914
|
(725)
|
|
Net
cash used for investing activities
|
(2,023)
|
(1,924)
|
(4,432)
|
|
FINANCING
ACTIVITIES
|
|||
|
Payment
of dividends
|
(6,073)
|
(4,110)
|
(2,737)
|
|
Cash
paid for common stock purchased and retired
|
(20,627)
|
(3,768)
|
(2,271)
|
|
Proceeds
received upon exercise of stock options
|
344
|
768
|
576
|
|
Net
cash used for financing activities
|
(26,356)
|
(7,110)
|
(4,432)
|
|
Net
(decrease) increase in cash and cash equivalents
|
(9,013)
|
20,371
|
8,964
|
|
Cash
and cash equivalents at beginning of year
|
46,615
|
26,244
|
17,280
|
|
Cash
and cash equivalents at end of year
|
$37,602
|
$46,615
|
$26,244
|
The
accompanying notes are an integral part of these statements.
30
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
NOTE
1: SIGNIFICANT ACCOUNTING POLICIES
Basis
of Consolidation and Presentation —
The
consolidated financial statements include the accounts of Marine Products
Corporation (a Delaware corporation) and its wholly owned subsidiaries (“Marine
Products” or the “Company”). Marine Products, through Chaparral Boats, Inc.
(“Chaparral”) and Robalo Acquisition Company LLC (“Robalo”), operates as a
manufacturer of fiberglass powerboats and related products and services to
a
broad range of consumers worldwide.
The
consolidated financial statements included herein may not necessarily be
indicative of the future results of operations, financial position and cash
flows of Marine Products.
The
Company has only one reportable segment — its Powerboat Manufacturing business.
The Company’s results of operations and its financial condition are not
significantly reliant upon any single customer or product model. Revenues from
the Company’s international operations were approximately $43,000,000 in 2005
and $27,500,000 in 2004.
Nature
of Operations —
Marine
Products is principally engaged in manufacturing powerboats and providing
related products and services. Marine Products distributes fiberglass
recreational boats through a network of domestic and international independent
dealers.
Common
Stock —
Marine
Products is authorized to issue 74,000,000 shares of common stock, $0.10 par
value. Holders of common stock are entitled to receive dividends when, as,
and
if declared by our Board of Directors out of legally available funds. Each
share
of common stock is entitled to one vote on all matters submitted to a vote
of
stockholders. Holders of common stock do not have cumulative voting rights.
In
the event of any liquidation, dissolution or winding up of the Company, holders
of common stock are entitled to ratable distribution of the remaining assets
available for distribution to stockholders.
Preferred
Stock — Marine
Products is authorized to issue up to 1,000,000 shares of preferred stock,
$0.10
par value. As of December 31, 2005, there were no shares of preferred stock
issued. The Board of Directors is authorized, subject to any limitations
prescribed by law, to provide for the issuance of preferred stock as a class
without series or, if so determined from time to time, in one or more series,
and by filing a certificate pursuant to the applicable laws of the state of
Delaware and to fix the designations, powers, preferences and rights,
exchangeability for shares of any other class or classes of stock. Any preferred
stock to be issued could rank prior to the common stock with respect to dividend
rights and rights on liquidation.
Share
Repurchases —
The
Company records the cost of share repurchases in stockholders’ equity as a
reduction to common stock to the extent of par value of the shares acquired
and
the remainder is allocated to capital in excess of par value.
Dividend
—
The
Board of Directors, at their quarterly meeting on January 24, 2006, declared
a quarterly dividend of $0.05 per common share that will be payable March 10,
2006 to stockholders of record at the close of business on February 10,
2006.
Use
of Estimates in the Preparation of Financial Statements —
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 financial
statements and the reported amounts of sales and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates
are used in the determination of sales incentives and discounts, warranty costs
and income taxes.
Reclassification
—
Certain
prior year balances have been reclassified to conform with the current year
presentation.
Sales
Recognition —
Marine
Products recognizes sales when a fully executed agreement exists, prices are
established, products are delivered to the dealer in the case of domestic
dealers and collectibility is reasonably assured. See “Deferred revenue” below
for recognition of sales to international dealers.
Deferred
Revenue —
Marine
Products requires payment from international dealers prior to delivery of
products to these dealers. Amounts received from international dealers toward
the purchase of boats are categorized as deferred revenue and recognized as
sales when the products are shipped.
31
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
Shipping
and Handling Charges —
The
shipping and handling of the Company’s products to dealers is handled through a
combination of a third-party marine transport service and a company owned fleet
of delivery trucks. Fees charged to customers for shipping and handling are
included in net sales in the accompanying consolidated statements of income;
the
related costs incurred by the Company are included in cost of goods sold.
Advertising
—
Advertising expenses are charged to expense during the period in which they
are
incurred. Expenses associated with product brochures and other inventoriable
marketing materials are deferred and amortized over the related model year
which
approximates the consumption of these materials. As of December 31, 2005 and
2004, the Company had approximately $390,000 and $327,000 in prepaid expenses
related to the unamortized product brochure costs. Advertising expense totaled
approximately $2,622,000 in 2005, $2,520,000 in 2004 and $2,785,000 in 2003.
Sales
Incentives and Discounts —
Sales
incentives including dealer discounts and retail sales promotions are provided
for and recorded as a reduction in sales for the period in which the related
sales are recorded. The Company records these incentives at the later of the
recognition of the related sales or the announcement of a promotional program.
Cash
and Cash Equivalents —
Highly
liquid investments with original maturities of three months or less are
considered to be cash equivalents.
Marketable
Securities —
Marine
Products maintains investments held with several large, well-capitalized
financial institutions. Marine Products’ investment policy does not allow
investment in any securities rated less than “investment grade” by national
rating services.
Management
determines the appropriate classification of debt securities at the time of
purchase and re-evaluates such designations as of each balance sheet date.
Debt
securities are classified as available-for-sale because the Company does not
have the intent to hold the securities to maturity. Available-for-sale
securities are stated at their fair values, with the unrealized gains and
losses, net of tax, reported as a separate component of stockholders’ equity.
The cost of securities sold is based on the specific identification method.
Realized gains and losses, declines in value judged to be other than temporary,
interest and dividends on available-for-sale securities are included in interest
income. Realized (losses)gains on marketable securities totaled $(52,174) in
2005, $148,127 in 2004 and $87,738 in 2003. Of the total (losses) gains
realized, reclassification from other comprehensive income totaled approximately
$(38,000) in 2005, $165,000 in 2004 and $168,000 in 2003. The fair value and
the
unrealized gains (losses) of the available for sale securities are as
follows:
|
December
31,
|
2005
|
2004
|
|||||||
|
Type
of Securities
|
Fair
Value
|
Unrealized
Gain (Loss)
|
Fair
Value
|
Unrealized
Gain (Loss)
|
|||||
|
U.S.
Treasury Notes
|
$
|
1,630,000
|
$
|
(14,000)
|
$
|
1,398,000
|
$
|
(9,800)
|
|
|
Federal
Agency Obligations
|
1,081,000
|
(15,000)
|
528,000
|
1,000
|
|||||
|
Mortgage
Backed Obligations
|
—
|
—
|
100,000
|
(1,000)
|
|||||
|
Corporate
Backed Obligations
|
1,654,000
|
(24,000)
|
1,386,000
|
(11,000)
|
|||||
|
Asset
Backed Securities
|
1,797,000
|
(39,000)
|
2,671,000
|
(46,000)
|
|||||
|
Municipal
Obligations
|
1,054,000
|
—
|
251,000
|
(3,000)
|
|||||
Corporate
backed obligations consist primarily of debentures and notes issued by other
companies ranging in maturity from nine months to five years. These securities
are rated A1/P1 or higher for the short-term securities and BBB or higher for
the long-term securities.
Asset
backed securities consist of a well diversified portfolio of securities backed
by receivables such as auto loans, equipment loans and credit cards. These
securities have a credit rating of A1/P1 or higher.
Investments
with remaining maturities of less than 12 months are considered to be current
marketable securities. Investments with remaining maturities greater than 12
months are considered to be non-current marketable securities. The maturities
of
the Company’s non-current marketable securities are as follows: $0 in 2006,
approximately $5,760,000 between 2007 and 2011, $128,000 between 2012 and 2016,
$5,000 in 2017 and thereafter.
32
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
Accounts
Receivable — The
majority of the Company’s accounts
receivable is due from dealers located in markets throughout the Unites States.
Most of Marine Products’ domestic shipments are made pursuant to “floor plan
financing” programs in which Marine Products’ subsidiaries participate on behalf
of their dealers with two major third-party financing institutions. Under these
arrangements, a dealer establishes lines of credit with one or more of these
third-party lenders for the purchase of boat inventory for sales to retail
customers in their show room or during boat show exhibitions. When a dealer
purchases and takes delivery of a boat pursuant to a floor plan financing
arrangement, it draws against its line of credit and the lender pays the invoice
cost of the boat directly to Marine Products, generally, within 10 business
days. The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Company’s previous loss history, the customer’s current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes-off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts.
Inventories
—
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market value. Market value is determined based on replacement cost
for
raw materials and net realizable value for work in process and finished goods.
Property,
Plant and Equipment —
Property, plant and equipment is carried at cost. Depreciation is provided
principally on a straight-line basis over the estimated useful lives of the
assets. The cost of assets retired or otherwise disposed of and the related
accumulated depreciation are eliminated from the accounts in the year of
disposal with the resulting gain or loss credited or charged to income.
Expenditures for additions, major renewals, and betterments are capitalized
while expenditures for routine maintenance and repairs are expensed as incurred.
Depreciation expense on operating equipment used in production is included
in
cost of goods sold in the accompanying consolidated statements of income. All
other depreciation is included in selling, general and administrative expenses
in the accompanying consolidated statements of income. Property, plant and
equipment are reviewed for impairment when indicators of impairment exist.
Goodwill
and Other Intangibles —
Intangibles consist primarily of goodwill and trade names related to businesses
acquired. Goodwill represents the excess of the purchase price over the fair
value of net assets of businesses acquired. The carrying amount of goodwill
was
$3,308,000 as of December 31, 2005 and 2004. Pursuant to the adoption of
Statement of Financial Accounting Standard (“SFAS”) No. 142 beginning on January
1, 2002, goodwill is no longer amortized to earnings but instead is subject
to
an annual test for impairment. The Company completed an initial impairment
analysis upon adoption of SFAS No. 142 and subsequent analyses in each year.
Based upon the results of these analyses, the Company has concluded that no
impairment of its goodwill has occurred.
Investments
—
The
Company maintains certain securities in the non-qualified Supplemental Executive
Retirement Plan that have been classified as Trading. See
Note 10 for further information regarding these securites.
Warranty
Costs —
The
Company warrants the entire boat, excluding the engine, against defects in
materials and workmanship for a period of one year. The Company also warrants
the entire deck and hull, including its bulkhead and supporting stringer system,
against defects in materials and workmanship for periods extending up to 10
years. The Company accrues for estimated future warranty costs at the time
of
the sale based on its historical claims experience. An analysis of the warranty
accruals for the years ended December 31, 2005 and 2004 is as follows:
|
(in
thousands)
|
2005
|
2004
|
|
Balance
at beginning of year
|
$3,796
|
$2,846
|
|
Less:
Payments made during the year
|
(4,453)
|
(3,839)
|
|
Add:
Warranty accruals during the year
|
4,435
|
4,315
|
|
Changes
to warranty accruals issued in prior years
|
494
|
474
|
|
Balance
at end of year
|
$4,272
|
$3,796
|
Changes
in warranties issued in prior years are due to updated information about
the
frequency and size of claims incurred related to prior year sales.
33
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
Insurance
Accruals —
The
Company fully insures its risks related to general liability, product liability,
workers’ compensation, and vehicle liability, whereas the health insurance plan
is self-funded up to a maximum annual claim amount for each covered employee
and
related dependents. The estimated cost of claims under the self-insurance
program is accrued as the claims are incurred and may subsequently be revised
based on developments relating to such claims.
Research
and Development Costs —
The
Company expenses research and development costs for new products and components
as incurred. Research and development costs are included in selling, general
and
administrative expenses and totaled $1,933,000 in 2005, $1,729,000 in 2004
and
$1,075,000 in 2003.
Income
Taxes —
Deferred tax liabilities and assets are determined based on the difference
between the financial and tax bases of assets and liabilities using enacted
tax
rates in effect for the year in which the differences are expected to reverse.
The Company establishes a valuation allowance against the carrying value of
deferred tax assets if the Company concludes that it is more likely than not
that the asset will not be realized through future taxable income.
Earnings
per Share —
SFAS
No. 128, “Earnings Per Share,” requires a basic earnings per share and diluted
earnings per share presentation. The two calculations differ as a result of
the
dilutive effect of stock options and time lapse restricted shares and
performance restricted shares included in diluted earnings per share, but
excluded from basic earnings per share. A reconciliation of weighted average
shares outstanding is as follows:
|
2005
|
2004
|
2003
|
|
|
Basic
|
38,015,899
|
38,452,704
|
38,079,651
|
|
Dilutive
effect of stock options and restricted shares
|
2,101,028
|
2,318,547
|
2,212,434
|
|
Diluted
|
40,116,927
|
40,771,251
|
40,292,085
|
Fair
Value of Financial Instruments —
The
Company’s financial instruments consist primarily of cash and cash equivalents,
accounts receivable, accounts payable and marketable securities. The carrying
value of cash, accounts receivable and accounts payable approximate their fair
values because of the short-term nature of such instruments. The Company’s
marketable securities are classified as available-for-sale securities and are
carried at fair value in the accompanying consolidated balance sheets. The
fair
value of these securities is based upon quoted market prices.
Concentration
of Suppliers —
The
Company purchases a significant number of its sterndrive engines from only
two
available suppliers. This concentration of suppliers could impact our sales
and
profitability in the event of a sudden interruption in the delivery of these
engines.
New
Accounting Standards — In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs—An
Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends
the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Among other provisions, the new rule
requires that items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs be recognized as current-period charges regardless
of whether they meet the criterion of “so abnormal” as stated in ARB
No. 43. Additionally, SFAS 151 requires that the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS 151 is effective for fiscal years
beginning after June 15, 2005. The Company plans to adopt SFAS 151 in the
first quarter of fiscal 2006, beginning on January 1, 2006. Adoption of
SFAS 151 is not expected to have a material impact on the Company’s
consolidated results of operations and financial condition.
34
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
In
December 2004, the FASB issued SFAS No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123,
“Accounting for Stock-Based Compensation,” (“SFAS 123”) and supersedes APB
Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on
their fair
values. The pro forma disclosures previously permitted under SFAS 123 will
no longer be an alternative to financial statement recognition. Under
SFAS 123R, the Company must determine the appropriate fair value model
to be used for valuing share-based payments, the amortization method
for
compensation cost and the transition method to be used at date of adoption.
The
transition methods available are the modified prospective application
and the
modified retrospective application. Under the modified retrospective
application, prior periods may be restated either as of the beginning of
the year of adoption or for all periods presented. The modified prospective
application requires that compensation expense be recorded for all unvested
stock options and restricted stock at the beginning of the first quarter
of
adoption of SFAS 123R, while the modified retrospective application would
record compensation expense for all unvested stock options and restricted
stock
beginning with the first period restated. SFAS No. 123R states that the
requirement is to adopt the provisions in the first interim or annual
period
beginning after June 15, 2005. However, the Securities and Exchange Commission
(“SEC”) issued a new rule that allows companies to implement Statement No.
123R
at the beginning of their next fiscal year, instead of the next reporting
period, that begins after June 15, 2005. In March 2005, the SEC issued
Staff
Accounting Bulletin No. 107 (“SAB 107”) regarding the interaction between SFAS
123R and certain SEC rules and regulations and provides the staff’s view
regarding the valuation of share-based payment arrangements for public
companies. In November 2005, the FASB issued FASB Staff Position (“FSP”)
FAS 123R-3, “Transition Election Related to Accounting for the Tax Effects
of Share-Based Payment Awards” (“FAS 123R-3”). FAS 123R-3 provides for
a practical transition election related to accounting for the tax effects
of
share-based payment awards to employees. Companies may elect either the
guidance
in SFAS No. 123R or this alternative transition method up to one year
from the later of its initial adoption of SFAS No. 123R or the
effective date of this FSP to make this one time
election.
The
Company will implement the provisions of SFAS 123R in the first quarter of
2006
using the modified prospective method. As
permitted by SFAS No. 123, the Company currently uses APB 25’s intrinsic
value method and recognizes no compensation cost for employee stock options.
The
Company currently utilizes a standard option pricing model (i.e., Black-Scholes)
to measure the fair value of stock options granted to employees and will
continue to use the Black-Scholes model for option valuation. Had we adopted
earlier, the impact of SFAS 123R would have approximated the impact of SFAS
No. 123 as described in the disclosure of pro forma net income and earnings
per share in Note 1 to our audited financial statements. SFAS No. 123R also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow. This requirement will reduce net operating cash flows and increase net
financing cash flows in periods after adoption. The Company cannot estimate
what those amounts will be in the future partly because the Company cannot
predict the stock prices when i) the employees exercise non-qualified options
or
ii) the restricted stock vests. Also, under the provision of SFAS 123R, unearned
compensation related to unvested restricted stock awards are not recorded.
Accordingly, any remaining unearned compensation related to unvested restricted
stock awards and the corresponding amount in paid-in capital will no longer
be
included in stockholders’ equity beginning January 1, 2006. Based on stock
options and restricted stock granted to employees through December 31,
2005, the Company expects that the adoption of SFAS 123R on January 1,
2006, will reduce first quarter net income by approximately $125,000. See
Note 10 for further information on the Company’s stock-based compensation
plans. The cumulative amount of excess tax deductions related to share-based
payment awards to employees computed in accordance with the provisions of SFAS
123R is approximately $874,000 as of December 31, 2005.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions” (“SFAS 153”). The amendments made by SFAS 153 are based on the
principle that exchanges of nonmonetary assets should be measured based on
the
fair value of the assets exchanged. Further, the amendments eliminate the narrow
exception for non-monetary exchanges of similar productive assets and replace
it
with a broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Previously, Opinion 29 required that the accounting for
an
exchange of a productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded
amount of the asset relinquished. By focusing the exception on exchanges that
lack commercial substance, SFAS 153 intends to produce financial reporting
that
more faithfully represents the economics of the transaction. SFAS 153 is
effective for the fiscal periods beginning after June 15, 2005 and the
provisions are to be applied prospectively. The Company has adopted the
provisions of SFAS 153 resulting in no material impact to its consolidated
results of operations and financial condition.
35
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
FASB
Staff Position (“FSP”) No. 109-1, “Application of FAS 109 to Tax Deduction
on Qualified Production Activities,” issued in December 2004 (“FSP 109-1”),
provides guidance on the application of FASB Statement No. 109, “Accounting
for Income Taxes,” (“SFAS 109”), to the tax deduction on qualified production
activities provided by the American Jobs Creation Act
of
2004 (the “Jobs Act”). The Jobs Act was enacted on October 22, 2004. FSP
109-1 is intended to clarify that the domestic manufacturing deduction
should be
accounted for as a special deduction (rather than a rate reduction) under
SFAS
109. A special deduction is recognized under SFAS 109 as it is earned.
During
the fourth quarter, the Company completed a study to quantify the methodology
and determine the deduction amount. The provisions of FSP
109-1 generated an after-tax benefit of approximately $400,000 during
2005.
In
March
2005, the FASB issued FIN 47, “Accounting
for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143”
(“FIN 47”), which requires an entity to recognize a liability for the fair
value of a conditional asset retirement obligation when incurred if the
liability’s
fair value can be reasonably estimated. FIN 47 is effective for fiscal
years ending after December 15, 2005 and has been adopted by the Company in
the fiscal year ended December 31, 2005. Adoption of FIN 47 did not have a
material impact on the consolidated results of operations and financial
condition of the Company.
In
May
2005, the FASB has issued FASB Statement No. 154, “Accounting Changes and Error
Corrections” (“SFAS 154”) which replaces APB Opinion No. 20, Accounting Changes,
and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial
Statements.” Among other changes, SFAS 154 requires that a voluntary change in
accounting principle or a change required by a new accounting pronouncement
that
does not include specific transition provisions be applied retrospectively
with
all prior period financial statements presented on the new accounting principle,
unless it is impracticable to do so. SFAS 154 also provides that (1) a change
in
method of depreciating or amortizing a long-lived nonfinancial asset be
accounted for as a change in estimate (prospectively) that was effected by
a
change in accounting principle, and (2) correction of errors in previously
issued financial statements should be termed a “restatement.” SFAS 154 is
effective for accounting changes and correction of errors made in fiscal years
beginning after December 15, 2005 with early adoption permitted for accounting
changes and correction of errors made in fiscal years beginning after June
1,
2005. Accordingly,
the Company plans to adopt the provisions of SFAS 154 in the first quarter
of
fiscal 2006, beginning on January 1, 2006 and does not expect it to have a
material impact on its consolidated results of operations and financial
condition of the Company.
Stock-Based
Compensation —
Marine
Products accounts for its stock incentive plan using the intrinsic value method
prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting
for Stock Issued to Employees.” Marine Products records deferred compensation
related to the restricted stock grants based on the fair market value of the
shares at the issue date and amortizes such amounts ratably over the vesting
period of the shares. Marine Products recorded amortization of deferred
compensation related to these restricted stock grants totaling approximately
$750,000 in 2005, $294,000 in 2004 and $104,000 in 2003.
If
Marine
Products had accounted for the stock incentives in accordance with the
provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” the total
fair value of awards granted under the plan would be amortized over the vesting
period of the awards, and Marine Products’ reported net income and diluted net
income per share would have been as follows:
|
Years
ended December 31,
|
2005
|
2004
|
2003
|
|
(in
thousands)
|
|||
|
Net
income (as reported)
|
$26,223
|
$23,743
|
$18,072
|
|
Add:
Stock-based employee compensation expense included in reported net
income,
net of related tax effect
|
506
|
191
|
68
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards, net of related tax
effect
|
(1,055)
|
(550)
|
(405)
|
|
Pro
forma net income
|
$25,674
|
$23,384
|
$17,735
|
|
Pro
forma income per share would have been as follows:
|
|||
|
Basic
— as reported
|
$0.69
|
$0.62
|
$0.47
|
|
Basic
— pro forma
|
$0.68
|
$0.61
|
$0.47
|
|
Diluted
— as reported
|
$0.65
|
$0.58
|
$0.45
|
|
Diluted
— pro forma
|
$0.64
|
$0.57
|
$0.44
|
36
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
The
Company did not grant any options during 2005 and has computed for pro forma
disclosure purposes the value of all options granted during 2004 and 2003 using
the Black-Scholes option pricing model as prescribed by SFAS No. 123 using
the
following weighted average assumptions:
|
2005
|
2004
|
2003
|
|
|
Risk
free interest rate
|
N/A
|
3.5%
|
1.1%
|
|
Expected
dividend yield
|
N/A
|
0.9%
|
1.3%
|
|
Expected
lives
|
N/A
|
7
years
|
7
years
|
|
Expected
volatility
|
N/A
|
47-52%
|
33%
|
The
total
fair value of options granted to Marine Products employees was $422,000 in
2004
and $1,838,000 in 2003.
Stock
Splits —
All
share and per share data appearing in the consolidated financial statements
and
related footnotes have been retroactively adjusted for the three-for-two stock
splits effective March 10, 2005 and March 10, 2004.
NOTE
2: ACCOUNTS
RECEIVABLE
Accounts
receivable consist of the following:
|
December
31,
|
2005
|
2004
|
|
(in
thousands)
|
||
|
Trade
receivables
|
$3,249
|
$1,024
|
|
Other
|
471
|
118
|
|
Total
|
3,720
|
1,142
|
|
Less:
Allowance for doubtful accounts
|
(58)
|
(60)
|
|
Net
accounts receivable
|
$3,662
|
$1,082
|
Trade
receivables consist primarily of balances related to the sales of boats which
are shipped pursuant to “floor-plan financing” programs with qualified
lenders. Other receivables consist primarily of amounts due from vendors for
co-op advertising and rebates on engine purchases.
Changes
in the Company’s allowance for doubtful accounts are disclosed in Schedule II on
page 51 of this report.
NOTE
3: INVENTORIES
Inventories
consist of the following:
|
December
31,
|
2005
|
2004
|
|
(in
thousands)
|
||
|
Raw
materials
|
$13,212
|
$12,768
|
|
Work
in process
|
7,727
|
6,721
|
|
Finished
goods
|
5,917
|
6,380
|
|
Total
inventories
|
$26,856
|
$25,869
|
37
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
NOTE
4: PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment are presented at cost, net of accumulated depreciation
and
consist of the following:
|
December
31,
|
Estimated
Useful
Lives
|
2005
|
2004
|
|
(in
thousands)
|
|||
|
Land
|
N/A
|
$
495
|
$
495
|
|
Buildings
|
20-39
|
16,120
|
16,010
|
|
Operating
equipment and property
|
3-15
|
8,453
|
7,960
|
|
Furniture
and fixtures
|
5-7
|
1,224
|
1,130
|
|
Vehicles
|
3-5
|
5,831
|
5,469
|
|
Gross
property, plant and equipment
|
32,123
|
31,064
|
|
|
Less:
accumulated depreciation
|
(14,871)
|
(12,702)
|
|
|
Net
property, plant and equipment
|
$
17,252
|
$
18,362
|
Depreciation
expense was $2,245,000 in 2005, $2,237,000 in 2004 and $2,162,000 in 2003.
NOTE
5: RELATED PARTY TRANSACTIONS
In
conjunction with its spin-off from RPC, Inc. (“RPC”) in 2001, the Company and
RPC entered into various agreements that define the companies’ relationship
after the spin-off.
The
Transition Support Services Agreement provides for RPC to provide certain
services, including financial reporting and income tax administration,
acquisition assistance, etc., to Marine Products until the agreement is
terminated by either party. Marine Products reimbursed RPC for its estimated
allocable share of administrative costs incurred for services rendered on behalf
of Marine Products totaling $616,000 in 2005, $546,000 in 2004 and $496,000
in
2003. The Company’s directors are also directors of RPC and all of the executive
officers with the exception of Mr. Lane are employees of both the Company and
RPC. The Company paid $171,000 in 2003 to a division of RPC for the purchase,
installation and service of overhead cranes.
The
Employee Benefits Agreement provides for, among other things, the Company’s
employees to continue participating subsequent to the spin-off in two RPC
sponsored benefit plans, specifically, the defined contribution 401(k) plan
and
the defined benefit retirement income plan.
The
Tax
Sharing and Indemnification Agreement provides for, among other things, the
treatment of income tax matters for periods through the date of the spin-off
and
responsibility for any adjustments as a result of audit by any taxing authority.
The general terms provide for the indemnification for any tax detriment incurred
by one party caused by the other party’s action. In accordance with the
agreement, RPC transferred approximately $19,000 in 2004 to the Company related
to tax settlements. Subsequent to the spin-off, Marine Products and RPC file
separate tax returns.
38
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
NOTE
6: ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued
expenses and other liabilities consist of the following:
|
December
31,
|
2005
|
2004
|
|
(in
thousands)
|
||
|
Accrued
payroll and related expenses
|
$2,185
|
$2,334
|
|
Accrued
sales incentives and discounts
|
2,887
|
3,058
|
|
Accrued
warranty costs
|
4,272
|
3,796
|
|
Deferred
revenue
|
1,010
|
2,474
|
|
Other
|
1,237
|
1,339
|
|
Total
accrued expenses and other liabilities
|
$11,591
|
$13,001
|
NOTE
7: INCOME TAXES
The
following table lists the components of the provision for income taxes:
|
Years
ended December 31,
|
2005
|
2004
|
2003
|
|
(in
thousands)
|
|||
|
Current
provision:
|
|||
|
Federal
|
$
11,958
|
$
12,574
|
$
8,295
|
|
State
|
682
|
833
|
407
|
|
Deferred
(benefit) provision:
|
|||
|
Federal
|
(1,862)
|
(678)
|
1,000
|
|
State
|
(107)
|
(106)
|
29
|
|
Total
income tax provision
|
$
10,671
|
$
12,623
|
$
9,731
|
A
reconciliation between the federal statutory rate and Marine Products’ effective
tax rate is as follows:
|
Years
ended December 31,
|
2005
|
2004
|
2003
|
|
Federal
statutory rate
|
35.0%
|
35.0%
|
35.0%
|
|
State
income taxes, net of federal benefit
|
0.8
|
1.3
|
1.3
|
|
Other
|
(6.9)
|
(1.6)
|
(1.3)
|
|
Effective
tax rate
|
28.9%
|
34.7%
|
35.0%
|
Other
includes the effect of the manufacturing deduction and a contingency adjustment.
39
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
Significant
components of the Company’s deferred tax assets and liabilities are as follows:
|
December
31,
|
2005
|
2004
|
|
(in
thousands)
|
||
|
Deferred
tax assets:
|
||
|
Warranty
costs
|
$
1,580
|
$
1,403
|
|
Sales
incentives and discounts
|
700
|
704
|
|
Self-insurance
expense
|
134
|
61
|
|
Stock-based
compensation
|
538
|
254
|
|
Pension
expense
|
1,842
|
1,069
|
|
Payroll
accrual
|
125
|
73
|
|
Advertising
expense
|
207
|
241
|
|
Uniform
capitalization
|
148
|
78
|
|
All
others
|
172
|
157
|
|
Total
deferred tax assets
|
5,446
|
4,040
|
|
Deferred
tax liabilities:
|
||
|
Depreciation
expense
|
(1,241)
|
(1,959)
|
|
All
others
|
—
|
—
|
|
Total
deferred tax liabilities
|
(1,241)
|
(1,959)
|
|
Net
deferred tax assets
|
$
4,205
|
$
2,081
|
Total
income tax payments, net of refunds, were $14,307,000 in 2005, $12,608,000
in
2004 and $9,751,000 in 2003. The Company currently does not have a valuation
allowance because it has determined that all of the deferred tax assets are
more
likely than not to be realized based on future market growth, forecasted
earnings, future taxable income, the mix of earnings in the jurisdictions in
which the Company operates, and prudent and feasible tax planning strategies.
40
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
NOTE
8: ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Accumulated
other comprehensive (loss) income consists of the following:
|
Minimum
Pension
Liability
|
Unrealized
Gain
(Loss) on
Securities
|
Total
|
|
|
(in
thousands)
|
|||
|
Balance
at December 31, 2003
|
$(552)
|
$43
|
$(509)
|
|
Change
during 2004:
|
|||
|
Before-tax
amount
|
(463)
|
19
|
(444)
|
|
Tax
benefit
|
162
|
(6)
|
156
|
|
Reclassification
adjustment, net of taxes
|
—
|
(107)
|
(107)
|
|
Total
activity in 2004
|
(301)
|
(94)
|
(395)
|
|
Balance
at December 31, 2004
|
$(853)
|
$(51)
|
$(904)
|
|
Change
during 2005:
|
|||
|
Before-tax
amount
|
(324)
|
(63)
|
(387)
|
|
Tax
benefit
|
146
|
23
|
169
|
|
Reclassification
adjustment, net of taxes
|
—
|
24
|
24
|
|
Total
activity in 2005
|
(178)
|
(16)
|
(194)
|
|
Balance
at December 31, 2005
|
$(1,031)
|
$(67)
|
$(1,098)
|
NOTE
9:
COMMITMENTS AND CONTINGENCIES
Lawsuits
—
The
Company is a defendant in certain lawsuits which allege that plaintiffs have
been damaged as a result of the use of the Company’s products. The Company is
vigorously contesting these actions. Management, after consultation with legal
counsel, is of the opinion that the outcome of these lawsuits will not have
a
material adverse effect on the financial position, results of operations or
liquidity of Marine Products.
Dealer
Floor-Plan Financing —
To
assist dealers in obtaining financing for the purchase of its boats for
inventory, the Company has entered into agreements with various dealers and
selected third-party lenders to guarantee varying amounts of qualifying dealers’
debt obligations. The Company’s obligation under these guarantees becomes
effective in the case of default by the dealer. The agreements provide for
the
return of all repossessed boats in “like new” condition to the Company, in
exchange for the Company’s assumption of specified percentages of the dealers’
unpaid debt obligation on those boats. The maximum contractual obligation and
the amount outstanding under these agreements, which expire in 2006 and 2007
was
$4.0 million as of December 31, 2005. The Company has recorded the estimated
fair value of this guarantee; at December 31, 2005, this amount is immaterial
and did not change from the prior year.
Lease
Obligation —
In
June
2001, the Company entered into a lease transaction for existing boat
manufacturing space located in Valdosta, Georgia. The lease has a term of 12
years. This lease has been accounted for as a capital lease and accordingly,
the
building, land, and miscellaneous equipment have been recorded in property,
plant and equipment on the consolidated balance sheet at a gross amount of
$887,000 with accumulated depreciation of approximately $119,000. A liability
equal to the estimated present value of the remaining lease obligation totaling
$150,000 has been recorded and is included in other long-term liabilities on
the
consolidated balance sheet.
Income
Taxes —
The amount of income taxes the Company pays is subject to ongoing audits by
federal and state tax authorities, which often result in proposed assessments.
Other long-term liabilities consist primarily of the Company’s estimated
liabilities for these probable assessments and totaled approximately $992,000
in
2005 and $1,559,000 in 2004.
41
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
Employment
Agreements —
The
Company has an agreement with two employees, which provides for a monthly
payment to each of the employees equal to 10 percent of profits (defined as
pretax income before goodwill amortization and certain allocated corporate
expenses) in addition to a base salary. The expense under these agreements
totaled approximately $10,320,000 in 2005, $9,997,000 in 2004 and $7,240,000
in
2003 and is included in selling, general and administrative expenses in the
accompanying consolidated statements of income.
NOTE
10:
EMPLOYEE BENEFIT PLANS
Retirement
Plan —
Marine
Products participates in the tax-qualified, defined benefit, noncontributory,
trusteed retirement income plan sponsored by RPC that covers substantially
all
employees with at least one year of service prior to 2002. In the first quarter
of 2002, the Company’s Board of Directors approved a resolution to cease all
future retirement benefit accruals under the Retirement Income Plan effective
March 31, 2002. In lieu thereof, the Company began providing enhanced benefits
in the form of cash contributions for certain longer serviced employees that
had
not reached the normal retirement age of 65 as of March 31, 2002. These
discretionary contributions are expected to be made over a seven year period
beginning in 2002 to either a non-qualified Supplemental Executive Retirement
Plan (“SERP”) established by the Company or to the 401(k) plan for each employee
that is entitled to the enhanced benefit. The expenses related to the enhanced
benefits were $119,000 in 2005, $122,000 in 2004 and $126,000 in 2003.
Beginning
late in 2002, the Company began permitting selected highly compensated employees
to defer a portion of their compensation into the non-qualified SERP. The SERP
assets are marked to market and as of December 31, 2005 and 2004 totaled
approximately $3,686,000 and $1,949,000. The assets are reported in other assets
on the balance sheet and changes related to the fair value of the SERP assets
are included in selling, general and administrative expenses on the consolidated
statement of income for 2005 and 2004. The SERP deferrals and the contributions
are recorded on the balance sheet in pension liabilities with any change in
the
fair value of the SERP liabilities recorded as compensation cost in the
statement of income.
The
following table sets forth the funded status of the retirement income plan
and
the amounts recognized in Marine Products’ consolidated balance sheets:
|
December
31,
|
2005
|
2004
|
|
(in
thousands)
|
||
|
CHANGE
IN BENEFIT OBLIGATION:
|
||
|
Benefit
obligation at beginning of year
|
$4,403
|
$3,703
|
|
Service
cost
|
—
|
—
|
|
Interest
cost
|
251
|
240
|
|
Actuarial
loss
|
336
|
515
|
|
Benefits
paid
|
(73)
|
(55)
|
|
Benefit
obligation at end of year
|
$
4,917
|
$
4,403
|
|
CHANGE
IN PLAN ASSETS:
|
||
|
Fair
value of plan assets at beginning of year
|
$3,378
|
$2,604
|
|
Actual
return on plan assets
|
175
|
198
|
|
Employer
contribution
|
300
|
631
|
|
Benefits
paid
|
(73)
|
(55)
|
|
Fair
value of plan assets at end of year
|
$3,780
|
$3,378
|
|
Funded
status
|
$(1,137)
|
$(1,025)
|
|
Unrecognized
net loss
|
1,637
|
1,313
|
|
Net
prepaid benefit cost
|
$500
|
$288
|
42
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
The
accumulated benefit obligation for the defined benefit pension plan at December
31, 2005 and 2004 have been disclosed above. The Company uses a December 31
measurement date for its qualified plan.
Marine
Products’ funding policy is to contribute to the retirement income plan the
amount required, if any, under the Employee Retirement Income Security Act
of
1974. Marine Products contributed $300,000 in 2005, $631,000 in 2004 and $25,000
in 2003.
Pursuant
to the provisions of SFAS No. 87, “Employers’ Accounting for Pensions,” the
Company recorded pre-tax minimum pension liability adjustments of $324,000
in
2005 and $462,000 in 2004. As there were no previously unrecognized prior
service costs as of December 31, 2005 and 2004, the full amount of the
adjustments, net of related taxes, are reflected as a reduction to stockholders’
equity.
Amounts
recognized in the consolidated balance sheets and reflected as pension
liabilities consist of:
|
December
31,
|
2005
|
2004
|
|
(in
thousands)
|
||
|
Net
prepaid benefit cost
|
$(500)
|
$(288)
|
|
Minimum
pension liability
|
1,637
|
1,313
|
|
SERP
employer contributions
|
275
|
206
|
|
SERP
employee deferrals
|
3,511
|
1,746
|
|
Net
amount recognized
|
$4,923
|
$2,977
|
The
components of net periodic benefit cost are summarized as follows:
|
Years
ended December 31,
|
2005
|
2004
|
|
(in
thousands)
|
||
|
Service
cost for benefits earned during the period
|
$
—
|
$
—
|
|
Interest
cost on projected benefit obligation
|
251
|
240
|
|
Expected
return on plan assets
|
(285)
|
(231)
|
|
Amortization
of net loss
|
122
|
86
|
|
Net
periodic benefit cost
|
$
88
|
$
95
|
The
weighted average assumptions as of December 31 used to determine the projected
benefit obligation and net benefit cost were as follows:
|
December
31,
|
2005
|
2004
|
|
PROJECTED
BENEFIT OBLIGATION:
|
||
|
Discount
rate
|
5.500%
|
5.750%
|
|
Rate
of compensation increase
|
N/A
|
N/A
|
|
NET
BENEFIT COST:
|
||
|
Discount
rate
|
5.750%
|
6.250%
|
|
Expected
return on plan assets
|
8.000%
|
8.000%
|
|
Rate
of compensation increase
|
N/A
|
N/A
|
The
Company’s expected return on assets assumption is derived from a detailed
periodic assessment by its management and investment advisor. It includes a
review of anticipated future long-term performance of individual asset classes
and consideration of the appropriate asset allocation strategy given the
anticipated requirements of the plan to determine the average rate of earnings
expected on the funds invested to provide for the pension plan benefits. While
the assessment gives appropriate consideration to recent fund performance and
historical returns, the rate of return assumption is derived primarily from
a
long-term, prospective view. Based on its recent assessment, the Company has
concluded that its expected long-term return assumption of eight percent is
reasonable.
43
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
At
December 31, 2005 and 2004, the Plan’s assets were comprised primarily of listed
common stocks and U.S. Government and corporate securities. The plan’s weighted
average asset allocation at December 31, 2005 and 2004 by asset category along
with the target allocation for 2006 are as follows:
|
Asset
Category
|
Target
Allocation
for
2006
|
Percentage
of
Plan
Assets as of
December
31,
2005
|
Percentage
of
Plan
Assets as of
December
31,
2004
|
|||
|
Equity
Securities
|
48.9
|
%
|
48.3
|
%
|
51.2
|
%
|
|
Debt
Securities — Core Fixed Income
|
27.2
|
28.7
|
29.5
|
|||
|
Tactical
— Fund of Equity and Debt Securities
|
5.4
|
2.6
|
2.7
|
|||
|
Real
Estate
|
5.4
|
5.4
|
5.1
|
|||
|
Other
|
13.1
|
15.0
|
11.5
|
|||
|
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
The
Company’s investment strategy for its pension plan is to maximize the long-term
rate of return on plan assets within an acceptable level of risk in order to
minimize the cost of providing pension benefits in accordance with this plan.
The investment policy establishes a target allocation for each asset class,
which is rebalanced as required. The Company utilizes a number of investment
approaches, including individual marketable securities, equity and fixed income
funds in which the underlying securities are marketable, and debt funds to
achieve this target allocation. The Company expects to contribute approximately
$300,000 to the pension plan in 2006.
The
Company estimates that the future benefits payable for the defined benefit
plan
over the next ten years are as follows: $96,000 in 2006, $108,000 in 2007,
$201,000 in 2008, $216,000 in 2009, $224,000 in 2010 and $1,313,000 between
2011-2015.
401(k)
Plan—
Marine
Products participates in a defined contribution 401(k) plan sponsored by RPC
that is available to substantially all full-time employees with more than six
months of service. This plan allows employees to make tax-deferred contributions
of up to 25 percent of their annual compensation, not exceeding the permissible
deduction imposed by the Internal Revenue Code. The Company matches 50 percent
of each employee’s contributions that do not exceed six percent of the
employee’s compensation, as defined by the 401(k) plan. Employees vest in the
Company’s contributions after three years of service. The charges to expense for
Marine Products’ contributions to the 401(k) plan were approximately $149,000 in
2005, $149,000 in 2004 and $147,000 in 2003.
Stock
Incentive Plan—
During
2001, Marine Products adopted a 10 year Employee Stock Incentive Plan (“2001
Plan”) under which 3,000,000 shares of common stock had been reserved for
issuance to Marine Products employees. In 2004, Marine Products adopted a new
10
year Employee Stock Incentive Plan (“2004 Plan”) under which 2,250,000 shares of
common stock have been reserved for issuance. Both plans provide for the
issuance of various forms of stock incentives, including, among others,
incentive and non-qualified stock options and restricted stock. As of December
31, 2005, 166,378 shares were available for grants under the 2001 Plan and
2,044,500 shares were available for grant under the 2004 Plan. All grants in
2005 were made under the 2001 Plan.
Stock
Options—
Stock
options are granted at an exercise price equal to the fair market value of
the
Company’s common stock at the date of grant except for grants of incentive stock
options to owners of greater than 10 percent of the Company’s voting securities
which must be made at 110 percent of the fair market value of the Company’s
common stock. Options generally vest ratably over a period of five years and
expire in 10 years, except to owners of greater than 10 percent of the Company’s
voting securities, which expire in five years.
44
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
Transactions
involving the Marine Products stock options were as follows:
|
Total
Options Outstanding
|
Exercisable
Options
|
|||
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
|
|
Outstanding
December 31, 2002
|
2,888,004
|
$1.47
|
1,298,622
|
$
0.82
|
|
Granted
|
760,500
|
4.61
|
||
|
Canceled
|
(4,050)
|
1.71
|
||
|
Exercised
|
(576,943)
|
1.00
|
||
|
Outstanding
December 31, 2003
|
3,067,511
|
$2.34
|
1,269,260
|
$
1.17
|
|
Granted
|
72,000
|
12.47
|
||
|
Canceled
|
(46,950)
|
4.47
|
||
|
Exercised
|
(565,047)
|
1.65
|
||
|
Outstanding
December 31, 2004
|
2,527,514
|
$2.75
|
1,209,627
|
$
1.55
|
|
Granted
|
-
|
-
|
||
|
Canceled
|
(39,902)
|
6.84
|
||
|
Exercised
|
(215,299)
|
2.77
|
||
|
Outstanding
December 31, 2005
|
2,272,313
|
$2.67
|
1,376,141
|
$
1.90
|
Options
exercised during 2005 and 2004 include transactions that involved exchange
of
shares and cash. The fair value of shares tendered to exercise employee stock
options totaled approximately $262,000 in 2005 and $168,000 in 2004 and have
been excluded from the consolidated statements of cash flows. As of December
31,
2005, the options outstanding and the exercise prices together with the weighted
average remaining contractual life are as follows:
|
Exercise
Prices
|
Number
of Options
|
Weighted
Average
Exercise
Prices
|
Weighted
Average
Remaining
Contractual
Life
|
||
|
Total
|
Exercisable
|
Total
|
Exercisable
|
||
|
$
0.39
|
151,864
|
151,864
|
$0.39
|
$0.39
|
0.1
years
|
|
$
0.66
|
83,536
|
83,536
|
0.66
|
0.66
|
1.1
years
|
|
$
1.12
|
242,975
|
242,975
|
1.12
|
1.12
|
2.1
years
|
|
$
0.61
|
326,510
|
326,510
|
0.61
|
0.61
|
3.1
years
|
|
$
1.71
|
204,148
|
128,773
|
1.71
|
1.71
|
5.3
years
|
|
$
2.67
|
573,230
|
169,133
|
2.67
|
2.67
|
6.1
years
|
|
$
4.54 - 4.99
|
636,750
|
263,250
|
4.62
|
4.65
|
6.2
years
|
|
$
12.47
|
53,300
|
10,100
|
12.47
|
12.47
|
8.3
years
|
|
2,272,313
|
1,376,141
|
$2.67
|
$
1.90
|
4.7
years
|
|
Restricted
Stock—
Marine
Products has granted employees two forms of restricted stock; time lapse
restricted and performance restricted. Time lapse restricted shares vest after
certain stipulated number of years from the grant date, depending on the terms
of the issue. The Company has issued time lapse restricted shares that vest
over
ten years in prior years and in 2005 and 2004 issued time lapse restricted
shares that vest in 20 percent increments starting with the second anniversary
of the grant, over the six year period beginning on the date of grant. During
these years, grantees receive all dividends declared and retain voting rights
for the granted shares. Units granted under these restricted stock programs
totaled 157,500 in 2005 and 157,500 in 2004; no units were granted in 2003.
The
performance restricted shares are granted, but not earned and issued, until
certain five-year tiered performance criteria are met. The performance criteria
are
45
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2005, 2004 and 2003
predetermined
market prices of Marine Products’ common stock. On the date the common stock
appreciates to each level (determination date), 20 percent of performance shares
are earned. Once earned, the performance shares vest five years from the
determination date. After the determination date, the grantee will receive
all
dividends declared and also voting rights to the shares. There were no units
earned and issued under these plans in 2005, 2004 and 2003. There were no
forfeitures of shares in 2005, 2004 and 2003. Compensation cost on restricted
shares is recorded at the fair market value on the date of issuance and
amortized ratably over the respective vesting periods. Total weighted average
value of restricted stock granted totaled approximately $2,465,000 in 2005,
$1,964,000 in 2004 and $0 in 2003. As of December 31, 2005, there were 562,574
shares of unvested restricted stock outstanding. During 2004, 167,400 shares
of
restricted stock vested and were released to the employees; no restricted shares
vested in 2005 or 2003. During 2004, the
tax
benefit aggregating $874,000 for compensation tax deductions in excess of
compensation expense was credited to capital in excess of par
value.
The
agreements under which the restricted stock is issued provide that shares
awarded may not be sold or otherwise transferred until restrictions established
under the plans have lapsed. Upon termination of employment from the Company
or,
in certain cases, termination of employment from RPC, shares with restrictions
must be returned to the Company.
46
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item
9A. Controls and Procedures
Evaluation
of disclosure controls and procedures—
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in its Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Commission’s rules and forms, and that such information is accumulated
and communicated to its management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
As
of the
end of the period covered by this report, December 31, 2005 (the “Evaluation
Date”), the Company carried out an evaluation, under the supervision and with
the participation of its management, including the Chief Executive Officer
and
Chief Financial Officer, of the effectiveness of the design and operation of
its
disclosure controls and procedures. Based upon this evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective at the reasonable assurance
level as of the Evaluation Date.
Management’s
report on internal control over financial reporting —
Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Management’s report on internal control over financial
reporting is included on page 25 of this report. Grant Thornton LLP, the
Company’s independent registered public accounting firm, has audited
management’s assessment of the effectiveness of internal control as of December
31, 2005 and issued a report thereon which is included on page 26 of this
report.
Changes
in internal control over financial reporting—
There
were no changes in the Company’s internal control over financial reporting that
occurred during the Company’s most recently completed fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Item
9B. Other Information
None.
47
PART
III
Item
10. Directors and Executive Officers of the Registrant
Information
concerning directors and executive officers will be included in the Marine
Products Proxy Statement for its 2006 Annual Meeting of Stockholders, in the
section titled “Election of Directors.” This information is incorporated herein
by reference. Information about executive officers is contained on page 12
of
this document.
Audit
Committee and Audit Committee Financial Expert
Information
concerning the Audit Committee of the Company and the Audit Committee Financial
Expert(s) will be included in the Marine Products Proxy Statement for its 2006
Annual Meeting of Stockholders, in the section titled “Corporate Governance and
Board of Directors Compensation, Committees and Meetings.” This information is
incorporated herein by reference.
Code
of Ethics
Marine
Products has a Code of Business Conduct that applies to all employees. In
addition, the Company has a Supplemental Code of Business Conduct and Ethics
for
directors, the Principal Executive Officer and Principal Financial and
Accounting Officer. Both of these documents are available on the Company’s
website at www.marineproductscorp.com.
Copies
are also available at no extra charge by writing to Attn.: Human Resources,
Marine Products Corporation, 2170 Piedmont Road, NE, Atlanta, Georgia
30324.
Section
16(a) Beneficial Ownership Reporting Compliance
Information
regarding compliance with Section 16(a) of the Exchange Act will be included
under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s
Proxy Statement for its 2006 Annual Meeting of Stockholders, which is
incorporated herein by reference.
Item
11. Executive Compensation
Information
concerning executive compensation will be included in the Marine Products Proxy
Statement for its 2006 Annual Meeting of Stockholders, in the section titled
“Executive Compensation.” This information is incorporated herein by reference.
Item
12. Security Ownership of Certain Beneficial Owners and Management
Information
concerning security ownership will be included in the Marine Products Proxy
Statement for its 2006 Annual Meeting of Stockholders, in the sections titled,
“Capital Stock” and “Election of Directors.” This information is incorporated
herein by reference.
Information
regarding Marine Products’ equity compensation plans including plans approved by
security holders and plans not approved by security holders will be included
in
the section titled, “Executive Compensation” in the Marine Products Proxy
Statement for its 2006 Annual Meeting of Stockholders, which is incorporated
herein by reference.
Item
13. Certain Relationships and Related Party Transactions
Information
concerning certain relationships and related party transactions will be included
in the Marine Products Proxy Statement for its 2006 Annual Meeting of
Stockholders, in the sections titled, “Certain Relationships and Related Party
Transactions” and “Compensation Committee Interlocks and Insider Participation.”
This information is incorporated herein by reference.
Item
14. Principal Accounting Fees and Services
Information
regarding principal accountant fees and services will be included in the section
titled, “Independent Public Accountants” in the Marine Products Proxy Statement
for its 2006 Annual Meeting of Stockholders. This information is incorporated
herein by reference.
48
PART
IV
Item
15. Exhibits and Financial Statement Schedules
Consolidated
Financial Statements, Financial Statement Schedule and Exhibits.
| 1. |
Consolidated
financial statements listed in the accompanying Index to Consolidated
Financial Statements and Schedule are filed as part of this report.
|
| 2. |
The
financial statement schedule listed in the accompanying Index to
Consolidated Financial Statements and Schedule is filed as part of
this
report.
|
| 3. |
Exhibits
listed in the accompanying Index to Exhibits are filed as part of
this
report. The following such exhibits are management contracts or
compensatory plans or arrangements:
|
| 10.1 |
Marine
Products Corporation 2001 Employee Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.1 to the Form 10 filed on February
13,
2001).
|
| 10.6 |
Compensation
Agreement between James A. Lane, Jr. and Chaparral Boats, Inc.
(incorporated herein by reference to Exhibit 10.6 to the Form 10
filed on
February 13, 2001).
|
| 10.7 |
Marine
Products Corporation 2004 Stock Incentive Plan (incorporated herein
by
reference to Appendix B to the Definitive Proxy Statement filed on
March
24, 2004).
|
| 10.8 |
Form
of stock option grant agreement under the 2001 Employee Stock Incentive
Plan (incorporated herein by reference to Exhibit 10.7 to the Form
10-K
filed on March 21, 2003).
|
| 10.9 |
Form
of time lapse restricted stock grant agreement under the 2001 Employee
Stock Incentive Plan (incorporated herein by reference to Exhibit
10.8 to
the Form 10-K filed on March 21,
2003).
|
| 10.10 |
Form
of performance restricted stock grant agreement under the 2001 Employee
Stock Incentive Plan (incorporated herein by reference to Exhibit
10.9 to
the Form 10-K filed on March 21,
2003).
|
| 10.11 |
Form
of stock option grant agreement under the 2004 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.1 to the Form 10-Q
filed
on November 1, 2004).
|
| 10.12 |
Form
of time lapse restricted stock grant agreement under the 2004 Stock
Incentive Plan (incorporated herein by reference to Exhibit 10.8
to the
Form 10-Q filed on November 1,
2004).
|
| 10.13 |
Form
of performance restricted stock grant agreement under the 2004 Stock
Incentive Plan (incorporated herein by reference to Exhibit 10.9
to the
Form 10-Q filed on November 1,
2004).
|
| 10.14 |
Summary
of ‘at will’ compensation arrangements with the Executive
Officers.
|
| 10.15 |
Summary
of compensation arrangements with the Directors (incorporated herein
by
reference to Exhibit 10.15 to the Form 10-K filed on March 15,
2005).
|
| 10.16 |
Supplemental
Retirement Plan (incorporated herein by reference to Exhibit 10.16
to the
Form 10-K filed on March 15, 2005).
|
49
Exhibits
(inclusive of item 3 above):
|
Exhibit
Number
|
Description
|
|
3.1
|
(A)
Articles of Incorporation of Marine Products Corporation (incorporated
herein by reference to Exhibit 3.1 to
the Form 10 filed on February 13, 2001).
|
|
(B)
Certificate of Amendment of Certificate of Incorporation of Marine
Products Corporation executed on June 8,
2005 (incorporated herein by reference to Exhibit 99.1 to the current
report on Form 8-K filed on June 9, 2005).
|
|
|
3.2
|
Bylaws
of Marine Products Corporation (incorporated herein by reference
to
Exhibit 3.2 to the Form 10-Q filed on May 5, 2004).
|
|
4
|
Form
of Common Stock Certificate of Marine Products Corporation (incorporated
herein by reference to Exhibit 4.1 to the Form 10 filed on February
13,
2001).
|
|
10.1
|
Marine
Products Corporation 2001 Employee Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.1 to the Form 10 filed on February
13,
2001).
|
|
10.2
|
Agreement
Regarding Distribution and Plan of Reorganization, dated February
12,
2001, by and between RPC, Inc. and Marine Products Corporation
(incorporated herein by reference to Exhibit 10.2 to the Form 10
filed on
February 13, 2001).
|
|
10.3
|
Employee
Benefits Agreement, dated February 12, 2001, by and between RPC,
Inc.,
Chaparral Boats, Inc. and Marine Products Corporation (incorporated
herein
by reference to Exhibit 10.3 to the Form 10 filed on February 13,
2002).
|
|
10.4
|
Transition
Support Services Agreement, dated February 12, 2001, by and between
RPC,
Inc. and Marine Products Corporation (incorporated herein by reference
to
Exhibit 10.4 to the Form 10 filed on February 13, 2001).
|
|
10.5
|
Tax
Sharing Agreement, dated February 12, 2001, by and between RPC, Inc.
and
Marine Products Corporation (incorporated herein by reference to
Exhibit
10.5 to the Form 10 filed on February 13, 2001).
|
|
10.6
|
Compensation
Agreement between James A. Lane, Jr. and Chaparral Boats, Inc.
(incorporated herein by reference to Exhibit 10.6 to the Form 10
filed on
February 13, 2001).
|
|
10.7
|
Marine
Products Corporation 2004 Stock Incentive Plan (incorporated herein
by
reference to Appendix B to the Definitive Proxy Statement filed on
March
24, 2004).
|
|
10.8
|
Form
of stock option grant agreement under the 2001 Employee Stock Incentive
Plan (incorporated herein by reference to Exhibit 10.7 to the Form
10-K
filed on March 21, 2003).
|
|
10.9
|
Form
of time lapse restricted stock grant agreement under the 2001 Employee
Stock Incentive Plan (incorporated herein by reference to Exhibit
10.8 to
the Form 10-K filed on March 21, 2003).
|
|
10.10
|
Form
of performance restricted stock grant agreement under the 2001 Employee
Stock Incentive Plan (incorporated herein by reference to Exhibit
10.9 to
the Form 10-K filed on March 21, 2003).
|
|
10.11
|
Form
of stock option grant agreement under the 2004 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.1 to the Form 10-Q
filed
on November 1, 2004).
|
|
10.12
|
Form
of time lapse restricted stock grant agreement under the 2004 Stock
Incentive Plan (incorporated
herein by reference to Exhibit 10.2 to the Form 10-Q filed on November
1,
2004).
|
|
10.13
|
Form
of performance restricted stock grant agreement under the 2004 Stock
Incentive Plan (incorporated
herein by reference to Exhibit 10.3 to the Form 10-Q filed on November
1,
2004).
|
|
10.14
|
Summary
of ‘at will’ compensation arrangements with the Executive
Officers.
|
|
10.15
|
Summary
of compensation arrangements with the Directors (incorporated herein
by
reference to Exhibit 10.15 to the Form 10-K filed on March 15,
2005).
|
|
10.16
|
Supplemental
Retirement Plan (incorporated herein by reference to Exhibit 10.16
to the
Form 10-K filed on March 15, 2005).
|
|
21
|
Subsidiaries
of Marine Products Corporation (incorporated herein by reference
to
Exhibit 21 to the Form 10-K filed on March 15, 2005).
|
|
23.1
|
Consent
of Grant Thornton LLP
|
|
23.2
|
Consent
of Ernst & Young LLP
|
|
24
|
Powers
of Attorney for Directors
|
|
31.1
|
Section
302 certification for Chief Executive Officer
|
|
31.2
|
Section
302 certification for Chief Financial Officer
|
|
32.1
|
Section
906 certification for Chief Executive Officer and Chief Financial
Officer
|
Any
schedules or exhibits not shown above have been omitted because they are not
applicable.
50
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
| Marine Products Corporation | |
| /s/ Richard A. Hubbell | |
|
Richard A. Hubbell
President and Chief Executive Officer
March 13, 2006
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Name
|
Title
|
Date
|
|
/s/
Richard A.
Hubbell
Richard
A. Hubbell
|
President
and Chief Executive Officer
(Principal
Executive Officer)
|
March
13, 2006
|
|
|
||
|
/s/
Ben M.
Palmer
Ben
M. Palmer
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
March
13, 2006
|
The
Directors of Marine Products (listed below) executed a power of attorney,
appointing Richard A. Hubbell their attorney-in-fact, empowering him to sign
this report on their behalf.
| R. Randall Rollins, Director | James B. Williams, Director |
| Wilton Looney, Director | James A. Lane, Jr., Director |
| Gary W. Rollins, Director | Linda H. Graham, Director |
| Henry B. Tippie, Director | Bill J. Dismuke, Director |
/s/ Richard A. Hubbell
Richard
A. Hubbell
Director
and as Attorney-in-fact
March
13,
2006
51
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND SCHEDULE
The
following documents are filed as part of this report.
|
FINANCIAL
STATEMENTS AND REPORTS
|
PAGE
|
|
Management’s
Report on Internal Control Over Financial Reporting
|
25
|
|
Report
of Independent Registered Public Accounting Firm on Internal Control
Over
Financial Reporting
|
26
|
|
Consolidated
Balance Sheets as of December 31, 2005 and 2004
|
27
|
|
Consolidated
Statements of Income for the three years ended December 31,
2005
|
28
|
|
Consolidated
Statements of Stockholders’ Equity for the three years ended December 31,
2005
|
29
|
|
Consolidated
Statements of Cash Flows for the three years ended December 31,
2005
|
30
|
|
Notes
to Consolidated Financial Statements
|
31-46
|
|
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial
Statements (for 2005 and 2004)
|
53
|
|
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial
Statements (2003)
|
54
|
|
SCHEDULE
|
|
|
Schedule
II — Valuation and Qualifying Accounts
|
S2
|
Schedules
not listed above have been omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
SCHEDULE
II—VALUATION AND QUALIFYING ACCOUNTS
|
MARINE
PRODUCTS CORPORATION AND SUBSIDIARIES (in thousands of
dollars)
|
||||
|
For
the years ended December 31, 2005, 2004 and
2003
|
||||
|
Description
|
Balance
at
Beginning
of
Period
|
Charged
to
Costs
and
Expenses
|
Net
(Write-Offs)/
Recoveries
|
Balance
at
End of
Period
|
|
Year
ended December 31, 2005
Allowance
for doubtful accounts
|
$
60
|
$
—
|
$
(2)
|
$58
|
|
Year
ended December 31, 2004
Allowance
for doubtful accounts
|
$
67
|
$
—
|
$
(7)
|
$60
|
|
Year
ended December 31, 2003
Allowance
for doubtful accounts
|
$
67
|
$
—
|
$
—
|
$67
|
52
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL
STATEMENTS
Board
of
Directors and Stockholders of
Marine
Products Corporation
We
have
audited the accompanying consolidated balance sheets of Marine Products
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2005
and 2004, and the related consolidated statements of income, stockholders’
equity, and cash flows for each of the two years in the period ended December
31, 2005. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Marine Products Corporation
and subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2005 in conformity with accounting principles generally accepted
in
the United States of America.
Our
audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II for the
years ended December 31, 2005 and 2004, listed in the Index is presented
for purposes of additional analysis and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, is fairly stated in all material respects in relation
to
the basic consolidated financial statements taken as a whole.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Marine Products
Corporation’s internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
and
our report dated March 8, 2006 expressed an unqualified opinion.
/s/
Grant Thornton LLP
Atlanta,
Georgia
March
8,
2006
53
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders
Marine
Products Corporation
We
have
audited the accompanying consolidated statements of income, stockholders’ equity
and
comprehensive income and cash flows for the year ended December 31, 2003. Our
audit also included the financial statement schedule for the year ended December
31, 2003, listed in the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Company’s management.
Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated results of operations of Marine Products
Corporation and Subsidiaries and their cash flows for the year ended December
31, 2003, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule for the year
ended December 31, 2003, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/
Ernst & Young LLP
Atlanta,
Georgia
February
27, 2004, except for the matter discussed in the final
paragraph
of Note 1, as to which the date is March 11, 2005
54
SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
First
|
Second
|
Third
|
Fourth
|
|
|
(in
thousands except per share data)
|
||||
|
Restated
for the three-for-two stock splits effective March 10, 2005 and March
10,
2004.
|
||||
|
2005
|
||||
|
Net
sales
|
$72,586
|
$77,566
|
$65,032
|
$56,873
|
|
Gross
profit
|
18,948
|
19,875
|
17,145
|
13,153
|
|
Net
income
|
6,817
|
7,956
|
7,265
|
4,185
|
|
Earnings
per share — basic (a)
|
0.18
|
0.21
|
0.19
|
0.11
|
|
Earnings
per share — diluted (a)
|
0.17
|
0.20
|
0.18
|
0.11
|
|
2004
|
||||
|
Net
sales
|
$61,830
|
$64,775
|
$63,129
|
$62,684
|
|
Gross
profit
|
15,723
|
16,971
|
17,117
|
15,775
|
|
Net
income
|
5,646
|
6,396
|
6,244
|
5,457
|
|
Earnings
per share — basic (a)
|
0.15
|
0.17
|
0.16
|
0.14
|
|
Earnings
per share — diluted (a)
|
0.14
|
0.16
|
0.15
|
0.13
|
(a) The
sum
of the earnings per share for the four quarters may differ from annual earnings
per share due to the required method of computing the weighted average shares
in
interim periods.
55