10-Q 1 t10q-3291.txt 10-Q 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 JUNE 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 Identification Number) incorporation or organization) 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 July 15, 2004, Marine Products Corporation had 25,979,161 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 June 30, 2004 and December 31, 2003 3 Consolidated statements of income - for the three and six months ended June 30, 2004 and 2003; 4 Consolidated statements of cash flows - for the six months ended June 30, 2004 and 2003 5 Notes to consolidated financial statements 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Item 4. Controls and Procedures 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 18 Item 3. Defaults upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 22 2
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2004 AND DECEMBER 31, 2003 (In thousands) (Unaudited) JUNE 30, December 31, 2004 2003 -------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $34,785 $26,244 Marketable securities 2,319 1,402 Accounts receivable, net 6,354 3,970 Inventories 24,807 21,770 Income taxes receivable 1,696 1,073 Deferred income taxes 2,571 2,265 Prepaid expenses and other current assets 698 616 -------------------------------------------------------------------------------------------- Total current assets 73,230 57,340 Property, plant and equipment, net 18,079 17,761 Intangibles, net 3,798 3,818 Marketable securities 5,910 5,930 Other assets 2,220 1,465 -------------------------------------------------------------------------------------------- TOTAL ASSETS $103,237 $86,314 ============================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $7,522 $2,730 Accrued expenses 11,709 8,626 -------------------------------------------------------------------------------------------- Total current liabilities 19,231 11,356 Pension liabilities 2,157 2,233 Deferred taxes 1,227 1,160 Other long-term liabilities 1,599 1,599 -------------------------------------------------------------------------------------------- Total liabilities 24,214 16,348 -------------------------------------------------------------------------------------------- Common stock 2,598 2,573 Capital in excess of par value 36,606 35,722 Retained earnings 42,391 32,409 Accumulated other comprehensive loss (549) (509) Deferred compensation (2,023) (229) -------------------------------------------------------------------------------------------- Total stockholders' equity 79,023 69,966 -------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $103,237 $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 SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (In thousands except per share data) (Unaudited) Three months ended June 30, Six months ended June 30, ------------------------------ ------------------------------- 2004 2003 2004 2003 --------------------------------------------------------------------------------- ------------------------------- NET SALES $64,775 $51,951 $126,605 $102,058 Cost of goods sold 47,804 38,400 93,911 76,415 --------------- ------------- --------------- -------------- Gross profit 16,971 13,551 32,694 25,643 Selling, general and administrative expenses 7,496 6,022 14,655 11,675 --------------- ------------- --------------- -------------- Operating income 9,475 7,529 18,039 13,968 Interest income 114 222 236 335 --------------- ------------- --------------- -------------- Income before income taxes 9,589 7,751 18,275 14,303 Income tax provision 3,193 2,790 6,233 5,149 --------------- ------------- --------------- -------------- NET INCOME $6,396 $4,961 $12,042 $9,154 =============== ============= =============== ============== EARNINGS PER SHARE Basic $0.25 $0.20 $0.47 $0.36 =============== ============= =============== ============== Diluted $0.24 $0.19 $0.44 $0.34 =============== ============= =============== ============== DIVIDENDS PER SHARE $0.040 $0.027 $0.080 $0.054 =============== ============= =============== ============== AVERAGE SHARES OUTSTANDING Basic 25,662 25,282 25,577 25,347 =============== ============= =============== ============== Diluted 27,216 26,636 27,139 26,748 =============== ============= =============== ============== The accompanying notes are an integral part of these consolidated statements. 4
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (In thousands) (Unaudited) Six months ended June 30 ----------------------------- 2004 2003 ------------------------------------------------------------------------------------------------- OPERATING ACTIVITES NET INCOME $12,042 $9,154 Noncash charges (credits) to earnings: Depreciation, amortization and other non-cash charges 1,232 1,144 Deferred income tax benefit (217) (653) (Increase) decrease in assets: Accounts receivable (2,384) (4,566) Inventories (3,037) 2,513 Prepaid expenses and other current assets (82) 883 Income taxes receivable 251 - Other non-current assets (742) (603) Increase (decrease) in liabilities: Accounts payable 4,792 23 Income taxes payable - 870 Other accrued expenses 3,083 1,864 Other long-term liabilities (76) (68) ------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 14,862 10,561 ------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures (1,435) (2,873) Net purchase of marketable securities (973) (1,632) ------------------------------------------------------------------------------------------------- NET CASH USED FOR INVESTING ACTIVITIES (2,408) (4,505) ------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Payment of dividends (2,060) (1,366) Cash paid for common stock purchased and retired (2,612) (2,046) Proceeds received upon exercise of stock options 759 402 ------------------------------------------------------------------------------------------------- NET CASH USED FOR FINANCING ACTIVITIES (3,913) (3,010) ------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 8,541 3,046 Cash and cash equivalents at beginning of period 26,244 17,280 ------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $34,785 $20,326 ================================================================================================= 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 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 period ended June 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 Six months ended ended June 30, June 30, ------------------------------------------------------------------------------------------ 2004 2003 2004 2003 ---- ---- ---- ---- Basic 25,662 25,282 25,577 25,347 Dilutive effect of stock options and restricted 1,554 1,354 1,562 1,401 SHARES -------------------------------------------------- Diluted 27,216 26,636 27,139 26,748 ===================================================
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 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. 4. COMPREHENSIVE INCOME The components of comprehensive income are as follows: 7 MARINE PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------------------ (IN THOUSANDS) Three months Six months ended ended June 30, June 30, ------------------------------------------------------------------------------------------ 2004 2003 2004 2003 -------------------------------------------------- Net income as reported $ 6,396 $ 4,961 $ 12,042 $ 9,154 Change in unrealized gain on marketable securities, net of taxes (74) (71) (41) (78) ------------------------------------------------------------------------------------------ Comprehensive income $ 6,322 $ 4,890 $ 12,001 $ 9,076 ==========================================================================================
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 Six months ended ended June 30, June 30, ------------------------------------------------------------------------------------------ 2004 2003 2004 2003 -------------------------------------------------- Net income - as reported $ 6,396 $ 4,961 $ 12,042 $ 9,154 Add: Stock-based employee compensation cost, included in reported net income, net of related tax effect 45 17 62 33 Deduct: Stock-based employee compensation cost, computed using the fair value method for all awards, net of related tax effect (127) (101) (225) (195) ------------------------------------------------------------------------------------------ Pro forma net income $ 6,314 $ 4,877 $ 11,879 $ 8,992 ========================================================================================== Earnings per share - as reported Basic $ 0.25 $ 0.20 $ 0.47 $ 0.36 Diluted 0.24 0.19 0.44 0.34 ========================================================================================== Earnings per share - Pro forma Basic $ 0.25 $ 0.19 $ 0.46 $ 0.35 Diluted 0.23 0.18 0.44 0.34 ==========================================================================================
8 MARINE PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During the quarter ended June 30, 2004, 111,600 shares of restricted stock vested and were released to the employees. The tax benefit aggregating $874 for compensation tax deductions in excess of compensation expense was credited to capital in excess of par value and has been excluded from the consolidated statements of cash flow for the six months ended June 30, 2004. 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 was as follows: ------------------------------------------------------------------------- (IN THOUSANDS) 2004 2003 ------------------------------------------------------------------------- Balances at beginning of year $ 2,846 $ 1,944 Less: Payments made during the period (1,957) (1,174) Add: Warranties issued during the period 1,905 1,501 Changes in estimated expenditures for warranties issued in prior periods 254 145 ------------------------------------------------------------------------- Balances at June 30 $ 3,048 $ 2,416 ========================================================================= 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 June 30, 2004, the maximum repurchase obligation outstanding under these agreements, which expire in 2004 and 2005, totaled approximately $4,000,000. The Company records the estimated fair value of the guarantee; at June 30, 2004, this amount was immaterial. 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 do not apply 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. 9 MARINE PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. INVENTORIES Inventories consist of the following: -------------------------------------------------------------------------- (IN THOUSANDS) JUNE 30, 2004 December 31, 2003 -------------------------------------------------------------------------- Raw materials and supplies $ 13,917 $ 9,485 Work in process 4,797 5,889 Finished goods 6,093 6,396 -------------------------------------------------------------------------- Total inventories $ 24,807 $ 21,770 ========================================================================== 9. 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 Six months ended June 30 June 30 ----------------------------------------------------------------------------------- 2004 2003 2004 2003 ----------------------------------------------------------------------------------- Service cost $ - $ - $ - $ - Interest cost 60 5 120 10 Expected return on plan assets (58) (2) (116) (4) Amortization of: Unrecognized net (gains) and losses 22 - 44 - ----------------------------------------------------------------------------------- Net periodic benefit cost $ 24 $ 3 $ 48 $ 6 ===================================================================================
Marine Products had previously disclosed that it expects to contribute $700,000 to its defined benefit plan in 2004. As of June 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. 10 MARINE PRODUCTS CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. 11 MARINE PRODUCTS CORPORATION AND SUBSIDIARIES RESULTS OF OPERATIONS Key operating and financial statistics for the three and six months ended June 30, 2004 and 2003 follow:
----------------------------------------------------------------------------------- ($ IN THOUSANDS) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ----------------------------------------------------------------------------------- 2004 2003 2004 2003 ----------------------------------------------------------------------------------- Total number of boats sold 1,899 1,681 3,742 3,415 Average sales price per boat $ 34.3 $ 31.1 $ 34.1 $ 30.3 Net sales $ 64,775 $ 51,951 $ 126,605 $102,058 Percentage of cost of goods sold to net sales 73.8% 73.9% 74.2% 74.9% Gross profit margin percent 26.2% 26.1% 25.8% 25.1% Percentage of selling, general and administrative expense to net sales 11.6% 11.6% 11.6% 11.4% Operating income $ 9,475 $ 7,529 $ 18,039 $ 13,968 Research and development expense $ 581 $ 378 $ 918 $ 671 Warranty expense $ 1,100 $ 906 $ 2,159 $ 1,646 -----------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003 NET SALES for the three months ended June 30, 2004 increased $12,824,000 or 24.7 percent. The increase in net sales was due to a 10.5 percent increase in the average sales price per boat and a 13.0 percent increase in the number of boats sold. The increase in average sales price per boat was due to increased sales of larger cruisers and sportboats, and increased sales of Robalo sport fishing boats in addition to overall price increases that were implemented for the 2004 model year, which began in July 2003. All four lines experienced an increase in unit sales. COST OF GOODS SOLD for the three months ended June 30, 2004 was $47,804,000 compared to $38,400,000 for the three months ended June 30, 2003, an increase of $9,404,000 or 24.5 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 due to higher production and sales volumes. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the three months ended June 30, 2004 were $7,496,000 compared to $6,022,000 for the three months ended June 30, 2003, an increase of $1,474,000, or 24.5 percent. The increase in selling, general and administrative expenses was due to incremental costs that vary with sales and profitability, such as warranty expense, sales commissions and other incentive compensation, and increased costs associated with the growth the Company has experienced in sales and expanded customer service efforts. Warranty expense for the three months ended June 30, 2004 and June 30, 2003 was 1.7 percent of net sales. Warranty expense tends to be higher for larger sportboats and cruisers compared to the other lines; however, the Company sold a higher volume of boats across all four lines in the second quarter of 12 MARINE PRODUCTS CORPORATION AND SUBSIDIARIES 2004 compared to the second quarter of 2003 and the increase in the larger models sold in 2004 was not material compared to 2003. OPERATING INCOME for the three months ended June 30, 2004 increased $1,946,000 or 25.8 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 $114,000 during the three months ended June 30, 2004 compared to $222,000 in the prior year period, a decrease of $108,000 or 48.6 percent. This decrease resulted from lower investment returns due to lower market interest rates, partially offset by higher investable average balances of cash and marketable securities during the three months ended June 30, 2004 compared to the three months ended June 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 three months ended June 30, 2004 reflects an effective tax rate of 33.0 percent, compared to 36.0 percent for the three months ended June 30, 2003, primarily because of a previously unrecognized tax refund received during the current quarter. The effective tax rate change increased net income by $259,000. The income tax provision of $3,193,000 was $403,000 or 14.4 percent higher than the income tax provision of $2,790,000 for the three months ended June 30, 2003 as a result of higher operating income, partially offset by the lower effective tax rate. SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003 NET SALES for the six months ended June 30, 2004 increased $24,547,000 or 24.1 percent. The increase in net sales was due to a 12.5 percent increase in the average sales price per boat and a 9.6 percent increase in the number of boats sold. 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 model year, which began in July 2003. All four lines experienced an increase in unit sales. COST OF GOODS SOLD for the six months ended June 30, 2004 was $93,911,000 compared to $76,415,000 for the six months ended June 30, 2003, an increase of $17,496,000 or 22.9 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 due to higher production and sales volumes. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the six months ended June 30, 2004 were $14,655,000 compared to $11,675,000 for the six months ended June 30, 2003, an increase of $2,980,000, or 25.5 percent. The increase in selling, general and administrative expenses was due 13 MARINE PRODUCTS CORPORATION AND SUBSIDIARIES to incremental costs that vary with sales and profitability, such as warranty expense, sales commissions and other incentive compensation, and increased costs associated with the growth the Company has experienced in sales and expanded customer service efforts. Warranty expense for the six months ended June 30, 2004 was 1.7 percent of net sales, compared to 1.6 percent of net sales for the six months ended June 30, 2003. Warranty expenses tend to be higher for larger sportboats and cruisers compared to smaller models. Although the Company sold a higher volume of larger boats in the first six months of 2004 as compared to the similar period of 2003, it did not materially impact the estimated warranty accruals. OPERATING INCOME for the six months ended June 30, 2004 increased $4,071,000 or 29.1 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 $236,000 during the six months ended June 30, 2004 compared to $335,000 in the prior year period, a decrease of $99,000 or 29.6 percent. This decrease resulted from lower investment returns due to lower market interest rates, partially offset by higher investable average balances of cash and marketable securities during the six months ended June 30, 2004 compared to the six months ended June 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 six months ended June 30, 2004 reflects an effective tax rate of 34.1 percent, compared to 36.0 percent for the six months ended June 30, 2003. The decrease in the effective tax rate reflects the effect of implementing tax planning strategies and a previously unrecognized tax refund received during the second quarter of 2004. The effective rate change increased net income by $346,000. The income tax provision of $6,233,000 was $1,084,000 or 21.1 percent higher than the income tax provision of $5,149,000 for the six months ended June 30, 2003 as a result of higher operating income, partially offset by the lower effective tax rate. LIQUIDITY AND CAPITAL RESOURCES
-------------------------------------------------------------------------------- (IN THOUSANDS) SIX MONTHS ENDED JUNE 30 -------------------------------------------------------------------------------- 2004 2003 -------------------------------------------------------------------------------- Net cash provided by operating activities $ 14,862 $ 10,561 Net cash used for investing activities (2,408) (4,505) Net cash used for financing activities $ (3,913) $ (3,010) --------------------------------------------------------------------------------
14 MARINE PRODUCTS CORPORATION AND SUBSIDIARIES 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 six months ended June 30, 2004, cash and cash equivalents increased by $8,541,000. Cash provided by operating activities for the six months ended June 30, 2004 increased $4,301,000 compared to the six months ended June 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 six months ended June 30, 2004 decreased $2,097,000 compared to the six months ended June 30, 2003. The decrease in cash used resulted from lower investments in marketable securities and lower capital expenditures in 2004 compared to the prior year. The Company currently expects that capital expenditures during 2004 will be approximately $4,000,000, of which $1,435,000 has been spent through June 30, 2004. Cash used for financing activities for the six months ended June 30, 2004 increased $903,000. 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 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 six months ended June 30, 2004 and 2003. 15 MARINE PRODUCTS CORPORATION AND SUBSIDIARIES 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 June 30, 2004, the maximum repurchase obligation outstanding under these agreements, which expire in 2004 and 2005 totaled approximately $4,000,000. The Company records the estimated fair value of the guarantee; at June 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 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 16 MARINE PRODUCTS CORPORATION AND SUBSIDIARIES 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 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Marine Products does not utilize financial instruments for trading purposes and, as of June 30, 2004, did not hold derivative financial instruments that could expose the Company to significant market risk. Also, as of June 30, 2004, the Company's investment portfolio totaling approximately $8.2 million, 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, June 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. 17 MARINE PRODUCTS CORPORATION AND SUBSIDIARIES 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. 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. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES SHARE REPURCHASES Shares repurchased during the three months ended June 30, 2004 were as follows: 18 MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------ Period Total Number of Average Price Paid Total number of Maximum Number (or Shares (or Units) Per Share (or Unit) Shares (or Units) Approximate Dollar Purchased Purchased as Part Value) of Shares of Publicly (or Units) that Announced Plans or May Yet Be Programs Purchased Under the Plans or Programs ------------------------------------------------------------------------------------------------------------------ Month #1 1,649 (1) $ 17.90 (1) 0 1,043,549 April 1, 2004 to April 30, 2004 Month #2 103,816 (2) $ 14.55 (2) 103,600 939,949 May 1, 2004 to May 31, 2004 Month #3 0 $ 0 0 939,949 June 1, 2004 to June 30, 2004 ------------------------------------------------------------------------------------------------------------------ Totals 105,465 $ 14.60 103,600 939,949 ==================================================================================================================
(1) Represents shares tendered in connection with option exercises (2) Includes 216 shares tendered at an average price of $17.85 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. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Stockholders was held on April 27, 2004. At the meeting, the stockholders, i.) re-elected three Class III directors to the Board of Directors for the terms expiring in 2007 and ii) approved the Marine Products Corporation 2004 Stock Incentive Plan. The following table sets forth the votes cast with respect to each of these proposals: 19 MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
BROKER PROPOSAL FOR AGAINST NON-VOTES WITHHELD ABSTAIN -------------------------------------------------------------------------------------------------------- Re-election of Wilton Looney 16,547,437 N/A N/A 211,325 0 Re-election of Gary W. Rollins 16,327,794 N/A N/A 430,968 0 Re-election of James A. Lane, Jr. 16,327,311 N/A N/A 431,451 0 Marine Products Corporation 2004 Stock Incentive Plan 13,055,528 3,106,329 565,117 N/A 31,788
Messrs. R. Randall Rollins, Henry B. Tippie, James B. Williams, Richard A. Hubbell and Ms. Linda H. Graham were not up for re-election and have continued as directors. ITEM 5. OTHER INFORMATION None ITEM 6. Exhibits and Reports on Form 8-K (a) 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 2004 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant's definitive Proxy Statement filed on March 24, 2004). 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 20 MARINE PRODUCTS CORPORATION AND SUBSIDIARIES (b) Reports on Form 8-K during the quarter ended June 30, 2004
--------------------------------------------------------------------------------------------------------------- Date of earliest event Date Filed reported Description of event --------------------------------------------------------------------------------------------------------------- April 20, 2004 April 19, 2004 Item 5 and Item 7: Registrant issued a press release titled "Marine Products Corporation to Announce First Quarter 2004 Results and Host a Conference Call on April 28, 2004" April 20, 2004 April 19, 2004 Item 5 and Item 7: Registrant issued a press release titled "Marine Products Corporation Announces Stock Repurchased in the First Quarter of 2004" April 28, 2004 April 28, 2004 Item 5 and Item 7: Registrant issued a press release titled "Marine Products Corporation Reports Record First Quarter Results" April 28, 2004 April 28, 2004 Item 5 and Item 7: Registrant issued a press release titled "Marine Products Corporation Announces First Quarter Cash Dividend" May 7, 2004 May 7, 2004 Item 5 and Item 7: Registrant issued a press release titled "Chaparral Wins Powerboat Magazine "Boat of the Year" Award"
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: August 4, 2004 Richard A. Hubbell President and Chief Executive Officer (Principal Executive Officer) /s/ Ben M. Palmer ---------------------- Date: August 4, 2004 Ben M. Palmer Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 22