MARINE PRODUCTS CORP - Annual Report: 2009 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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(Mark
One)
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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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o
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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, 2009
Commission
File No. 1-16263
MARINE
PRODUCTS CORPORATION
|
Delaware
(State
of Incorporation)
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58-2572419
(I.R.S.
Employer Identification No.)
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2801
BUFORD HIGHWAY, SUITE 520
ATLANTA,
GEORGIA 30329
(404)
321-7910
Securities
registered pursuant to Section 12(b) of the Act:
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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. o 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. o 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 o No
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). o
Yes o
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, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer o Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of Marine Products Corporation common stock held by
non-affiliates on June 30, 2009, the last business day of the registrant’s most
recent second fiscal quarter, was $35,263,689 based on the closing price on the
New York Stock Exchange on June 30, 2009 of $3.75 per share.
Marine
Products Corporation had 37,093,228 shares of common stock outstanding as of
February 12, 2010.
Documents
Incorporated by Reference
Portions
of the Proxy Statement for the 2010 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,” “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 regarding our belief that the loss of our
largest customer would not have a significant adverse effect on our financial
results; our
belief that international sales could produce additional sales growth; our
belief that our dealers will complete their liquidation of older models in
2010; our belief that the Wide TechTM bow
design may be incorporated on other Chaparral boat models in subsequent model
years; management’s belief that Marine Products is well positioned to
take advantage of current market conditions which characterize the industry;
our belief that reductions in field inventory levels will allow our
dealers to finance future purchases and meet retail demand; our
intention to continue seeking the most advantageous purchasing arrangements from
our suppliers; our ability to execute our marketing strategy to increase market
share by expanding our presence by building dedicated sales, marketing and
distribution systems; our intention to continue to strengthen our dealer network
and build brand loyalty with dealers and customers; our ability to locate and
complete strategic acquisitions that will complement our existing product lines,
expand our geographic presence and strengthen our capabilities; our belief that
our corporate infrastructure and marketing and sales capabilities, in addition
to our cost structure and nationwide presence, enable us to compete effectively;
our belief that we do not currently anticipate that any material expenditures
will be required to continue to comply with existing environmental or safety
regulations; our belief that the increase in prices of certain
commodities is likely to lead to higher costs in 2010; our
belief that our product liability insurance will be adequate; our intention to
pursue acquisitions and form strategic alliances that will enable us to acquire
complementary skills and capabilities, offer new products, expand our customer
base and obtain other competitive advantages; our belief that the ultimate
outcome of litigation arising in the ordinary course of business will not have a
material adverse effect on our liquidity, financial condition or results of
operations; our ability to execute stated business and financial strategies in
the future to better manage our Company;
management’s belief that net sales will increase in 2010 compared to 2009 and
that our operating results will improve and that the downturn in recreational
boating has ended; our belief that the production and sales to dealers will
increase because retail demand will have to be fulfilled by production from our
manufacturing plants rather than by sales of dealer inventory; our belief that
our operating results should improve due to higher gross profit from increased
production and lower selling, general and administrative expenses; our belief
that retail sales will not increase significantly in 2010; our belief that the
current financial crisis may have long-term effects on consumer behavior with
regard to pleasure boating; our belief that advertising and consumer targeting
efforts will benefit the industry and Marine Products; our anticipation that the
Company will continue to be challenged by the effect of an uncertain level of
consumer demand; expectations
about the amount of contributions to our defined benefit plan and capital
expenditures during 2010 and the purpose of those capital expenditures; the
adequacy of the Company’s capital resources; the amount and timing of future
contractual obligations; judgments about the Company’s critical accounting
policies; 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 11 for a discussion of factors that may cause actual results to
differ from our projections.
2
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
and Overview
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.
Marine
Products designs, manufactures and sells recreational fiberglass powerboats in
the sportboat, deckboat, cruiser, sport yacht and sport fishing markets. The
Company sells its products to a network of 150 domestic and 38 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.
The
Company manufactures Chaparral sterndrive and inboard-powered pleasure boats
including SSi Sportboats, SSX Sportdecks, Sunesta Wide TechTM and
Xtreme boats, Signature Cruisers, Premiere Sport Yachts and Robalo outboard
sport fishing boats. The most recent available industry statistics [source:
Statistical Surveys, Inc. report dated September 30, 2009] indicate that
Chaparral is the fourth 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
Chaparral 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 almost 45 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.
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 believes that Robalo’s share of the outboard sport
fishing boat market is approximately four percent.
3
Products
Marine
Products distinguishes itself by offering a wide range of products to the family
recreational, cruiser and sport yacht markets 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
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Overall
Length
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Approximate
Retail
Price
Range
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Description
|
|
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Chaparral
- SSi Sportboats
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8
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18′-28′
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$29,000
- $160,000
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Fiberglass
closed deck runabouts. Encompasses affordable, entry-level to mid-range
and larger sportboats. Marketed as high value runabouts for family
groups.
|
|
|
Chaparral
– SSX Sportdecks
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3
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24′-28′
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$58,000
- $129,000
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Fiberglass
bowrider crossover sportboats that combine the ride of a sportboat and the
usefulness of a deckboat. Marketed as high value runabouts for
family groups.
|
|
|
Chaparral
- Sunesta Wide TechsTM
/ Xtremes
|
8
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20′-28′
|
$49,000
- $138,000
|
Fiberglass
pleasure boats with a high-performance hull design and updated styling.
Wide TechTM
is marketed as an affordable, entry-level to mid-range pleasure boat with
the handling of a runabout, the style of a sportboat and the roominess of
a cruiser. Xtreme is marketed as a high-performance wakeboard/ski boat
with technical features and styling that appeal to wakeboard and ski
enthusiasts.
|
|
|
Chaparral
- Signature Cruisers
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5
|
27′-37′
|
$79,000
- $388,000
|
Fiberglass,
accommodation-focused cruisers. Marketed to experienced boat owners
through trade magazines and boat show exhibitions.
|
|
|
Chaparral
– Premiere Sport Yacht
|
1
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42′
|
$660,000
- $871,000
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High
value, fiberglass sport yacht with a Wide TechTM
bow design marketed to experienced boat owners through trade magazines and
boat show exhibitions.
|
|
|
Robalo
- Sport Fishing Boats
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10
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22′-31′
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$54,000
- $290,000
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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. In 2008 and 2009, the Company temporarily idled
its plant located in Valdosta, Georgia in response to the decline in production
volumes. Marine Products utilizes five 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. The Company’s manufacturing
operations are ISO 9001: 2008 certified, which is an international designation
of design, manufacturing, and customer service processes. ISO 9001: 2008
surpasses previous ISO designations. Management believes Chaparral is
the third largest sterndrive boat manufacturing brand to hold the ISO 9001: 2008
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. 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 hull 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.
4
Product
Warranty
For our
Chaparral products, Marine Products provides a lifetime limited structural hull
warranty against defects in material and workmanship for the original purchaser,
and a 10-year limited structural hull warranty for one subsequent owner.
Warranties on additional items are provided for periods of one to five
years. For our Robalo products, Marine Products provides a
transferable 10-year limited structural hull warranty against defects in
material and workmanship, and a transferable one-year limited warranty on other
components. The engine manufacturers for our Robalo and Chaparral
products warrant engines included in the boats as well.
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 of these materials
adjusting model mixes, introducing new product lines or limiting production in
response to industry-wide reduction in boat demand. 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 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 an outboard engine supply contract with
Yamaha. This engine supply arrangement was not negotiated through the ABA. In
the event of a sudden and extended interruption in the supply of engines from
these suppliers, our sales and profitability could be negatively impacted. See
“Risk Factors” below.
Marine
Products uses other raw materials in its manufacturing processes. Among these
are stainless steel, copper and resins made from feedstocks. The
average prices of these commodities was lower in 2009 than in 2008, although
prices for these commodities increased during the third and fourth
quarters. See “Inflation” below.
Sales
and Distribution
Sales are
made through approximately 109 Chaparral dealers, 16 Robalo dealers, and 25
dealers that sell both brands located in markets throughout the United States. A
number of our dealers ceased operations during 2009 for various reasons;
however, we were able to replace most of them with new dealers who established
relationships with us because their manufacturers had shut down production or
ceased operations altogether. Dealers market directly to consumers at
boat show exhibitions and in the dealers’ showrooms. Marine Products
also has 38 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’ eight 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. Due to our significantly lower sales in 2009, one dealer
accounted for approximately 13 percent of net sales in 2009. Since
many other dealers have sold enough inventory to begin ordering boats in 2010,
the loss of this dealer would not have a significant adverse affect on Marine
Product’s financial results. If Marine Products loses this dealer, we
believe that we could attract another strong dealer in this market.
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, although the volume
of sales to international dealers decreased in 2009 compared to 2008 due to
global economic weakness. International sales are also affected by
the value of the U.S. dollar relative to other
currencies. International net sales as a percentage of total net
sales were 29.4 percent in 2009, 33.4 percent in 2008 and 23.3
percent in 2007.
5
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, and during 2009, produced and sold its product to dealers at a much
lower level than the level of retail sales. 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.
Although
some dealers finance their boat inventory with smaller regional financial
institutions in local markets, the majority 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 major
third-party financing institutions. Historically, there were at least
two major floor plan financing institutions, although one of these institutions
ceased its floor plan lending to the marine industry in 2008. For
this reason, a number of lending institutions have considered expanding into the
marine floor plan lending business, and several of our dealers have established
relationships with these lenders on a limited basis. Under these
established arrangements with qualified lending institutions, a dealer
establishes a line of credit with one or more of these lenders for the purchase
of boat inventory for sales to retail customers in their showroom or during boat
show exhibitions. In general, 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. Until recently,
most dealers maintained financing arrangements with more than one lender,
although that is less common at the present time, given that there are fewer
lenders. In connection with the dealer’s floor plan financing
arrangements with these qualified lending institutions, Marine Products or its
subsidiaries have agreed to repurchase inventory which the lender repossesses
from a dealer and returns to Marine Products in a “new and unused” condition
subject to normal wear and tear, as defined. The contractual
agreements that Marine Products or its subsidiaries have with these qualified
lenders contain the Company’s assumption of specified percentages of debt
obligation on repossessed boats, up to certain contractually determined dollar
limits set by the lender.
During
the third quarter of 2009, an amendment to the agreement with one of the lenders
was executed to increase the contractual repurchase limit to $9.0 million
effective January 1, 2009 with an expiration of June 30, 2010. The
Company has contractual repurchase agreements with additional lenders with an
aggregate maximum repurchase obligation of approximately $3.2 million with
expiration dates ranging from June 30 to December 31, 2010. As of
December 31, 2009, Marine Products’ aggregate remaining contractual obligation
to repurchase boats under the floor plan financing programs described above was
approximately $5.5 million, although for business reasons, we may decide to
purchase additional boats in excess of this contractual obligation. In the
event that a dealer defaults under a credit line, the qualified lender may then
invoke the manufacturers’ repurchase obligation 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. 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 a prospective boat purchaser
would be the responsibility of the dealer. See “Risk Factors” on page
11 for a discussion of the potential impact of the ongoing volatility and lack
of liquidity in the financial markets which may impact Marine Products during
2010.
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, and to 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 2010 model year (which commenced July 1,
2009), Marine Products offered its dealers several sales incentive programs
based on dollar volumes and timing of dealer purchases. Program incentives
offered include sales discounts, inventory reduction rebates, and payment of
floor plan financing interest charged by qualified floor plan providers to
dealers generally through March 31, 2010. 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.
As part
of Marine Products’ strategy to assist dealers in reducing their inventories,
the Company assisted dealers during 2009 in liquidating non-current models
in dealer inventories in addition to the sales incentive programs described
above. During the 2009 retail selling season, Marine Products supported its
dealers by sharing in the additional cost of retail incentives
for non-current models totaling approximately $8.6 million. We
believe this effort to liquidate inventory was successful in reducing our dealer
field inventories during the current year and that our dealers will
complete the liquidation of these older models during 2010.
6
The sales
order backlog as of December 31, 2009 was approximately 845 boats with estimated
net sales of approximately $44.4 million. This represents an
approximate 16 week backlog based on recent production levels. As of
December 31, 2008, the sales order backlog was approximately 200 boats with
estimated net sales of approximately $7.8 million. The increase in the sales
order backlog is the result of significantly lower field inventories and
slightly higher dealer orders, which were placed in response to retail
demand. The Company will continue to monitor the number of boats in
dealer inventory and is prepared to adjust its production levels as it deems
necessary to manage dealer inventory levels. The Company typically
does not manufacture a significant number of boats for its own
inventory. 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.
Marine
Products has been a leading innovator in the recreational boating
industry. One of the Company’s most innovative designs is the
full-length “Extended V-Plane” running surface on its Chaparral boat
models. Typically, sterndrive boats have a several foot gap on the
bottom rear of the hull where the engine enters the water. With the
Extended V-Plane, 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. Although the basic
hull designs are similar, the Company has historically introduced a variety of
new models each year and periodically replaces, updates or discontinues existing
models.
Another
hull design is the Hydro LiftTM used
on the Robalo boat models. 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.
A bow
design known as the Wide TechTM was first
used on the Chaparral Sunesta Wide TechTM and
Xtreme models for the 2008 model year, and for the 2010 model year is being used
on Chaparral’s Premiere Sport Yacht, its SSi Wide TechTM Sport
Boats, its Sunesta Wide TechTM
Sportdecks, its Xtreme Tow Boats and one of its Signature
Cruisers. The Wide TechTM bow
design allows the models to have the Extended V-Plane hull, with the features
and benefits that this hull design offers. In addition, the Wide TechTM
bow design provides a larger
seating area, as well as additional storage space, in the front of the
boat. Furthermore, it allows the models to have a non-skid walkway on the
bow, which makes entering and leaving the boat easier than in other boat
models. This bow design may be incorporated on other Chaparral boat models
in subsequent model years.
In
support of its new product development efforts, Marine Products incurred
research and development costs of $712 thousand in 2009, $1.8 million in 2008
and $1.7 million in 2007.
Industry
Overview
For 2009,
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 2008 (latest data available to us) retail expenditures of
approximately $33.6 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”). Pleasure boats compete for
consumers’ free time with all other leisure activities, from computers and video
games to other outdoor sports. Non-active boat owners cite the lack
of leisure time as the primary reason for not using their boats.
The NMMA
conducts various surveys of pleasure boat industry trends, and the most recent
surveys indicate that 70 million adults in the United States participated in
recreational boating in 2008, an increase of 5.6 percent compared to the prior
year. There are currently approximately 17 million boats owned in the
United States, including outboard, inboard, sterndrive, sailboats, personal
watercraft, and miscellaneous (canoes, kayaks, rowboats, etc.). Marine
Products competes in the sterndrive and inboard boating category with its seven
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 new sterndrive boats in the United States during 2009 totaling 21,655
(source: Info-Link Technologies, Inc.) accounted for approximately 36 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
$1.0 billion, or an average retail price per boat of approximately
$48,000. Management believes that the five largest states for boat
sales are Florida, Texas, California, New York and North Carolina at the present
time. Marine Products has dealers in each of these
states.
7
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. The new fiberglass boat market segment with hull lengths
of 18 to 35 feet, the primary market segment in which Marine Products competes,
represented $2.5 billion in retail sales during 2009. The table below reflects
the estimated sales within this segment by category for 2009 and 2008, ranked by
2009 retail sales (source: Info-Link Technologies, Inc.):
|
2009
|
2008
|
|||
|
Boats
|
Sales
($ B)
|
Boats
|
Sales
($ B)
|
|
|
Sterndrive
Boats
|
21,655
|
$
1.0
|
32,402
|
$
2.8
|
|
Outboard
Boats
|
28,545
|
1.0
|
39,148
|
2.2
|
|
Inboard
Boats
|
6,880
|
0.4
|
9,653
|
1.0
|
|
Jet
Boats
|
2,522
|
0.1
|
3,364
|
0.1
|
|
TOTAL
|
59,602
|
$
2.5
|
84,567
|
$
6.1
|
Chaparral’s
products are categorized as sterndrive and inboard boats and Robalo’s products
are categorized as outboard boats.
Although
the recreational boat manufacturing market remains highly fragmented, Brunswick
Corporation and Genmar Holdings, Inc. have acquired a number of recreational
boat manufacturing operations, although Genmar Holdings sold or liquidated a
number of its divisions in 2009 and early 2010 as a result of its bankruptcy
proceedings. We estimate that the boat manufacturing industry
includes over 130 sterndrive manufacturers and over 300 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, 2009
(latest information available), the top five sterndrive manufacturers, which
includes Chaparral, have a market share of approximately 53
percent. Chaparral’s market share in units during the period was 8.1
percent, which represents an increase of 0.7 percent compared to the 12 months
ended December 31, 2008. Chaparral’s market share increased in all the sizes of
boats that we manufacture, but particularly among boats that are 21 to 35 feet
in length. We attribute the relatively larger increase in market share of this
segment to Chaparral’s long-term strategy of designing, building, and selling
larger boats which carry higher average selling prices.
Several
factors influence sales trends in the recreational boating industry, including
general economic growth, consumer confidence, household incomes, the
availability and cost of financing for our dealers and customers, weather, fuel
prices, tax laws, demographics and consumers’ leisure time. Also, the
value of residential and vacation real estate in strong boating states such as
California and Florida influences recreational boat sales. In
addition, inflation, the cost of certain components and the impact of
environmental regulation have increased the cost of boats in recent
years. As the cost of certain raw materials used in the manufacturing
process has increased, the cost of boat ownership increases as well, which has
prompted consumers either to buy a smaller or less expensive boat or defer or
forego their purchase. 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;
• a lack of
financial strength among retail boat dealers and many manufacturers, and tight
credit availability by floor plan lenders; and
• a high degree
of fragmentation and competition among the more than 130 sterndrive and 300
outboard recreational boat manufacturers.
Business
Strategies
Recreational
boating is a mature industry. According to Info-Link Technologies,
Inc., sales of sterndrive boats declined at a compounded annual rate of
approximately 21 percent between 2006 and 2008. During this period,
Marine Products experienced a compound annual decline rate of approximately 24
percent in the number of boats sold. The Company has historically grown its boat
sales and net sales primarily through increasing market share and by expanding
its number of models and product lines. However, the Company’s strategy in 2009
was to reduce dealer inventories dramatically. As a result, the
Company’s unit sales declined in 2009 by more than 73 percent in comparison to
2008. Chaparral has grown its sterndrive market share in the 18 to 35
feet length category from 5.9 percent in fiscal 1996 to 8.1 percent during the
nine months ended September 30, 2009 (the most recent information provided to us
by Statistical Surveys, Inc.). Market share is greater than this in several of
our larger boat models, reflecting the success of our strategy to build and sell
large boats with higher average selling prices. The Company continues
to expand its product offerings in the outboard boat market and by improvement
of existing models and expansion into larger boats within its sterndrive and
inboard offerings.
8
During
2009 we reduced our production levels drastically as compared to 2008. This
action allowed our dealers to reduce their inventories, thus supporting their
efforts to remain solvent and preparing them to sell updated models to consumers
when demand returns. Also, lower inventories assisted our dealers in
their relationships with floor plan lenders, who curtailed credit availability
and increased borrowing costs during 2009. Consequences of this
production change in 2009 were additional headcount reductions as well as
periodic, scheduled idling of our production facilities. In 2009 we also
supported our dealers through retail incentive programs, which included
financial support in the form of additional incentives during the
traditional peak retail selling season. This strategy negatively impacted
our 2009 financial results because of the lower sales and gross margin
due to these incentives provided for non-current models in dealer
inventories. As a result, our field inventories at the end of 2009 are at
their lowest levels since 1996 which will allow our dealers to finance
future purchases of updated models and meet retail demand for updated
products.
Marine
Products’ operating strategy emphasizes innovative designs and manufacturing
processes, by producing a high quality product while seeking to lower
manufacturing costs through increased efficiencies in our facilities. In the
current and projected near-term depressed selling environment for our products,
our operating strategy also includes producing fewer models, with fewer options
and more standard features, in order to maximize profitability at lower
production levels and reduce the amount and value of inventory our dealers are
forced to carry. 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 188 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. We have implemented a
marketing program for potential new dealers which emphasizes our financial
strength and product quality as an alternative to many competitors who are less
financially stable and less able to support their dealers with quality products
and good service. During 2009 we lost a number of dealers who exited
the business; however, we gained almost as many new dealers as we lost because
dealers who sell other brands approached us as their manufacturer became
insolvent or ceased production. 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 and customer satisfaction. Marine
Products believes that the depressed selling environment for our industry
provides an opportunity for us to strengthen our dealer network and build brand
loyalty with both dealers and customers because Marine Products is better
capitalized than most of its competitors.
A
component of Marine Products’ overall strategy is to consider making strategic
acquisitions in order to complement existing product lines, expand its
geographic presence in the marketplace and strengthen its capabilities depending
upon availability, price and complementary product lines. We
considered several potential targets during 2009 and intend to continue doing so
in 2010.
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 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.
9
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
in 2009. According to Statistical Surveys, Inc., the companies set
forth below represent approximately 74 percent of all United States retail
sterndrive boat registrations for the nine months ended September 30,
2009.
|
1.
|
Bayliner
*
|
|
|
2.
|
Sea
Ray *
|
|
|
3.
|
Tahoe
|
|
|
4.
|
Chaparral
|
|
|
5.
|
Glastron
|
|
|
6.
|
Four
Winns
|
|
|
7.
|
Stingray
|
|
|
8.
|
Crownline
|
|
|
9.
|
Cobalt
|
|
|
10.
|
Regal
|
The
outboard engine powered market has a large breadth and depth, accounting for
approximately 75 percent traditional powerboat unit sales during 2008 (the
latest year available). Robalo’s share of the outboard sport fishing
boat market during the nine months ended September 30, 2009 was approximately
four percent. Primary competitors for Robalo during 2009 included Sea
Hunt, Triton, Grady-White, Sea Fox, Boston Whaler*, Century, Hydra Sports,
Everglades and Parker.
*
Division or subsidiary of Brunswick Corporation.
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
our 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.
During
2009 the U.S. Environmental Protection Agency (EPA) adopted regulations
stipulating that many marine propulsion engines manufactured for the 2010 model
year and later meet an air emission standard that requires fitting a catalytic
converter to the engine. These regulations also require, among other
things, that the engine manufacturer provide a warranty that the engine meets
EPA emission standards. The majority of the engines used in Marine
Products’ Chaparral product line and all of the engines used in the Company’s
Robalo product line are subject to these regulations. These
regulations are similar to regulations adopted by the California Air Resources
Board in 2007, but apply to all U.S. states and territories. This
regulation will increase the cost of the majority of the Company’s sterndrive
products. The additional cost of complying with these EPA regulations
may reduce Marine Products’ profitability, because the Company may have to
absorb the increased cost. It may also reduce Marine Products’ net
sales, because the increased cost of owning a boat may force consumers to buy a
smaller or less expensive boat or forego a boat purchase, and because increased
product cost will reduce the amount of inventory that Marine Products’ dealers
can carry, thus reducing retail consumers’ choices.
Employees
As of
December 31, 2009, Marine Products had approximately 300 employees (a
reduction from approximately 440 at December 31, 2008), of whom
six were management and 27 administrative. In response to the
significant decline in consumer demand for our products and lower production,
the Company has maintained a significantly smaller work force during the latter
part of 2008 and throughout 2009 in an effort to align costs with lower
sales.
10
None of
Marine Products’ employees are 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.
Proprietary
Matters
Marine
Products owns a number of trademarks, trade names and patents 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 and Robalo’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, 2009, there were 22 Chaparral hull designs and four Robalo
hull designs registered under the Vessel Hull Design Protection
Act.
During
2008 Chaparral was granted a design patent on its Wide TechTM hull
design by the U.S. Patent and Trademark Office. The patent has a term
of 14 years and protects the Wide TechTM hull
currently used on the Sunesta Wide TechTM and
Xtreme, 400 Premiere, SSi Wide TechTM and
one of its Signature Cruisers from being used by other pleasure boat
manufacturers. Marine Products believes that this patent is important
to its business.
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 because this
corresponds with the highest retail sales volume period. The results for any
quarter are not necessarily indicative of results to be expected in any future
period.
Inflation
During
the third and fourth quarters of 2008, the Company experienced dramatic declines
in the prices of certain material and component costs, especially for copper,
stainless steel, and resins that have hydrocarbon feedstocks. During
2009, the prices of some of these commodities at first stabilized and then
increased. At the end of 2009 and in the beginning of 2010, prices
continued to increase. This increase in commodity prices is likely to
lead to higher materials costs in 2010. The impact of the fluctuations in
commodities prices on the Company’s operating results in 2009 was not material
due to low production volumes. However, since the Company is
increasing production in 2010 it is likely that such increases will negatively
impact the Company’s operating results if they continue. Also, given
low retail consumer demand for the Company’s products at the present time, we
cannot be confident that the Company will be able to institute price increases
to its dealers in the event that the prices of its raw materials and components
increase in the future.
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 forego or delay their purchases or
buy a less expensive boat in the event that interest rates rise.
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, Unavailability of Credit and Consumer Confidence Levels Affect
Marine Products’ Sales Because Marine Products’ Products are Purchased with
Discretionary Income
11
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 or economic uncertainty, Marine Products will
be negatively affected to the extent consumers forego or delay large
discretionary purchases pending the resolution of those
uncertainties. The recent financial crisis and deep, enduring
recession may have long-term effects on consumer behavior with regard to
pleasure boating as well. Current and potential future lower returns
on financial assets may force consumers to delay retirement, or to choose more
modest lifestyles when they do retire. In such a case, consumers may
not purchase boats, may purchase boats later in their lives, or may purchase
smaller or less expensive boats. Tight
lending and credit standards, such as those currently in use by lenders in the
United States, can make loans for boats harder to secure, and such loans may
carry unfavorable terms, which may force consumers to forego boat
purchases. These factors have also resulted in the past, and
may continue to result in the future, in a reduction in the quality and number
of dealers upon which Marine Products relies to sell its
products.
Marine
Products Relies upon Third-Party Dealer Floor Plan Lenders Which Provide
Financing to its Network of Independent Dealers
Marine
Products sells its products to a network of independent dealers, most of whom
rely on one or more third-party dealer floor plan lenders to provide financing
for their inventory prior to its sale to retail customers. In
general, this source of financing is vital to Marine Products’ ability to sell
products to its dealer network. The credit crisis and financial
market volatility that occurred in late 2008 and extended into 2009 caused
disruptions among dealer floor plan lenders. While dealer floor plan
credit is currently available for many of our dealers during the 2010 model
year, it is less available and more costly than in prior years. Such
factors may have reduced the availability of floor plan loans to our dealers,
increased the cost of financing, and may change the limits under which Marine
Products or its subsidiaries are required to repurchase inventory in the event
of a dealer default. Any of these factors negatively impact Marine
Products’ sales and profitability.
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.
Marine
Products’ Dependence on its Network of Independent Boat Dealers may Affect its
Operating Results 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. The Company faces
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 which
occurred during the current depressed selling environment, has had and could
continue to 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 business
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. During the current depressed selling
environment, some boat dealers included within the Marine Products’ dealer
network ceased operations and this trend may continue given the current adverse
business environment in which boat dealers operate. See
“Business Strategies” above.
Marine
Products’ Financial Condition and Operating Results may be Adversely Affected by
Boat Dealer Defaults
The
Company’s products are sold through dealers and the financial health of these
dealers is critical to the Company’s continued success. The Company’s
results can be negatively affected if a dealer defaults because Marine Products
or its subsidiaries may be contractually required to repurchase inventory
up to certain limits, although for business reasons, the Company may decide to
purchase additional boats in excess of this contractual obligation.
12
Marine
Products’ Ability to Adjust its Business Operations to Compensate for Reduced
Sales of Boats may be Restricted in the Future.
In 2008
Marine Products idled certain production facilities and reduced its number of
employees to offset the impact that reduced net sales has on the Company’s
operating results and cash flows. The Company experienced lower rates
of absorption of its fixed costs and in 2009 reported operating and net losses
for the first time in its history as a public company. This prolonged
downturn in the Company’s sale of boats may continue to have an adverse affect
in 2010 and in future periods beyond 2010. In addition, the Company’s
ability to reduce its fixed costs in the future to respond to potential future
reduced net sales is limited.
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
manufacturing facilities.
Marine
Products Encounters Intense Competition Which Affects our Sales and
Profits
The
recreational boat industry is highly fragmented, resulting in intense
competition for customers, dealers and boat show exhibition
space. This competition affects both the markets which we currently
serve and new markets that we may enter in the future. We compete
with several large national or regional manufacturers that have substantial
financial, marketing and other resources. Competitive manufacturers
have executed a strategy of constructing entry-level smaller boats which are
constructed in off-shore manufacturing plants with lower labor
costs. These competitive conditions have contributed to our inability
to pass along our increased manufacturing costs to customers, reduced our market
share in various selling categories including particularly smaller boats, and
negatively impacted our profit margins.
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, that
these suppliers will remain in operation given the extended business downturn in
the recreational boating industry or that the quantity or quality of materials
available from these suppliers will be sufficient to meet Marine Products’
future needs. 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 boats 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 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.
13
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 at times 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 and comply
with applicable laws and regulations. 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.
The U.S.
Environmental Protection Agency (EPA) recently adopted regulations affecting
many marine propulsion engines manufactured for the 2010 model year and
later. This regulation will increase the cost of boats subject
to the regulation, which may either reduce the Company’s profitability or reduce
sales.
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 discretionary
consumer products 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’ Suspension of its Dividends Payable on Common Shares may Reduce the
Return on Investment in Marine Products’ Stock
In April
2009, the Company suspended its cash dividend per common share which may
adversely affects the stockholders’ return on investment in the Company’s
shares.
14
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 74
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.
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.
The
Insurance Companies that Insure a Number of Marine Products’ Marketable
Securities have been Downgraded, Which may Cause Volatility in the Market Prices
of our Marketable Securities
Marine
Products maintains a diversified portfolio of investment-grade municipal debt
securities managed by a large, well-capitalized financial
institution. A number of these securities are insured by large
insurance companies. Due to the problems confronting the financial
system over the past few years, these insurance companies have become much less
active in issuing credit insurance of municipal debt securities, either because
they have exited the business or merged with other insurance
companies. Our investment manager selects securities based on the
credit quality of the underlying securities rather than the credit rating of the
insurer, if any, and all of our securities have credit ratings which are within
our investment policy guidelines. However, this disruption among insurers of
municipal debt securities, as well as the fact that many municipalities are
struggling due to lower tax revenues, increase the volatility of the market
prices of these marketable securities. The market prices of these
securities may continue to be volatile during periods of uncertainty in the bond
insurance industry.
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 $2,000 per month in rent. Marine Products may cancel this
arrangement at any time after giving a 30 day notice.
Chaparral
owns and maintains approximately 1,011,000 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. During the fourth quarter of
2008, the Robalo facility was temporarily idled and production of these boats
was moved to the Nashville facility. There are no plans or current
intentions to dispose of the facilities in Valdosta, Georgia. The
Company also leases 111,000 square feet of warehouse space in Nashville, Georgia
under a long-term arrangement expiring in 2018. Marine Products’
total square footage under roof is allocated as follows: manufacturing —
712,000, research and development — 67,200, warehousing — 294,500, office and
other — 131,400.
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.
15
Item
4. Reserved
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)
|
78
|
2/28/01
|
|
Chairman
of the Board
|
||
|
Richard
A. Hubbell (2)
|
65
|
2/28/01
|
|
President
and Chief Executive Officer
|
||
|
James
A. Lane, Jr. (3)
|
67
|
2/28/01
|
|
Executive
Vice President and President of Chaparral Boats, Inc.
|
||
|
Linda
H. Graham (4)
|
73
|
2/28/01
|
|
Vice
President and Secretary
|
||
|
Ben
M. Palmer (5)
|
49
|
2/28/01
|
|
Vice
President, Chief Financial Officer and Treasurer
|
|
(1)
|
R.
Randall Rollins began working for Rollins, Inc. (consumer services) 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 stepped down from the position of
Chief Executive Officer effective in 2003. He has served as
Chairman of the Board of Marine Products since 2001 and Chairman of the
Board of Rollins, Inc. since 1991. He is also a director of Dover Downs
Gaming and Entertainment, Inc. and Dover Motorsports,
Inc.
|
|
(2)
|
Richard
A. Hubbell has been the President and Chief Executive Officer of Marine
Products since it was spun off in 2001. He has also been the President of
RPC since 1987 and its Chief Executive Officer since 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.
|
16
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Marine
Products’ common stock is listed for trading on the New York Stock Exchange
under the symbol “MPX.” At February 12, 2010, there were
37,092,228 shares of
common stock outstanding.
At the
close of business on February 12, 2010, there were approximately 2,400
beneficial holders of record of the Company’s common stock. The high and low
prices of Marine Products’ common stock and dividends paid for each quarter in
the years ended December 31, 2009 and 2008 were as follows:
|
2009
|
2008
|
|||||
|
Quarter
|
High
|
Low
|
Dividends
|
High
|
Low
|
Dividends
|
|
First
|
$5.62
|
$2.99
|
$0.01
|
$9.23
|
$6.49
|
$0.065
|
|
Second
|
5.06
|
3.25
|
0.00
|
8.53
|
6.56
|
0.065
|
|
Third
|
5.94
|
3.65
|
0.00
|
9.75
|
6.05
|
0.065
|
|
Fourth
|
5.87
|
3.88
|
0.00
|
8.65
|
3.58
|
0.065
|
On April
28, 2009, the Board of Directors voted to suspend the quarterly cash dividend to
common stockholders.
Issuer
Purchases of Equity Securities
In accordance with actions
by the Company’s Board of Directors, an aggregate of 8,250,000 shares have been
authorized for repurchase in connection with a stock buy back program announced
in 2001, and subsequent increases to this program announced in 2005 and
2008. These programs do not have predetermined expiration
dates. A total of 4,925,157 shares have been repurchased in the open
market under these programs as of December 31, 2009. There were no
shares repurchased during the fourth quarter of 2009. As of December
31, 2009, a total of 3,324,843 shares remain available for repurchase under
these programs.
Performance
Graph
The
following graph shows a five-year comparison of the cumulative total stockholder
return based on the performance of the stock of the Company, assuming dividend
reinvestment, as compared with both a broad equity market index and an industry
or peer group index. The indices included in the following graph are
the Russell 2000 Index (“Russell 2000”) and a peer group which includes
companies that are considered peers of the Company (“Peer
Group”). The companies included in the peer group have been weighted
according to each respective issuer’s stock market capitalization at the
beginning of each year. The companies are Brunswick Corporation and
MarineMax, Inc.
The
Russell 2000 is used because the Company became a component of the Russell 2000
in 2004, and because the Russell 2000 is a stock index representing small
capitalization U.S. stocks. During 2009 the components of the Russell
2000 had an average market capitalization of $1.019 billion.
17
The graph below assumes
the value of $100.00 invested on December 31, 2004.
18
Item
6. Selected Financial Data
The
following table summarizes certain selected financial data of Marine Products.
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.
|
Years
Ended December 31,
|
||||||||||||||||||||
|
(In
thousands, except share, per share and employee data)
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||||||
|
Net
sales
|
$ | 39,439 | $ | 175,622 | $ | 244,273 | $ | 261,378 | $ | 272,057 | ||||||||||
|
Cost
of goods sold
|
45,996 | 143,677 | 191,810 | 201,971 | 202,936 | |||||||||||||||
|
Gross
(loss) profit
|
(6,557 | ) | 31,945 | 52,463 | 59,407 | 69,121 | ||||||||||||||
|
Selling,
general and administrative expenses
|
12,606 | 23,146 | 30,228 | 32,474 | 33,557 | |||||||||||||||
|
Operating
(loss) income
|
(19,163 | ) | 8,799 | 22,235 | 26,933 | 35,564 | ||||||||||||||
|
Interest
income
|
1,663 | 2,420 | 2,590 | 2,502 | 1,330 | |||||||||||||||
|
(Loss)
income before income taxes
|
(17,500 | ) | 11,219 | 24,825 | 29,435 | 36,894 | ||||||||||||||
|
Income
tax (benefit) provision
|
(6,807 | ) | 3,633 | 8,402 | 9,121 | 10,671 | ||||||||||||||
|
Net
(loss) income
|
$ | (10,693 | ) | $ | 7,586 | $ | 16,423 | $ | 20,314 | $ | 26,223 | |||||||||
|
(Loss)
earnings per share:
|
||||||||||||||||||||
|
Basic
|
$ | (0.30 | ) | $ | 0.21 | $ | 0.44 | $ | 0.54 | $ | 0.69 | |||||||||
|
Diluted
|
$ | (0.30 | ) | $ | 0.21 | $ | 0.43 | $ | 0.52 | $ | 0.65 | |||||||||
|
Dividends
paid per share
|
$ | 0.01 | $ | 0.26 | $ | 0.24 | $ | 0.20 | $ | 0.16 | ||||||||||
|
Other
Financial and Operating Data:
|
||||||||||||||||||||
|
Gross
(loss) profit margin percent
|
(16.6 | )% | 18.2 | % | 21.5 | % | 22.7 | % | 25.4 | % | ||||||||||
|
Operating
margin percent
|
(39.5 | ) % | 5.0 | % | 9.1 | % | 10.3 | % | 13.1 | % | ||||||||||
|
Net
cash (used for) provided by operating activities
|
$ | (9,036 | ) | $ | 14,045 | $ | 16,431 | $ | 23,997 | $ | 19,366 | |||||||||
|
Net
cash provided by (used for) investing activities
|
7,416 | (2,255 | ) | (41,391 | ) | (1,351 | ) | (2,023 | ) | |||||||||||
|
Net
cash used for financing activities
|
(429 | ) | (10,401 | ) | (26,263 | ) | (8,494 | ) | (26,356 | ) | ||||||||||
|
Capital
expenditures
|
$ | 85 | $ | 329 | $ | 1,263 | $ | 1,667 | $ | 1,118 | ||||||||||
|
Employees
at end of year
|
307 | 441 | 1,073 | 1,089 | 1,065 | |||||||||||||||
|
Factory
and administrative space at end of year (square ft.)
|
1,205 | 1,205 | 1,205 | 1,149 | 1,149 | |||||||||||||||
|
Balance
Sheet Data at end of year:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 2,573 | $ | 4,622 | $ | 3,233 | $ | 54,456 | $ | 37,602 | ||||||||||
|
Marketable
securities — current
|
23,328 | 8,799 | 8,870 | 652 | 1,323 | |||||||||||||||
|
Marketable
securities — non-current
|
16,117 | 37,953 | 36,087 | 3,715 | 5,893 | |||||||||||||||
|
Inventories
|
19,487 | 22,453 | 33,159 | 29,556 | 26,856 | |||||||||||||||
|
Working
capital
|
46,065 | 32,992 | 36,113 | 76,506 | 61,341 | |||||||||||||||
|
Property,
plant and equipment, net
|
13,310 | 14,579 | 15,944 | 16,641 | 17,252 | |||||||||||||||
|
Total
assets
|
98,249 | 110,293 | 118,726 | 124,179 | 108,805 | |||||||||||||||
|
Total
stockholders’ equity
|
$ | 81,512 | $ | 90,789 | $ | 93,757 | $ | 101,401 | $ | 87,688 | ||||||||||
19
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, 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 consumers. These
dealers are located throughout the continental United States and in several
international markets. Most of these dealers finance their inventory through
third-party floor plan 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 consumers,
|
|
| ● |
Providing
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 optimize operating results and
reduce risk in the event of a further downturn in sales of our
products,
|
|
| ● |
Maintaining
a flexible, variable cost structure which can be reduced quickly when
deemed appropriate,
|
|
| ● |
Focusing
on the competitive nature of the boating business and designing our
products and strategies in order to grow and maintain profitable market
share,
|
|
| ● |
Monitoring
the activities and financial condition of the third-party floor plan
lenders who finance our dealers’ inventories and of our
dealers,
|
|
| ● |
Maximizing
stockholder return by optimizing the balance of cash invested in the
Company’s productive assets, the payment of dividends to stockholders, and
the repurchase of the Company’s common stock on the open market,
and
|
|
| ● |
Aligning
the interests of our management and
stockholders.
|
In
implementing these strategies and attempting to optimize our financial returns,
management closely monitors dealer orders and inventories, the production mix of
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
historical and forecasted financial results, 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.
During
2009, the industry continued the trend of lower wholesale and retail sales that
began in the fourth quarter of 2005. High fuel prices and the
problems in the residential mortgage market which came to light in 2007 had a
continuing impact on both consumer confidence as a whole, as well as consumer
spending decisions in popular boating areas such as Florida and Southern
California. In addition, the financial crisis which intensified in
late 2008 and continued through 2009 reduced the availability of floor plan
credit for our dealers, which in turn reduced their capacity to accept
deliveries of new products from us. The Company believes that the
current boating cycle has reached a trough, but there are no near-term catalysts
which will improve the retail selling environment for our
products. However, as a result of our prior curtailment of
production, our dealer inventories have reached historically low
levels. As a result, we have increased production during the fourth
quarter of 2009 in order to meet dealer and expected retail demand for new
models. During 2009, the weak financial condition of a number of our
dealers, combined with the lack of availability of floor plan lending, required
us to assist our dealers in the liquidation of their inventory of non-current
models. This financial support negatively impacted our financial
results during 2009, but we do not believe that there will be any additional
impact on our financial results from further financial support of our dealer
network to liquidate non-current models. However, management will
continue to monitor dealer inventory levels and the risk of additional dealer
defaults and resulting repurchase obligations.
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, 2009 (latest data available to
us), Chaparral’s market share in the 18 to 35 foot sterndrive category was 8.1
percent, an increase from our market share in the same category for the twelve
months ended December 31, 2008 of 7.4 percent. This increase was
concentrated in the larger 21 to 35 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.
20
Outlook
Management
believes that net sales will increase in 2010 compared to 2009 and that our
operating results will improve. This belief is based on indications
that the downturn in recreational boating has ended, and the fact that our
dealer inventories are at historically low levels. While retail
demand may not increase significantly in 2010, our production and sales to
dealers will increase because retail demand will have to be fulfilled by
production from our manufacturing plants rather than by sales of dealer
inventory to retail consumers. Early indications from winter boat
shows are that attendance and sales are equal to, or slightly higher than,
2009. Our operating results should improve due to an improved gross
margin from increased production and significantly lower incentive
costs. In addition, the availability of credit from third-party floor
plan lenders who provide inventory financing to the vast majority of our dealers
has improved for financially stable dealers. Also, the prolonged
drought in several of Marine Products’ major Southeastern markets is over, which
enhances the navigability of waterways as well as access to docks, boat ramps
and other recreational facilities. However, we do not
believe that retail sales will increase significantly in 2010 due to the
prolonged recession and continued weak consumer confidence, which will dampen
the enthusiasm for purchases of large discretionary items such as pleasure
boats. In addition, consumer credit remains tight and fuel prices are
somewhat higher than at this time last year. In addition, the current
financial crisis may have long-term effects on consumer behavior with regard to
pleasure boating. Current and potential future lower returns on
financial assets may force consumers to delay retirement, or to choose more
modest lifestyles when they do retire. In such a case, consumers may
not purchase boats, may purchase boats later in their lives, or may purchase
smaller, less expensive boats. 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. In addition, the recreational boating industry
began a promotional program several years ago which involves advertising and
consumer targeting efforts, as well as other activities designed to increase the
potential consumer market for pleasure boats. Many manufacturers,
including Marine Products, are participating in this
program. Management believes that these efforts will benefit the
industry and Marine Products. We have implemented a marketing program
for potential new dealers which emphasizes our financial strength and product
quality as an alternative to many competitors who are less financially stable
and less able to support their dealers with quality products and good
service. During 2009 we gained a number of new dealers who had
previously sold competitors’ products, which served to offset the number of our
dealers who exited the business due to bankruptcy or for other
reasons. As in past years, Marine Products enhanced the design of a
number of its product lines for the 2010 model year which began on July 1,
2009. For this model year, Marine Products is emphasizing fewer
models with more standard features and fewer options, which will allow dealers
with limited financial resources to reduce the quantity of inventory which they
are required to carry.
Our financial results
in 2010 will depend on a number of factors, including interest rates, consumer
confidence, the availability of credit to our dealers and consumers, fuel costs,
the continued acceptance of our new 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. We
anticipate that the Company will continue to be challenged by the effect of an
uncertain level of consumer demand during the winter boat show and 2010 retail
selling seasons.
21
Results
of Operations
|
Years
ended December 31,
|
||||||||||||
|
($’s
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Total
number of boats sold
|
963 | 3,590 | 5,444 | |||||||||
|
Average
gross selling price per boat
|
$ | 47.1 | $ | 46.6 | $ | 43.4 | ||||||
|
Net
sales
|
$ | 39,439 | $ | 175,622 | $ | 244,273 | ||||||
|
Percentage
of gross (loss) profit margin to net sales
|
(16.6 | )% | 18.2 | % | 21.5 | % | ||||||
|
Percentage
of selling, general and administrative expense to net
sales
|
32.0 | % | 13.2 | % | 12.4 | % | ||||||
|
Operating
(loss) income
|
$ | (19,163 | ) | $ | 8,799 | $ | 22,235 | |||||
|
Warranty
expense
|
$ | 2,001 | $ | 3,191 | $ | 4,958 | ||||||
Year
Ended December 31, 2009 Compared To Year Ended December 31, 2008
Net
Sales. Marine
Products’ net sales decreased by $136.2 million or 77.5 percent in 2009 compared
to 2008. The decrease was primarily due to a 73.2 percent decrease in the number
of boats sold, partially offset by a 1.1 percent increase in the average gross
selling price per boat. Unit sales among all models declined
significantly compared to the prior year, as we
operated at very low production levels in response to weak industry
conditions. Average gross selling price per boat increased
slightly due to sales of the Premiere Sport Yacht during 2009 partially offset
by the decrease in average selling prices in our other product lines. Also
contributing to the decrease in net sales were the incentive costs totaling
approximately $8.6 million associated with liquidating
non-current models in dealer inventories.
Cost
of Goods Sold. Cost of goods sold decreased 68.0 percent in
2009 compared to 2008, less than the decrease in net sales. As a percentage of
net sales, cost of goods sold increased in 2009 compared to 2008, primarily due
to cost inefficiencies resulting from lower production volumes and to a lesser
extent higher dealer discounts and retail incentives.
Selling,
General and Administrative Expenses. Selling,
general and administrative expenses decreased 45.5 percent in 2009 compared to
2008 primarily as a result of costs, including incentive compensation and
warranty expense, that vary with the level of Company sales and
profitability. Warranty
expense decreased in 2009 due to lower sales. However, warranty
expense was 5.1 percent of net sales in 2009 compared to 1.8 percent of net
sales in 2008. This increase was due primarily to
approximately $1.1 million in additional warranty expense recognized during 2009
relating to the unusually high number of claims associated with prior model
year boats sold at retail requiring unanticipated repair
costs.
Interest
Income. Interest income was $1.7 million in 2009 compared to $2.4 million
in 2008. Marine Products generates interest income primarily from investments in
tax-exempt municipal obligations.
Income
Tax Provision. The income tax (benefit) provision was $(6.8
million) in 2009 compared to $3.6 million in 2008. The effective tax
rate in 2009 was 38.9 percent compared to 32.4 percent in
2008.
Year
Ended December 31, 2008 Compared To Year Ended December 31, 2007
Net
Sales. Marine
Products’ net sales decreased by $68.7 million or 28.1 percent in 2008 compared
to 2007. The decrease was primarily due to a 34.1 percent decrease in the number
of boats sold, partially offset by a 7.4 percent increase in the average gross
selling price per boat. The increase in average gross selling price per boat was
due primarily to
relatively higher sales of the redesigned Sunesta product line, which also
carried higher average selling prices. Also contributing to the
increase were sales of Chaparral’s new Premiere 400 Sport Yacht during the
fourth quarter of 2008.
Cost
of Goods Sold. Cost of goods sold decreased 25.1 percent in
2008 compared to 2007, less than the decrease in net sales. As a percentage of
net sales, cost of goods sold increased in 2008 compared to 2007, primarily due
to cost inefficiencies resulting from lower production volumes and to a lesser
extent higher dealer discounts and retail incentives.
Selling,
General and Administrative Expenses. Selling, general and
administrative expenses decreased 23.4 percent in 2008 compared to 2007 as a
result of costs, including incentive compensation and warranty expense, that
vary with the level of Company sales and profitability. Warranty
expense decreased in 2008 due to lower sales. Warranty expense was
1.8 percent of net sales in 2008 and 2.0 percent of net sales in
2007. These decreases were offset by costs totaling $0.5 million
associated with the repurchase of dealer inventory in accordance with agreements
with third-party floor plan lenders.
Interest
Income. Interest income was $2.4 million in 2008 compared to
$2.6 million in 2007. Marine Products generates interest income primarily from
investments in tax-exempt municipal obligations.
22
Income
Tax Provision. The income tax (benefit) provision was $3.6
million in 2008 compared to $8.4 million in 2007. The effective tax
rate in 2008 was 32.4 percent compared to 33.8 percent in
2007.
Liquidity
and Capital Resources
Cash
and Cash Flows
The
Company’s cash and cash equivalents were $2.6 million at December 31, 2009, $4.6
million at December 31, 2008 and $3.2 million at December 31,
2007. In addition, the aggregate of short-term and long-term
marketable securities were $39.4 million at December 31, 2009, $46.8 million at
December 31, 2008 and $45.0 million at December 31, 2007. During 2007
the Company changed its investment strategy towards investments with original
maturities greater than three months.
The
following table sets forth the historical cash flows for the twelve months ended
December 31:
|
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Net
cash (used for) provided by operating activities
|
$ | (9,036 | ) | $ | 14,045 | $ | 16,431 | |||||
|
Net
cash provided by (used for) investing activities
|
7,416 | (2,255 | ) | (41,391 | ) | |||||||
|
Net
cash used for financing activities
|
(429 | ) | (10,401 | ) | (26,263 | ) | ||||||
2009
Cash
provided by operating activities decreased by $23.1 million in 2009 compared to
2008. This decrease is primarily the result of a decrease in
earnings in 2009 compared to 2008 and the very significant reduction in working
capital requirements occurring during 2008. This reduction in working
capital requirements was primarily related to the large decline in inventory
when production levels declined in response to lower demand and
sales.
Cash used
for investing activities decreased $9.7 million in 2009 compared to 2008,
resulting primarily from lower net purchases of marketable securities in 2009
compared to 2008.
Cash used
for financing activities decreased $10.0 million in 2009 compared to 2008
due to a reduction during 2009 in dividends paid per share coupled with
the reduction in cash used to repurchase stock on the open
market.
2008
Cash
provided by operating activities decreased by $2.4 million in 2008 compared to
2007 as a result of lower net income and a decrease in working capital
requirements for inventory consistent with lower sales in 2008 compared to 2007
partially offset by the timing of receipts and payments.
Cash used
for investing activities decreased $39.1 million in 2008 compared to 2007,
resulting primarily from lower purchases of marketable securities in 2008
compared to 2007. Cash used for investing activities in 2007 was
comprised of $40.1 million in net purchases of marketable securities as a result
of a new investment strategy and $1.3 million in capital
expenditures.
Cash used
for financing activities decreased $15.9 million in 2008 compared to 2007 due
primarily to a decrease of $16.6 million in cash used to purchase the Company’s
common stock in the open market.
Cash
Requirements
Management
expects that capital expenditures during 2010 will be approximately $0.2 million
for enhancements to certain manufacturing plants.
The Company participates
in a multiple employer Retirement Income Plan, sponsored by RPC, Inc.
(“RPC”). We expect that additional contributions to the Retirement
Income Plan of approximately $22,000 will be
required in 2010 to achieve the Company’s funding
objective.
On April
28, 2009, the Board of Directors voted to suspend the quarterly cash dividend to
common stockholders.
The
Company has agreements with two employees, which provide for a monthly payment
to the employees equal to 10 percent of profits (defined as pretax income before
goodwill amortization and certain allocated corporate expenses).
23
On
January 22, 2008, the Board of Directors authorized an additional 3,000,000
shares that the Company may repurchase for a total aggregate authorization of
8,250,000 shares. As of December 31, 2009, the Company has purchased
a total of 4,925,157 shares in the open market under this program and there are
3,324,843 shares that remain available for repurchase. The Company did not
repurchase any shares under this program during 2009.
The
Company has entered into agreements with third-party floor plan lenders where it
has agreed, in the event of default by the dealer, to repurchase MPC boats
repossessed from the dealer. These arrangements are subject to
maximum repurchase amounts and the associated risk is mitigated by the value of
the boats repurchased. The Company incurred obligations for
inventory repurchases totaling approximately $6.3 million during 2009 resulting
from dealer defaults on floor plan financing. As of December 31,
2009, there were no payables due to lenders related to repurchased
inventory. There are no repurchased boats remaining in
inventory as of December 31, 2009 as all of these boats have been
redistributed among existing and replacement dealers. If additional
dealers experience financial difficulty as a result of the current market
conditions, the Company may incur additional repurchase obligations under
current programs or programs initiated in the future for the 2010 model
year. See further information regarding repurchase obligations in
“NOTE 9: COMMITMENTS AND CONTINGENCIES” of the Consolidated Financial
Statements.
The
Company believes that the liquidity provided by its existing cash and cash
equivalents, marketable securities, 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, 2009:
|
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
|
293,554 | — | — | — | 293,554 | |||||||||||||||
|
Operating
leases (1)
|
1,330,543 | 155,868 | 317,616 | 284,659 | 572,400 | |||||||||||||||
|
Purchase
obligations (2)
|
— | — | — | — | — | |||||||||||||||
|
Due
to floor plan lenders (3)
|
— | — | — | — | — | |||||||||||||||
|
Other
long-term liabilities
|
— | — | — | — | — | |||||||||||||||
|
Total
|
$ | 1,624,097 | $ | 155,868 | $ | 317,616 | $ | 284,659 | $ | 865,954 | ||||||||||
|
(1)
|
Operating
leases represent agreements for warehouse space and 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)
|
The Company has
agreements with various third-party lenders where it guarantees varying
amounts of debt for qualifying dealers on boats in
inventory. As
of December 31, 2009, there are no payables outstanding to floor plan
lenders.
|
Additionally,
our liability for unrecognized tax benefits and related interest and
penalties was $23,000 as of December 31, 2009. Management is unable
to make a reasonable estimate as to when cash settlement with the tax
authorities might occur due to the uncertainties related to these tax
matters.
Fair
Value Measurements
The
Company’s assets and liabilities measured at fair value are classified in the
fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation.
Assets and liabilities that are traded on an exchange with a quoted price are
classified as Level 1. Assets and liabilities that are valued using significant
observable inputs in addition to quoted market prices are classified as Level 2.
The Company currently has no assets or liabilities measured on a recurring basis
that are valued using unobservable inputs and therefore no assets or liabilities
measured on a recurring basis are classified as Level 3. For defined benefit
plan assets classified as Level 3, the values are computed using inputs such as
cost, discounted future cash flows, independent appraisals and market based
comparable data or on net asset values calculated by the fund and not publicly
available.
24
In 2009,
the Company transferred trading securities from assets utilizing Level 1 inputs
to assets utilizing Level 2 inputs because significant observable inputs in
addition to quoted market prices were used to value these trading
securities. Also in 2009, due to market disruptions that led to
decreased availability of quoted prices for identical assets, the Company
classified available-for-sale securities, consisting primarily of municipal
bonds, from assets utilizing Level 1 inputs to assets utilizing Level 2
inputs.
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 third-party floor plan lenders
whereby the Company guarantees varying amounts of debt for qualifying dealers on
boats in inventory. The Company’s obligation under these guarantees becomes
effective in the case of a default under the financing arrangement between the
dealer and the third-party lender. The agreements provide for the
return of all repossessed boats in “new and unused” condition subject to normal
wear and tear, as defined, to the Company, in exchange for the Company’s
assumption of specified percentages of the debt obligation on those boats, up to
certain contractually determined dollar limits which vary by
lender. During 2009, MPC became contractually obligated to repurchase
inventory of approximately $6.3 million as a result of dealer defaults, none of
which remains outstanding as of December 31, 2009. All of these
repossessed boats have been redistributed among existing and replacement
dealers.
Management
continues to monitor the risk of additional defaults and resulting repurchase
obligation based primarily upon information provided by the third-party floor
plan lenders and will adjust the guarantee liability at the end of each
reporting period based on information reasonably available at that time. See
further information regarding repurchase obligations in “NOTE 9: COMMITMENTS AND
CONTINGENCIES” of the Consolidated Financial Statements.
During
the third quarter of 2009, an amendment to the current agreement with one of the
Company’s lenders was executed with a contractual repurchase limit of $9.0
million effective January 1, 2009 which will expire June 30,
2010. The Company has contractual repurchase agreements with
additional lenders with an aggregate maximum repurchase obligation of
approximately $3.2 million with expiration dates from June 30, 2010 to December
31, 2010. As of December 31, 2009, the Company had an aggregate
remaining repurchase obligation of $5.5 million with these financing
institutions, although in certain situations, the Company may decide for
business reasons to repurchase boats in excess of these contractual
amounts.
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 $713,000 in 2009, $842,000 in 2008, and $957,000 in
2007. The Company’s liability to RPC for these services as of December 31, 2009
and 2008 was approximately $65,000 and $70,000. The Company’s
directors are also directors of RPC and all of the Company’s executive officers
with the exception of one are employees of both the Company and
RPC.
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.
A group
that includes the Company’s Chairman of the Board, R. Randall Rollins and his
brother Gary W. Rollins, who is also director of the Company, and certain
companies under their control, controls in excess of fifty percent of the
Company’s voting power.
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 historically 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.
25
Sales
incentives and discounts – The Company records incentives as a reduction of
sales. Using historical trends and management estimates, 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 primarily 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
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 recorded in net sales as a percentage of
gross sales were 30.3 percent in 2009, 13.3 percent in 2008, and 13.1
percent in 2007. A 0.25 percentage point change in incentives as a
percentage of gross sales during 2009 would have increased or decreased net
sales, gross margin and operating loss by approximately $0.1
million.
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 generally 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 the Company’s enforcement of those terms over time, defects, repair
costs, and the volume and mix of boat sales. The estimate of warranty
costs is regularly analyzed and is adjusted based on several factors including
the actual claims that occur. Warranty expense as a percentage of net
sales was 5.1 percent in 2009, 1.8 percent in 2008, and 2.0 percent in
2007. Warranty expense as a percentage of net sales increased in 2009
compared to 2008 due primarily to approximately $1.1 million in additional
warranty expense recognized during 2009 relating to the unusually high number of
claims associated with prior model year boats sold at retail requiring
unanticipated repair costs. A 0.10 percentage point increase in the
estimated warranty expense as a percentage of net sales during 2009 would have
increased selling, general and administrative expenses and reduced operating
income by approximately $39,000.
Income
taxes - The effective income tax rates were 38.9 percent in 2009, 32.4 percent
in 2008, and 33.8 percent in 2007. The effective tax rates vary due to changes
in estimates of future taxable income, fluctuations in the tax jurisdictions in
which the earnings and deductions are realized, variations in the relationship
of tax-exempt income or losses to income before taxes and favorable or
unfavorable adjustments to estimated tax liabilities related to proposed or
probable assessments. As a result, the effective tax rate may fluctuate
significantly on a quarterly or annual basis.
The
Company establishes a valuation allowance against the carrying value of deferred
tax assets when it is determined 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 the determination is made. Likewise, if it is later
determined that it is more likely than not that the net deferred tax assets
would be realized, the applicable portion of the previously provided valuation
allowance is reversed. The Company considers 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 in
determining the need for a valuation allowance.
The
Company calculates the 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.
26
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. Our
estimate for the potential outcome for any uncertain tax issue is highly
judgmental. The Company believes it has adequately provided for any reasonably
foreseeable outcome related to these matters. However, future results may
include favorable or unfavorable adjustments to 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 earnings
or deductions are realized may differ from current estimates.
Impact
of Recent Accounting Pronouncements
Recently
Adopted Accounting Pronouncements:
During
2009, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update No. 2009-01(ASU 2009-01) titled
“Topic 105-Generally Accepted Accounting Principles amendments based on
Statement of Financial Accounting Standards No. 168-The FASB Accounting
Standards CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles.” FASB
Accounting Standards CodificationTM
(ASC) Topic 105,
“Generally Accepted Accounting Principles” has become the single source
of authoritative U.S. generally accepted accounting principles (GAAP) recognized
by the FASB to be applied by nongovernmental entities, effective for financial
statements issued for interim and annual periods ending after September 15,
2009. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The FASB now issues
Accounting Standards Updates that are not considered authoritative in their own
right, but will serve to update the Codification, provide background information
about the guidance, and provide the bases for conclusions on the change(s) in
the Codification. References to accounting literature throughout this
document have been updated to reflect the codification.
In
September 2009, the FASB issued ASU No. 2009-12, “Investments
in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent)” (ASU 2009-12). ASU 2009-12 amends Accounting Standards Codification
Topic 820-10, “Fair Value Measurements-Overall.” The amendments in
ASU 2009-12 provide a practical expedient to measure investments that are
required to be measured at fair value on a recurring or non-recurring basis but
do not have a readily determinable fair value. The investments can be valued on
the basis of the net asset value per share of the investment. There
are additional disclosure requirements by major category of investments and the
nature of restrictions on the investor’s ability to redeem its investments. The
amendments in this ASU are effective for annual periods ending after December
15, 2009. See “NOTE 10: EMPLOYEE BENEFIT PLANS” of the Company’s consolidated
financial statements for related disclosures regarding pension assets that do
not have readily determinable fair value.
In August
2009, the FASB issued Accounting Standards Update No. 2009-5, “Measuring
Liabilities at Fair Value” (ASU 2009-05). ASU 2009-05 amends Accounting
Standards Codification Topic 820, “Fair Value Measurements.” ASU
2009-05 provides clarification that in circumstances in which a quoted price in
an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the following
methods: 1) a valuation technique that uses a) the quoted price of the
identical liability when traded as an asset or b) quoted prices for similar
liabilities or similar liabilities when traded as assets and/or 2) a
valuation technique that is consistent with the principles of ASC Topic 820
(e.g. an income approach or market approach). ASU 2009-05 also clarifies that
when estimating the fair value of a liability, a reporting entity is not
required to adjust to include inputs relating to the existence of transfer
restrictions on that liability. The Company adopted these provisions in
the fourth quarter of 2009 and the adoption
did not have a material impact on the Company’s consolidated financial
statements.
In December 2008, the FASB
issued certain
amendments as codified in ASC 715-20-65, “Compensation – Retirement Benefits,
Defined Benefit Plans.” These amendments require additional disclosures
regarding how investment decisions are made: the major categories of plan
assets; the inputs and valuation techniques used to measure the fair value of
plan assets; the effect of fair value measurements using significant
unobservable inputs on changes in plan assets for the period; and significant
concentrations of risk within plan assets The disclosures about plan
assets are required to be provided for fiscal years ending after December 15,
2009, with no restatement required for earlier periods that are presented for
comparative purposes, upon initial application. Earlier application of the
provisions is permitted. See “NOTE
10: EMPLOYEE BENEFIT PLANS” of the Company’s consolidated financial statements
for related disclosures.
In May
2009, the FASB issued a new standard, as codified in FASB ASC Topic 855
“Subsequent Events.” FASB ASC Topic 855 establishes general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
In addition, it provides guidance regarding the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements; the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements; and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The Company
adopted this standard in the second quarter of 2009 and the adoption did not
have a material effect on the Company’s consolidated financial
statements.
27
In April
2009, the FASB issued certain amendments as codified in ASC 820-10-65, “Fair
Value Disclosures.” ASC 820-10-65 affirms that the objective of fair
value when the market for an asset is not active is the price that would be
received to sell the asset in an orderly transaction, and includes additional
factors for determining whether there has been a significant decrease in market
activity for an asset when the market for that asset is not
active. An entity is required to base its conclusion about whether a
transaction was not orderly on the weight of the evidence. The Company
adopted these provisions in the second quarter of 2009 and the adoption
did not have a material impact on the Company’s consolidated financial
statements.
In April
2009, the FASB issued certain amendments as codified in FASB ASC Topic
320-10-65, “Investments — Debt and Equity Securities.” These amendments
(i) change existing guidance for determining whether an impairment is other
than temporary to debt securities and (ii) replace the existing requirement
that the entity’s management assert it has both the intent and ability to hold
an impaired security until recovery with a requirement that management assert:
(a) it does not have the intent to sell the security; and (b) it is
more likely than not it will not have to sell the security before recovery of
its cost basis. Declines in the fair value of held-to-maturity and
available-for-sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses to the extent the
impairment is related to credit losses. The amount of the impairment related to
other factors is recognized in other comprehensive income. The Company
adopted ASC 320 in the second quarter of 2009 and the adoption
did not have a material impact on the Company’s consolidated financial
statements.
In April
2009, the FASB issued certain amendments as codified in ASC 825-10-65,
“Financial Instruments,” that require an entity to provide disclosures about
fair value of financial instruments in interim financial information including
whenever it issues summarized financial information for interim reporting
periods. In addition, entities must disclose, in the body or in the accompanying
notes of its summarized financial information for interim reporting periods and
in its financial statements for annual reporting periods, the fair value of all
financial instruments for which it is practicable to estimate that value,
whether recognized or not recognized in the statement of financial position.
The Company adopted these amendments in the second quarter of
2009. See “NOTE 8:
FAIR VALUE MEASUREMENTS” for related disclosures.
Recently
Issued Accounting Pronouncements Not Yet Adopted:
In
November 2009, the FASB issued ASU 2009-17, “Consolidations (Topic 810) –
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities,” which codifies FASB Statement No. 167, “Amendments to FASB
Interpretation No. 46(R).” The ASU changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic
performance. These provisions are effective January 1, 2010, for a
calendar year-end entity, with early application not being
permitted. Adoption of these provisions is not expected to have a
material impact on the Company’s consolidated financial statements.
In
November 2009, the FASB issued ASU 2009-16, “Transfers and Servicing (Topic 860)
– Accounting for Transfers of Financial Assets,” which formally codifies FASB
Statement No. 166, “Accounting for Transfers of Financial
Assets.” ASU 2009-16 is a revision to SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,” and requires more information about transfers of financial assets,
including securitization transactions, and where entities have continuing
exposure to the risks related to transferred financial assets. It eliminates the
concept of a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets, and requires additional
disclosures. The provisions are effective January 1, 2010, for a
calendar year-end entity, with early application not being
permitted. Adoption of these provisions is not expected to have a
material impact on the Company’s consolidated financial statements.
In
September 2009, the FASB issued certain amendments as codified in ASC 605-25,
“Revenue Recognition; Multiple-Element Arrangements.” These
amendments provide clarification on whether multiple deliverables exist, how the
arrangement should be separated, and the consideration allocated. An
entity is required to allocate revenue in an arrangement using estimated selling
prices of deliverables in the absence of vendor-specific objective evidence or
third-party evidence of selling price. These amendments also eliminate the use
of the residual method and require an entity to allocate revenue using the
relative selling price method. The amendments significantly expand
the disclosure requirements for multiple-deliverable revenue
arrangements. These provisions are to be applied on a prospective
basis for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, with earlier application
permitted. The Company is currently evaluating the impact of these
amendments to its consolidated financial statements.
28
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
Marine
Products holds no derivative financial instruments which could expose Marine
Products to significant market risk. Marine Products maintains an investment
portfolio, comprised primarily of municipal debt and corporate debt securities,
which are 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.
29
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, 2009 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’s
internal control over financial reporting was not effective as a result of the
material weakness related to accounting for certain dealer incentive costs as of
December 31, 2009.
A
“material weakness” is a deficiency or a combination of control deficiencies in
internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of our annual or interim financial
statements will not be prevented or detected on a timely
basis. Management identified a material weakness in our internal
control over financial reporting as of December 31, 2009, related to the
accounting for certain dealer incentive costs. These dealer incentive costs were
improperly classified as selling, general and administrative expenses rather
than as a reduction in net sales. Although the Company believes that
it had designed effective controls related to accounting for dealer incentive
costs, the operating effectiveness of these controls was inadequate. In order to
improve the operating effectiveness of these controls, in March 2010, the
Company implemented extensive and comprehensive technical accounting reviews of
certain dealer incentive costs on a monthly basis. In March 2010,
management has determined the appropriate classification of the aforementioned
dealer incentive costs and believes the reinforced monitoring and review will
remediate this material weakness.
The
independent registered public accounting firm, Grant Thornton LLP, has audited
the consolidated financial statements as of and for the year ended December 31,
2009, and has also issued their report on the effectiveness of the Company’s
internal control over financial reporting, included in this report on page
31.
|
/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
10, 2010
30
Report of Independent
Registered Public Accounting Firm on Internal Control over Financial
Reporting
Board of
Directors and Stockholders
Marine
Products Corporation
We have
audited Marine Products Corporation (a Delaware Corporation) and subsidiaries’
(the “Company”) internal control over financial reporting as of December 31,
2009 based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’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, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on 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, assessing the risk that a material
weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, 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.
A material weakness
is a deficiency, or combination of control deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of the Company’s annual or interim financial statements
will not be prevented or detected on a timely basis. The following material
weakness has been identified and included in management’s assessment: inadequate
operating effectiveness of the controls related to accounting for dealer
incentive costs.
In our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of December
31, 2009, based on criteria established in Internal
Control—Integrated Framework issued
by COSO.
We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2009. The
material weakness identified above was considered in determining the nature,
timing, and extent of audit tests applied in our audit of the 2009 consolidated
financial statements, and this report does not affect our report dated March 10,
2010, which expressed an unqualified opinion on those consolidated financial
statements.
/s/ Grant
Thornton LLP
Atlanta,
Georgia
March 10,
2010
31
Report
of Independent Registered Public Accounting Firm on Consolidated Financial
Statements
Board of
Directors and Stockholders
Marine
Products Corporation
We have
audited the accompanying consolidated balance sheets of Marine Products
Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of
December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2009. Our audits of the basic
consolidated financial statements included the financial statement schedule
listed in the index appearing under Item 15. These financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule 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 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 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 the Company as of December
31, 2009 and 2008, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As described
in Note 6 to the consolidated financial statements, the Company adopted new
accounting guidance related to the accounting for uncertainty in income tax
reporting during 2007.
We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2009, 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 10,
2010 expressed an adverse opinion thereon.
/s/ Grant
Thornton LLP
Atlanta,
Georgia
March 10,
2010
32
Item
8. Financial Statements and Supplementary Data
CONSOLIDATED
BALANCE SHEETS
MARINE
PRODUCTS CORPORATION AND SUBSIDIARIES
(in
thousands except share information)
|
December
31,
|
2009
|
2008
|
||||||
|
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 2,573 | $ | 4,622 | ||||
|
Marketable
securities
|
23,328 | 8,799 | ||||||
|
Accounts
receivable, net
|
1,265 | 5,575 | ||||||
|
Inventories
|
19,487 | 22,453 | ||||||
|
Income
taxes receivable
|
6,304 | 2,464 | ||||||
|
Deferred
income taxes
|
1,008 | 1,116 | ||||||
|
Prepaid
expenses and other current assets
|
2,783 | 1,681 | ||||||
|
Current
assets
|
56,748 | 46,710 | ||||||
|
Property,
plant and equipment, net
|
13,310 | 14,579 | ||||||
|
Goodwill
|
3,308 | 3,308 | ||||||
|
Other
intangibles, net
|
465 | 465 | ||||||
|
Marketable
securities
|
16,117 | 37,953 | ||||||
|
Deferred
income taxes
|
3,224 | 2,934 | ||||||
|
Other
assets
|
5,077 | 4,344 | ||||||
|
Total
assets
|
$ | 98,249 | $ | 110,293 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Liabilities
|
||||||||
|
Accounts
payable
|
$ | 1,972 | $ | 1,437 | ||||
|
Accrued
expenses and other liabilities
|
8,711 | 12,281 | ||||||
|
Current
liabilities
|
10,683 | 13,718 | ||||||
|
Pension
liabilities
|
5,689 | 5,285 | ||||||
|
Other
long-term liabilities
|
365 | 501 | ||||||
|
Total
liabilities
|
16,737 | 19,504 | ||||||
|
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 – 36,883,104 shares in 2009, 36,425,449 shares in
2008
|
3,688 | 3,643 | ||||||
|
Capital
in excess of par value
|
— | — | ||||||
|
Retained
earnings
|
78,690 | 88,535 | ||||||
|
Accumulated
other comprehensive loss
|
(866 | ) | (1,389 | ) | ||||
|
Total
stockholders’ equity
|
81,512 | 90,789 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 98,249 | $ | 110,293 | ||||
The
accompanying notes are an integral part of these statements.
33
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||
|
MARINE
PRODUCTS CORPORATION AND SUBSIDIARIES
|
||||||||||||
|
(in
thousands except per share data)
|
||||||||||||
|
Years
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Net
sales
|
$ | 39,439 | $ | 175,622 | $ | 244,273 | ||||||
|
Cost
of goods sold
|
45,996 | 143,677 | 191,810 | |||||||||
|
Gross
(loss) profit
|
(6,557 | ) | 31,945 | 52,463 | ||||||||
|
Selling,
general and administrative expenses
|
12,606 | 23,146 | 30,228 | |||||||||
|
Operating
(loss) income
|
(19,163 | ) | 8,799 | 22,235 | ||||||||
|
Interest
income
|
1,663 | 2,420 | 2,590 | |||||||||
|
(Loss)
income before income taxes
|
(17,500 | ) | 11,219 | 24,825 | ||||||||
|
Income
tax (benefit) provision
|
(6,807 | ) | 3,633 | 8,402 | ||||||||
|
Net
(loss) income
|
$ | (10,693 | ) | $ | 7,586 | $ | 16,423 | |||||
|
(LOSS)
EARNINGS PER SHARE
|
||||||||||||
|
Basic
|
$ | (0.30 | ) | $ | 0.21 | $ | 0.44 | |||||
|
Diluted
|
(0.30 | ) | 0.21 | $ | 0.43 | |||||||
|
Dividends
paid per share
|
$ | 0.01 | $ | 0.26 | $ | 0.24 | ||||||
The
accompanying notes are an integral part of these statements.
34
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
||||||||||||||||||||||||||||
|
MARINE
PRODUCTS CORPORATION AND SUBSIDIARIES
|
||||||||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||||||
|
Three
Years Ended
December
31, 2009
|
Comprehensive
Income
(Loss)
|
Common Stock |
Capital
in
Excess
of
Par
Value
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Total
|
||||||||||||||||||||||
|
Shares
|
Amount
|
|||||||||||||||||||||||||||
|
Balance,
December 31, 2006
|
37,908 | $ | 3,791 | $ | 13,453 | $ | 84,875 | $ | (718 | ) | $ | 101,401 | ||||||||||||||||
|
Stock
issued for stock incentive plans, net
|
407 | 41 | 1,810 | — | — | 1,851 | ||||||||||||||||||||||
|
Stock
purchased and retired
|
(2,297 | ) | (230 | ) | (15,694 | ) | (2,182 | ) | — | (18,106 | ) | |||||||||||||||||
|
Net
income
|
$ | 16,423 | — | — | — | 16,423 | — | 16,423 | ||||||||||||||||||||
|
Pension
adjustment, net of taxes
|
476 | — | — | — | — | 476 | 476 | |||||||||||||||||||||
|
Unrealized
gain on securities, net of taxes and reclassification
adjustments
|
292 | — | — | — | — | 292 | 292 | |||||||||||||||||||||
|
Comprehensive
income
|
$ | 17,191 | ||||||||||||||||||||||||||
|
Dividends
declared
|
— | — | — | (9,011 | ) | — | (9,011 | ) | ||||||||||||||||||||
|
Excess
tax benefits for share-based payments
|
— | — | 431 | — | — | 431 | ||||||||||||||||||||||
|
Balance,
December 31, 2007
|
36,018 | 3,602 | — | 90,105 | 50 | 93,757 | ||||||||||||||||||||||
|
Stock
issued for stock incentive plans, net
|
862 | 87 | 3,389 | — | — | 3,476 | ||||||||||||||||||||||
|
Stock
purchased and retired
|
(455 | ) | (46 | ) | (4,011 | ) | 286 | — | (3,771 | ) | ||||||||||||||||||
|
Net
income
|
$ | 7,586 | — | — | — | 7,586 | — | 7,586 | ||||||||||||||||||||
|
Pension
adjustment, net of taxes
|
(1,345 | ) | — | — | — | — | (1,345 | ) | (1,345 | ) | ||||||||||||||||||
|
Unrealized
loss on securities, net of taxes and reclassification
adjustments
|
(94 | ) | — | — | — | — | (94 | ) | (94 | ) | ||||||||||||||||||
|
Comprehensive
income
|
$ | 6,147 | ||||||||||||||||||||||||||
|
Dividends
declared
|
— | — | — | (9,442 | ) | — | (9,442 | ) | ||||||||||||||||||||
|
Excess
tax benefits for share-based payments
|
— | — | 622 | — | — | 622 | ||||||||||||||||||||||
|
Balance,
December 31, 2008
|
36,425 | 3,643 | — | 88,535 | (1,389 | ) | 90,789 | |||||||||||||||||||||
|
Stock
issued for stock incentive plans, net
|
616 | 61 | 226 | 1,217 | — | 1,504 | ||||||||||||||||||||||
|
Stock
purchased and retired
|
(158 | ) | (16 | ) | (679 | ) | — | — | (695 | ) | ||||||||||||||||||
|
Net
loss
|
$ | (10,693 | ) | — | — | — | (10,693 | ) | — | (10,693 | ) | |||||||||||||||||
|
Pension
adjustment, net of taxes
|
408 | — | — | — | — | 408 | 408 | |||||||||||||||||||||
|
Unrealized
gain on securities, net of taxes and reclassification
adjustments
|
115 | — | — | — | — | 115 | 115 | |||||||||||||||||||||
|
Comprehensive
loss
|
$ | (10,170 | ) | |||||||||||||||||||||||||
|
Dividends
declared
|
— | — | — | (369 | ) | — | (369 | ) | ||||||||||||||||||||
|
Excess
tax benefits for share-based payments
|
— | — | 453 | — | — | 453 | ||||||||||||||||||||||
|
Balance,
December 31, 2009
|
36,883 | $ | 3,688 | $ | — | $ | 78,690 | $ | (866 | ) | $ | 81,512 | ||||||||||||||||
The
accompanying notes are an integral part of these statements.
35
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
|
MARINE
PRODUCTS CORPORATION AND SUBSIDIARIES
|
||||||||||||
|
(in
thousands)
|
||||||||||||
|
Years
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
OPERATING
ACTIVITIES
|
||||||||||||
|
Net
(loss) income
|
$ | (10,693 | ) | $ | 7,586 | $ | 16,423 | |||||
|
Adjustments
to reconcile net (loss) income to net cash (used for) provided by
operating activities:
|
||||||||||||
|
Depreciation
expense
|
1,354 | 1,694 | 1,950 | |||||||||
|
Gain
on sale of equipment and property
|
(15 | ) | (14 | ) | - | |||||||
|
Stock-based
compensation expense
|
1,645 | 1,440 | 1,524 | |||||||||
|
Excess
tax benefits for share-based payments
|
(453 | ) | (622 | ) | (431 | ) | ||||||
|
Deferred
income tax (benefit) provision
|
(854 | ) | 431 | 331 | ||||||||
|
(Increase)
decrease in assets:
|
||||||||||||
|
Accounts
receivable
|
4,310 | (2,035 | ) | (560 | ) | |||||||
|
Inventories
|
2,966 | 10,706 | (3,603 | ) | ||||||||
|
Prepaid
expenses and other current assets
|
(1,102 | ) | 478 | (286 | ) | |||||||
|
Income
taxes receivable
|
(3,325 | ) | (521 | ) | (56 | ) | ||||||
|
Other
non-current assets
|
(733 | ) | 1,286 | (1,052 | ) | |||||||
|
Increase
(decrease) in liabilities:
|
||||||||||||
|
Accounts
payable
|
535 | (3,184 | ) | 1,166 | ||||||||
|
Other
accrued expenses
|
(3,570 | ) | (2,013 | ) | 660 | |||||||
|
Other
long-term liabilities
|
899 | (1,187 | ) | 365 | ||||||||
|
Net
cash (used for) provided by operating activities
|
(9,036 | ) | 14,045 | 16,431 | ||||||||
|
INVESTING
ACTIVITIES
|
||||||||||||
|
Capital
expenditures
|
(85 | ) | (329 | ) | (1,263 | ) | ||||||
|
Proceeds
from sale of assets
|
15 | 14 | 10 | |||||||||
|
Sales
and maturities of marketable securities
|
22,344 | 46,024 | 32,437 | |||||||||
|
Purchases
of marketable securities
|
(14,858 | ) | (47,964 | ) | (72,575 | ) | ||||||
|
Net
cash provided by (used for) investing activities
|
7,416 | (2,255 | ) | (41,391 | ) | |||||||
|
FINANCING
ACTIVITIES
|
||||||||||||
|
Payment
of dividends
|
(369 | ) | (9,442 | ) | (9,011 | ) | ||||||
|
Cash
paid for common stock purchased and retired
|
(537 | ) | (1,619 | ) | (17,818 | ) | ||||||
|
Excess
tax benefits for share-based payments
|
453 | 622 | 431 | |||||||||
|
Proceeds
received upon exercise of stock options
|
24 | 38 | 135 | |||||||||
|
Net
cash used for financing activities
|
(429 | ) | (10,401 | ) | (26,263 | ) | ||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(2,049 | ) | 1,389 | (51,223 | ) | |||||||
|
Cash
and cash equivalents at beginning of year
|
4,622 | 3,233 | 54,456 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 2,573 | $ | 4,622 | $ | 3,233 | ||||||
The
accompanying notes are an integral part of these statements.
36
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
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. However, due to our significantly lower sales in 2009, one
dealer accounted for approximately 13 percent of net sales in
2009. Since many other dealers have sold enough inventory to begin
ordering boats in 2010, the loss of this dealer would not have a significant
material adverse affect on the Company’s financial results. Net sales
from the Company’s international dealers were approximately $12,000,000 in 2009,
$59,000,000 in 2008 and $57,000,000 in 2007.
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, 2009, 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 or retained earnings if capital in excess of par value is
eliminated.
Dividend
— On March 10, 2009, Marine Products paid a quarterly dividend of $0.01
per common share to stockholders of record at the close of business on February
10, 2009. There were no additional quarterly dividends paid in
2009.
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,
costs associated with repurchase obligations and income
taxes.
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 shipment 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.
37
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Shipping
and Handling Charges — The shipping and handling of the Company’s
products to dealers is handled through a combination of third-party marine
transporters 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 operations; 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, 2009 and 2008, the Company had approximately $55,000 and $297,000 in prepaid
expenses related to the unamortized product brochure
costs. Advertising expenses totaled approximately $1,206,000 in 2009,
$2,421,000 in 2008, and $2,490,000 in 2007.
Sales
Incentives and Discounts — Sales incentives including dealer discounts
and retail sales promotions are provided for and recorded as a reduction in
sales. The Company records the estimated cost of 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 classified as cash equivalents.
Marketable
Securities — Marine Products maintains investments at a large,
well-capitalized financial institution. 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. Net realized gains (losses) on marketable securities totaled $163,000 in
2009, $425,000 in 2008 and $51,000 in 2007. Of the total gains
(losses) realized, reclassification from other comprehensive income totaled
approximately $163,000 in 2009, $425,000 in 2008 and $(35,000) in
2007. Gross unrealized gains on marketable securities totaled
$444,000 at December 31, 2009 and $370,000 at December 31,
2008. Gross unrealized losses on marketable securities totaled $6,000
at December 31, 2009 and $110,000 at December 31, 2008. The amortized
cost basis, fair value and net unrealized gains of the available-for-sale
securities are as follows:
|
December
31,
|
2009
|
2008
|
||||||||||||||||||||||
|
Type
of Securities
|
Amortized
Cost Basis |
Fair
Value |
Net
Unrealized Gain |
Adjusted
Cost Basis |
Fair
Value |
Net
Unrealized Gain |
||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Municipal
Obligations
|
$ | 35,996 | $ | 36,335 | $ | 339 | $ | 46,492 | $ | 46,752 | $ | 260 | ||||||||||||
|
Corporate
Obligations
|
3,011 | 3,110 | 99 | — | — | — | ||||||||||||||||||
|
Total
|
$ | 39,007 | $ | 39,445 | $ | 438 | $ | 46,492 | $ | 46,752 | $ | 260 | ||||||||||||
Municipal
obligations consist primarily of municipal notes rated 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 Company’s non-current marketable securities are scheduled to
mature between 2010 and 2014.
Corporate
backed obligations consist primarily of debentures and notes issued by other
companies ranging in maturity from two to five years. These
securities are rated BBB or higher.
38
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Accounts
Receivable — The majority of the Company’s accounts receivable are 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 various 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 within approximately 10 business
days. The Company determines its allowance for doubtful accounts 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.
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 operations.
All other depreciation is included in selling, general and administrative
expenses in the accompanying consolidated statements of operations. 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, 2009 and 2008. Goodwill
is reviewed annually for impairment and the potential impairment is measured by
comparing the estimated fair value of a reporting unit with its carrying
value. Based upon the results of these analyses, the Company has
concluded that no impairment of its goodwill has occurred for the years ended
December 31, 2009, 2008 or 2007.
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 securities.
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, 2009 and 2008 is as follows:
|
(in
thousands)
|
2009
|
2008
|
||||||
|
Balance
at beginning of year
|
$ | 3,567 | $ | 4,768 | ||||
|
Less:
Payments made during the year
|
(3,164 | ) | (4,392 | ) | ||||
|
Add:
Warranty provision for the current year
|
908 | 3,348 | ||||||
|
Changes
to warranty provision for prior years
|
1,092 | (157 | ) | |||||
|
Balance
at end of year
|
$ | 2,403 | $ | 3,567 | ||||
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
$712,000 in 2009, $1,759,000 in 2008, and $1,746,000 in
2007.
Repurchase
Obligations — The Company has entered into agreements with third-party
floor plan lenders where it has agreed, in the event of default by the dealer,
to repurchase MPC boats repossessed from the dealer. These
arrangements are subject to maximum repurchase amounts and the associated risk
is mitigated by the value of the boats repurchased. The Company
estimates and accrues potential losses related to the repurchase obligation
exposure.
39
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
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.
Stock-Based
Compensation — Stock-based compensation expense is recognized for all
share-based payment awards, net of an estimated forfeiture rate. Thus,
compensation cost is amortized for those shares expected to vest on a
straight-line basis over the requisite service period of the award. See Note 10
for additional information.
Earnings
per Share —
FASB ASC Topic 260-10 “Earnings Per Share-Overall,” requires a basic
earnings per share and diluted earnings per share
presentation. During 2009, the Company adopted certain amendments to
ASC 260-10 which requires that all outstanding unvested share-based payment
awards that contain non-forfeitable rights to dividends or dividend equivalents,
whether paid or unpaid, be considered participating securities and included in
the calculation of its basic earnings per share.
The
Company has periodically issued share-based payment awards that contain
non-forfeitable rights to dividends and therefore are considered participating
securities. See Note 10 for further information on restricted stock
granted to employees.
The basic
and diluted 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. Basic and diluted earnings per share are computed by dividing net (loss)
income by the weighted average number of shares outstanding during the
respective periods.
A
reconciliation of weighted average shares outstanding along with the earnings
per share attributable to restricted shares of common stock (participating
securities) is as follows:
40
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
|
(In
thousands except per share data )
|
2009
|
2008
|
2007
|
|||||||||
|
Net
(loss) income available for stockholders:
|
$ | (10,693 | ) | $ | 7,586 | $ | 16,423 | |||||
|
Less:
Dividends paid
|
||||||||||||
|
Common
Stock
|
(361 | ) | (9,286 | ) | (8,885 | ) | ||||||
|
Restricted
shares of common stock
|
(8 | ) | (156 | ) | (126 | ) | ||||||
|
Undistributed (loss)
earnings
|
$ | (11,062 | ) | $ | (1,856 | ) | $ | 7,412 | ||||
|
Allocation
of undistributed earnings:
|
||||||||||||
|
Common
Stock
|
$ | (10,823 | ) | $ | (1,825 | ) | $ | 7,304 | ||||
|
Restricted
shares of common stock
|
(239 | ) | (31 | ) | 108 | |||||||
|
Basic
shares outstanding:
|
||||||||||||
|
Common
Stock
|
35,271 | 35,167 | 36,676 | |||||||||
|
Restricted
shares of common stock
|
796 | 619 | 472 | |||||||||
| 36,067 | 35,786 | 37,148 | ||||||||||
|
Diluted
shares outstanding:
|
||||||||||||
|
Common
Stock
|
35,271 | 35,167 | 36,679 | |||||||||
|
Dilutive
effect of options
|
- | 658 | 1,139 | |||||||||
| 35,271 | 35,825 | 37,818 | ||||||||||
|
Restricted
shares of common stock
|
796 | 619 | 472 | |||||||||
| 36,067 | 36,444 | 38,290 | ||||||||||
|
Basic
earnings per share:
|
||||||||||||
|
Common
Stock:
|
||||||||||||
|
Distributed
earnings
|
$ | 0.01 | $ | 0.26 | $ | 0.24 | ||||||
|
Undistributed (loss)
earnings
|
(0.31 | ) | (0.05 | ) | 0.20 | |||||||
| $ | (0.30 | ) | $ | 0.21 | $ | 0.44 | ||||||
|
Restricted
shares of common stock:
|
||||||||||||
|
Distributed
earnings
|
$ | 0.01 | $ | 0.25 | $ | 0.27 | ||||||
|
Undistributed (loss)
earnings
|
(0.30 | ) | (0.05 | ) | 0.23 | |||||||
| $ | (0.29 | ) | $ | 0.20 | $ | 0.50 | ||||||
|
Diluted
earnings per share:
|
||||||||||||
|
Common
Stock:
|
||||||||||||
|
Distributed
earnings
|
$ | 0.01 | $ | 0.26 | $ | 0.24 | ||||||
|
Undistributed (loss)
earnings
|
(0.31 | ) | (0.05 | ) | 0.19 | |||||||
| $ | (0.30 | ) | $ | 0.21 | $ | 0.43 | ||||||
During the
year ended December 31, 2009, the Company incurred a net loss from continuing
operations and consequently the common stock equivalents were excluded from the
computation of diluted loss per share because the effect would have been
anti-dilutive.
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 with the exception of securities
held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) which
are classified as trading securities. All of these securities are
carried at fair value in the accompanying consolidated balance sheets. See Note
8 for further information regarding the fair value measurement of assets and
liabilities.
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.
Reclassifications — In the
current year the Company classified stock-based compensation with stock issued
for stock incentive plans, net in the consolidated statements of stockholders'
equity. For comparative purposes, amounts in the prior year have been
reclassified to conform to current year presentation.
41
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
New
Accounting Standards —
Recently
Adopted Accounting Pronouncements:
During
2009, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update No. 2009-01(ASU 2009-01) titled
“Topic 105-Generally Accepted Accounting Principles amendments based on
Statement of Financial Accounting Standards No. 168-The FASB Accounting
Standards CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles.” FASB
Accounting Standards CodificationTM (ASC)
Topic 105,
“Generally Accepted Accounting Principles” has become the single source
of authoritative U.S. generally accepted accounting principles (GAAP) recognized
by the FASB to be applied by nongovernmental entities, effective for financial
statements issued for interim and annual periods ending after September 15,
2009. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The FASB now issues
Accounting Standards Updates that are not considered authoritative in their own
right, but will serve to update the Codification, provide background information
about the guidance, and provide the bases for conclusions on the change(s) in
the Codification. References to accounting literature throughout this
document have been updated to reflect the codification.
In
September 2009, the FASB issued ASU No. 2009-12, “Investments
in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent)” (ASU 2009-12). ASU 2009-12 amends Accounting Standards Codification
Topic 820-10, “Fair Value Measurements-Overall.” The amendments in
ASU 2009-12 provide a practical expedient to measure investments that are
required to be measured at fair value on a recurring or non-recurring basis but
do not have a readily determinable fair value. The investments can be valued on
the basis of the net asset value per share of the investment. There
are additional disclosure requirements by major category of investments and the
nature of restrictions on the investor’s ability to redeem its investments. The
amendments in this ASU are effective for annual periods ending after December
15, 2009. See “NOTE 10: EMPLOYEE BENEFIT PLANS” of the Company’s consolidated
financial statements for related disclosures regarding pension assets that do
not have readily determinable fair value.
In August
2009, the FASB issued Accounting Standards Update No. 2009-5, “Measuring
Liabilities at Fair Value” (ASU 2009-05). ASU 2009-05 amends Accounting
Standards Codification Topic 820, “Fair Value Measurements.” ASU
2009-05 provides clarification that in circumstances in which a quoted price in
an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the following
methods: 1) a valuation technique that uses a) the quoted price of the
identical liability when traded as an asset or b) quoted prices for similar
liabilities or similar liabilities when traded as assets and/or 2) a
valuation technique that is consistent with the principles of ASC Topic 820
(e.g. an income approach or market approach). ASU 2009-05 also clarifies that
when estimating the fair value of a liability, a reporting entity is not
required to adjust to include inputs relating to the existence of transfer
restrictions on that liability. The Company adopted these provisions in
the fourth quarter of 2009 and the adoption
did not have a material impact on the Company’s consolidated financial
statements.
In December 2008, the FASB
issued certain
amendments as codified in ASC 715-20-65, “Compensation – Retirement Benefits,
Defined Benefit Plans.” These amendments require additional disclosures
regarding how investment decisions are made: the major categories of plan
assets; the inputs and valuation techniques used to measure the fair value of
plan assets; the effect of fair value measurements using significant
unobservable inputs on changes in plan assets for the period; and significant
concentrations of risk within plan assets. The disclosures about plan
assets are required to be provided for fiscal years ending after December 15,
2009, with no restatement required for earlier periods that are presented for
comparative purposes, upon initial application. Earlier application of the
provisions is permitted. See “NOTE
10: EMPLOYEE BENEFIT PLANS” of the Company’s consolidated financial statements
for related disclosures.
In May
2009, the FASB issued a new standard, as codified in FASB ASC Topic 855
“Subsequent Events.” FASB ASC Topic 855 establishes general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
In addition, it provides guidance regarding the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements; the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements; and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The Company
adopted this standard in the second quarter of 2009 and the adoption did not
have a material effect on the Company’s consolidated financial
statements.
42
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
In April
2009, the FASB issued certain amendments as codified in ASC 820-10-65, “Fair
Value Disclosures.” ASC 820-10-65 affirms that the objective of fair
value when the market for an asset is not active is the price that would be
received to sell the asset in an orderly transaction, and includes additional
factors for determining whether there has been a significant decrease in market
activity for an asset when the market for that asset is not
active. An entity is required to base its conclusion about whether a
transaction was not orderly on the weight of the evidence. The Company
adopted these provisions in the second quarter of 2009 and the adoption
did not have a material impact on the Company’s consolidated financial
statements.
In April
2009, the FASB issued certain amendments as codified in FASB ASC Topic
320-10-65, “Investments — Debt and Equity Securities.” These amendments
(i) change existing guidance for determining whether an impairment is other
than temporary to debt securities and (ii) replace the existing requirement
that the entity’s management assert it has both the intent and ability to hold
an impaired security until recovery with a requirement that management assert:
(a) it does not have the intent to sell the security; and (b) it is
more likely than not it will not have to sell the security before recovery of
its cost basis. Declines in the fair value of held-to-maturity and
available-for-sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses to the extent the
impairment is related to credit losses. The amount of the impairment related to
other factors is recognized in other comprehensive income. The Company
adopted ASC 320 in the second quarter of 2009 and the adoption
did not have a material impact on the Company’s consolidated financial
statements.
In April
2009, the FASB issued certain amendments as codified in ASC 825-10-65,
“Financial Instruments,” that require an entity to provide disclosures about
fair value of financial instruments in interim financial information including
whenever it issues summarized financial information for interim reporting
periods. In addition, entities must disclose, in the body or in the accompanying
notes of its summarized financial information for interim reporting periods and
in its financial statements for annual reporting periods, the fair value of all
financial instruments for which it is practicable to estimate that value,
whether recognized or not recognized in the statement of financial position.
The Company adopted these amendments in the second quarter of
2009. See “NOTE 8:
FAIR VALUE MEASUREMENTS” for related disclosures.
Recently
Issued Accounting Pronouncements Not Yet Adopted:
In
November 2009, the FASB issued ASU 2009-17, “Consolidations (Topic 810) –
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities,” which codifies FASB Statement No. 167, “Amendments to FASB
Interpretation No. 46(R).” The ASU changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic
performance. These provisions are effective January 1, 2010, for a
calendar year-end entity, with early application not being
permitted. Adoption of these provisions is not expected to have a
material impact on the Company’s consolidated financial statements.
In
November 2009, the FASB issued ASU 2009-16, “Transfers and Servicing (Topic 860)
– Accounting for Transfers of Financial Assets,” which formally codifies FASB
Statement No. 166, “Accounting for Transfers of Financial
Assets.” ASU 2009-16 is a revision to SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,” and requires more information about transfers of financial assets,
including securitization transactions, and where entities have continuing
exposure to the risks related to transferred financial assets. It eliminates the
concept of a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets, and requires additional
disclosures. The provisions are effective January 1, 2010, for a
calendar year-end entity, with early application not being
permitted. Adoption of these provisions is not expected to have a
material impact on the Company’s consolidated financial statements.
In
September 2009, the FASB issued certain amendments as codified in ASC 605-25,
“Revenue Recognition; Multiple-Element Arrangements.” These
amendments provide clarification on whether multiple deliverables exist, how the
arrangement should be separated, and the consideration allocated. An
entity is required to allocate revenue in an arrangement using estimated selling
prices of deliverables in the absence of vendor-specific objective evidence or
third-party evidence of selling price. These amendments also eliminate the use
of the residual method and require an entity to allocate revenue using the
relative selling price method. The amendments significantly expand
the disclosure requirements for multiple-deliverable revenue
arrangements. These provisions are to be applied on a prospective
basis for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, with earlier application
permitted. The Company is currently evaluating the impact of these
amendments to its consolidated financial statements.
43
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
NOTE
2: ACCOUNTS RECEIVABLE
Accounts
receivable consist of the following:
|
December
31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
Trade
receivables
|
$ | 975 | $ | 5,499 | ||||
|
Other
|
326 | 114 | ||||||
|
Total
|
1,301 | 5,613 | ||||||
|
Less:
Allowance for doubtful accounts
|
(36 | ) | (38 | ) | ||||
|
Net
accounts receivable
|
$ | 1,265 | $ | 5,575 | ||||
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 62 of this report.
NOTE
3: INVENTORIES
Inventories
consist of the following:
|
December
31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
Raw
materials
|
$ | 13,149 | $ | 11,052 | ||||
|
Work
in process
|
4,578 | 5,095 | ||||||
|
Finished
goods
|
1,760 | 6,306 | ||||||
|
Total
inventories
|
$ | 19,487 | $ | 22,453 | ||||
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
|
2009
|
2008
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Land
|
N/A | $ | 657 | $ | 657 | |||||||
|
Buildings
|
20-39 | 16,923 | 16,912 | |||||||||
|
Operating
equipment and property
|
3-15 | 9,515 | 9,483 | |||||||||
|
Furniture
and fixtures
|
5-7 | 1,691 | 1,686 | |||||||||
|
Vehicles
|
3-5 | 6,155 | 6,183 | |||||||||
|
Gross
property, plant and equipment
|
34,941 | 34,921 | ||||||||||
|
Less:
accumulated depreciation
|
(21,631 | ) | (20,342 | ) | ||||||||
|
Net
property, plant and equipment
|
$ | 13,310 | $ | 14,579 | ||||||||
Depreciation
expense was $1,354,000 in 2009, $1,694,000 in 2008 and $1,950,000 in
2007.
44
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
NOTE
5: ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued
expenses and other liabilities consist of the following:
|
December
31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
Accrued
payroll and related expenses
|
$ | 514 | $ | 1,031 | ||||
|
Accrued
sales incentives and discounts
|
3,801 | 2,937 | ||||||
|
Accrued
warranty costs
|
2,403 | 3,567 | ||||||
|
Deferred
revenue
|
1,370 | 1,604 | ||||||
|
Due
to floor plan lenders for repurchased boats
|
— | 2,378 | ||||||
|
Other
|
623 | 764 | ||||||
|
Total
accrued expenses and other liabilities
|
$ | 8,711 | $ | 12,281 | ||||
NOTE
6: INCOME TAXES
The
following table lists the components of the provision for income
taxes:
|
Years
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Current
(benefit) provision:
|
||||||||||||
|
Federal
|
$ | (5,892 | ) | $ | 3,109 | $ | 7,806 | |||||
|
State
|
(61 | ) | 93 | 265 | ||||||||
|
Deferred
(benefit) provision:
|
||||||||||||
|
Federal
|
(802 | ) | 477 | 309 | ||||||||
|
State
|
(52 | ) | (46 | ) | 22 | |||||||
|
Total
income tax (benefit) provision
|
$ | (6,807 | ) | $ | 3,633 | $ | 8,402 | |||||
A
reconciliation between the federal statutory rate and Marine Products’ effective
tax rate is as follows:
|
Years
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Federal
statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
income taxes, net of federal benefit
|
0.3 | 0.7 | 0.7 | |||||||||
|
Tax-exempt
interest
|
3.1 | (7.0 | ) | (2.0 | ) | |||||||
|
Tax-exempt
gain/loss on SERP assets
|
1.2 | 5.5 | (0.1 | ) | ||||||||
|
Manufacturing
deduction
|
- | (1.2 | ) | (2.2 | ) | |||||||
|
Change
in state credits
|
1.9 | (2.2 | ) | (5.8 | ) | |||||||
|
Change
in valuation allowance
|
(2.3 | ) | 1.3 | 5.8 | ||||||||
|
Other
|
(0.3 | ) | 0.3 | 2.4 | ||||||||
|
Effective
tax rate
|
38.9 | % | 32.4 | % | 33.8 | % | ||||||
45
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Significant
components of the Company’s deferred tax assets and liabilities are as
follows:
|
December
31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Warranty
costs
|
$ | 853 | $ | 1,266 | ||||
|
Sales
incentives and discounts
|
1,069 | 579 | ||||||
|
Stock-based
compensation
|
834 | 763 | ||||||
|
Pension
|
2,020 | 1,891 | ||||||
|
All
others
|
195 | 298 | ||||||
|
State
credits
|
5,371 | 5,032 | ||||||
|
Valuation
Allowance
|
(5,339 | ) | (4,935 | ) | ||||
|
Total
deferred tax assets
|
5,003 | 4,894 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Depreciation
and amortization expense
|
(771 | ) | (844 | ) | ||||
|
Net
deferred tax assets
|
$ | 4,232 | $ | 4,050 | ||||
Total net
income tax (refunds) payments were $(2,406,000) in 2009, $3,714,000 in 2008 and
$7,718,000 in 2007. The Company includes a valuation allowance
against certain state credits based on an examination of these deferred tax
assets and the expectation that they will not 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.
The
Company’s policy is to record interest and penalties related to income tax
matters as income tax expense. Accrued interest and penalties were
immaterial as of December 31, 2009 and 2008.
During
2007 the Company adopted new accounting guidance relating to the accounting for
uncertainty in income tax reporting, which provided criteria for the
recognition, measurement, presentation and disclosure of uncertain tax
positions. As a result of the adoption the Company did not recognize
a material adjustment in the liability for unrecognized income tax
benefits.
As of
December 31, 2009 and 2008, our liability for unrecognized tax benefits was
$23,000 and $173,000, respectively, all of which would affect our effective rate
if recognized. The reductions identified during 2009 relate primarily
to the payment of state taxes under voluntary disclosure
agreements. A reconciliation of the beginning and ending amount of
unrecognized tax benefits for 2009 and 2008 are as follows:
|
(in
thousands)
|
2009
|
2008
|
|||||||
|
Balance
at the beginning of the year
|
$ | 173 | $ | 175 | |||||
|
Additions
based on tax positions related to current year
|
- | - | |||||||
|
Additions
for tax positions of prior years
|
- | 3 | |||||||
|
Reductions
for tax positions of prior years
|
(150 | ) | ( 5 | ) | |||||
|
Balance
at the end of the year
|
$ | 23 | $ | 173 | |||||
The
Company and its subsidiaries are subject to U.S. federal and state income tax in
multiple jurisdictions. In many cases our uncertain tax positions are
related to tax years that remain open and subject to examination by the relevant
taxing authorities. The Company’s 2006 through 2009 tax years remain
open to examination.
It is
reasonably possible that the amount of the unrecognized benefits with respect to
our unrecognized tax positions will increase or decrease in the next 12
months. These changes may be the result of, among other things, state
tax settlements under voluntary disclosure agreements. However,
quantification of an estimated range cannot be made at this time.
46
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
NOTE
7: ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Accumulated
other comprehensive (loss) income consists of the following:
|
Pension
Adjustment |
Unrealized
Gain
on
Securities
|
Total
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Balance
at December 31, 2007
|
$ | (211 | ) | $ | 261 | $ | 50 | |||||
|
Change
during 2008:
|
||||||||||||
|
Before-tax
amount
|
(2,085 | ) | 280 | (1,805 | ) | |||||||
|
Tax
benefit (provision)
|
740 | (99 | ) | 641 | ||||||||
|
Reclassification
adjustment, net of taxes
|
— | (275 | ) | (275 | ) | |||||||
|
Total
activity in 2008
|
(1,345 | ) | (94 | ) | (1,439 | ) | ||||||
|
Balance
at December 31, 2008
|
(1,556 | ) | 167 | (1,389 | ) | |||||||
|
Change
during 2009:
|
||||||||||||
|
Before-tax
amount
|
632 | 342 | 974 | |||||||||
|
Tax
provision
|
(224 | ) | (122 | ) | (346 | ) | ||||||
|
Reclassification
adjustment, net of taxes
|
— | (105 | ) | (105 | ) | |||||||
|
Total
activity in 2009
|
408 | 115 | 523 | |||||||||
|
Balance
at December 31, 2009
|
$ | (1,148 | ) | $ | 282 | $ | (866 | ) | ||||
NOTE
8: FAIR VALUE MEASUREMENTS
The
various inputs used to measure assets at fair value establish a hierarchy that
distinguishes between assumptions based on market data (observable inputs) and
the Company’s assumptions (unobservable inputs). The hierarchy
consists of three broad levels as follows:
|
1.
|
Level
1 – Quoted market prices in active markets for identical assets or
liabilities.
|
|
2.
|
Level
2 – Quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.
|
|
3.
|
Level
3 – Unobservable inputs developed using the Company’s estimates and
assumptions, which reflect those that market participants would
use.
|
The
following table summarizes the valuation of financial instruments measured at
fair value on a recurring basis on the balance sheet as of December 31, 2009 and
2008:
|
Fair
Value Measurements at December 31, 2009 with:
|
||||||||||||
|
(in
thousands)
|
Quoted
prices in
active markets for identical assets |
Significant
other
observable inputs |
Significant
unobservable inputs |
|||||||||
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||
|
Assets:
|
||||||||||||
|
Trading
securities
|
$ | - | $ | 4,450 | $ | - | ||||||
|
Available-for-sale
securities
|
- | 39,445 | - | |||||||||
|
Fair
Value Measurements at December 31, 2008 with:
|
||||||||||||
|
(in
thousands)
|
Quoted
prices in
active markets for identical assets |
Significant
other
observable inputs |
Significant
unobservable inputs |
|||||||||
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||
|
Assets:
|
||||||||||||
|
Trading
securities
|
$ | 3,742 | $ | - | $ | - | ||||||
|
Available-for-sale
securities
|
46,752 | - | - | |||||||||
47
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
During
fiscal year 2009, significant observable inputs in addition to quoted market
prices were used to value trading securities. As a result, the Company
classified these investments as using Level 2 inputs. Also during fiscal
year 2009, due to market disruptions that led to decreased availability of
quoted prices for identical assets, the Company classified available-for-sale
securities as using Level 2 inputs.
The carrying amount of
other financial instruments reported in the balance sheet for current assets and
current liabilities approximate their fair values because of the short-term
maturity of these instruments. The
Company currently does not use the fair value option to measure any of its
existing financial instruments and has not determined whether or not it will
elect this option for financial instruments it may acquire in the
future.
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 floor plan lenders to guarantee varying amounts of
qualifying dealers’ debt obligations. The Company’s obligation
under these guarantees becomes effective in the case of a default under the
financing arrangement between the dealer and the third party
lender. The agreements provide for the return of repossessed boats to
the Company in new and unused condition subject to normal wear and tear as
defined, in exchange for the Company’s assumption of specified percentages of
the debt obligation on those boats, up to certain contractually determined
dollar limits by lender.
As a result of dealer
defaults, the Company became contractually obligated to repurchase inventory for
approximately $2.6 million during the fourth quarter of 2008 and approximately
$6.3 million during 2009. The amount payable to floor plan
lenders for inventory repurchases was $2.4 million as of December 31, 2008;
there was no amount payable as of December 31, 2009. As of December
31, 2009, there were no repossessed boats remaining in inventory as the
Company redistributed all of these boats among existing and replacement
dealers. During 2009, the Company recorded costs of approximately
$0.7 million as a reduction of net sales in connection with these
repurchases, including the write down of repurchased inventory to net
realizable value.
Management
continues to monitor the risk of additional defaults and resulting repurchase
obligations based in part on information provided by the third-party floor plan
lenders and will adjust the guarantee liability at the end of each reporting
period based on information reasonably available at that
time. During 2009, the fair value of the remaining guarantee
liability was reduced by approximately $200 thousand to $50
thousand.
During
the third quarter of 2009, an amendment to the current agreement with one of its
lenders was executed with a contractual repurchase limit of $9.0 million
effective January 1, 2009 with an expiration date of June 30,
2010. The Company has contractual repurchase agreements with
additional lenders with an aggregate maximum repurchase obligation of
approximately $3.2 million with expiration dates from June 30, 2010 to December
31, 2010. As of December 31, 2009, the Company has an aggregate
remaining repurchase obligation of $5.5 million, although for business reasons,
the Company may decide to purchase additional boats in excess of this
contractual obligation.
Lease
Obligations — 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 $1,016,000 with accumulated depreciation of approximately $246,000 as
of December 31, 2009. A liability equal to the estimated present value of the
remaining lease obligation totaling $294,000 as of December 31, 2009 is included
in other long-term liabilities on the consolidated balance
sheet. During the fourth quarter of 2008, this facility in Valdosta,
Georgia was temporarily idled and production of these boats was moved to the
Nashville, Georgia facility. There are no plans or current intentions
to dispose of this facility.
48
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Minimum
annual operating lease obligations with terms in excess of one year, in effect
at December 31, 2009, are summarized in the following table:
|
(in
thousands)
|
||||
|
2010
|
$ | 155,868 | ||
|
2011
|
155,868 | |||
|
2012
|
161,748 | |||
|
2013
|
142,687 | |||
|
2014
|
141,972 | |||
|
Thereafter
|
572,400 | |||
|
Total
rental commitments
|
$ | 1,330,543 | ||
Total
rent expense charged to operations was approximately $117,000 in 2009, $112,000
in 2008 and $119,000 in 2007.
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 included the
Company’s estimated liabilities for these probable assessments and totaled
approximately $58,000 as of December 31, 2009 and $226,000 as of December 31,
2008.
Employment
Agreements — The Company has agreements with two employees, which provide
for a monthly payment to each of the employees equal to 10 percent of profits
(defined as pretax income before goodwill adjustments and certain allocated
corporate expenses) in addition to a base salary. The expense paid
under these argeements totaled approximately $283,000 in 2009, $3,519,000
in 2008 and $6,933,000 in 2007 and is included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
NOTE
10: EMPLOYEE BENEFIT PLANS
Retirement
Income 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. 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 were made over a
seven year period which ended in 2008 to either the non-qualified 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 $94,000 in 2008 and $127,000 in 2007.
The
Company permits selected highly compensated employees to defer a portion of
their compensation into the SERP. The SERP assets are marked to
market and as of December 31, 2009 and 2008 totaled approximately $4,450,000 and
$3,742,000. The SERP assets are reported in other assets on the
consolidated balance sheets and changes related to the fair value of the assets
are included in selling, general and administrative expenses in the consolidated
statements of operations for 2009, 2008 and 2007. Trading gains
(losses) related to the SERP assets totaled $598,000 in 2009, $(1,729,000) in
2008, and $73,000 in 2007. 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 selling, general and
administrative expenses in the consolidated statements of
operations.
The Company’s projected
benefit obligation exceeded the fair value of the plan assets for its Retirement
Income Plan by $381,000 and thus the plan was under-funded as of December 31,
2009. The
following table sets forth the funded status of the Retirement Income Plan and
the amounts recognized in Marine Products’ consolidated balance
sheets:
49
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
|
December
31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
ACCUMULATED
BENEFIT OBLIGATION, END OF YEAR
|
$ | 4,746 | $ | 4,656 | ||||
|
CHANGE
IN PROJECTED BENEFIT OBLIGATION:
|
||||||||
|
Benefit
obligation at beginning of year
|
$ | 4,656 | $ | 4,385 | ||||
|
Service
cost
|
— | — | ||||||
|
Interest
cost
|
282 | 281 | ||||||
|
Actuarial
(gain) loss
|
49 | 196 | ||||||
|
Benefits
paid
|
(241 | ) | (206 | ) | ||||
|
Projected
benefit obligation at end of year
|
$ | 4,746 | $ | 4,656 | ||||
|
CHANGE
IN PLAN ASSETS:
|
||||||||
|
Fair
value of plan assets at beginning of year
|
$ | 3,895 | $ | 5,554 | ||||
|
Actual
return on plan assets
|
711 | (1,453 | ) | |||||
|
Employer
contributions
|
— | — | ||||||
|
Benefits
paid
|
(241 | ) | (206 | ) | ||||
|
Fair
value of plan assets at end of year
|
$ | 4,365 | $ | 3,895 | ||||
|
Funded
status at end of year
|
$ | (381 | ) | $ | (761 | ) | ||
|
December
31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
AMOUNTS
RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF:
|
||||||||
|
Noncurrent
assets
|
$ | — | $ | — | ||||
|
Current
liabilities
|
— | — | ||||||
|
Noncurrent
liabilities
|
(381 | ) | (761 | ) | ||||
| $ | (381 | ) | $ | (761 | ) | |||
The
funded status of the Retirement Income Plan was recorded in the consolidated
balance sheets in long-term pension liabilities as of December 31, 2009 and
2008.
|
December
31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
AMOUNTS
(PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
CONSIST OF:
|
||||||||
|
Net
loss (gain)
|
$ | 1,781 | $ | 2,412 | ||||
|
Prior
service cost (credit)
|
— | — | ||||||
|
Net
transition obligation (asset)
|
— | — | ||||||
| $ | 1,781 | $ | 2,412 | |||||
The
accumulated benefit obligation for the Retirement Income Plan at December 31,
2009 and 2008 has been disclosed above. The Company uses a December 31
measurement date for this qualified plan.
50
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Amounts
recognized in the consolidated balance sheet under pension liabilities consist
of:
|
December
31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
SERP
employer contributions/employee deferrals
|
$ | (5,308 | ) | $ | (4,524 | ) | ||
|
Long-term
pension liability
|
(381 | ) | (761 | ) | ||||
| $ | (5,689 | ) | $ | (5,285 | ) | |||
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. There were no contributions made to this plan in 2009 and
2008.
The
components of net periodic benefit cost are summarized as follows:
|
Years
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Service
cost for benefits earned during the period
|
$ | — | $ | — | $ | — | ||||||
|
Interest
cost on projected benefit obligation
|
282 | 280 | 257 | |||||||||
|
Expected
return on plan assets
|
(265 | ) | (436 | ) | (398 | ) | ||||||
|
Amortization
of net (gain) loss
|
235 | — | 81 | |||||||||
| $ | 252 | $ | (156 | ) | $ | (60 | ) | |||||
The
Company recognized pre-tax decreases (increases) to the funded status in
comprehensive income of $(632,000) in 2009, $2,085,000 in 2008 and $(738,000) in
2007. There were no previously unrecognized prior service costs
during 2009, 2008 and 2007. The pre-tax amounts recognized in
comprehensive income for the years ended December 31, 2009, 2008 and 2007 are
summarized as follows:
|
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Net
(gain) loss
|
$ | (397 | ) | $ | 2,085 | $ | (657 | ) | ||||
|
Amortization
of net (loss) gain
|
(235 | ) | — | (81 | ) | |||||||
|
Net
transition obligation (asset)
|
— | — | — | |||||||||
|
Amount
recognized in other comprehensive income
|
$ | (632 | ) | $ | 2,085 | $ | (738 | ) | ||||
The
amounts in accumulated other comprehensive income expected to be recognized as
components of net periodic benefit cost in 2010 are as follows:
|
(in
thousands)
|
2010
|
|||
|
Amortization
of net loss (gain)
|
$ | 38 | ||
|
Prior
service cost (credit)
|
— | |||
|
Net
transition obligation (asset)
|
— | |||
|
Estimated
net periodic cost
|
$ | 38 | ||
51
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
The
weighted average assumptions as of December 31 used to determine the projected
benefit obligation and net benefit cost were as follows:
|
December
31,
|
2009
|
2008
|
2007
|
|||||||||
|
PROJECTED
BENEFIT OBLIGATION:
|
||||||||||||
|
Discount
rate
|
6.05 | % | 6.43 | % | 6.25 | % | ||||||
|
Rate
of compensation increase
|
N/A | N/A | N/A | |||||||||
|
NET
BENEFIT COST:
|
||||||||||||
|
Discount
rate
|
6.43 | % | 6.25 | % | 5.75 | % | ||||||
|
Expected
return on plan assets
|
7.00 | % | 8.00 | % | 8.00 | % | ||||||
|
Rate
of compensation increase
|
N/A | 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 seven percent is
reasonable.
The
plan’s weighted average asset allocation at December 31, 2009 and 2008 by asset
category along with the target allocation for 2010 are as follows:
|
Asset
Category
|
Target
Allocation
for
2010
|
Percentage
of
Plan
Assets as of
December
31,
2009
|
Percentage
of
Plan
Assets as of
December
31,
2008
|
|||||||||
|
Debt
Securities – Core Fixed Income
|
27.0 | % | 26.2 | % | 14.0 | % | ||||||
|
Tactical
– Fund of Equity and Debt Securities
|
5.0 | 5.2 | 4.3 | |||||||||
|
Domestic
Equity Securities
|
32.5 | 25.0 | 22.7 | |||||||||
|
Global
Equity Securities
|
2.5 | 4.4 | 3.6 | |||||||||
|
International
Equity Securities
|
8.0 | 13.8 | 11.2 | |||||||||
|
Real
Estate
|
5.0 | 4.2 | 7.7 | |||||||||
|
Other
|
20.0 | 21.2 | 36.5 | |||||||||
|
Total
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
The
Company’s overall investment strategy is to achieve a mix of approximately 70
percent of investments for long-term growth and 30 percent for near-term benefit
payments, with a wide diversification of asset types, fund strategies and fund
managers. Equity securities primarily include investments
in large-cap and mid-cap companies. Fixed-income securities include
corporate bonds of companies in diversified securities, mortgage-backed
securities, and U.S. Treasuries. Other types of investments include
hedge funds and private equity funds that follow several different investment
strategies. For each of the asset categories in the pension plan, the
investment strategy is identical – maximize the long-term rate of return on plan
assets with an acceptable level of risk in order to minimize the cost of
providing pension benefits. The investment policy establishes a target
allocation for each asset class which is rebalanced as required.
Some of
our assets, primarily our private equity, real estate and hedge funds, do not
have readily determinable market values given the specific investment structures
involved and the nature of the underlying investments. For the December 31,
2009 plan asset reporting, publicly traded asset pricing was used where
possible. For assets without readily determinable values, estimates were derived
from investment manager discussions focusing on underlying fundamentals and
significant events.
The
following table presents our plan assets using the fair value hierarchy as of
December 31, 2009. The fair value hierarchy has three levels based on the
reliability of the inputs used to determine fair value. See Note 8
for a brief description of the three levels under the fair value
hierarchy.
52
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
|
Investments
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||
|
Cash
and Cash Equivalents
|
(1)
|
$
|
165
|
$
|
165
|
$
|
—
|
$
|
—
|
|
Fixed
Income Securities
|
(2)
|
1,143
|
—
|
1,143
|
—
|
||||
|
Domestic
Equity Securities
|
1,092
|
1,092
|
—
|
—
|
|||||
|
Global
Equity Securities
|
(3)
|
190
|
—
|
190
|
—
|
||||
|
International
Equity Securities
|
(3)
|
602
|
258
|
344
|
—
|
||||
|
Real
Estate
|
(4)
|
182
|
—
|
—
|
182
|
||||
|
Hedge
Funds
|
(5)
|
991
|
—
|
228
|
763
|
||||
|
$
|
4,365
|
$
|
1,515
|
$
|
1,905
|
$
|
945
|
|
(1)
|
Cash
and cash equivalents, which are used to pay benefits and plan
administrative expenses, are held in Rule 2a-7 money market
funds.
|
|
(2)
|
Fixed
income securities are primarily valued using a market approach with inputs
that include broker quotes, benchmark yields, base spreads and reported
trades.
|
|
(3)
|
Global
equity securities and certain international securities are valued using a
market approach based on the quoted market prices of similar instruments
in their respective markets.
|
|
(4)
|
Real
estate fund values are primarily reported by the fund manager and are
based on valuation of the underlying investments, which include inputs
such as cost, discounted future cash flows, independent appraisals and
market based comparable data.
|
|
(5)
|
Hedge
funds consist of fund-of-fund LLC or commingled fund structures. The LLCs
are primarily valued based on Net Asset Values [NAVs] calculated by the
fund and are not publicly available. Liquidity for the LLCs is monthly and
is subject to liquidity of the underlying funds. The commingled fund NAV
is calculated by the manager on a daily basis and has monthly
liquidity.
|
The
following table presents a reconciliation of Level 3 assets held during the year
ended December 31, 2009:
|
Investments
|
Balance
at
December 31, 2008 |
Net
Realized and
Unrealized Gains/(Losses) |
Net
Purchases,
Issuances and Settlements |
Net
Transfers
In to (Out of) Level 3 |
Balance
at
December 31, 2009 |
|||||||||||||||
|
Real
Estate
|
$ | 302 | $ | (63 | ) | $ | (57 | ) | $ | - | $ | 182 | ||||||||
|
Hedge
Funds
|
720 | 43 | - | - | 763 | |||||||||||||||
| $ | 1,022 | $ | (20 | ) | $ | (57 | ) | $ | - | $ | 945 | |||||||||
The Company expects to
contribute approximately $22,000 to the Retirement Income Plan in
2010.
The
Company estimates that the future benefits payable for the Retirement Income
Plan over the next ten years are as follows:
|
(in
thousands)
|
||||
|
2010
|
$ | 226 | ||
|
2011
|
241 | |||
|
2012
|
255 | |||
|
2013
|
269 | |||
|
2014
|
273 | |||
|
2015-2019
|
1,427 | |||
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 90 days 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
$101,000 in 2009, $204,000 in 2008 and $221,000 in 2007.
53
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Stock
Incentive Plan— The Company has granted various awards to employees under
two stock incentive plans (the “Plans”) that were approved by the stockholders
in 2001 and 2004. The Company reserved a total of 5,250,000 shares of
common stock under both Plans, each of which expires 10 years from
approval. The 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, 2009, shares
totaling 1,472,000 were available for grants. The Company issues new
shares from its authorized but unissued share pool.
The
Company recognizes compensation expense for the unvested portion of awards
outstanding over the remainder of the service period. The
compensation cost recorded for these awards will be based on their fair value at
grant date less the cost of estimated forfeitures. Forfeitures are
estimated at the time of grant and revised, if necessary, in subsequent periods
to reflect actual forfeitures. Cash flows related to share-based
awards to employees that result in tax benefits in excess of recognized
cumulative compensation cost (excess tax benefits) are classified as financing
cash flows.
Pre-tax
stock-based employee compensation expense was approximately $1,645,000
($1,071,000 after tax) for 2009, $1,440,000 ($963,000 after tax) for 2008 and
$1,524,000 ($1,070,000 after tax) for 2007.
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.
The
Company estimates the fair value of stock options as of the date of grant using
the Black-Scholes option pricing model. The Company has not granted
stock options to employees since 2004. Transactions involving the
Marine Products stock options for the year ended December 31, 2009 were as
follows:
|
Shares
|
Weighted
Average
Exercise Price |
Weighted
Average
Remaining Contractual Life |
Aggregate
Intrinsic
Value |
|||||||||||||
|
Outstanding
at January 1, 2009
|
990,172 | $ | 2.88 |
2.5
years
|
||||||||||||
|
Granted
|
- | - | N/A | |||||||||||||
|
Exercised
|
(283,455 | ) | 0.64 | N/A | ||||||||||||
|
Forfeited
|
(19,425 | ) | 6.90 | N/A | ||||||||||||
|
Expired
|
- | - |
N/A
|
|||||||||||||
|
Outstanding
and exercisable at December 31, 2009
|
687,292 | $ | 3.70 |
2.4
years
|
$ | 845,000 | ||||||||||
The total
intrinsic value of share options exercised was approximately $994,000 in 2009,
$3,542,000 in 2008 and $2,243,000 in 2007. Tax benefits associated
with the exercise of non-qualified stock options were approximately $256,000
during 2009 and $468,000 during 2008. There were no tax benefits
associated with the exercise of stock options during 2007, because all of the
options exercised were incentive stock options which do not generate tax
deductions for the Company.
Restricted
Stock— Marine Products has granted employees two forms of restricted
stock; time lapse restricted and performance restricted. Time lapse restricted
shares vest after a certain stipulated number of years from the grant date,
depending on the terms of the issue. Prior to 2004, the Company
issued time lapse restricted shares that vest over ten
years. Beginning in 2004, the Company 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 shares. The performance restricted
shares are granted, but not earned and issued, until certain five-year tiered
performance criteria are met. The performance criteria are
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.
54
Notes
to Consolidated Financial Statements
Marine
Products Corporation and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
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 stock plans have lapsed. Upon termination of employment
from the Company (other than due to death, disability or retirement on or after
age 65), shares with restrictions must be returned to the Company.
The
following is a summary of the changes in non-vested restricted shares for the
year ended December 31, 2009:
|
Shares
|
Weighted
Average
Grant-Date Fair Value |
||||||||
|
Non-vested
shares at January 1, 2009
|
600,700 | $ | 9.93 | ||||||
|
Granted
|
353,500 | 4.26 | |||||||
|
Vested
|
(135,450 | ) | 10.39 | ||||||
|
Forfeited
|
(21,300 | ) | 6.67 | ||||||
|
Non-vested
shares at December 31, 2009
|
797,450 | $ | 7.38 | ||||||
The fair
value of restricted stock awards is based on the market price of the Company’s
stock on the date of grant and is amortized to compensation expense on a
straight line basis over the requisite service period. The weighted
average grant date fair value of these restricted stock awards was $4.26 in
2009, $7.08 in 2008 and $9.54 in 2007. The total fair value of shares
vested was approximately $666,000 in 2009, $1,239,000 during 2008 and $2,094,000
during 2007. The tax benefits for compensation tax deductions in
excess of compensation expense related to restricted shares was credited to
capital in excess of par value aggregating $197,000 in 2009, $154,000 in 2008
and $431,000 in 2007. The excess tax deductions are classified as
financing cash flows.
Other
Information— As of December 31, 2009 total unrecognized compensation cost
related to non-vested restricted shares was approximately $4,307,000 which is
expected to be recognized over a weighted-average period of 3.9
years.
The
Company received cash from options exercised of $24,000 in 2009, $38,000 in 2008
and $135,000 in 2007. These cash receipts are classified as financing
cash flows in the accompanying consolidated statements of cash
flows. The fair value of shares tendered to exercise employee stock
options totaled approximately $157,000 in 2009, $2,152,000 in 2008 and $288,000
in 2007 and have been excluded from the consolidated statements of cash
flows.
NOTE
11: 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 $713,000 in 2009, $842,000 in 2008 and $957,000 in
2007. The Company’s liability to RPC for these services as of December 31, 2009
and 2008 was approximately $65,000 and $70,000. The Company’s
directors are also directors of RPC and all of the Company’s executive officers
with the exception of one are employees of both the Company and
RPC.
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.
A group
that includes the Company’s Chairman of the Board, R. Randall Rollins and his
brother Gary W. Rollins, who is also director of the Company, and certain
companies under their control, controls in excess of fifty percent of the
Company’s voting power.
55
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item
9A (T). 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, 2009 (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. As
described below under Management’s Report on Internal Control Over Financial
Reporting, we have identified a material weakness in our internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)). Our Chief Executive Officer and Chief Financial Officer have
concluded that as a result of this material weakness in accounting for certain
dealer incentive costs, as of the end of the period covered by this Annual
Report on Form 10-K, our disclosure controls and procedures were not
effective.
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 30 of this report. Grant Thornton LLP, the Company’s
independent registered public accounting firm, has audited the effectiveness of
internal control as of December 31, 2009 and issued a report thereon which is
included on page 31 of this report.
Changes
in internal control over financial reporting— Except as described in
management’s report on 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.
56
PART
III
Item
10. Directors, Executive Officers and Corporate Governance
Information
concerning directors and executive officers will be included in the Marine
Products Proxy Statement for its 2010 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 16 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 2010
Annual Meeting of Stockholders, in the section titled “Corporate Governance and
Board of Directors, Committees and Meetings – Audit Committee.” 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 Code of Business Conduct and Ethics for Directors
and Executive Officers and Related Party Transaction Policy. 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, 2801 Buford Highway, Suite 520, Atlanta,
Georgia 30329. Marine Products intends to satisfy the disclosure
requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from,
a provision of its code of ethics that relates to any elements of the code of
ethics definition enumerated in SEC rules by posting such information on its
internet website, the address of which is provided above.
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 2010 Annual Meeting of Stockholders, which is
incorporated herein by reference.
Item
11. Executive Compensation
Information
concerning director and executive compensation will be included in the Marine
Products Proxy Statement for its 2010 Annual Meeting of Stockholders, in the
sections titled “Compensation Committee Interlocks and Insider Participation,”
“Director Compensation,” “Compensation Discussion and Analysis,” “Compensation
Committee Report,” and “Executive Compensation.” This information is
incorporated herein by reference.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information
concerning security ownership will be included in the Marine Products Proxy
Statement for its 2010 Annual Meeting of Stockholders, in the sections titled,
“Capital Stock” and “Election of Directors.” This information is incorporated
herein by reference.
57
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth certain information regarding equity compensation
plans as of December 31, 2009.
|
Plan
Category
|
(A)
Number
of Securities To
Be Issued Upon Exercise of Outstanding Options, Warrants and Rights |
(B)
Weighted
Average
Exercise Price of Outstanding Options, Warrants and Rights |
(C)
Number
of Securities
Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (A)) |
|
Equity
compensation plans approved by securityholders
|
687,292
|
$3.70
|
1,471,503(1)
|
|
Equity
compensation plans not approved by securityholders
|
-
|
-
|
-
|
|
Total
|
687,292
|
$3.70
|
1,471,503
|
|
(1)
|
All
of the securities can be issued in the form of restricted stock or other
stock awards.
|
See “NOTE
10: EMPLOYEE BENEFIT PLANS” to the Consolidated Financial Statements for
information regarding the material terms of the equity compensation
plans.
Item
13. Certain Relationships and Related Transactions, and Director
Independence
Information
concerning certain relationships and related party transactions will be included
in the Marine Products Proxy Statement for its 2010 Annual Meeting of
Stockholders, in the section titled “Certain Relationships and Related Party
Transactions.” Information regarding director independence will be included in
the Marine Products Proxy Statement for its 2010 Annual Meeting of Stockholders
in the section titled “Director Independence and NYSE
Requirements.” 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 Registered Public Accountants” in the Marine Products Proxy
Statement for its 2010 Annual Meeting of Stockholders. This information is
incorporated herein by reference.
58
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
|
Marine
Products Corporation 2004 Stock Incentive Plan (incorporated herein by
reference to Appendix B to the Definitive Proxy Statement filed on March
24, 2004).
|
|
|
10.7
|
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).
|
|
|
10.8
|
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).
|
|
|
10.9
|
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).
|
|
|
10.10
|
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).
|
|
|
10.11
|
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).
|
|
|
10.12
|
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).
|
|
|
10.13
|
Supplemental
Retirement Plan (incorporated herein by reference to Exhibit 10.16 to the
Form 10-K filed on March 15,
2005).
|
|
|
10.14
|
First
Amendment to 2001 Employee Stock Incentive Plan and 2004 Stock Incentive
Plan (incorporated by reference to Exhibit 10.19 to the Form 10-K filed on
March 2, 2007).
|
|
|
10.15
|
Summary
of ‘At-Will’ compensation arrangements with the Executive Officers as of
February 28, 2008 (incorporated herein by reference to Exhibit 10.20 to
the Form 10-K filed on March 4,
2008).
|
|
|
10.16
|
Summary
of Compensation Arrangements with Non-Employee Directors as of February
28, 2008 (incorporated herein by reference to Exhibit 10.21 to the Form
8-K filed on March 4, 2008).
|
|
|
10.17
|
Performance
Based Compensation Agreement between James A. Lane, Jr. and Chaparral
Boats, Inc. (incorporated herein by reference to Exhibit 10.1 to the Form
8-K filed on April 25, 2008).
|
|
|
10.18
|
Summary
of ‘At-Will’ compensation arrangements with the Executive Officers as of
February 28, 2009 (incorporated herein by reference to Exhibit
10.20 to the Form 10-K filed on March 5,
2009).
|
59
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 3.1 to the Form 8-K filed on October 25, 2007).
|
|
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
|
Marine
Products Corporation 2004 Stock Incentive Plan (incorporated herein by
reference to Appendix B to the Definitive Proxy Statement filed on March
24, 2004).
|
|
10.7
|
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).
|
|
10.8
|
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).
|
|
10.9
|
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).
|
|
10.10
|
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).
|
|
10.11
|
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).
|
|
10.12
|
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).
|
|
10.13
|
Supplemental
Retirement Plan (incorporated herein by reference to Exhibit 10.16 to the
Form 10-K filed on March 15, 2005).
|
|
10.14
|
First
Amendment to 2001 Employee Stock Incentive Plan and 2004 Stock Incentive
Plan (incorporated herein by reference to Exhibit 10.19 to the Form 10-K
filed on March 2, 2007).
|
|
10.15
|
Summary
of ‘At-Will’ compensation arrangements with the Executive Officers as of
February 28, 2008 (incorporated herein by reference to Exhibit 10.20 to
the Form 10-K filed on March 4, 2008).
|
|
10.16
|
Summary
of Compensation Arrangements with Non-Employee Directors as of February
28, 2008 (incorporated herein by reference to Exhibit 10.21 to the Form
10-K filed on March 4, 2008).
|
|
10.17
|
Performance
Based Compensation Agreement between James A. Lane, Jr. and Chaparral
Boats, Inc. (incorporated herein by reference to Exhibit 10.1 to the Form
8-K filed on April 25, 2008).
|
|
10.18
|
Summary
of ‘At-Will’ compensation arrangements with the Executive Officers as of
February 28, 2009 (incorporated herein by reference to Exhibit
10.20 to the Form 10-K filed on March 5, 2009).
|
|
21
|
Subsidiaries
of Marine Products Corporation (incorporated herein by reference to
Exhibit 21 to the Form 10-K filed on March 4, 2008).
|
|
23
|
Consent
of Grant Thornton 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.
60
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
10, 2010
|
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
|
|
President
and Chief Executive Officer
|
March
10, 2010
|
|
Richard
A. Hubbell
|
|
(Principal
Executive Officer)
|
|
| /s/ Ben M. Palmer |
|
Chief
Financial Officer
|
March
10, 2010
|
|
Ben
M. Palmer
|
|
(Principal
Financial and Accounting
Officer) |
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
A. Lane, Jr., Director
|
|
Wilton
Looney, Director
|
Linda
H. Graham, Director
|
|
Gary
W. Rollins, Director
|
Bill
J. Dismuke, Director
|
|
Henry
B. Tippie, Director
|
Larry
L. Prince, Director
|
|
James
B. Williams, Director
|
/s/
Richard A. Hubbell
Richard
A. Hubbell
Director
and as Attorney-in-fact
March
10, 2010
61
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
|
30
|
|
Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting
|
31
|
|
Report
of Independent Registered Public Accounting Firm on Consolidated Financial
Statements
|
32
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
33
|
|
Consolidated
Statements of Operations for the three years ended December 31,
2009
|
34
|
|
Consolidated
Statements of Stockholders’ Equity for the three years ended December 31,
2009
|
35
|
|
Consolidated
Statements of Cash Flows for the three years ended December 31,
2009
|
36
|
|
Notes
to Consolidated Financial Statements
|
37-55
|
|
SCHEDULE
|
|
|
Schedule
II — Valuation and Qualifying Accounts
|
62
|
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, 2009, 2008 and 2007
|
||||||||||||||||
|
Description
|
Balance
at
Beginning
of
Period
|
Charged
to
Costs
and
Expenses
|
Net
(Write-Offs)/
Recoveries
|
Balance
at
End of
Period
|
||||||||||||
|
Year
ended December 31, 2009
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 38 | $ | — | $ | (2 | ) | $ | 36 | |||||||
|
Deferred
tax asset valuation allowance
|
$ | 4,935 | $ | 404 | $ | — | $ | 5,339 | ||||||||
|
Year
ended December 31, 2008
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 41 | $ | — | $ | (3 | ) | $ | 38 | |||||||
|
Deferred
tax asset valuation allowance
|
$ | 4,790 | $ | 145 | $ | — | $ | 4,935 | ||||||||
|
Year
ended December 31, 2007
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 52 | $ | — | $ | (11 | ) | $ | 41 | |||||||
|
Deferred
tax asset valuation allowance
|
$ | 3,339 | $ | 1,451 | $ | — | $ | 4,790 | ||||||||
|
/s/
Richard A. Hubbell
|
||
|
Date: March
10, 2010
|
Richard
A. Hubbell
|
|
|
President
and Chief Executive Officer
|
||
|
(Principal
Executive Officer)
|
||
62
SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
(in
thousands except per share data)
|
||||||||||||||||
|
2009
|
||||||||||||||||
|
Net
sales
|
$ | 13,250 | $ | 8,188 | $ | 7,011 | $ | 10,990 | ||||||||
|
Gross
(loss) profit
|
(614 | ) | (3,968 | ) | (585 | ) | (1,390 | ) | ||||||||
|
Net
loss
|
(2,486 | ) | (3,835 | ) | (1,608 | ) | (2,764 | ) | ||||||||
|
Loss per share —
basic (a)
|
(0.07 | ) | (0.11 | ) | (0.04 | ) | (0.08 | ) | ||||||||
|
Loss per share —
diluted (a)
|
$ | (0.07 | ) | $ | (0.11 | ) | $ | (0.04 | ) | $ | (0.08 | ) | ||||
|
2008
|
||||||||||||||||
|
Net
sales
|
$ | 65,542 | $ | 55,734 | $ | 31,582 | $ | 22,764 | ||||||||
|
Gross
profit
|
13,464 | 11,027 | 5,104 | 2,350 | ||||||||||||
|
Net
income (loss)
|
4,132 | 3,896 | 684 | (1,126 | ) | |||||||||||
|
Earnings (loss) per
share — basic (a)
|
0.12 | 0.11 | 0.02 | (0.03 | ) | |||||||||||
|
Earnings (loss) per
share — diluted (a)
|
$ | 0.11 | $ | 0.11 | $ | 0.02 | $ | (0.03 | ) | |||||||
|
(a)
|
The
sum of the (loss) earnings per share for the four quarters may differ from
annual amounts due to the required method of computing the weighted
average shares in interim periods.
|
63