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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

 (Mark One)
x    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2005
 
o             Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


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)

 
2170 Piedmont Road, NE, Atlanta, Georgia 30324
(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__

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X  No__

As of April 26, 2005 Marine Products Corporation had 39,200,831 shares of common stock outstanding.
 
 
1

 
Marine Products Corporation.
Table of Contents
 
 
 
Page
No.
      Item 1.
Financial Statements (Unaudited)
  
     
 
3
         
 
4
         
 
5
         
 
6-12
         
      Item 2.
13
         
      Item 3.
20
         
      Item 4.
20
         
 
 
      Item 1.
 
 
21
     
      Item 2.
21
     
      Item 3.
22
     
      Item 4.
22
     
      Item 5.
22
     
      Item 6.
22
     
 
23
   


2
 

MARINE PRODUCTS CORPORATION AND SUBSIDIARIES 
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
         
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2005 AND DECEMBER 31, 2004
(In thousands)
(Unaudited)
         
         
 
March 31,
  
December 31,
  
 
2005
  
2004
  
ASSETS
            
             
Cash and cash equivalents
$
49,161
  
$
46,615
  
Marketable securities
  
2,686
   
132
 
Accounts receivable, net
 
4,588
   
1,082
 
Inventories
  
29,189
   
25,869
 
Income taxes receivable
  
275
   
1,160
 
Deferred income taxes
  
3,169
   
3,006
 
Prepaid expenses and other current assets
  
1,816
   
876
 
    Total current assets
  
90,884
   
78,740
 
Property, plant and equipment, net
  
17,968
   
18,362
 
Goodwill and other intangibles, net
  
3,768
   
3,778
 
Marketable securities
  
5,911
   
6,202
 
Other assets
  
3,359
   
2,652
 
    Total assets
$
121,890
  
$
109,734
  
             
             
             
LIABILITIES AND STOCKHOLDERS' EQUITY
            
             
Accounts payable
$
10,038
  
$
6,224
  
Accrued expenses
  
13,151
   
10,527
 
    Total current liabilities
  
23,189
   
16,751
 
Pension liabilities
  
3,424
   
2,977
 
Deferred taxes
 
745
   
925
 
Other long-term liabilities
  
1,709
   
1,709
 
    Total liabilities
  
29,067
   
22,362
 
Common stock
  
3,920
   
3,894
 
Capital in excess of par value
  
36,722
   
34,239
 
Retained earnings
  
57,317
   
52,042
 
Accumulated other comprehensive loss
  
(939
)
  
(1,899
)
Deferred compensation
  
(4,197
)
  
(904
)
Total stockholders' equity
  
92,823
   
87,372
 
Total liabilities and stockholders' equity
$
121,890
  
$
109,734
  
             
The accompanying notes are an integral part of these consolidated statements.
            
 
 
3
 
 

MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
  
           
CONSOLIDATED STATEMENTS OF INCOME
  
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
  
(In thousands except per share data)
  
(Unaudited)
  
           
           
   
Three months ended March 31,
  
 
  
2005
  
2004
  
           
Net sales
  
$
72,586
  
$
61,830
  
Cost of goods sold
    
53,638
   
46,107
 
Gross profit
    
18,948
   
15,723
 
Selling, general and administrative expenses
   
8,847
   
7,159
 
Operating income
    
10,101
   
8,564
 
Interest income
    
291
   
122
 
Income before income taxes
    
10,392
   
8,686
 
Income tax provision
    
3,575
   
3,040
 
Net income
  
$
6,817
  
$
5,646
  
               
               
Earnings per share
              
Basic
 
$
0.18
  
$
0.15
  
Diluted
 
$
0.17
  
$
0.14
  
               
               
Dividends per share
  
$
0.040
  
$
0.027
  
               
               
Average shares outstanding
              
Basic
   
38,602
   
38,240
 
Diluted
   
40,930
   
40,659
 
               
The accompanying notes are an integral part of these consolidated statements.
              
 
 
 
4
 
 

MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
  
         
CONSOLIDATED STATEMENTS OF CASH FLOWS
  
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
  
(In thousands)
  
(Unaudited)
 
         
         
 
Three months ended March 31,
  
 
2005
  
2004
  
OPERATING ACTIVITES
            
     Net income
$
6,817
  
$
5,646
  
     Noncash charges (credits) to earnings:
            
        Depreciation, amortization and other non-cash charges
  
735
   
589
 
        Deferred income tax benefit
  
(323
)
  
(341
)
     (Increase) decrease in assets:
            
        Accounts receivable
 
(3,506
)
  
(4,075
)
        Inventories
 
(3,320
)
  
2,092
 
        Prepaid expenses and other current assets
  
(940
)
  
(520
)
        Income taxes receivable
  
885
   
1,008
 
        Other non-current assets
  
(707
)
  
(525
)
     Increase (decrease) in liabilities:
            
        Accounts payable
 
3,814
   
4,153
 
        Other accrued expenses
 
2,623
   
2,737
 
        Other long-term liabilities
  
447
   
(230
)
Net cash provided by operating activities
 
6,525
   
10,534
 
             
INVESTING ACTIVITIES
            
Capital expenditures
 
(163
)
  
(989
)
Net purchases of marketable securities
  
(2,319
)
  
(1,819
)
Net cash used for investing activities
 
(2,482
)
  
(2,808
)
             
FINANCING ACTIVITIES
            
Payment of dividends
  
(1,541
)
  
(1,032
)
Cash paid for common stock purchased and retired
  
(45
)
  
(169
)
Proceeds received upon exercise of stock options
  
89
   
164
 
Net cash used for financing activities
  
(1,497
)
  
(1,037
)
             
Net increase in cash and cash equivalents
  
2,546
   
6,689
 
Cash and cash equivalents at beginning of period
  
46,615
   
26,244
 
Cash and cash equivalents at end of period
$
49,161
  
$
32,933
  
             
             
The accompanying notes are an integral part of these consolidated statements.
            
 
 
5
 
MARINE PRODUCTS CORPORATIONS AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
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 (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
The balance sheet at December 31, 2004 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, 2004.

The Board of Directors, at its quarterly meeting on January 25, 2005, authorized a three-for-two stock split by the issuance on March 10, 2005 of one additional common share for every two common shares held of record on February 10, 2005. Accordingly, the par value of additional shares issued has been adjusted between common stock and capital in excess of par value, and fractional shares resulting from the stock split were settled in cash. All share and per share data appearing throughout this Form 10-Q have been retroactively adjusted to reflect the impact of this stock split.
 
2.  
EARNINGS PER SHARE
 
Statement of Financial Accounting Standard (“SFAS”) No. 128, “Earnings Per Share,” requires a basic earnings per share and diluted earnings per share presentation. The two calculations differ as a result of the dilutive effect of stock options and time lapse restricted shares and performance restricted shares included in diluted earnings per share, but excluded from basic earnings per share. Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the respective periods. A reconciliation of weighted shares outstanding is as follows: 
 
 
 
6
 
MARINE PRODUCTS CORPORATIONS AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 

(In thousands)
    
Three months ended March 31, 
  
     
2005
    
2004
  
Basic
    
38,602
    
38,240
  
Dilutive effect of stock
options and restricted  shares 
    
2,328
   
2,419
  
Diluted
    
40,930
    
40,659
  
 
3.  
RECENT ACCOUNTING PRONOUNCEMENTS
 
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—An Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges  regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2006, beginning on January 1, 2006. The Company is currently evaluating the effect that the adoption of SFAS 151 will have on its consolidated results of operations and financial condition.
 
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for  compensation cost and the transition method to be used at date of adoption. The transition methods include the modified prospective application and the modified retrospective application. Under the modified retrospective application, prior periods may  be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective application requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the modified retrospective application would record compensation expense for all unvested stock options and restricted
 
 
 
7
 
 
MARINE PRODUCTS CORPORATIONS AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
stock beginning with the first period restated. SFAS No. 123R states that the requirement is to adopt the provisions in the first interim or annual period beginning after June 15, 2005. However, the Securities and Exchange Commission issued a new rule that allows companies to implement Statement No. 123R at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. The Company will implement the provisions of SFAS 123R in the first quarter of 2006 pursuant to this rule. The Company is currently evaluating the impact of applying the various provisions of SFAS 123R.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“SFAS 153”). The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for non-monetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion 29 required that the accounting for an exchange of productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. By focusing the exception on exchanges that lack commercial substance, SFAS 153 intends to produce financial reporting that more faithfully represents the economics of the transaction. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005 with earlier application permitted for nonmonetary exchanges occurring in fiscal periods beginning after the date of issuance. The provisions are to be applied prospectively. The Company is currently evaluating the effect that the adoption of SFAS 153 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact.

FASB Staff Position (“FSP”) No. 109-1, “Application of FAS 109 to Tax Deduction on Qualified Production Activities,” issued in December 2004 (“FSP 109-1”), provides guidance on the application of FASB Statement No. 109, “Accounting for Income Taxes,” (“SFAS 109”), to the tax deduction on qualified production activities provided by the American Jobs Creation Act of 2004 (the “Jobs Act”). The Jobs Act was enacted on October 22, 2004. FSP 109-1 is intended to clarify that the domestic manufacturing deduction should be accounted for as a special deduction (rather than a rate reduction) under SFAS 109. A special deduction is recognized under SFAS 109 as it is earned. Marine Products has completed a preliminary evaluation to determine applicability and potential impact, if any, regarding the applicability of FSP 109-1. The Company currently estimates that the provisions of FSP 109-1 will generate an after-tax benefit of approximately $600,000 during 2005.
 
 
8
 
 
MARINE PRODUCTS CORPORATIONS AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

4.  
COMPREHENSIVE INCOME
 
The components of comprehensive income are as follows:
 
   
(in thousands)
 Three months ended March 31,
   
2005
  
2004
  
Net income as reported
  
$
6,817
  
$
5,646
  
Change in unrealized gain on  marketable securities, net of  taxes
   
(35
)
  
33
  
Comprehensive income
  
$
6,782
  
$
5,679
  


5.  
STOCK-BASED COMPENSATION

Marine Products accounts for its stock incentive plans using the intrinsic value method prescribed by Accounting Principles Board (”APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” If Marine Products had accounted for the stock incentive plans in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” reported net income per share would have been as follows:

 
         
(in thousands)
    
Three months ended March 31, 
  
     
2005
    
2004
  
Net income (as reported)
  
$
6,817
  
$
5,646
  
Add:       Stock-based employee compensation
cost, included in reported net income,
 net of related tax effect
    
167
    
17
  
Deduct:   Stock-based employee compensation
 cost, computed using the fair value
 method for all awards, net of related  tax effect
   
(257
)
  
(98
)
Pro forma net income
 
$
6,727
  
$
5,565
  
               
               
Earnings per share - as reported
              
Basic
  
$
0.18
  
$
0.15
  
Diluted
    
0.17
    
0.14
  
Earnings per share - Pro forma
              
Basic
  
$
0.17
  
$
0.15
  
Diluted
    
0.16
    
0.14
  
 
9
 
MARINE PRODUCTS CORPORATIONS AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
6.  
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 three months ended March 31, 2005 and 2004 was as follows: 

               
(in thousands)
    
2005
    
2004
  
Balances at beginning of year
 
$
3,796
  
$
2,846
  
Less: Payments made during the period
    
(1,312
)
  
(940
)
Add:   Warranty accruals during the period
    
1,102
    
934
  
Changes to warranty accruals issued in  prior periods
    
147
   
125
  
Balances at March 31
  
$
3,733
  
$
2,965
  

 
The Company is also a party to certain agreements with third party lenders that provide financing to the Company’s network of dealers. The agreements provide for the return of repossessed boats in “like new” condition to the Company, in exchange for the Company’s assumption of specified percentages of the unpaid debt obligation on those boats, up to certain contractually determined dollar limits. As of March 31, 2005 the maximum repurchase obligation outstanding under these agreements, which expire in 2005 and 2006, totaled approximately $4,003,000. The Company records the estimated fair value of the guarantee; at March 31, 2005, this amount was immaterial.


10
 
MARINE PRODUCTS CORPORATIONS AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.  
BUSINESS SEGMENT INFORMATION
The Company has only one reportable segment, its powerboat manufacturing business; therefore, the majority of the disclosures required by SFAS No. 131 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 on sales to international customers.


8.  
INVENTORIES

Inventories consist of the following:
 
 
          
(in thousands)
  
March 31, 2005
  
December 31, 2004
  
Raw materials and supplies
  
$
16,618
  
$
12,768
  
Work in process
    
5,132
    
6,721
  
Finished goods
    
7,439
    
6,380
  
Total inventories
  
$
29,189
  
$
25,869
  


9.  
INCOME TAXES

The Company determines its periodic income tax provision based upon the current period  income and the estimated annual effective tax rate for the Company. The rate is revised, if  necessary, as of the end of each successive interim period during the fiscal year to the  Company's best current estimate of its annual effective tax rate.



11
 
MARINE PRODUCTS CORPORATIONS AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10.  
EMPLOYEE BENEFIT PLAN

The following represents the net periodic defined benefit cost and related components for the Company’s pension plan.


(in thousands)
    
Three months ended March 31, 
  
     
2005
    
2004
  
Service cost
  
$
-
  
$
-
  
Interest cost
    
63
    
60
  
Expected return on plan assets
    
(71
)
  
(58
)
Amortization of:
              
Unrecognized net (gains)  and losses
    
30
    
22
  
Net periodic benefit cost
  
$
22
  
$
24
  
 
 
During the quarter ended March 31, 2005, the Company contributed $300,000 to the pension plan. The Company does not currently expect to make any additional contribution to the defined benefit plan in 2005.


12


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. A majority of these dealers finance their inventory through third-party floorplan lenders, who pay Marine Products generally within seven to 10 days of 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, 2004 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 — 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.

In the first quarter of 2005, we returned to previous production levels and realized efficiencies after adjusting some of our manufacturing processes during the fourth quarter of 2004. This coupled with an approximate one percent price increase effective January 1, 2005 contributed to the improvement in gross profit margin percent compared to the fourth quarter of 2004 and the first quarter of 2004. At the end of the quarter, our unit backlog was lower than at this time last year due to higher production levels during the last several months. The unit backlog remains strong; comparable to the levels at year-end. Although the unit backlog is lower than the comparable period in 2004, our production levels are expected to remain at current levels through the 2005 model year, which ends during the second quarter of 2005. Our dealer inventories were higher than at the end of the first quarter of 2004, and were slightly higher than at the end of 2004, in order to support anticipated retail sales during the remainder of 2005 model year. While we are comfortable with the current unit back log, dealer inventories and production levels, we are closely monitoring these key indicators as well as macroeconomic indicators such as consumer confidence and interest rates.
 
 
13
 
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
OUTLOOK

The discussion on the outlook for 2005 is incorporated herein by reference from the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004. There have been no significant changes in the outlook for the remainder of 2005.

RESULTS OF OPERATIONS

Key operating and financial statistics for the three months ended March 31, 2005 and 2004 follow:

       
($ in thousands)
  
Three months ended March 31
  
   
2005
  
2004
  
           
Total number of boats sold
    
2,049
    
1,843
  
Average gross selling price per boat
  
$
35.9
  
$
33.9
  
Net sales
 
$
72,586
  
$
61,830
  
Percentage of cost of goods sold to  net sales
    
73.9
%
  
74.6
%
Gross profit margin percent
    
26.1
%
  
25.4
%
Percentage of selling, general and  administrative expenses to net sales
    
12.2
%
  
11.6
%
Operating income
  
$
10,101
  
$
8,564
  
Warranty expense
  
$
1,249
  
$
1,059
  

THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004

Net sales for the three months ended March 31, 2005 increased $10.8 million or 17.4 percent compared to the comparable period in 2004. The increase in net sales was due to a 5.9 percent increase in the average selling price per boat and an 11.2 percent increase in the number of boats sold and an increase in parts and accessories sales. The increase in average selling price per boat was due to higher sales of larger SSi sportboats and Signature Cruisers, in addition to overall price increases that were implemented for the 2005 model year, which began in July 2004 and a one percent price increase that took effect in January 2005 to offset the higher cost of raw materials. The increase in unit sales was highlighted by enhanced sales of Sunesta deckboats and Robalo sport fishing boats.
 
 
14
 
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
 
Cost of goods sold for the three months ended March 31, 2005 was $53.6 million compared to $46.1 million for the comparable period in 2004, an increase of $7.5 million or 16.3 percent. The increase in cost of goods sold was primarily due to increases in sales. Cost of goods sold, as a percentage of net sales, decreased slightly in 2005 compared to 2004, due to efficiencies realized with higher production volumes and a favorable model mix.

Selling, general and administrative expenses for the three months ended March 31, 2005 were $8.8 million compared to $7.2 million for the comparable period in 2004, an increase of $1.6 million or 23.6 percent. The increase in selling, general and administrative expenses was due to incremental costs that vary with sales and profitability, such as sales commissions, and other incentive compensation, warranty expense, as well as increased costs associated with public company compliance. Warranty expense was 1.7 percent of net sales for the three months ended March 31, 2005 and March 31, 2004.

Operating income for the three months ended March 31, 2005 increased $1.5 million or 17.9 percent compared to the comparable period in 2004. Operating income was higher due to higher gross profit, partially offset by higher selling, general and administrative expenses during the period, as discussed above.

Interest income was $0.3 million during the three months ended March 31, 2005 compared to $0.1 million for the comparable period in 2004, an increase of $0.2 million or 138.5 percent. This increase resulted primarily from higher average investable balances of cash and marketable securities in the first quarter of 2005 compared to the first quarter of 2004. Marine Products generates interest income from investment of its available cash primarily in overnight and marketable securities.

Income tax provision for the three months ended March 31, 2005 reflects an effective tax rate of 34.4 percent, compared to 35.0 percent for the three months ended March 31, 2004. The decrease in rate reflects the effect of manufacturing deduction resulting from the American Jobs Creation Act of 2004. The income tax provision of $3.6 million was $0.6 million or 17.6 percent higher than the income tax provision of $3.0 million for the comparable period in 2004 as a result of higher operating income.




15
 
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

LIQUIDITY AND CAPITAL RESOURCES
 
Cash Flows

The following table sets forth the historical cash flows for:

         
($ in thousands)
    
Three months ended March 31,
  
     
2005 
    
2004 
  
               
Net cash provided by operating activities
  
$
6,525
  
$
10,534
  
Net cash used for investing activities
    
(2,482
)
  
(2,808
)
Net cash used for financing activities
  
$
(1,497
)
$
(1,037
)

Cash provided by operating activities for the three months ended March 31, 2005 decreased $4.0 million compared to the comparable period in 2004. Despite higher net income in the first quarter of 2005 compared to the comparable period in 2004, cash provided by operating activities decreased due to  increased working capital requirements, primarily inventories. This increase was primarily due to higher requirements for raw materials and supplies to support current production levels and to a lesser extent due to timing of delivery of finished goods.

Cash used for investing activities for the three months ended March 31, 2005 decreased $0.3 million compared to the comparable period in 2004, resulting from lower capital expenditures partially offset by higher investments in marketable securities in the first quarter of 2005 compared to the comparable period in the prior year.

Cash used for financing activities for the three months ended March 31, 2005 increased $0.5 million primarily due to an increase in dividend payments resulting from the 50 percent increase to $0.04 per share.

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 expected to be generated from operations, will provide sufficient capital to meet the Company’s requirements for the remainder of 2005. The Company believes that the liquidity will allow it the ability to continue to grow and provide the opportunity to take advantage of business opportunities that may arise.

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. During the three months ended March 31, 2005, cash and cash equivalents increased by $2.5 million.
 

 
16
 
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
 
Cash Requirements

The Company currently expects that capital expenditures during 2005 will be approximately $6.0 million, of which $0.2 million has been spent through March 31, 2005.

The Company participates in a multiple employer Retirement Income Plan, sponsored by RPC, Inc. (“RPC”). The Company contributed $0.3 million to the multiple employer pension plan in the first quarter of 2005. The Company does not currently expect to make any additional contribution to this plan in 2005.

On January 25, 2005, the Board of Directors approved a 50 percent increase in the quarterly cash dividend, from $0.027 to $0.040. Based on the shares outstanding on March 31, 2005, the amount payable each quarter would be approximately $1.6 million. The Company expects to continue to pay cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors.

The Company has purchased a total of 949,726 shares in the open market pursuant to a resolution in April 2001 by the Board of Directors and, as of March 31, 2005, can buy back 1,300,274 additional shares under the program. Details regarding the shares repurchased during the quarter have been disclosed in Part II, Item 2 of this document.

The Company has an immaterial amount of obligations and commitments that require future payments. See the section titled Off Balance Sheet Arrangements for details regarding agreements that the Company has with third-party dealer floor plan lenders.

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 6 to these Consolidated Financial Statements for a detail of activity in the warranty accrual account during the three months ended March 31, 2005 and 2004.


OFF BALANCE SHEET ARRANGEMENTS

To assist dealers in obtaining financing for the purchase of its boats for inventory, the Company has entered into agreements with various dealers and selected third-party lenders to guarantee varying amounts of qualifying dealers’ debt obligations. The Company’s obligation under these guarantees becomes effective in the case of default by the dealer. The agreements provide for the return of all repossessed boats in “like new” condition to the Company, in exchange for the Company’s assumption of specified percentages of the dealers’ unpaid debt obligation on those boats. As of March 31, 2005, the maximum repurchase obligation outstanding under these agreements which expire in 2005 and 2006 totaled approximately $4.0 million. The Company has recorded the estimated fair value of this guarantee; at March 31, 2005, this amount is immaterial and did not change from the prior year.
 
 
17
 
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

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, 2004. During the three months ended March 31, 2005, the Company reimbursed RPC for its allocable share of administrative costs incurred for services rendered on behalf of Marine Products totaling $158,000 compared to $145,000 for the comparable period in 2004.

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, 2004. There have been no significant changes in the critical accounting policies since year-end.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

See Note 3 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 the general economic conditions in the United States. 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.
 

 
18

MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
 
INFLATION

Recently, the Company has experienced an increase in certain raw material costs. The Company responded to this increase in raw materials costs by instituting price increases to its dealers effective January 1, 2005. We believe these price increases effectively offset the increased raw materials costs during the quarter ended March 31, 2005. If the prices of these raw materials begin to increase again, or the prices of other factors of production increase, Marine Products will attempt to increase its product prices to offset its increased costs. No assurance can be given, however, that the Company will be able to adequately increase its product prices in response to inflation or estimate the impact of increasing product prices on future sales.

New boat buyers typically finance their purchases. Higher inflation typically results in higher interest rates that could translate into increased cost of boat ownership. Prospective buyers may choose to delay their purchases or buy a less expensive boat.


FORWARD-LOOKING STATEMENTS

Certain statements made in this report that are not historical facts are “forward-looking statements” under Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements that relate to the Company's business strategy, plans and objectives, market risk exposure, adequacy of capital resources and funds, opportunity for continued growth, ability to effect future price increases, estimates regarding boat repurchase obligations, estimated pension contributions, the impact of SFAS 151, SFAS 123R, SFAS 153 and FSP 109-1 and the Company's beliefs and expectations regarding future demand for the Company's products and services and other events and conditions that may influence the Company's performance in the future.

The words “may,” “should,” “will,” “expect,” “believe,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “project,” “estimate,” and similar expressions used in this document that do not relate to historical facts are intended to identify forward-looking statements. Such statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. 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 those described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and the following: Marine Products’ dependence on its network of independent boat dealers, which may affect its growth plans and net sales, weather conditions, personal injury or property damage claims, inability to obtain adequate raw materials, inability to continue to increase the production of the Robalo product line, realization of repurchase obligations under agreements with third-party dealer floor plan lenders, actual warranty claims being higher than estimated, the effects of the economy and inflation, on the demand for power boats, competitive nature of the recreational boat industry, inability to complete acquisitions, loss of key personnel, or ability to attract and retain qualified personnel.

 
19
 
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 March 31, 2005, did not hold derivative financial instruments that could expose the Company to significant market risk. Also, as of March 31, 2005, the Company’s investment portfolio, totaling approximately $8.6 million and comprised of United States Government, corporate and municipal 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. Marine Products did not experience any material changes in market risk exposures or how those risks are managed during the first quarter of 2005, and currently expects no such changes through the end of the year.


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, March 31, 2005 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of the Evaluation Date.

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.
 
 
20

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 outcomes of such litigation will have a material adverse effect on the financial position or results of operations of Marine Products.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Share Repurchases

Shares repurchased during the three months ended March 31, 2005 were as follows:
 

Period
  
Total Number
of Shares
(or Units)
Purchased
      
Average Price
Paid Per Share
(or Unit)
  
Total number
of Shares
(or Units)
Purchased as
Part of
Publicly
Announced
Plans or
Programs
  
Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs (3)
  
Month #1
January 1, 2005 to January 31, 2005
    
0
        
$
0
    
0
   
1,300,274
  
                                 
Month #2
February 1, 2005 to February 28, 2005
    
15,171
    
(1)
 
$
19.17
    
0
   
1,300,274
  
                                 
Month #3
March 1, 2005 to March 31, 2005
    
2,580
    
(2)
 
$
17.46
    
0
   
1,300,274
  
                                 
Totals
    
17,751
        
$
18.92
    
0
    
1,300,274
  

 
(1)  
A total of 13,671 shares were tendered to the Company in payment for option exercises at an average price of $19.28 per share and 1,500 shares were purchased by a certain director for his own account at an average price of $18.15 per share.
(2)  
All of the shares were tendered to the Company in payment for taxes related to the release of restricted shares.
(3)  
The Company’s Board of Directors announced a stock buyback program on April 25, 2001 authorizing the repurchase of 2,250,000 shares in the open market. A total of 949,726 shares have been repurchased through March 31, 2005. Currently the program does not have a predetermined expiration date.
 

 
21

MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
 
 
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. Exhibits
 

Exhibit Number
Description
   
3.1
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).
   
3.2
By-laws of Marine Products Corporation (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2004).
   
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).
   
10.14
Summary of ‘at will’ compensation arrangements with the Executive Officers (incorporated herein by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K filed on March 15, 2005).
   
10.15
Summary of compensation arrangements with the Directors (incorporated herein by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K filed on March 15, 2005).
   
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

 

22
 
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: May 6, 2005
Richard A. Hubbell
President and Chief Executive Officer
  (Principal Executive Officer)
   
   
   /s/ Ben M. Palmer
 Date: May 6, 2005     
Ben M. Palmer
Vice President, Chief Financial Officer and Treasurer
  (Principal Financial and Accounting Officer)
 
 
 
23