10-Q 1 t10q-3870.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 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
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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. 19 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. 20 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