MARINE PRODUCTS CORP - Quarter Report: 2010 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the quarterly period ended June 30, 2010
Commission
File No. 1-16263
MARINE
PRODUCTS CORPORATION
(exact
name of registrant as specified in its charter)
| Delaware | 58-2572419 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
2801
Buford Highway, Suite 520, Atlanta, Georgia 30329
(Address
of principal executive offices) (zip code)
Registrant’s telephone
number, including area code -- (404)
321-7910
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes o No o
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.
|
Large
accelerated filer
|
o
|
Accelerated
filer
|
o
|
|
Non-accelerated
filer
|
o (Do
not check if smaller reporting company)
|
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
As of
July 29, 2010 Marine Products Corporation had 37,086,514 shares of common stock
outstanding.
Marine
Products Corporation
Table of
Contents
|
|
Page
No. |
|
| Part I. Financial Information | ||
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
Consolidated
Balance Sheets – As of June 30, 2010 and December 31, 2009
|
3
|
|
|
Consolidated
Statements of Operations – for the three months and six months ended June
30, 2010 and 2009
|
4
|
|
|
Consolidated
Statement of Stockholders’ Equity – for the six months ended June 30,
2010
|
5
|
|
|
Consolidated
Statements of Cash Flows – for the six months ended June 30, 2010 and
2009
|
6
|
|
|
Notes
to Consolidated Financial Statements
|
7-18
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
19-28
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
29
|
|
Item
4.
|
Controls
and Procedures
|
30
|
|
Part
II. Other Information
|
||
|
Item
1.
|
Legal
Proceedings
|
31
|
|
Item
1A.
|
Risk
Factors
|
31
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
31
|
|
Item
3.
|
Defaults
upon Senior Securities
|
31
|
|
Item
4.
|
Removed
and Reserved
|
31
|
|
Item
5.
|
Other
Information
|
31
|
|
Item
6.
|
Exhibits
|
32
|
|
Signatures
|
33
|
|
2
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
PART
I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS, AS RESTATED
CONSOLIDATED
BALANCE SHEETS
AS OF
JUNE 30, 2010 AND DECEMBER 31, 2009
(In
thousands)
(Unaudited)
|
June
30,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
|
(Note
1)
|
|||||||
|
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 8,961 | $ | 2,573 | ||||
|
Marketable
securities
|
15,476 | 23,328 | ||||||
|
Accounts
receivable, net
|
2,445 | 1,265 | ||||||
|
Inventories
|
25,958 | 19,487 | ||||||
|
Income
taxes receivable
|
- | 6,304 | ||||||
|
Deferred
income taxes
|
1,192 | 1,008 | ||||||
|
Prepaid
expenses and other current assets
|
1,196 | 2,783 | ||||||
|
Total
current assets
|
55,228 | 56,748 | ||||||
|
Property,
plant and equipment, net
|
12,811 | 13,310 | ||||||
|
Goodwill
|
3,308 | 3,308 | ||||||
|
Other
intangibles, net
|
465 | 465 | ||||||
|
Marketable
securities
|
25,595 | 16,117 | ||||||
|
Deferred
income taxes
|
3,521 | 3,224 | ||||||
|
Other
assets
|
4,960 | 5,077 | ||||||
|
Total
assets
|
$ | 105,888 | $ | 98,249 | ||||
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
||||||||
|
Accounts
payable
|
$ | 5,149 | $ | 1,972 | ||||
|
Accrued
expenses and other liabilities
|
10,882 | 8,711 | ||||||
|
Total
current liabilities
|
16,031 | 10,683 | ||||||
|
Pension
liabilities
|
5,108 | 5,689 | ||||||
|
Other
long-term liabilities
|
400 | 365 | ||||||
|
Total
liabilities
|
21,539 | 16,737 | ||||||
|
Common
stock
|
3,709 | 3,688 | ||||||
|
Capital
in excess of par value
|
- | - | ||||||
|
Retained
earnings
|
81,398 | 78,690 | ||||||
|
Accumulated
other comprehensive loss
|
(758 | ) | (866 | ) | ||||
|
Total
stockholders’
equity
|
84,349 | 81,512 | ||||||
|
Total
liabilities and stockholders’
equity
|
$ | 105,888 | $ | 98,249 | ||||
The
accompanying notes are an integral part of these consolidated
statements.
3
MARINE
PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(In
thousands except per share data)
(Unaudited)
|
Three
months ended June 30,
|
Six
months ended June 30,
|
|||||||||||||||
|
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
Net
sales
|
$ | 31,677 | $ | 8,188 | $ | 56,170 | $ | 21,438 | ||||||||
|
Cost
of goods sold
|
25,080 | 12,156 | 46,128 | 26,020 | ||||||||||||
|
Gross
profit (loss)
|
6,597 | (3,968 | ) | 10,042 | (4,582 | ) | ||||||||||
|
Selling,
general and administrative expenses
|
4,065 | 2,342 | 7,913 | 6,485 | ||||||||||||
|
Operating
income (loss)
|
2,532 | (6,310 | ) | 2,129 | (11,067 | ) | ||||||||||
|
Interest
income
|
290 | 382 | 598 | 837 | ||||||||||||
|
Income
(loss) before income taxes
|
2,822 | (5,928 | ) | 2,727 | (10,230 | ) | ||||||||||
|
Income
tax provision (benefit)
|
357 | (2,093 | ) | 342 | (3,909 | ) | ||||||||||
|
Net
income (loss)
|
$ | 2,465 | $ | (3,835 | ) | $ | 2,385 | $ | (6,321 | ) | ||||||
|
Earnings
(loss) per share
|
||||||||||||||||
|
Basic
|
$ | 0.07 | $ | (0.11 | ) | $ | 0.07 | $ | (0.18 | ) | ||||||
|
Diluted
|
$ | 0.07 | $ | (0.11 | ) | $ | 0.07 | $ | (0.18 | ) | ||||||
|
Dividends
per share
|
$ | - | $ | - | $ | - | $ | 0.010 | ||||||||
|
Average
shares outstanding
|
||||||||||||||||
|
Basic
|
36,182 | 36,074 | 36,165 | 35,996 | ||||||||||||
|
Diluted
|
36,703 | 36,074 | 36,653 | 35,996 | ||||||||||||
The
accompanying notes are an integral part of these consolidated
statements.
4
MARINE
PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’
EQUITY
FOR THE
SIX MONTHS ENDED JUNE 30, 2010
(In
thousands)
(Unaudited)
|
|
Accumulated | |||||||||||||||||||||||||||
|
Comprehensive
Income
(Loss)
|
Shares
|
Common
Stock Amount |
Capital
in
Excess
of
Par
Value
|
Retained
Earnings
|
Other
Comprehensive
Income
(Loss)
|
Total
|
||||||||||||||||||||||
|
Balance,
December 31, 2009
|
|
36,883 | $ | 3,688 | $ | — | $ | 78,690 | $ | (866 | ) | $ | 81,512 | |||||||||||||||
|
Stock
issued for stock incentive plans, net
|
|
247 | 25 | 240 | 323 | — | 588 | |||||||||||||||||||||
|
Stock
purchased and retired
|
|
(43 | ) | (4 | ) | (240 | ) | — | — | (244 | ) | |||||||||||||||||
|
Net
income
|
$ | 2,385 | — | — | — | 2,385 | — | 2,385 | ||||||||||||||||||||
|
Other
comprehensive income, net of tax:
|
||||||||||||||||||||||||||||
|
Pension
adjustment
|
164 | — | — | — | — | 164 | 164 | |||||||||||||||||||||
|
Unrealized
loss on securities, net of reclassification adjustment
|
(56 | ) | — | — | — | — | (56 | ) | (56 | ) | ||||||||||||||||||
|
Comprehensive
income
|
$ | 2,493 | ||||||||||||||||||||||||||
|
Balance,
June 30, 2010
|
|
37,087 | $ | 3,709 | $ | — | $ | 81,398 | $ | (758 | ) | $ | 84,349 | |||||||||||||||
The
accompanying notes are an integral part of this consolidated
statement.
5
MARINE
PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(In
thousands)
(Unaudited)
|
Six
months ended June 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
OPERATING
ACTIVITIES
|
||||||||
|
Net
income (loss)
|
$ | 2,385 | $ | (6,321 | ) | |||
|
Adjustments
to reconcile net income (loss) to net cash
|
||||||||
|
provided
by operating activities:
|
||||||||
|
Depreciation
and amortization
|
567 | 741 | ||||||
|
Gain
on sale of equipment and property
|
- | (15 | ) | |||||
|
Stock-based
compensation expense
|
855 | 815 | ||||||
|
Excess
tax benefits for share-based payments
|
- | (453 | ) | |||||
|
Deferred
income tax (benefit) provision
|
(886 | ) | 183 | |||||
|
(Increase)
decrease in assets:
|
||||||||
|
Accounts
receivable
|
(1,180 | ) | 4,164 | |||||
|
Inventories
|
(6,471 | ) | 9,754 | |||||
|
Prepaid
expenses and other current assets
|
1,587 | 364 | ||||||
|
Income
taxes receivable
|
6,376 | (1,563 | ) | |||||
|
Other
non-current assets
|
117 | (274 | ) | |||||
|
Increase
(decrease) in liabilities:
|
||||||||
|
Accounts
payable
|
3,177 | (401 | ) | |||||
|
Income
taxes payable
|
432 | - | ||||||
|
Accrued
expenses and other liabilities
|
1,739 | (2,636 | ) | |||||
|
Other
long-term liabilities
|
(292 | ) | 282 | |||||
|
Net
cash provided by operating activities
|
8,406 | 4,640 | ||||||
|
INVESTING
ACTIVITIES
|
||||||||
|
Capital
expenditures
|
(68 | ) | (62 | ) | ||||
|
Proceeds
from sale of property and equipment
|
- | 15 | ||||||
|
Purchases
of marketable securities
|
(14,488 | ) | (8,331 | ) | ||||
|
Sales
of marketable securities
|
4,416 | 3,746 | ||||||
|
Maturities
of marketable securities
|
8,360 | 5,954 | ||||||
|
Net
cash (used for) provided by investing activities
|
(1,780 | ) | 1,322 | |||||
|
FINANCING
ACTIVITIES
|
||||||||
|
Payment
of dividends
|
- | (369 | ) | |||||
|
Excess
tax benefits for share-based payments
|
- | 453 | ||||||
|
Cash
paid for common stock purchased and retired
|
(244 | ) | (537 | ) | ||||
|
Proceeds
received upon exercise of stock options
|
6 | 12 | ||||||
|
Net
cash used for financing activities
|
(238 | ) | (441 | ) | ||||
|
Net
increase in cash and cash equivalents
|
6,388 | 5,521 | ||||||
|
Cash
and cash equivalents at beginning of period
|
2,573 | 4,622 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 8,961 | $ | 10,143 | ||||
The
accompanying notes are an integral part of these consolidated
statements.
6
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
|
1.
|
GENERAL
|
|
|
The
accompanying unaudited condensed financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management,
all adjustments (all of which consisted of normal recurring accruals)
considered necessary for a fair presentation have been
included. Operating results for the three and six months ended
June 30, 2010 are not necessarily indicative of the results that may be
expected for the year ending December 31,
2010.
|
|
|
The
balance sheet at December 31, 2009 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial
statements.
|
|
|
For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company’s annual
report on Form 10-K for the year ended December 31,
2009.
|
|
|
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.
|
|
2.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
| The Financial Accounting Standards Board (FASB) recently issued the following Accounting Standards Updates (ASU): | |
| Recently Adopted Accounting Pronouncements: | |
| ASU 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments to the Codification in this ASU clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and not a share dividend. The Company adopted these provisions in the first quarter of 2010 and the adoption did not have a material impact on the Company’s consolidated financial statements. |
7
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
| ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The amendments to the Codification in this ASU now require |
| 1. the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfer be disclosed separately and | |
| 2. in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances and settlements. | |
| 3. judgment in determining the appropriate classes of assets and liabilities when reporting fair value measurements for each class | |
| 4. disclosures about valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. | |
| The Company complied with these disclosure requirements in its annual report on Form 10-K for the year ended December 31, 2009 and plans to provide the disclosures on an interim basis as necessary. Adoption of these disclosure requirements did not have a material impact on the Company’s consolidated financial statements. |
| Recently Issued Accounting Pronouncements Not Yet Adopted: | |
| ASU 2010-13, Compensation – Stock Compensation (topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. The amendments to the Codification in this ASU provide guidance on share-based payment awards to employees with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trade. The ASU states that if such awards meet all the criteria for equity should be classified as such and not liability based solely on the currency it is denominated in. The amendments are effective beginning in 2011 with adoption required in the first quarter of that year. Adoption of these provisions is not expected to have a material impact on the Company’s consolidated financial statements. | |
| 3. |
EARNINGS
PER SHARE
|
| FASB ASC Topic 260-10 “Earnings Per Share- Overall,” requires a basic earnings per share and diluted earnings per share presentation. Certain amendments to ASC 260-10 require 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 are therefore considered participating securities. |
8
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
| 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 income (loss) 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: |
9
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
|
Three
months ended
June
30,
|
Six
months ended
June
30,
|
|||||||||||||||
|
(In
thousands except per share data )
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
Net
income (loss) available for stockholders:
|
$ | 2,465 | $ | (3,835 | ) | $ | 2,385 | $ | (6,321 | ) | ||||||
|
Less: Dividends
paid
|
||||||||||||||||
|
Common
Stock
|
- | - | - | (361 | ) | |||||||||||
|
Restricted
shares of common stock
|
- | - | - | (8 | ) | |||||||||||
|
Undistributed
income (loss)
|
$ | 2,465 | $ | (3,835 | ) | $ | 2,385 | $ | (6,690 | ) | ||||||
|
Allocation
of undistributed income (loss):
|
||||||||||||||||
|
Common
Stock
|
$ | 2,405 | $ | (3,751 | ) | $ | 2,327 | $ | (6,543 | ) | ||||||
|
Restricted
shares of common stock
|
60 | (84 | ) | 58 | (147 | ) | ||||||||||
|
Basic
shares outstanding:
|
||||||||||||||||
|
Common
Stock
|
35,277 | 35,253 | 35,270 | 35,210 | ||||||||||||
|
Restricted
shares of common stock
|
905 | 821 | 895 | 786 | ||||||||||||
| 36,182 | 36,074 | 36,165 | 35,996 | |||||||||||||
|
Diluted
shares outstanding:
|
||||||||||||||||
|
Common
Stock
|
35,277 | 35,253 | 35,270 | 35,210 | ||||||||||||
|
Dilutive
effect of stock options
|
521 | - | 488 | - | ||||||||||||
| 35,798 | 35,253 | 35,758 | 35,210 | |||||||||||||
|
Restricted
shares of common stock
|
905 | 821 | 895 | 786 | ||||||||||||
| 36,703 | 36,074 | 36,653 | 35,996 | |||||||||||||
|
Basic
earnings (loss) per share:
|
||||||||||||||||
|
Common
Stock:
|
||||||||||||||||
|
Distributed
earnings
|
$ | - | $ | - | $ | - | $ | 0.01 | ||||||||
|
Undistributed
income (loss)
|
0.07 | (0.11 | ) | 0.07 | (0.19 | ) | ||||||||||
| $ | 0.07 | $ | (0.11 | ) | $ | 0.07 | $ | (0.18 | ) | |||||||
|
Restricted
shares of common stock:
|
||||||||||||||||
|
Distributed
earnings
|
$ | - | $ | - | $ | - | $ | 0.01 | ||||||||
|
Undistributed
income (loss)
|
0.07 | (0.10 | ) | 0.06 | (0.19 | ) | ||||||||||
| $ | 0.07 | $ | (0.10 | ) | $ | 0.06 | $ | (0.18 | ) | |||||||
|
Diluted
earnings per share:
|
||||||||||||||||
|
Common
Stock:
|
||||||||||||||||
|
Distributed
earnings
|
$ | - | $ | - | $ | - | $ | 0.01 | ||||||||
|
Undistributed
income (loss)
|
0.07 | (0.11 | ) | 0.07 | (0.19 | ) | ||||||||||
| $ | 0.07 | $ | (0.11 | ) | $ | 0.07 | $ | (0.18 | ) | |||||||
10
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
During
the three and six months ended June 30, 2009, the Company incurred a net loss
from continuing operations and consequently the common stock equivalents were
excluded from the computation of the corresponding diluted loss per share
because the effect would have been anti-dilutive.
|
4.
|
COMPREHENSIVE
(LOSS) INCOME
|
|
|
The
components of comprehensive (loss) income for the applicable periods are
as follows:
|
|
(in
thousands)
|
Three
months ended
June
30,
|
Six
months ended
June
30,
|
||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
|
||||||||||||||||
| Net income (loss) | $ | 2,465 | $ | (3,835 | ) | $ | 2,385 | $ | (6,321 | ) | ||||||
| Other comprehensive income (loss), net of taxes: | ||||||||||||||||
| Pension adjustment | 5 | 38 | 164 | 178 | ||||||||||||
| Unrealized (loss) gain on securities available for sale, net of | ||||||||||||||||
| reclassification adjustment during the period | (16 | ) | (48 | ) | (56 | ) | 85 | |||||||||
|
Total
comprehensive income (loss)
|
$ | 2,454 | $ | (3,845 | ) | $ | 2,493 | $ | (6,058 | ) | ||||||
|
5.
|
STOCK-BASED
COMPENSATION
|
The
Company reserved 5,250,000 shares of common stock under the 2001 and 2004 Stock
Incentive Plans each of which expires ten years from the date of
approval. These 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 June 30, 2010, there were
approximately 1,227,000 shares available for grants.
Stock-based
compensation for the three and six months ended June 30, 2010 and 2009 were as
follows:
|
(in
thousands)
|
Three
months ended
June
30,
|
Six
months ended
June
30,
|
||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Pre
– tax cost
|
$ | 419 | $ | 415 | $ | 855 | $ | 815 | ||||||||
|
After
tax cost
|
$ | 270 | $ | 270 | $ | 551 | $ | 536 | ||||||||
11
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
Stock
Options
Transactions
involving Marine Products stock options for the six months ended June 30, 2010
were as follows:
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average Remaining Contractual
Life
|
Aggregate
Intrinsic Value |
|||||||||||||
|
Outstanding
at January 1, 2010
|
687,292 | $ | 3.70 |
2.4
years
|
||||||||||||
|
Granted
|
- | - | N/A | |||||||||||||
|
Exercised
|
(3,375 | ) | 1.71 | N/A | ||||||||||||
|
Reinstated/(Forfeited)
|
1,500 | 12.47 | N/A | |||||||||||||
|
Expired
|
- | - | N/A | |||||||||||||
|
Outstanding
and exercisable at June 30, 2010
|
685,417 | $ | 3.72 |
1.9
years
|
$ |
1,330,000
|
||||||||||
The total
intrinsic value of share options exercised was approximately $17,000 during the
six months ended June 30, 2010 and approximately $975,000 during the six months
ended June 30, 2009. Tax benefits associated with the exercise of
non-qualified stock options during the six months ended June 30, 2009 of
approximately $256,000 were credited to capital in excess of par value and are
classified as financing cash flows.
Restricted
Stock
The
following is a summary of the changes in non-vested restricted shares for the
six months ended June 30, 2010:
|
Shares
|
Weighted
Average
Grant-Date
Fair
Value
|
|||||||
|
Non-vested
shares at January 1, 2010
|
797,450 | $ | 7.38 | |||||
|
Granted
|
249,000 | 5.16 | ||||||
|
Vested
|
(144,050 | ) | 10.99 | |||||
|
Forfeited
|
(5,600 | ) | 9.38 | |||||
|
Non-vested
shares at June 30, 2010
|
896,800 | $ | 6.17 | |||||
The total
fair value of shares vested was approximately $814,000 during the six months
ended June 30, 2010 and $666,000 during the six months ended June 30,
2009. There were no tax benefits for compensation tax deductions in
excess of compensation expense during the six months ended June 30,
2010. Tax benefits for compensation tax deductions in excess of
compensation expense totaling approximately $197,000 for the six months ended
June 30, 2009 were credited to capital in excess of par value and are classified
as financing cash flows.
12
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
Other
Information
As of
June 30, 2010, total unrecognized compensation cost related to non-vested
restricted shares was approximately $4,737,000. This cost is expected
to be recognized over a weighted-average period of 4.2 years.
|
6.
|
MARKETABLE
SECURITIES
|
Marine
Products maintains investments held with a large, well-capitalized financial
institution. Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates 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. The net realized gains (losses) and the reclassification of
net realized gains (losses) from other comprehensive income are as
follows:
|
Three
months ended June
30, |
Six
months ended
June
30,
|
|||||||||||||||
|
(In
thousands)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
Net
realized gain (losses)
|
$ | - | $ | 6 | $ | - | $ | 39 | ||||||||
|
Reclassification
of net realized gains (losses) from other comprehensive
income
|
$ | - | $ | 6 | $ | - | $ | 39 | ||||||||
Gross
unrealized gains (losses) on marketable securities are as follows:
|
June
30, 2010
|
December
31, 2009
|
|||||||||||||||
|
Gross
unrealized
|
Gross
unrealized
|
|||||||||||||||
|
(In
thousands)
|
Gains
|
(Losses)
|
Gains
|
(Losses)
|
||||||||||||
|
Municipal
Obligations
|
$ | 285 | $ | (8 | ) | $ | 345 | $ | (6 | ) | ||||||
|
Corporate
Obligations
|
$ | 81 | $ | (6 | ) | $ | 99 | $ | - | |||||||
| $ | 366 | (14 | ) | $ | 444 | $ | (6 | ) | ||||||||
13
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
The
amortized cost basis, fair value and net unrealized gains of the
available-for-sale securities are as follows:
|
June
30, 2010
|
December
31, 2009
|
|||||||||||||||||||||||
|
Type
of Securities
|
Amortized
Cost
Basis
|
Fair
Value
|
Net
Unrealized
Gain
|
Amortized
Cost
Basis
|
Fair
Value
|
Net
Unrealized
Gain
|
||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Municipal
Obligations
|
$ | 34,964 | $ | 35,241 | $ | 277 | $ | 35,996 | $ | 36,335 | $ | 339 | ||||||||||||
|
Corporate
Obligations
|
5,755 | 5,830 | 75 | 3,011 | 3,110 | 99 | ||||||||||||||||||
|
Total
|
$ | 40,719 | $ | 41,071 | $ | 352 | $ | 39,007 | $ | 39,445 | $ | 438 | ||||||||||||
Municipal
obligations consist primarily of municipal notes rated A1/P1 or higher ranging
in maturity from less than 12 months to 12 years. Corporate
backed obligations consist primarily of debentures and notes issued by other
companies ranging in maturity from two to four years. These
securities are rated BBB 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 2011 and
2022.
|
7.
|
WARRANTY
COSTS AND OTHER CONTINGENCIES
|
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
ranging from five to ten years.
An
analysis of the warranty accruals for the six months ended June 30, 2010 and
2009 is as follows:
|
(in
thousands)
|
2010
|
2009
|
||||||
|
Balance
at beginning of period
|
$ | 2,403 | $ | 3,567 | ||||
|
Less:
Payments made during the period
|
(986 | ) | (1,573 | ) | ||||
|
Add: Warranty
provision for the period
|
1,319 | 506 | ||||||
|
Changes
to warranty provision for prior periods
|
(48 | ) | 329 | |||||
|
Balance
at June 30
|
$ | 2,688 | $ | 2,829 | ||||
14
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
Repurchase
Obligations
The
Company is a party to various agreements with third party lenders that provide
floor plan financing to qualifying dealers whereby the Company guarantees
varying amounts of debt on boats in dealer 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 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, MPC became contractually obligated to repurchase inventory of
approximately $5.3 million during the six months ended June 30,
2009. There were no repurchases of inventory under contractual
agreements during the six months ended June 30, 2010. The
Company recorded costs in connection with the repurchase of boats of
approximately $0.8 million during the six months ended June 30, 2009 as a
reduction of net sales.
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
the third quarter of 2009, an amendment to the current agreement with one of the
Company’s floor plan lenders was executed with a contractual repurchase limit of
$9.0 million effective January 1, 2009 which expired June 30,
2010. Effective July 1, 2010, this agreement was further amended to
change the contractual repurchase limit to not exceed 15 percent of the amount
of the average net receivables financed by the floor plan lender for
dealers during the prior 12 month period. The Company has
contractual repurchase agreements with additional lenders with an aggregate
maximum repurchase obligation of approximately $2.5 million with expiration
dates through June 30, 2011. As of June 30, 2010, the Company has an
aggregate remaining repurchase obligation with these financing institutions of
approximately $6.0 million.
|
8.
|
|
BUSINESS
SEGMENT INFORMATION
|
|
|
The
Company has only one reportable segment, its powerboat manufacturing
business; therefore, the majority of segment-related disclosures are not
relevant to the Company. In addition, the Company’s results of
operations and its financial condition are not significantly reliant upon
any single customer or product
model.
|
15
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
|
9.
|
INVENTORIES
|
Inventories
consist of the following:
|
(in
thousands)
|
June
30,
2010
|
December
31, 2009
|
||||||
|
Raw
materials and supplies
|
$ | 18,033 | $ | 13,149 | ||||
|
Work
in process
|
4,697 | 4,578 | ||||||
|
Finished
goods
|
3,228 | 1,760 | ||||||
|
Total
inventories
|
$ | 25,958 | $ | 19,487 | ||||
|
10.
|
INCOME
TAXES
|
The
Company determines its periodic income tax (benefit) provision based upon the
current period income and the annual estimated tax rate for the Company adjusted
for any change to prior year estimates. The estimated tax rate is revised, if
necessary, as of the end of each successive interim period during the fiscal
year to the Company’s current annual estimated tax rate.
For the
second quarter of 2010, the income tax expense reflects an effective tax rate of
12.7 percent, compared to an effective tax rate of 35.3 percent for the
comparable period in the prior year. For the six months ended June
30, 2010, the income tax expense reflects an effective tax rate of 12.5 percent,
compared to an effective tax rate of 38.2 percent for the comparable period in
the prior year. The change in the effective rate was due primarily to
the relationship of our annual estimated pretax income (loss) to permanent
differences between book and taxable income including tax-exempt interest earned
on municipal securities, coupled with the impact of discrete tax adjustments,
including state net operating losses (“NOLs”) expected to be used in the
future.
|
11.
|
EMPLOYEE
BENEFIT PLANS
|
The
Company participates in a multiple employer pension plan. The
following represents the net periodic benefit cost (credit) and related
components for the plan:
16
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
|
(in
thousands)
|
Three months
ended
June
30,
|
Six
months ended
June
30,
|
||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Service
cost
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Interest
cost
|
67 | 70 | 133 | 140 | ||||||||||||
|
Expected
return on plan assets
|
(75 | ) | (66 | ) | (149 | ) | (132 | ) | ||||||||
|
Amortization
of net losses
|
8 | 59 | 17 | 118 | ||||||||||||
|
Net
periodic benefit cost
|
$ | - | $ | 63 | $ | 1 | $ | 126 | ||||||||
During
the second quarter of 2010, the Company made a contribution of $86,000 to this
plan.
The
Company permits selected highly compensated employees to defer a portion of
their compensation into a non-qualified Supplemental Executive Retirement Plan
(“SERP”). The Company maintains certain securities in the SERP that
have been classified as trading. The SERP assets are marked to market
and totaled $4,333,000 as of June 30, 2010 and $4,450,000 as of December
31, 2009. 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. Trading gains (losses) related to the SERP
assets totaled $(118,000) during the three months ended June 30, 2010 and
$(117,000) during the six months ended June 30, 2010. Trading gains
(losses) related to the SERP assets totaled $260,000 during the three months
ended June 30, 2009 and $205,000 during the six months ended June 30,
2009.
|
12.
|
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.
17
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
The
following table summarizes the valuation of financial instruments measured at
fair value on a recurring basis on the balance sheet as of June 30, 2010 and
December 31, 2009:
|
Fair
Value Measurements at June 30, 2010 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
|
$ | - | $ | 4,333 | $ | - | ||||||
|
Available-for-sale
securities
|
- | 41,071 | - | |||||||||
|
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 | - | |||||||||
During
fiscal year 2009 and the six months ended June 30, 2010, 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 and the six months ended June
30, 2010, 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.
18
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Marine
Products Corporation, through our wholly-owned subsidiaries Chaparral and
Robalo, is a leading manufacturer of recreational fiberglass powerboats. Our
sales and profits are generated by selling the products that we manufacture to a
network of independent dealers who in turn sell the products to retail
customers. These dealers are located throughout the continental United States
and in several international markets. Many of these dealers finance their
inventory through third-party floorplan lenders, who pay Marine Products
generally within seven to 10 days after delivery of the products to the
dealers.
The
discussion on business and financial strategies of the Company set forth under
the heading “Overview” in the Company’s annual report on Form 10-K for the
fiscal year ended December 31, 2009 is incorporated herein by
reference. There have been no significant changes in the strategies
since year-end.
In
implementing these strategies and attempting to optimize our financial returns,
management closely monitors dealer orders and inventories, the production mix of
its various models, and indications of near term demand such as consumer
confidence, interest rates, fuel costs, dealer orders placed at our annual
dealer conferences, and retail attendance and orders at annual winter boat show
exhibitions. We also consider trends related to certain key financial
and other data, including our market share, unit sales of our products, average
selling price per unit, 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 and credit availability — 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.
Our
production levels were significantly higher during the second quarter of 2010
compared to the second quarter of 2009 as a result of dealer demand for new
models in our industry. Operating income increased significantly
compared to the prior year due to higher net sales and gross profit, which was
in part due to significantly lower retail incentive costs, and increased
efficiencies due to higher production levels. Our unit backlog at
June 30, 2010 is significantly higher in comparison to this time last
year.
19
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
OUTLOOK
The
discussion on the outlook for 2010 is incorporated herein by reference from the
Company’s annual report on Form 10-K for the fiscal year ended December 31,
2009.
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 bottomed, the fact that our dealer
inventories are at historically low levels and that our year to date net sales
and operating results for the six months ended June 30, 2010 are much improved
compared to results for the 12 months ended December 31, 2009. While
retail demand may decline in 2010, our production and sales to dealers will
increase because a significant portion of our retail demand will have to be
fulfilled by additional production from our manufacturing plants rather than
primarily by sales from older dealer inventory which occurred in
2009. Industry data published in 2010 indicate that retail boat sales
are lower than in 2009. This decline will be further exacerbated to
some extent by the weakness in the Gulf Coast markets as a result of reduced
tourism from the oil spill that occurred in April of 2010. 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 in 2010 will return to levels experienced in
2008 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. The
financial crisis may have long-term effects on consumer behavior with regard to
pleasure boating. Over the past several years, Marine Products as
well as other manufacturers have been working to improve 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. During 2009, we implemented a marketing
program for potential new dealers which emphasized 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. As a result of these efforts, 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 developed a number of new
models for the 2011 model year which began during the second calendar quarter of
2010. For this model year, Marine Products continues to emphasize
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.
20
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
Given the
continued weak selling environment for our products and our desire to maintain
appropriate levels of dealer inventories, we plan to reduce production during
the third quarter of 2010 which is historically the lowest retail sales
quarter.
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 remainder of 2010.
21
MARINE
PRODUCTS CORPORATION AND SUBSIDIARIES
RESULTS OF
OPERATIONS
Key
operating and financial statistics for the three and six months ended June 30,
2010 and 2009 are as follows:
|
($
in thousands)
|
Three
months ended
June
30
|
Six
months ended
June
30
|
||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Total
number of boats sold
|
676 | 219 | 1,215 | 529 | ||||||||||||
|
Average
gross selling price per boat
|
$ | 44.2 | $ | 51.6 | $ | 44.1 | $ | 47.8 | ||||||||
|
Net
sales
|
$ | 31,677 | $ | 8,188 | $ | 56,170 | $ | 21,438 | ||||||||
|
Percentage
of cost of goods sold to net sales
|
79.2 | % | 148.5 | % | 82.1 | % | 121.4 | % | ||||||||
|
Gross
profit (loss) margin percent
|
20.8 | % | (48.5 | )% | 17.9 | % | (21.4 | )% | ||||||||
|
Percentage
of selling, general and administrative expenses to net
sales
|
12.8 | % | 28.6 | % | 14.1 | % | 30.3 | % | ||||||||
|
Operating
income (loss)
|
$ | 2,532 | $ | (6,310 | ) | $ | 2,129 | $ | (11,067 | ) | ||||||
|
Warranty
expense
|
$ | 644 | $ | 188 | $ | 1,271 | $ | 835 | ||||||||
THREE MONTHS ENDED JUNE 30,
2010 COMPARED TO THREE MONTHS ENDED JUNE 30, 2009
Net sales for the three
months ended June 30, 2010 increased $23.5 million or 286.9 percent compared to
the comparable period in 2009. The change in net sales was due primarily to a
208.7 percent increase in the number of boats sold partially offset by a 14.3
percent decrease in the average gross selling price per boat. Unit
sales among all models increased significantly compared to the prior year due to
increased dealer demand for units in all of our product
lines. Average gross selling price per boat decreased due mainly to
the change in model mix in our Sunesta and Signature Cruiser lines as well as
sale of fewer Premiere Sport Yachts during the current period. Also
contributing to the increase in net sales were significantly lower retail
incentives recognized in 2010 compared to 2009. In the second quarter
of 2010, sales outside of the United States accounted for 36.5 percent of net
sales compared to 22.5 percent of net sales in the prior year.
Cost of goods sold for the three months
ended June 30, 2010 was $25.1 million compared to $12.2 million for the
comparable period in 2009, an increase of $12.9 million or 106.3
percent. Cost of goods sold, as a percentage of net sales, decreased
primarily as the result of significantly lower retail incentive costs, improved
manufacturing cost efficiencies due to significantly higher production volumes
and cost leverage with increased sales during the second quarter of 2010
compared to the same period of 2009. Production levels were
significantly increased in response to higher retail demand for new models and
lower dealer inventories.
22
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
Selling, general and administrative
expenses for the three months ended June 30, 2010 were $4.1 million
compared to $2.3 million for the comparable period in 2009, an increase of $1.7
million or 73.6 percent. Selling, general and administrative
expenses, as a percentage of net sales, decreased due to leverage of fixed costs
over higher net sales partially offset by costs that vary with sales and
profitability. Warranty expense was 2.0 percent of net sales for the three
months ended June 30, 2010 compared to 2.3 percent in the prior
year.
Operating income for the
three months ended June 30, 2010 increased $8.8 million compared to the
comparable period in 2009. The increase in operating income was
primarily due to higher net sales and gross profit partially offset by an
increase in selling, general and administrative expenses in the second quarter
of 2010 compared to the prior year.
Interest income was $0.3
million during the three months ended June 30, 2010 and $0.4 million for the
comparable period in 2009. The decrease was primarily due to a
decrease in the average investment balance coupled with lower market returns on
the Company’s short-term debt investments compared to the prior
year.
Income tax provision for the
three months ended June 30, 2010 was $357 thousand compared to an income tax
benefit of $2.1 million for the comparable period in 2009. The income
tax provision for the three months ended June 30, 2010 reflects an effective tax
rate of 12.7 percent compared to an effective tax rate of 35.3 percent for the
prior year. The change in the effective rate was due primarily to the
relationship of our annual estimated pretax income (loss) to permanent
differences between book and taxable income including tax-exempt interest earned
on municipal securities, coupled with the impact of discrete tax adjustments,
including state NOLs expected to be used in the future.
SIX MONTHS ENDED JUNE 30,
2010 COMPARED TO SIX MONTHS ENDED JUNE 30, 2009
Net sales for the six months
ended June 30, 2010 increased $34.7 million or 162.0 percent compared to the
comparable period in 2009. The change in net sales was due primarily to a 129.7
percent increase in the number of boats sold partially offset by a 7.8 percent
decrease in the average gross selling price per boat. Unit sales
among all models increased significantly compared to the prior year due to
increased dealer demand for units in all of our product
lines. Average gross selling price per boat decreased due to the sale
of a higher percentage of smaller boats in our Sunesta and Signature Cruisers
lines in response to dealer demand. Also contributing to the increase
in net sales were significantly lower retail incentives recognized in 2010
compared to 2009. In the first six months of 2010, sales outside of
the United States accounted for 31.5 percent of net sales compared to 29.0
percent of net sales in the prior year.
Cost of goods sold for the six months ended
June 30, 2010 was $46.1 million compared to $26.0 million for the comparable
period in 2009, an increase of $20.1 million or 77.3 percent. Cost of
goods sold, as a percentage of net sales, decreased primarily as the result of
lower retail incentive costs, improved manufacturing cost efficiencies due to
significantly higher production volumes and cost leverage with increased sales
during the first and second quarters of 2010 compared to the same periods
in 2009. Production levels were increased during the first
six months of 2010 in response to higher retail demand for new models and lower
dealer inventories.
23
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
Selling, general and administrative
expenses for the six months ended June 30, 2010 were $7.9 million
compared to $6.5 million for the comparable period in 2009, an increase of $1.4
million or 22.0 percent. Selling, general and administrative
expenses, as a percentage of net sales, decreased due to leverage of fixed costs
over higher net sales. Warranty expense was 2.3 percent of net sales
for the six months ended June 30, 2010 compared to 3.9 percent in the prior
year.
Operating income for the six
months ended June 30, 2010 increased $13.2 million compared to the comparable
period in 2009. The increase in operating income was primarily due to
higher net sales and gross profit partially offset by an increase in selling,
general and administrative expenses during the six months ended June 30, 2010
compared to the same period of the prior year.
Interest income was $0.6
million during the six months ended June 30, 2010 and $0.8 million for the
comparable period in 2009. The decrease was primarily due to a
decrease in the average investment balance coupled with lower market returns on
the Company’s short-term debt investments compared to the prior
year.
Income tax provision for the
six months ended June 30, 2010 was $342 thousand compared to an income tax
benefit of $3.9 million for the comparable period in 2009. The income
tax provision for the six months ended June 30, 2010 reflects an effective tax
rate of 12.5 percent compared to an effective tax rate of 38.2 percent for the
prior year. The change in the effective rate was due primarily to the
relationship of our annual estimated pretax income (loss) to permanent
differences between book and taxable income including tax-exempt interest earned
on municipal securities, coupled with the impact of discrete tax adjustments,
including state NOLs expected to be used in the future.
24
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
LIQUIDITY AND CAPITAL
RESOURCES
Cash
Flows
The
Company’s cash and cash equivalents at June 30, 2010 were $9.0
million. In addition, the aggregate of short-term and long-term
marketable securities were $41.1 million at June 30, 2010 compared to $39.4
million at December 31, 2009. The following table sets forth the
historical cash flows for the applicable period:
|
(in
thousands)
|
Six
months ended June 30,
|
|||||||
|
2010
|
2009
|
|||||||
|
Net
cash provided by operating activities
|
$ | 8,406 | $ | 4,640 | ||||
|
Net
cash (used for) provided by investing activities
|
(1,780 | ) | 1,322 | |||||
|
Net
cash used for financing activities
|
$ | (238 | ) | $ | (441 | ) | ||
Cash
provided by operating activities for the six months ended June 30, 2010
increased approximately $3.8 million compared to the comparable period in
2009. This increase is primarily the result of higher net income
during the first six months of 2010 and an income tax refund of $6.0 million
received during the second quarter of 2010 partially offset by higher working
capital requirements. Inventories and accounts receivables increased
during the current period consistent with higher production volumes and
sales.
Cash used
for investing activities for the six months ended June 30, 2010 increased
approximately $3.1 million compared to the comparable period in 2009 due
to increased purchases of marketable securities in the current
period.
Cash used
for financing activities for the six months ended June 30, 2010 decreased
approximately $0.2 million primarily due to a reduction in dividends paid per
share during 2010 compared to 2009 coupled with lower common share repurchases
in the current year.
Financial
Condition and Liquidity
The
Company believes that the liquidity provided by existing cash, cash equivalents
and marketable securities, its overall strong capitalization and cash generated
by operations will provide sufficient capital to meet the Company’s requirements
for the next twelve months. The Company’s decisions about the amount
of cash to be used for investing and financing purposes are influenced by its
capital position and the expected amount of cash to be provided by
operations.
25
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
Cash
Requirements
The
Company currently expects that capital expenditures during 2010 will be
approximately $200 thousand, of which $68 thousand has been spent through June
30, 2010.
The
Company participates in a multiple employer Retirement Income Plan, sponsored by
RPC, Inc. (“RPC”). During the second quarter of 2010, the Company
made a contribution of $86 thousand to this plan in order to achieve the
Company’s funding objective. The Company does not currently expect to
make any additional contributions to this plan for the remainder of
2010.
As of
June 30, 2010, the Company has purchased a total of 4,925,157 shares in the open
market under the Company stock repurchase program and there are 3,324,843 shares
that remain available for repurchase. The Company did not repurchase any shares
under this program during the six months ended June 30, 2010.
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
ranging from five to ten years. See Note 7 to the Consolidated
Financial Statements for a detail of activity in the warranty accruals during
the six months ended June 30, 2010 and 2009.
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 to the Company in a new and unused condition 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 which vary by lender. There were no repurchases of
dealer inventory during the first and second quarters of 2010.
Management
continues to monitor the risk of additional dealer defaults and resulting
repurchase obligation 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. As of June 30, 2010, the Company believes the fair value of its
remaining guarantee liability is $50 thousand. See further
information regarding repurchase obligations in Note 7 of the Consolidated
Financial Statements.
26
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
During
the third quarter of 2009, an amendment to the current agreement with one of the
Company’s floor plan lenders was executed with a contractual repurchase limit of
$9.0 million effective January 1, 2009 which expired June 30,
2010. Effective July 1, 2010, this agreement was further amended to
change the contractual repurchase limit to not exceed 15 percent of the amount
of the average net receivables financed by the floor plan lender for
dealers during the prior 12 month period. The Company has
contractual repurchase agreements with additional lenders with an aggregate
maximum repurchase obligation of approximately $2.5 million with expiration
dates through June 30, 2011. As of June 30, 2010, the Company has an
aggregate remaining repurchase obligation with these financing institutions of
approximately $6.0 million.
RELATED PARTY
TRANSACTIONS
In
conjunction with its spin-off from RPC in 2001, the Company and RPC entered into
various agreements that define their relationship after the
spin-off. A detailed discussion of the various agreements in effect
is contained in the Company’s annual report on Form 10-K for the year ended
December 31, 2009. RPC charged the Company for its allocable share of
administrative costs incurred for services rendered on behalf of Marine Products
totaling approximately $326 thousand in the six months ended June 30, 2010 and
$379 thousand in the six months ended June 30, 2009.
CRITICAL ACCOUNTING
POLICIES
The
discussion of Critical Accounting Policies is incorporated herein by reference
from the Company’s annual report on Form 10-K for the fiscal year ended December
31, 2009. There have been no significant changes in the critical
accounting policies since year-end.
IMPACT OF RECENT ACCOUNTING
PRONOUNCEMENTS
See
Note 2 of the Consolidated Financial Statements for a description of recent
accounting pronouncements, including the expected dates of adoption and
estimated effects on results of operations and financial condition.
SEASONALITY
Marine
Products’ quarterly operating results are affected by weather and general
economic conditions. Quarterly operating results for the second
quarter historically have reflected the highest quarterly sales volume during
the year with the first quarter being the next highest sales quarter. However,
the results for any quarter are not necessarily indicative of results to be
expected in any future period.
INFLATION
During
the fourth quarter of 2009 and the first and second quarter of 2010, the prices
of commodities such as copper, stainless steel and resins, which have
hydrocarbon feedstocks, began to rise due to the recovery from the global
recession. This increase in commodity prices is likely to lead to
higher materials costs in 2010. Since retail consumer demand for
recreational boats is extremely low at the present time, we cannot be confident
that the Company will be able to institute sufficient price increases to its
dealers to compensate for these increased materials costs. It is
likely that these increased commodity prices will negatively impact the
Company’s operating results in 2010 compared to 2009.
27
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
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.
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, the
expected effect of recent accounting pronouncements on the Company’s
consolidated financial statements; the Company’s estimate of the guarantee
liability under dealer floor plan financing arrangements; the Company’s
expectation about contributions to its pension plan in 2010; management’s belief
that net sales will increase in 2010 compared to 2009 and that the Company’s
operating results will improve; the Company’s belief that the downturn in
recreational boating has bottomed and is showing signs of improvement; the
Company’s belief that production and sales to dealers will increase because
retail demand will have to be fulfilled by additional production from our
manufacturing plants rather than sales from older dealer inventory; our belief
that our operating results will improve due to an improved gross margin from
increased production and significantly lower incentive costs; our belief that
the availability of credit to our dealers has improved for financially stable
dealers; our belief that retail sales in 2010 will not return to levels
experienced in 2008 and that the financial crisis may have long-term effects on
consumer behavior with regard to pleasure boating; our
expectation that the decline in retail boat sales will be exacerbated by
weakness in the Gulf Coast markets due to the oil spill;our belief that
the recreational boating industry promotional program will benefit the industry
and Marine Products; our belief that the Company will continue to be challenged
by the effect of an uncertain level of consumer demand during the latter part of
2010 model year and the remainder of 2010; the Company’s belief that its
liquidity, capitalization and cash expected to be generated from operations,
will provide sufficient capital to meet the Company’s requirements for the next
twelve months; the Company’s expectations about capital expenditures during
2010; our plan
to reduce production in the third quarter of 2010; that the Company may
in the future incur additional repurchase obligations as a result of dealer
floor plan financing defaults; the Company’s belief that the prices of many
commodities used as raw materials for its manufacturing processes will rise in
the near future; the Company’s expectations regarding market risk of its
investment portfolio; and the Company’s expectation about the effect of
litigation on the Company’s financial position or results of
operations. The words “may,” “should,” “will,” “expect,” “believe,”
“anticipate,” “intend,” “plan,” “believe,” “seek,” “project,” “estimate,” and
similar expressions used in this document that do not relate to historical facts
are intended to identify forward-looking statements. Such statements are based
on certain assumptions and analyses made by our management in light of its
experience and its perception of historical trends, current conditions, expected
future developments and other factors it believes to be appropriate. 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. Risk
factors that could cause such future events not to occur as expected include the
following: economic conditions, unavailability of credit and possible decreases
in the level of consumer confidence impacting discretionary spending, business
interruptions due to adverse weather conditions, increased interest rates,
unanticipated changes in consumer demand and preferences, deterioration in the
quality of Marine Products’ network of independent boat dealers or availability
of financing of their inventory, our ability to insulate financial results
against increasing commodity prices, the impact of rising gasoline prices and a
weak housing market on consumer demand for our products, competition from other
boat manufacturers and dealers, the
effects of the oil spill in the Gulf Coast of Mexico on boat sales and
insurance companies that insure a number of Marine Products’ marketable
securities have recently been downgraded, which may cause volatility in the
market price of Marine Products’ marketable securities. Additional discussion of
factors that could cause the actual results to differ materially from
management’s projections, forecasts, estimates and expectations is contained in
Marine Products’ Form 10-K, filed with the Securities and Exchange Commission
for the year ended December 31, 2009. The Company does not undertake
to update its forward-looking statements.
28
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Marine
Products does not utilize financial instruments for trading purposes and, as of
June 30, 2010, did not hold derivative financial instruments that could expose
the Company to significant market risk. Also, as of June 30, 2010,
the Company’s investment portfolio, totaling approximately $41.1 million and
comprised primarily of municipal and corporate debt securities, is subject to
interest rate risk exposure. This risk is managed through conservative policies
to invest in high-quality obligations that are both short-term and long-term in
nature. Because Marine Products’ investment portfolio mix has been
allocated towards securities with similar term maturities compared to the end of
fiscal year 2009, the risk of material market value fluctuations is not expected
to be significantly different from the end of fiscal year 2009 and the Company
currently expects no such changes through the remainder of the current
year.
29
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
ITEM 4.
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, June 30, 2010 (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 defined in Exchange Act Rule 13a –
15(e)). Based upon this evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures (as defined in Exchange Act Rule 13a – 15(e)) were effective at a
reasonable assurance level as of the Evaluation Date.
Changes in internal control over
financial reporting - Management’s evaluation of changes in internal
control did not identify any changes in the Company’s internal control over
financial reporting that occurred during the Company’s most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
30
MARINE
PRODUCTS CORPORATION AND SUBSIDIARIES
PART II.
OTHER INFORMATION
ITEM
1. 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 outcome of
such litigation will have a material adverse effect on the financial position or
results of operations of Marine Products.
Item 1A.
RISK FACTORS
See the
risk factors described in the Company’s annual report on Form 10-K for the year
ended December 31, 2009.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM
4. REMOVED AND RESERVED
ITEM
5. OTHER INFORMATION
None
31
MARINE PRODUCTS CORPORATION AND
SUBSIDIARIES
| ITEM 6. | Exhibits | |||
| Exhibit Number | Description | |||
|
3.1(a)
|
Marine
Products Corporation Articles of Incorporation (incorporated herein by
reference to Exhibit 3.1 to the Registrant’s Registration Statement on
Form 10 filed on February 13, 2001).
|
|||
|
3.1(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 Registrant’s Current Report on Form 8-K filed June 9,
2005).
|
|||
|
3.2
|
Amended
and Restated By-laws of Marine Products Corporation (incorporated herein
by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K
filed on October 25, 2007).
|
|||
|
4
|
Restated
Form of Stock Certificate (incorporated herein by reference to Exhibit 4.1
to the Registrant’s Registration Statement on Form 10 filed on February
13, 2001).
|
|||
|
31.1
|
Section
302 certification for Chief Executive Officer
|
|||
|
31.2
|
Section 302 certification for Chief Financial Officer | |||
|
32.1
|
Section
906 certifications for Chief Executive Officer and Chief Financial
Officer
|
|||
32
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant
to the requirements 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 | ||
| Date: August 6, 2010 | Richard A. Hubbell | |
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| /s/ Ben M. Palmer | ||
| Date: August 6, 2010 | Ben M. Palmer | |
| Vice President, Chief Financial Officer and Treasurer | ||
| (Principal Financial and Accounting Officer) | ||
33