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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 SEPTEMBER 30, 2004
[ ] 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 (I.R.S. Employer
incorporation or organization) 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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of October 15, 2004, Marine Products Corporation had 25,962,074 shares of
common stock outstanding.
MARINE PRODUCTS CORPORATION.
Table of Contents
PART I. FINANCIAL INFORMATION PAGE
NO.
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -
As of September 30, 2004 and December 31, 2003 3
Consolidated statements of income - for the three and nine months ended
September 30, 2004 and 2003 4
Consolidated statements of cash flows - for the nine months ended September 30, 2004
and 2003 5
Notes to consolidated financial statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
SIGNATURES 22
2
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(In thousands)
(Unaudited)
SEPTEMBER 30, December 31,
2004 2003
- ------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $34,757 $26,244
Marketable securities 5,291 1,402
Accounts receivable, net 4,762 3,970
Inventories 25,908 21,770
Income taxes receivable 945 1,073
Deferred income taxes 2,442 2,265
Prepaid expenses and other current assets 974 616
- ------------------------------------------------------------------------------------------------------------
Total current assets 75,079 57,340
Property, plant and equipment, net 18,212 17,761
Intangibles, net 3,788 3,818
Marketable securities 5,762 5,930
Other assets 2,488 1,465
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $105,329 $86,314
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $7,824 $2,730
Accrued expenses 9,158 8,626
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 16,982 11,356
Pension liabilities 2,323 2,233
Deferred income taxes 772 1,160
Other long-term liabilities 1,734 1,599
- ------------------------------------------------------------------------------------------------------------
Total liabilities 21,811 16,348
- ------------------------------------------------------------------------------------------------------------
Common stock 2,596 2,573
Capital in excess of par value 35,825 35,722
Retained earnings 47,609 32,409
Accumulated other comprehensive loss (515) (509)
Deferred compensation (1,997) (229)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 83,518 69,966
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $105,329 $86,314
============================================================================================================
The accompanying notes are an integral part of these consolidated statements.
3
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(In thousands except per share data)
(Unaudited)
Three months ended September 30, Nine months ended September 30,
------------------------------- -------------------------------
2004 2003 2004 2003
- ---------------------------------------------------------------------------- -------------------------------
NET SALES $63,129 $44,903 $189,734 $146,961
Cost of goods sold 46,012 33,400 139,923 109,815
------------ ------------ ------------ ------------
Gross profit 17,117 11,503 49,811 37,146
Selling, general and administrative expenses 7,475 4,937 22,130 16,611
------------ ------------ ------------ ------------
Operating income 9,642 6,566 27,681 20,535
Interest income 139 75 375 410
------------ ------------ ------------ ------------
Income before income taxes 9,781 6,641 28,056 20,945
Income tax provision 3,537 2,182 9,770 7,331
------------ ------------ ------------ ------------
NET INCOME $6,244 $4,459 $18,286 $13,614
============ ============ ============ ============
EARNINGS PER SHARE
Basic $0.24 $0.18 $0.71 $0.54
============ ============ ============ ============
Diluted $0.23 $0.17 $0.67 $0.51
============ ============ ============ ============
DIVIDENDS PER SHARE $0.040 $0.027 $0.120 $0.081
============ ============ ============ ============
AVERAGE SHARES OUTSTANDING
Basic 25,699 25,405 25,618 25,362
============ ============ ============ ============
Diluted 27,202 26,847 27,166 26,788
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
4
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(In thousands)
(Unaudited)
Nine months ended September 30
-----------------------------------------
2004 2003
- ---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITES
NET INCOME $18,286 $13,614
Noncash charges (credits) to earnings:
Depreciation, amortization and other non-cash charges 1,921 1,741
Deferred income tax (benefit) provision (562) 2,403
(Increase) decrease in assets:
Accounts receivable (792) (5,313)
Inventories (4,138) 795
Prepaid expenses and other current assets (358) 807
Income taxes receivable 1,002 (1,265)
Other non-current assets (979) (609)
Increase (decrease) in liabilities:
Accounts payable 5,094 1,120
Income taxes payable - (1,889)
Other accrued expenses 532 (246)
Other long-term liabilities 225 919
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,231 12,077
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (2,146) (3,372)
Net purchase of marketable securities (3,774) (603)
- ---------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (5,920) (3,975)
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payment of dividends (3,086) (2,051)
Cash paid for common stock purchased and retired (3,544) (2,271)
Proceeds received upon exercise of stock options 832 569
- ---------------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (5,798) (3,753)
- ---------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 8,513 4,349
Cash and cash equivalents at beginning of period 26,244 17,280
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $34,757 $21,629
=========================================================================================================
The accompanying notes are an integral part of these consolidated statements.
5
MARINE PRODUCTS CORPORATION 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
and nine months ended September 30, 2004 are not necessarily indicative
of the results that may be expected for the year ending December 31,
2004.
The balance sheet at December 31, 2003 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, 2003.
The Board of Directors, at its quarterly meeting on January 27, 2004,
authorized a three-for-two stock split by the issuance on March 10, 2004
of one additional common share for every two common shares held of
record on February 10, 2004. 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
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 CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) Three months ended Nine months ended
September 30, September 30,
--------------------------------------------------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Basic 25,699 25,405 25,618 25,362
Dilutive effect of stock
options and restricted shares 1,503 1,442 1,548 1,426
----------------------------------------------------
Diluted 27,202 26,847 27,166 26,788
====================================================
3. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable
Interest Entities." The Interpretation requires that a variable interest
entity be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns or both. The Company has completed an evaluation of its
relationships with various dealerships that sell its products and has
concluded that none of them are variable interest entities under the
provisions of FIN 46. Therefore, the adoption of the Interpretation did
not have a material impact on the financial position, results of
operations or liquidity of the Company.
In March 2004, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments." EITF 03-1
applies to investments accounted for under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and SFAS No. 124,
"Accounting for Certain Investments Held by Not-for-Profit
Organizations." EITF 03-1 provides a basic three-step model to evaluate
whether the impairment is other than temporary. This model for
evaluating impairment must be applied to all current and prospective
investments beginning in the second quarter of 2004. Qualitative and
quantitative disclosures are effective for the fiscal year ending
December 31, 2004. The adoption of EITF 03-1 did not have a material
impact on the financial position, results of operations or liquidity of
the Company.
7
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
-------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Three months ended Nine months ended
September 30 September 30
-------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------
Net income as reported $ 6,244 $ 4,459 $ 18,286 $ 13,614
Change in unrealized gain on
marketable securities, net of
taxes 35 5 (6) (73)
-------------------------------------------------------------------------------------------------------
Comprehensive income $ 6,279 $ 4,464 $ 18,280 $ 13,541
=======================================================================================================
5. STOCK-BASED COMPENSATION
Marine Products accounts for its stock incentive plan using the
intrinsic value method prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." 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 Nine months ended
September 30 September 30
------------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income - as reported $ 6,244 $ 4,459 $ 18,286 $ 13,614
Add: Stock-based employee compensation
cost, included in reported net income, net
of related tax effect 65 17 127 51
Deduct: Stock-based employee compensation
cost, computed using the fair value
method for all awards, net of related
tax effect (149) (101) (374) (300)
------------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 6,160 $ 4,375 $ 18,039 $ 13,365
========================================================================================================================
8
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per share - as reported
Basic $ 0.24 $ 0.18 $ 0.71 $ 0.54
Diluted 0.23 0.17 0.67 0.51
========================================================================================================================
Earnings per share - Pro forma
Basic $ 0.24 $ 0.17 $ 0.70 $ 0.53
Diluted 0.23 0.16 0.66 0.50
========================================================================================================================
6. WARRANTY ACCRUALS
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.
Activity in the warranty accrual for the nine months ended September 30,
2004 and 2003 was as follows:
--------------------------------------------------------------------------------------------
(IN THOUSANDS) 2004 2003
--------------------------------------------------------------------------------------------
Balances at beginning of year $ 2,846 $ 1,944
Less: Payments made during the period (2,977) (1,827)
Add: Warranties issued during the period 2,852 2,158
Changes in estimated expenditures
for warranties issued in prior periods 380 145
--------------------------------------------------------------------------------------------
Balances at September 30 $ 3,101 $ 2,420
============================================================================================
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 September 30,
2004, the maximum repurchase obligation outstanding under these
agreements, which expire in 2004 and 2005, totaled approximately
$3,500,000. The Company records the estimated fair value of the
guarantee; at September 30, 2004, this amount was immaterial.
9
MARINE PRODUCTS CORPORATION 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) SEPTEMBER 30, 2004 December 31, 2003
-------------------------------------------------------------------------------------------------------
Raw materials and supplies $ 14,542 $ 9,485
Work in process 5,078 5,889
Finished goods 6,288 6,396
-------------------------------------------------------------------------------------------------------
Total inventories $ 25,908 $ 21,770
=======================================================================================================
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.
10
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 Nine months ended
September 30 September 30
--------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------------------------------------------
Service cost $ - $ - $ - $ -
Interest cost 60 7 180 17
Expected return on plan assets (57) (3) (173) (7)
Amortization of:
Unrecognized net (gains)
and losses 20 - 64 -
--------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 23 $ 4 $ 71 $ 10
========================================================================================================
As of September 30, 2004, the Company contributed approximately $630,000
to the pension plan. The Company does not currently expect to make any
additional contribution to the defined benefit plan in 2004.
11
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Marine Products Corporation, through its wholly-owned subsidiaries Chaparral and
Robalo, is a leading manufacturer of recreational fiberglass powerboats. The
Company sells its products 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.
The Company operates under a single business segment, its Powerboat
Manufacturing business. Marine Products' mission is to maximize the boating
experience by providing its customers with high-quality, innovative powerboats
and related products and services. Chaparral competes in the sterndrive and
inboard engine-powered sportboat, deckboat and cruiser markets, manufacturing
boats from 18 to 35 feet in length. The Company's Robalo brand competes in the
outboard engine-powered sport fishing boat market, manufacturing boats from 19
to 26 feet in length.
Marine Products' business is impacted by economic conditions, consumer
confidence, interest rates, the weather, and other factors. The Company's
management believes that it has the opportunity to continue to enhance its
customers' boating experience by providing them with high quality, innovative
powerboats, and thereby increase its market share, net sales, and net income.
Marine Products' management is also focused on the competitive nature of the
recreational powerboat manufacturing business and factors that may lead to a
decline in consumer confidence or consumers' discretionary income, both of which
could negatively impact sales of the Company's powerboats.
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, 2003. There have been no significant changes in the critical
accounting policies since year-end.
12
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
Key operating and financial statistics for the three and nine months ended
September 30, 2004 and 2003 follow:
---------------------------------------------------------------------------------------------------------------------
($ IN THOUSANDS) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------
Total number of boats sold 1,804 1,387 5,546 4,802
Average sales price per boat $ 30.1 $ 27.9 $ 29.6 $ 26.7
Net sales $ 63,129 $ 44,903 $ 189,734 $ 146,961
Percentage of cost of goods sold to
net sales 72.9% 74.4% 73.7% 74.7%
Gross profit margin percent 27.1% 25.6% 26.3% 25.3%
Percentage of selling, general and
administrative expense to net sales 11.8% 11.0% 11.7% 11.3%
Operating income $ 9,642 $ 6,566 $ 27,681 $ 20,535
Warranty expense $ 1,073 $ 657 $ 3,232 $ 2,303
---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
NET SALES for the three months ended September 30, 2004 increased $18,226,000 or
40.6 percent. The increase in net sales was due to a 7.9 percent increase in the
average sales price per boat and a 30.1 percent increase in the number of boats
sold and an increase in parts and accessories sales. The increase in average
sales price per boat was due to higher sales of larger SSi sportboats, and a
favorable model mix at Robalo in addition to overall price increases that were
implemented for the 2005 model year, which began in July 2004. All four lines
experienced increased unit sales and higher average sales prices. The increase
in unit sales was highlighted by enhanced sales of SSi sportboats and Robalo
sport fishing boats. The third quarter of 2004 was marked by several severe
hurricanes in Florida, which is a large boating market. The storms did not have
a material negative impact on the financial results for the quarter, due to the
backlog of orders from dealers in the other markets served by the Company. All
of the Company's dealers that were impacted by the storms have resumed normal
operations.
COST OF GOODS SOLD for the three months ended September 30, 2004 was $46,012,000
compared to $33,400,000 for the three months ended September 30, 2003, an
increase of $12,612,000 or 37.8 percent. The increase in cost of goods sold was
due to increases in sales. Cost of goods sold, as a percentage of net sales,
decreased slightly in 2004 compared to 2003, due to higher unit sales of larger
boats, which generate higher profit margins, and improvements in manufacturing
efficiencies realized at higher production volumes.
13
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the three months ended
September 30, 2004 were $7,475,000 compared to $4,937,000 for the three months
ended September 30, 2003, an increase of $2,538,000, or 51.4 percent. The
increase in selling, general and administrative expenses was due to incremental
costs that vary with sales and profitability, such as sales commissions, other
incentive compensation and warranty expense, as well as increased costs
associated with public company compliance. Warranty expense for the three months
ended September 30, 2004 was 1.7 percent of net sales compared to 1.5 percent of
net sales for the three months ended September 2003. Warranty expense tends to
be higher for larger sportboats and cruisers compared to the other lines and the
Company sold a higher volume of the larger boats in the third quarter of 2004
compared to the third quarter of 2003.
OPERATING INCOME for the three months ended September 30, 2004 increased
$3,076,000 or 46.8 percent compared to operating income for the comparable
period in 2003. Operating income was higher due to higher net sales, partially
offset by higher cost of goods sold and selling, general and administrative
expenses during the period, as discussed above.
INTEREST INCOME was $139,000 during the three months ended September 30, 2004
compared to $75,000 in the prior year period, an increase of $64,000 or 85.3
percent. This increase resulted from higher investment returns, coupled with
higher average investable balances of cash and marketable securities in the
third quarter of 2004 compared to the third quarter of 2003. Marine Products
generates interest income from investment of its available cash primarily in
overnight and marketable debt securities.
INCOME TAX PROVISION for the three months ended September 30, 2004 reflects an
effective tax rate of 36.2 percent, compared to 32.9 percent for the three
months ended September 30, 2003. The income tax provision in the third quarter
of 2003 included an adjustment to reduce the estimated effective tax rate from
36 percent to 35 percent. The effective tax rate change increased 2003 third
quarter net income by approximately $140,000. The income tax provision of
$3,537,000 was $1,355,000 or 62.1 percent higher than the income tax provision
of $2,182,000 for the three months ended September 30, 2003 as a result of
higher operating income, together with the higher effective tax rate.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
NET SALES for the nine months ended September 30, 2004 increased $42,773,000 or
29.1 percent. The increase in net sales was due to a 10.8 percent increase in
the average sales price per boat and a 15.5 percent increase in the number of
boats sold and an increase in parts and accessories sales. The increase in
average sales price per boat was due to a favorable model mix, highlighted by
volume increases in cruisers, sales of larger sportboats, and increases in sales
of sport fishing boats, in addition to overall price increases that were
implemented for the 2004 and 2005 model years. All four lines experienced an
increase in unit sales.
14
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
COST OF GOODS SOLD for the nine months ended September 30, 2004 was $139,923,000
compared to $109,815,000 for the nine months ended September 30, 2003, an
increase of $30,108,000 or 27.4 percent. The increase in cost of goods sold was
due to increases in sales. Cost of goods sold, as a percentage of net sales,
decreased in 2004 compared to 2003, due to higher unit sales of larger boats,
which generate higher profit margins, and improvements in manufacturing
efficiencies realized at higher production volumes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the nine months ended September
30, 2004 were $22,130,000 compared to $16,611,000 for the nine months ended
September 30, 2003, an increase of $5,519,000, or 33.2 percent. The increase in
selling, general and administrative expenses was due to incremental costs that
vary with sales and profitability, such as sales commissions, other incentive
compensation and warranty expense, as well as increased costs associated with
public company compliance. Warranty expense for the nine months ended September
30, 2004 was 1.7 percent of net sales, compared to 1.6 percent of net sales for
the nine months ended September 30, 2003. Warranty expenses tend to be higher
for larger sportboats and cruisers compared to smaller models and the Company
sold a higher volume of larger boats in the first nine months of 2004 as
compared to the comparable period of 2003.
OPERATING INCOME for the nine months ended September 30, 2004 increased
$7,146,000 or 34.8 percent compared to operating income for the comparable
period in 2003. Operating income was higher due to higher net sales, partially
offset by higher cost of goods sold and selling, general and administrative
expenses during the period, as discussed above.
INTEREST INCOME was $375,000 during the nine months ended September 30, 2004
compared to $410,000 in the prior year period, a decrease of $35,000 or 8.5
percent. This decrease resulted from lower investment returns due to lower
market interest rates, partially offset by higher average investable balances of
cash and marketable securities during the nine months ended September 30, 2004
compared to the nine months ended September 30, 2003. Marine Products generates
interest income from investment of its available cash primarily in overnight and
marketable debt securities.
INCOME TAX PROVISION for the nine months ended September 30, 2004 reflects an
effective tax rate of 34.8 percent, compared to 35.0 percent for the nine months
ended September 30, 2003. The income tax provision of $9,770,000 was $2,439,000
or 33.3 percent higher than the income tax provision of $7,331,000 for the nine
months ended September 30, 2003 as a result of higher operating income.
LIQUIDITY AND CAPITAL RESOURCES
15
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30
------------------------------------------------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 20,231 $ 12,077
Net cash used for investing activities (5,920) (3,975)
Net cash used for financing activities $ (5,798) $ (3,753)
------------------------------------------------------------------------------------------------------------------
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 nine months ended
September 30, 2004, cash and cash equivalents increased by $8,513,000.
Cash provided by operating activities for the nine months ended September 30,
2004 increased $8,154,000 compared to the nine months ended September 30, 2003.
The increase resulted primarily from higher net income coupled with increases in
accounts payable, increases in other accrued expenses and smaller increases in
accounts receivable, all due to timing differences. These increases in cash were
partially offset by higher inventories correlated with higher sales and related
manufacturing activities.
Cash used for investing activities for the nine months ended September 30, 2004
increased $1,945,000 compared to the nine months ended September 30, 2003. The
increase in cash used resulted from higher investments in marketable securities
partially offset by lower capital expenditures in 2004 compared to the prior
year. The Company has invested $2,146,000 in capital expenditures as of
September 30, 2004 and expects that capital expenditures for all of 2004 will be
approximately $2,500,000.
Cash used for financing activities for the nine months ended September 30, 2004
increased $2,045,000. The increase in cash used was due to a higher cost of
share repurchases, primarily due to higher prices paid per share in 2004
compared to 2003, and an increase in dividend payments resulting from the
Company's decision during the first quarter of 2004 to increase its quarterly
dividend by 50 percent to $0.04 per share. Details regarding the shares
repurchased during the quarter have been disclosed in Part II, Item 2 of this
document.
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 at least the next twelve months. 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 participates in a multiple employer Retirement Income Plan,
sponsored by RPC, Inc. The Company contributed approximately $630,000 to the
multiple employer pension plan in
16
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
the first quarter of 2004. The Company does not currently expect to make any
additional contribution to the defined benefit plan in 2004.
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 nine months ended September
30, 2004 and 2003.
OFF BALANCE SHEET ARRANGEMENTS
GUARANTEES. To assist dealers in obtaining financing for the purchase of its
boats, the Company has entered into agreements with various dealers and
financing institutions to guarantee varying amounts of qualifying dealers' debt
obligations related to inventory purchases. 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 unpaid debt obligation on those boats. As of September 30,
2004, the maximum repurchase obligation outstanding under these agreements,
which expire in 2004 and 2005 totaled approximately $3,500,000. The Company
records the estimated fair value of the guarantee; at September 30, 2004, this
amount is immaterial. The Company has no other off balance sheet arrangements as
defined in the SEC rules.
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.
INFLATION
Inflation has not had a material effect on Marine Products' operations. If
inflation increases, Marine Products will attempt to increase its prices to
offset its increased costs. No assurance can be given, however, that the Company
will be able to adequately increase its prices in response to inflation.
Inflation can also impact Marine Products' sales and profitability. New boat
buyers typically finance
17
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
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 132R
and EITF 03-1 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, 2003 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, 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.
18
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 September 30, 2004, did not hold derivative financial instruments that
could expose the Company to significant market risk. Also, as of September 30,
2004, the Company's investment portfolio totaling approximately $11,053,000
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. Marine Products
does not expect any material changes in market risk exposures or how those risks
are managed.
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, September 30, 2004 (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 - There were no 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.
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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 September 30, 2004 were as
follows:
--------------------------------------------------------------------------------------------------------------------------
Period Total Number of Average Price Total number of Maximum Number (or
Shares Paid Per Share Shares (or Approximate Dollar
(or Units) (or Unit) Units) Value) of Shares (or
Purchased Purchased as Units) that May Yet
Part of Be Purchased Under
Publicly the Plans or Programs
Announced Plans
or Programs
--------------------------------------------------------------------------------------------------------------------------
Month #1 0 $ 0 0 939,949
July 1, 2004 to
July 31, 2004
Month #2 16,700 $ 16.39 16,700 923,249
August 1, 2004 to
August 31, 2004
Month #3 40,225 (1) $ 16.40 (1) 37,000 886,249
September 1, 2004 to
September 30, 2004
--------------------------------------------------------------------------------------------------------------------------
Totals 56,925 $ 16.40 53,700 886,249
==========================================================================================================================
(1) Includes 3,225 shares tendered at an average price of $17.92 per
share in connection with option exercises
The Company's Board of Directors announced a stock buyback program in April 2001
authorizing the repurchase of 1,500,000 shares in the open market. Currently the
program does not have a predetermined expiration date.
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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 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).
10.1 Form of Stock Option grant agreement
10.2 Form of Time Lapse Restricted Stock grant
agreement
10.3 Form of Performance Restricted Stock grant
agreement
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
21
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: November 1, 2004 Richard A. Hubbell
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Ben M. Palmer
--------------------------------------------
Date: November 1, 2004 Ben M. Palmer
Vice President, Chief Financial Officer and
Treasurer
(Principal Financial and Accounting Officer)
22