ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2017 AND DECEMBER 31, 2016
(In thousands)
(Unaudited)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
(Note 1)
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,834
|
|
|
$
|
2,619
|
|
Marketable securities
|
|
|
4,846
|
|
|
|
4,109
|
|
Accounts receivable, net of allowance for doubtful accounts of $25 in 2017 and $25 in 2016
|
|
|
5,207
|
|
|
|
1,087
|
|
Inventories
|
|
|
41,221
|
|
|
|
42,488
|
|
Income taxes receivable
|
|
|
1,279
|
|
|
|
29
|
|
Prepaid expenses and other current assets
|
|
|
1,629
|
|
|
|
1,823
|
|
Total current assets
|
|
|
58,016
|
|
|
|
52,155
|
|
Property, plant and equipment, net of accumulated depreciation of $23,754 in 2017 and $23,470 in 2016
|
|
|
13,518
|
|
|
|
13,334
|
|
Goodwill
|
|
|
3,308
|
|
|
|
3,308
|
|
Other intangibles, net
|
|
|
465
|
|
|
|
465
|
|
Marketable securities
|
|
|
12,941
|
|
|
|
5,221
|
|
Deferred income taxes
|
|
|
5,169
|
|
|
|
5,278
|
|
Other assets
|
|
|
9,070
|
|
|
|
8,766
|
|
Total assets
|
|
$
|
102,487
|
|
|
$
|
88,527
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
10,352
|
|
|
$
|
5,163
|
|
Accrued expenses and other liabilities
|
|
|
14,358
|
|
|
|
12,239
|
|
Total current liabilities
|
|
|
24,710
|
|
|
|
17,402
|
|
Pension liabilities
|
|
|
6,605
|
|
|
|
5,614
|
|
Other long-term liabilities
|
|
|
59
|
|
|
|
66
|
|
Total liabilities
|
|
|
31,374
|
|
|
|
23,082
|
|
Common stock
|
|
|
3,488
|
|
|
|
3,486
|
|
Capital in excess of par value
|
|
|
-
|
|
|
|
-
|
|
Retained earnings
|
|
|
69,742
|
|
|
|
64,141
|
|
Accumulated other comprehensive loss
|
|
|
(2,117
|
)
|
|
|
(2,182
|
)
|
Total stockholders' equity
|
|
|
71,113
|
|
|
|
65,445
|
|
Total liabilities and stockholders' equity
|
|
$
|
102,487
|
|
|
$
|
88,527
|
|
The accompanying notes are an integral part of these consolidated
statements.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(In thousands except per share data)
(Unaudited)
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
71,484
|
|
|
$
|
65,066
|
|
|
$
|
142,524
|
|
|
$
|
128,731
|
|
Cost of goods sold
|
|
|
55,197
|
|
|
|
51,258
|
|
|
|
111,331
|
|
|
|
102,235
|
|
Gross profit
|
|
|
16,287
|
|
|
|
13,808
|
|
|
|
31,193
|
|
|
|
26,496
|
|
Selling, general and administrative expenses
|
|
|
7,565
|
|
|
|
7,096
|
|
|
|
15,573
|
|
|
|
14,139
|
|
Operating income
|
|
|
8,722
|
|
|
|
6,712
|
|
|
|
15,620
|
|
|
|
12,357
|
|
Interest income
|
|
|
57
|
|
|
|
151
|
|
|
|
108
|
|
|
|
243
|
|
Income before income taxes
|
|
|
8,779
|
|
|
|
6,863
|
|
|
|
15,728
|
|
|
|
12,600
|
|
Income tax provision
|
|
|
2,660
|
|
|
|
2,045
|
|
|
|
4,348
|
|
|
|
3,861
|
|
Net income
|
|
$
|
6,119
|
|
|
$
|
4,818
|
|
|
$
|
11,380
|
|
|
$
|
8,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
|
$
|
0.13
|
|
|
$
|
0.33
|
|
|
$
|
0.23
|
|
Diluted
|
|
$
|
0.18
|
|
|
$
|
0.13
|
|
|
$
|
0.33
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(In thousands)
(Unaudited)
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,119
|
|
|
$
|
4,818
|
|
|
$
|
11,380
|
|
|
$
|
8,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension adjustment
|
|
|
14
|
|
|
|
13
|
|
|
|
29
|
|
|
|
27
|
|
Unrealized gain on securities, net of reclassification adjustments
|
|
|
14
|
|
|
|
65
|
|
|
|
36
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
6,147
|
|
|
$
|
4,896
|
|
|
$
|
11,445
|
|
|
$
|
8,881
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2017
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Excess of
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Par Value
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
Balance, December 31, 2016
|
|
|
34,855
|
|
|
$
|
3,486
|
|
|
$
|
-
|
|
|
$
|
64,141
|
|
|
$
|
(2,182
|
)
|
|
$
|
65,445
|
|
Stock issued for stock incentive plans, net
|
|
|
201
|
|
|
|
20
|
|
|
|
1,341
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,361
|
|
Stock purchased and retired
|
|
|
(173
|
)
|
|
|
(18
|
)
|
|
|
(1,341
|
)
|
|
|
(887
|
)
|
|
|
—
|
|
|
|
(2,246
|
)
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,380
|
|
|
|
—
|
|
|
|
11,380
|
|
Pension adjustment, net of taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29
|
|
|
|
29
|
|
Unrealized gain on securities, net of taxes and reclassification adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
36
|
|
|
|
36
|
|
Dividends paid
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,892
|
)
|
|
|
—
|
|
|
|
(4,892
|
)
|
Balance, June 30, 2017
|
|
|
34,883
|
|
|
$
|
3,488
|
|
|
$
|
-
|
|
|
$
|
69,742
|
|
|
$
|
(2,117
|
)
|
|
$
|
71,113
|
|
The accompanying notes are an integral part of these consolidated
statements.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND
2016
(In thousands)
(Unaudited)
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,380
|
|
|
$
|
8,739
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
730
|
|
|
|
671
|
|
Gain on sale of equipment and property
|
|
|
(8
|
)
|
|
|
(79
|
)
|
Amortization of premium related to marketable securities
|
|
|
189
|
|
|
|
609
|
|
Stock-based compensation expense
|
|
|
1,361
|
|
|
|
1,655
|
|
Excess tax benefits for share-based payments
|
|
|
-
|
|
|
|
(109
|
)
|
Deferred income tax provision
|
|
|
73
|
|
|
|
608
|
|
(Increase) decrease in assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,120
|
)
|
|
|
(3,561
|
)
|
Inventories
|
|
|
1,267
|
|
|
|
(1,954
|
)
|
Prepaid expenses and other current assets
|
|
|
194
|
|
|
|
328
|
|
Income taxes receivable
|
|
|
(1,250
|
)
|
|
|
820
|
|
Other non-current assets
|
|
|
(304
|
)
|
|
|
(514
|
)
|
Increase (decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
5,189
|
|
|
|
2,375
|
|
Accrued expenses and other liabilities
|
|
|
2,119
|
|
|
|
2,438
|
|
Other long-term liabilities
|
|
|
1,030
|
|
|
|
(1,248
|
)
|
Net cash provided by operating activities
|
|
|
17,850
|
|
|
|
10,778
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(914
|
)
|
|
|
(663
|
)
|
Proceeds from sale of assets
|
|
|
8
|
|
|
|
79
|
|
Purchases of marketable securities
|
|
|
(17,264
|
)
|
|
|
(17,997
|
)
|
Sales of marketable securities
|
|
|
7,603
|
|
|
|
2,464
|
|
Maturities of marketable securities
|
|
|
1,070
|
|
|
|
2,901
|
|
Net cash used for investing activities
|
|
|
(9,497
|
)
|
|
|
(13,216
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Payment of dividends
|
|
|
(4,892
|
)
|
|
|
(4,593
|
)
|
Excess tax benefits for share-based payments
|
|
|
-
|
|
|
|
109
|
|
Cash paid for common stock purchased and retired
|
|
|
(2,246
|
)
|
|
|
(768
|
)
|
Net cash used for financing activities
|
|
|
(7,138
|
)
|
|
|
(5,252
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
1,215
|
|
|
|
(7,690
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
2,619
|
|
|
|
7,986
|
|
Cash and cash equivalents at end of period
|
|
$
|
3,834
|
|
|
$
|
296
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Income
tax payments, net
|
|
$
|
5,436
|
|
|
$
|
1,772
|
|
The accompanying notes are an integral part of these consolidated
statements.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 accounting principles generally accepted
in the United States of America for complete financial statements. In the opinion of management, all adjustments (all of which
consisted of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for
the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the year ending December
31, 2017.
The balance sheet
at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United States of America 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, 2016.
A group that includes
the Company’s Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company,
and certain companies under their control, controls in excess of fifty percent of the Company’s voting power.
|
2.
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
Recently Adopted Accounting Pronouncements:
|
·
|
Accounting Standards Update (ASU) No. 2015-11,
Inventory (Topic
330): Simplifying the Measurement of Inventory.
Current requirements are to measure inventory at the lower of cost or market.
Market could be replacement cost, net realizable value, or net realizable value less an approximated normal profit margin. These
amendments allow inventory to be measured at lower of cost or net realizable value and eliminates the market requirement. Net realizable
value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. The Company adopted these provisions in the first quarter of 2017 on a prospective basis. The adoption of these
provisions did not have a material impact on the Company’s consolidated financial statements.
|
|
·
|
ASU No. 2016-09,
Compensation
—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
The amendments simplify
several aspects of the accounting for share-based payment award transactions, requiring excess tax benefits and deficiencies to
be recognized as a component of income tax expense rather than equity. This guidance also requires excess tax benefits and deficiencies
to be presented as an operating activity on the statement of cash flows and allows an entity to make an accounting policy election
to either estimate expected forfeitures or to account for them as they occur.
The Company will continue to estimate expected forfeitures. The Company adopted these provisions
in the first quarter of 2017 on a prospective basis.
See Notes on Stock-Based Compensation and Income Taxes for the effect
of adoption on the financial statements.
|
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recently Issued Accounting Pronouncements Not Yet Adopted:
To be adopted in 2018:
REVENUE RECOGNITION:
The Financial Accounting Standards Board and International Accounting
Standards Board issued their converged standard on revenue recognition in May 2014. The standard provides a comprehensive, industry-neutral
revenue recognition model intended to increase financial statement comparability across companies and industries and significantly
reduce the complexity inherent in today's revenue recognition guidance. The various ASUs related to
Revenue from Contracts with
Customers (Topic 606)
have been listed below:
|
·
|
ASU
No. 2014-09,
the core principle of the guidance is that an entity should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services using a five step process.
|
|
·
|
ASU
No. 2015-14,
deferred the effective date of ASU 2014-09 for all entities by one year to the first quarter of 2018 with early
application permitted.
|
|
·
|
ASU
No. 2016-08,
Principal versus Agent Considerations (Reporting Revenue Gross versus Net).
The amendments provide guidance
on whether an entity is a principal or agent when providing services to a customer along with another party.
|
|
·
|
ASU
No. 2016-10
, Identifying Performance Obligations and Licensing.
The amendments clarify the earlier guidance on identifying
performance obligations and licensing implementation.
|
|
·
|
ASU
No. 2016-11
, Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements
at the March 3, 2016 EITF Meeting.
This ASU rescinds certain SEC guidance related to issues that are currently codified
under various topics
.
|
|
·
|
ASU
No. 2016-12
, Narrow-Scope Improvements and Practical Expedients.
The amendments provide clarifying guidance on certain
aspects of the five step process and practical expedients regarding the effect of modifications and status of completed contracts
under legacy GAAP and disclosures related to the application of this guidance using the modified retrospective or retrospective
transition method.
|
|
·
|
ASU
No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.
The amendments
in ASU 2016-20 affect narrow aspects of the guidance issued in ASU 2014-09 and includes among others, loan guarantees, impairment
testing of contract costs, performance obligations disclosures and accrual of advertising costs.
|
Current Status of implementation:
The Company is currently analyzing the effect of the standard
across all of its revenue streams to evaluate the impact of the new standard on revenue contracts.
This includes reviewing current accounting policies and practices to identify potential differences that would result from applying
the requirements under the new standard.
The Company plans to adopt the standard in the first quarter of 2018 using the
modified retrospective method by recognizing the cumulative effect of initially applying the new standard as an adjustment to the
opening balance of retained earnings.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
·
|
ASU No. 2016-01,
Financial Instruments – Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
The amendments make targeted improvements
to existing U.S. GAAP and affects accounting for equity investments and financial instruments and liabilities and related disclosures.
The amendments are effective starting in the first quarter of 2018, with early adoption permitted for certain provisions. The Company
is currently evaluating the impact of these provisions on its consolidated financial statements.
|
|
·
|
ASU
No. 2016-15, Statement of Cash Flows (Topic 230): Classification
of Certain Cash Receipts and Cash Payments.
The amendments provide guidance in the presentation and classification of certain
cash receipts and cash payments in the statement of cash flows including debt prepayment or debt extinguishment costs, contingent
consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement
of corporate-owned life insurance policies, and distributions received from equity method investees. The amendments are effective
starting in the first quarter of 2018 with early adoption permitted. The amendments should be applied using a retrospective transition
method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments
for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact
of adopting these provisions on its consolidated financial statements.
|
|
·
|
ASU No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers
of Assets Other Than Inventory.
The amendments require an entity to recognize the income tax consequences of an intra-entity
transfer of an asset other than inventory when the transfer occurs. The amendments eliminate the exception for an intra-entity
transfer of an asset other than inventory. Two common examples of assets included in the scope of the amendments are intellectual
property and property, plant, and equipment. The amendments do not include new disclosure requirements; however, existing disclosure
requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset
other than inventory. The amendments are effective starting in the first quarter of 2018 with early adoption permitted. The amendments
are required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings
as of the beginning of the period of adoption. The Company is currently evaluating the impact of adopting these provisions on its
consolidated financial statements.
|
|
·
|
ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying
the Definition of a Business.
The amendments are intended to help companies and other organizations evaluate whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas
of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments provide a more robust framework to
use in determining when a set of assets and activities is a business. They also provide more consistency in applying the guidance,
reduce the costs of application, and make the definition of a business more operable. The amendments are effective beginning in
the first quarter of 2018 with early application permitted under certain circumstances. The Company expects to adopt these provisions
as it completes future acquisitions and plans to evaluate the impact of adoption on its consolidated financial statements as acquisitions
are completed.
|
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
·
|
ASU No. 2017-09 —
Compensation —Stock Compensation
(Topic 718): Scope of Modification Accounting.
The provisions are applicable when there are changes to the terms or conditions
of a share-based payment award. The amendments require an entity to apply modification accounting for the effects of changes to
the terms and conditions of a share-based payment award unless certain conditions including fair value, vesting conditions and
classification are met. The amendments are effective beginning in the first quarter of 2018 with early application permitted under
certain circumstances. The Company is currently evaluating the impact of adopting these provisions on its consolidated financial
statements.
|
To be adopted in 2019 and later:
|
·
|
ASU No. 2016-02 —
Leases (Topic 842).
Under the
new guidance, lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their leases (other
than leases that meet the definition of a short-term lease), at the commencement of the lease term. The liability will be equal
to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct
costs.
The amendments in this standard are effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. Early application is permitted.
Lessees (for capital and operating leases)
and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for
leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.
Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the impact of adopting
these provisions on its consolidated financial statements.
|
|
·
|
ASU No. 2016-13,
Financial Instruments —Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments.
The amendments require the credit losses on available-for-sale
debt securities and purchased financial assets with credit deterioration should presented as an allowance rather than a write-down.
It also allows recording of credit loss reversals in current period net income. The amendments are effective starting in the first
quarter of 2020 with early application permitted a year earlier. The Company is currently evaluating the impact of adopting these
provisions on its consolidated financial statements.
|
|
·
|
ASU No. 2017-04
—Intangibles —Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment.
To simplify the subsequent measurement of goodwill, the amendments
eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing
the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which
the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount
of goodwill allocated to that reporting unit. The amendments are effective for annual or any interim goodwill impairment tests
beginning in 2020 applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed
on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting these provisions on its consolidated
financial statements.
|
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
·
|
ASU No. 2017-08 —
Receivables —Nonrefundable Fees
and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.
The amendments shorten the
amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest
call date. However, the amendments do not require an accounting change for securities held at a discount; the discount continues
to be amortized to maturity. The amendments are effective starting in the first quarter of 2019 with early application permitted.
The amendments are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained
earnings as of the beginning of the period of adoption. The entity is required to provide disclosures about a change in accounting
principle in the period of adoption. The Company is currently evaluating the impact of adopting these provisions on its consolidated
financial statements.
|
Basic and diluted earnings per share are computed
by dividing net income by the weighted average number of shares outstanding during the respective periods. In addition, the Company
has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and are therefore considered
participating securities. Restricted shares of common stock (participating securities) outstanding and a reconciliation of weighted
average shares outstanding is as follows:
|
|
Three months ended
June 30
|
|
|
Six months ended
June 30
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income available for stockholders:
|
|
$
|
6,119
|
|
|
$
|
4,818
|
|
|
$
|
11,380
|
|
|
$
|
8,739
|
|
Less: Adjustments for earnings attributable to participating securities
|
|
|
(203
|
)
|
|
|
(152
|
)
|
|
|
(368
|
)
|
|
|
(306
|
)
|
Net income used in calculating earnings per share
|
|
$
|
5,916
|
|
|
$
|
4,666
|
|
|
$
|
11,012
|
|
|
$
|
8,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (including participating securities)
|
|
|
34,936
|
|
|
|
38,363
|
|
|
|
34,934
|
|
|
|
38,330
|
|
Adjustment for participating
securities
|
|
|
(1,116
|
)
|
|
|
(1,252
|
)
|
|
|
(1,151
|
)
|
|
|
(1,453
|
)
|
Shares used in calculating basic and diluted earnings per share
|
|
|
33,820
|
|
|
|
37,111
|
|
|
|
33,783
|
|
|
|
36,877
|
|
|
4.
|
STOCK-BASED COMPENSATION
|
The Company reserved 3,000,000 shares of common stock
under the 2014 Stock Incentive Plan with a term of ten years expiring in April 2024. All future equity compensation awards by the
Company will be issued under the 2014 plan. This plan provides for the issuance of various forms of stock incentives, including
among others, incentive and non-qualified stock options and restricted shares. As of June 30, 2017, there were approximately 2,048,900
shares available for grant.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock-based compensation for the three and six months
ended June 30, 2017 and 2016 were as follows:
(in thousands)
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Pre – tax cost
|
|
$
|
853
|
|
|
$
|
487
|
|
|
$
|
1,361
|
|
|
$
|
1,655
|
|
After tax cost
|
|
$
|
550
|
|
|
$
|
314
|
|
|
$
|
878
|
|
|
$
|
1,067
|
|
Restricted Stock
The following is a summary of the changes in non-vested
restricted shares for the six months ended June 30, 2017:
|
|
Shares
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Non-vested shares at December 31, 2016
|
|
1,200,900
|
|
|
$
|
6.58
|
|
Granted
|
|
|
202,400
|
|
|
|
13.39
|
|
Vested
|
|
|
(344,250
|
)
|
|
|
6.93
|
|
Forfeited
|
|
|
(1,400
|
)
|
|
|
5.72
|
|
Non-vested shares at June 30, 2017
|
|
|
1,057,650
|
|
|
|
7.77
|
|
The total fair value of shares vested was approximately
$4,182,680 during the six months ended June 30, 2017 and $2,560,000 during the six months ended June 30, 2016. Excess tax benefits
realized from tax compensation deductions in excess of compensation expense have been reflected as follows:
|
·
|
Approximately
$650,000 for the six months ended June 30, 2017 has been recorded as a discrete tax
adjustment and classified within operating activities in the consolidated statements of cash flows; and
|
|
·
|
Approximately
$109,000 for the six months ended June 30, 2016 were credited to capital in excess of par value and classified within financing
activities as an inflow in addition to being disclosed as an outflow within operating activities in the consolidated statements
of cash flows.
|
The change in classification beginning in the first
quarter of 2017 resulted from the adoption of the amendments in ASU 2016-09.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other Information
As of June 30, 2017, total unrecognized compensation
cost related to non-vested restricted shares was approximately $7,780,000. This cost is expected to be recognized over a weighted-average
period of 3.7 years.
Marine Products’ marketable securities are held
with a large, well-capitalized financial institution. Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designations as of each balance sheet date. Debt securities are classified as available-for-sale
because the Company does not have the intent to hold the securities to maturity. Available-for-sale securities are stated at their
fair values, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity.
The cost of securities sold is based on the specific identification method. Realized gains and losses, declines in value judged
to be other than temporary, interest and dividends on available-for-sale securities are included in interest income.
The net realized gains and the reclassification of
net realized gains from other comprehensive income are as follows:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net realized gain
|
|
$
|
2
|
|
|
$
|
14
|
|
|
$
|
12
|
|
|
$
|
14
|
|
Reclassification of net realized gains from other comprehensive income
|
|
$
|
2
|
|
|
$
|
14
|
|
|
$
|
12
|
|
|
$
|
14
|
|
Gross unrealized gains (losses) on marketable securities
are as follows:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Gross unrealized
|
|
|
Gross unrealized
|
|
(in thousands)
|
|
Gains
|
|
|
(Losses)
|
|
|
Gains
|
|
|
(Losses)
|
|
Municipal Obligations
|
|
$
|
20
|
|
|
$
|
(15
|
)
|
|
$
|
4
|
|
|
$
|
(53
|
)
|
Corporate Obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
20
|
|
|
$
|
(15
|
)
|
|
$
|
4
|
|
|
$
|
(53
|
)
|
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The amortized cost basis, fair value and net unrealized
gains on the available-for-sale securities are as follows:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Type of Securities
|
|
Amortized
Cost Basis
|
|
|
Fair
Value
|
|
|
Net
Unrealized
Gains
|
|
|
Amortized
Cost Basis
|
|
|
Fair
Value
|
|
|
Net
Unrealized
Losses
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Obligations
|
|
$
|
17,782
|
|
|
$
|
17,787
|
|
|
$
|
5
|
|
|
$
|
9,379
|
|
|
$
|
9,330
|
|
|
$
|
(49
|
)
|
Corporate Obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
17,782
|
|
|
$
|
17,787
|
|
|
$
|
5
|
|
|
$
|
9,379
|
|
|
$
|
9,330
|
|
|
$
|
(49
|
)
|
Municipal obligations consist primarily of municipal
notes rated AA- or higher ranging in maturity from less than one year to over 20 years. Investments with remaining maturities of
less than 12 months are considered to be current marketable securities. Investments with remaining maturities greater than 12 months
are considered to be non-current marketable securities. The Company’s non-current marketable securities are scheduled to
mature between 2018 and 2047.
|
6.
|
WARRANTY COSTS AND OTHER CONTINGENCIES
|
Warranty Costs
For our Chaparral products, Marine Products provides
a lifetime limited structural hull warranty, a five-year limited structural deck warranty, and a transferable one-year limited
warranty to the original owner. Warranties for additional items are provided for periods of one to five years and are not transferrable.
Additionally, as it relates to the second subsequent owner, a five-year transferrable hull warranty and the remainder of the original
one-year limited warranty on certain components are available. The five-year transferable hull warranty terminates five years after
the date of the original retail purchase. Claim costs related to components are generally absorbed by the original component manufacturer.
For our Robalo products, Marine Products provides
a ten-year limited structural hull warranty and a transferable one-year limited warranty on certain components to the original
owner. Warranties on additional items are provided for periods of one to five years and are not transferrable.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Additionally, as it relates to the second subsequent
owner, a five-year transferrable hull warranty and the remainder of the original one-year limited warranty on certain components
are available. The five-year transferable hull warranty terminates five years after the date of the original retail purchase. Claim
costs related to components are generally absorbed by the original component manufacturer.
The manufacturers of the engines, generators, and
navigation electronics included on our boats provide and administer their own warranties for various lengths of time.
An analysis of the warranty accruals for the six months
ended June 30, 2017 and 2016 is as follows:
(in thousands)
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
4,629
|
|
|
$
|
3,405
|
|
Less: Payments made during the period
|
|
|
(1,345
|
)
|
|
|
(1,428
|
)
|
Add: Warranty provision for the period
|
|
|
1,796
|
|
|
|
1,375
|
|
Changes to warranty provision for prior periods
|
|
|
60
|
|
|
|
1
|
|
Balance at June 30
|
|
$
|
5,140
|
|
|
$
|
3,353
|
|
The warranty accruals are reflected
in accrued expenses and other liabilities on the consolidated balance sheets.
Repurchase Obligations
The Company is a party to various agreements with
third party lenders that provide floor plan financing to qualifying dealers whereby the Company guarantees varying amounts of debt
on boats in dealer inventory. The Company’s obligation under these guarantees becomes effective in the case of a default
under the financing arrangement between the dealer and the third party lender. The agreements provide for the return of repossessed
boats to the Company in new and unused condition subject to normal wear and tear as defined, in exchange for the Company’s
assumption of specified percentages of the debt obligation on those boats, up to certain contractually determined dollar limits
by the lenders. The Company had no material repurchases of inventory under contractual agreements during the three months ended
June 30, 2017 and June 30, 2016.
Management continues to monitor the risk of defaults
and resulting repurchase obligations based in part on information provided by third-party floor plan lenders and will adjust the
guarantee liability at the end of each reporting period based on information reasonably available at that time.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company currently has an agreement with one of
the floor plan lenders whereby the contractual repurchase limit is 16 percent of the amount of the average net receivables financed
by the floor plan lender for our dealers during the prior 12 month period, which was $11.1 million as of June 30, 2017. The Company
has contractual repurchase agreements with additional lenders with an aggregate maximum repurchase obligation of approximately
$5.5 million with various expiration and cancellation terms of less than one year, for an aggregate repurchase obligation with
all floor plan financing institutions of approximately $16.6 million as of June 30, 2017.
|
7.
|
BUSINESS SEGMENT INFORMATION
|
The Company has only one reportable segment, its powerboat
manufacturing business; therefore, the majority of segment-related disclosures are not relevant to the Company. In addition, the
Company’s results of operations and its financial condition are not significantly reliant upon any single customer or product
model.
Inventories consist of the following:
(in thousands)
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Raw materials and supplies
|
|
$
|
27,520
|
|
|
$
|
26,106
|
|
Work in process
|
|
|
8,241
|
|
|
|
9,007
|
|
Finished goods
|
|
|
5,460
|
|
|
|
7,375
|
|
Total inventories
|
|
$
|
41,221
|
|
|
$
|
42,488
|
|
The Company determines its periodic income tax provision
based upon the current period income and the annual estimated tax rate for the Company adjusted for discrete items including tax
credits and changes to prior year estimates. The estimated tax rate is revised, if necessary, as of the end of each successive
interim period during the fiscal year to the Company's current annual estimated tax rate.
Income tax provision for the second quarter
of 2017 reflects an effective tax rate of 30.3 percent, compared to an effective tax rate of 29.8 percent for the
comparable period in the prior year. For the six months ended June 30, 2017 the income tax provision reflects an effective
rate of 27.6 percent, compared to an effective rate of 30.6 percent for the six months ended June 30, 2016. The effective
rate in both periods includes the effect of beneficial permanent differences including tax-exempt interest income and
favorable U.S. manufacturing deductions. The Company adopted the amendments of ASU 2016-09 in the first quarter of 2017 that
requires excess tax benefits and deficiencies to be recognized as a component of income tax expense rather than equity. This
resulted in a beneficial discrete adjustment of approximately $650 thousand to the provision for income taxes during the
first six months of 2017. The 2016 effective tax rate reflects certain beneficial permanent tax differences generated from
life insurance proceeds.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
10.
|
EMPLOYEE BENEFIT PLANS
|
The Company participates in a
multiple employer pension plan. The following represents the net periodic benefit (credit) cost and related components for the
plan:
(in thousands)
|
|
Three months
ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Interest cost
|
|
$
|
66
|
|
|
$
|
68
|
|
|
$
|
132
|
|
|
$
|
137
|
|
Expected return on plan assets
|
|
|
(103
|
)
|
|
|
(101
|
)
|
|
|
(207
|
)
|
|
|
(203
|
)
|
Amortization of net losses
|
|
|
23
|
|
|
|
21
|
|
|
|
46
|
|
|
|
42
|
|
Net periodic benefit
|
|
$
|
(14
|
)
|
|
$
|
(12
|
)
|
|
$
|
(29
|
)
|
|
$
|
(24
|
)
|
The Company did not make a contribution to this plan
during the six months ended June 30, 2017.
The Company permits selected highly compensated employees
to defer a portion of their compensation into a non-qualified Supplemental Executive Retirement Plan (“SERP”). The
Company maintains certain securities in the SERP that have been classified as trading. The SERP assets are marked to market and
totaled $5,786,000 as of June 30, 2017 and $7,019,000 as of December 31, 2016. The SERP assets are reported in other non-current
assets on the consolidated balance sheets and changes to the fair value of the assets are reported in selling, general and administrative
expenses in the consolidated statements of operations.
Trading gains related to the SERP assets totaled approximately
$234,000 during the six months ended June 30, 2017, compared to trading gains of $42,000 during the six months ended June 30, 2016.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
11.
|
FAIR VALUE MEASUREMENTS
|
The various inputs used to measure assets at fair
value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s
assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows:
1. Level 1 – Quoted market prices in active
markets for identical assets or liabilities.
2. Level 2 – Quoted prices for similar instruments
in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data
for substantially the full term of the assets or liabilities.
3. Level 3 – Unobservable inputs developed
using the Company’s estimates and assumptions, which reflect those that market participants would use.
The following table summarizes the valuation of financial
instruments measured at fair value on a recurring basis on the balance sheet as of June 30, 2017 and December 31, 2016:
|
|
Fair Value Measurements at June 30, 2017 with:
|
|
(in thousands)
|
|
Total
|
|
|
Quoted prices in
active markets for
identical assets
|
|
|
Significant
other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Obligations
|
|
$
|
17,787
|
|
|
$
|
—
|
|
|
$
|
17,787
|
|
|
$
|
—
|
|
Corporate Obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
17,787
|
|
|
$
|
—
|
|
|
$
|
17,787
|
|
|
$
|
—
|
|
Investments measured at Net Asset Value - Trading securities
|
|
$
|
5,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2016 with:
|
|
(in thousands)
|
|
Total
|
|
|
Quoted prices in
active markets for
identical assets
|
|
|
Significant
other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Obligations
|
|
$
|
9,330
|
|
|
$
|
—
|
|
|
$
|
9,330
|
|
|
$
|
—
|
|
Corporate Obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
9,330
|
|
|
$
|
—
|
|
|
$
|
9,330
|
|
|
$
|
—
|
|
Investments measured at Net Asset Value - Trading securities
|
|
$
|
7,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company determines the fair value of marketable
securities classified as available-for-sale through quoted market prices. The total fair value is the final closing price, as defined
by the exchange in which the asset is actively traded, on the last trading day of the period, multiplied by the number of units
held without consideration of transaction costs. Marketable securities classified as trading are comprised of the SERP assets,
as described in Note 10, and are recorded primarily at their net cash surrender values, calculated using their net asset values,
which approximates fair value, as provided by the issuing insurance company. Significant observable inputs, in addition to quoted
market prices, were used to value the trading securities. The Company’s policy is to recognize transfers between levels at
the beginning of quarterly reporting periods. For the period ended June 30, 2017, there were no significant transfers in or out
of levels 1, 2 or 3.
The carrying amount of other financial instruments
reported in the consolidated balance sheets for current assets and current liabilities approximate their fair values because of
the short-term nature of these instruments.
|
12.
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
Accumulated other comprehensive
loss
consists
of the following:
(in thousands)
|
|
Pension
Adjustment
|
|
|
Unrealized
Gain
(loss) On
Securities
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
(2,151
|
)
|
|
$
|
(31
|
)
|
|
$
|
(2,182
|
)
|
Change during the period ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before-tax amount
|
|
|
|
_
|
|
|
67
|
|
|
|
67
|
|
Tax provision
|
|
|
|
_
|
|
|
(23
|
)
|
|
|
(23
|
)
|
Reclassification adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss
(1)
|
|
|
29
|
|
|
|
-
|
|
|
|
29
|
|
Net realized gain
(2)
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Total activity for the period
|
|
|
29
|
|
|
|
36
|
|
|
|
65
|
|
Balance at June 30, 2017
|
|
$
|
(2,122
|
)
|
|
$
|
5
|
|
|
$
|
(2,117
|
)
|
|
(1)
|
Reported as part of selling, general and administrative expenses.
|
|
(2)
|
Reported as part of interest income.
|
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands)
|
|
Pension
Adjustment
|
|
|
Unrealized
Gain
(loss) On
Securities
|
|
|
Total
|
|
Balance at December 31, 2015
|
|
$
|
(1,899
|
)
|
|
$
|
(2
|
)
|
|
$
|
(1,901
|
)
|
Change during the period ended June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before-tax amount
|
|
|
|
_
|
|
|
193
|
|
|
|
165
|
|
Tax benefit
|
|
|
|
_
|
|
|
(69
|
)
|
|
|
(64
|
)
|
Reclassification adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss
(1)
|
|
|
27
|
|
|
|
-
|
|
|
|
27
|
|
Net realized gain
(2)
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
14
|
|
Total activity for the period
|
|
|
27
|
|
|
|
115
|
|
|
|
142
|
|
Balance at June 30, 2016
|
|
$
|
(1,872
|
)
|
|
$
|
113
|
|
|
$
|
(1,759
|
)
|
|
(1)
|
Reported as part of selling, general and administrative expenses.
|
|
(2)
|
Reported as part of interest income.
|
On July 25, 2017, the Board of Directors approved
a $0.07 per share cash dividend payable September 11, 2017 to stockholders of record at the close of business August 10, 2017.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Marine Products Corporation, through our
wholly owned subsidiaries Chaparral and Robalo, is a leading manufacturer of recreational fiberglass powerboats. Our sales and
profits are generated by selling the products that we manufacture to a network of independent dealers who in turn sell the products
to retail customers. These dealers are located throughout the continental United States and in several international markets. Many
of these dealers finance their inventory through third-party floorplan lenders, who pay Marine Products generally within seven
to ten days after delivery of the products to the dealers.
The discussion on business and financial
strategies of the Company set forth under the heading “Overview” in the Company’s annual report on Form 10-K
for the fiscal year ended December 31, 2016 is incorporated herein by reference. There have been no significant changes in the
strategies since year-end.
In implementing these strategies and attempting
to optimize our financial returns, management closely monitors dealer orders and inventories, the production mix of various models,
and indications of near term demand such as consumer confidence, interest rates, dealer orders placed at our annual dealer conferences,
and retail attendance and orders at annual winter boat show exhibitions. We also consider trends related to certain key financial
and other data, including our historical and forecasted financial results, market share, unit sales of our products, average selling
price per boat, and gross profit margins, among others, as indicators of the success of our strategies. Marine Products’
financial results are affected by consumer confidence — because pleasure boating is a discretionary expenditure, interest
rates — because many retail customers finance the purchase of their boats, and other socioeconomic and environmental factors
such as availability of leisure time, consumer preferences, demographics and the weather.
Our net sales were higher during the second
quarter of 2017 compared to the first quarter of 2017 and the second quarter of 2016 primarily due to increases in Robalo sales,
coupled with an increase in Chaparral H2O sales, partially offset by decreases in sales of our SunCoast outboard and Vortex jet
boats.
Operating income increased 29.9 percent
during the second quarter of 2017 compared to the same period in the prior year due to higher gross profit, partially offset by
higher selling, general and administrative expenses. Selling, general and administrative expenses increased primarily due to costs
that vary with sales and profitability, such as warranty expense and sales commissions. Dealer inventory in units as of June 30,
2017 was lower than at the end of the first quarter of 2017 but higher than at the end of the second quarter of 2016.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
OUTLOOK
The discussion of the outlook for 2017
is incorporated herein by reference from the Company’s annual report on Form 10-K for the fiscal year ended December 31,
2016.
We believe that recreational boating retail
demand in many segments of the industry is improving. Attendance and sales during the 2017 winter boat shows were moderately higher
than the 2016 winter boat show season, residential real estate markets have improved, and consumer confidence and fuel prices are
stable. We also believe that there is improved demand from consumers who have delayed purchasing a boat over the past few years
due to economic uncertainty.
Although industry wide retail
boat sales remain lower than they were prior to the 2008 financial crisis, retail boat sales have increased each year since
2011. We believe that continued improvements in retail boat sales will be modest due to the lack of strong economic
improvement, which tends to discourage consumers from purchasing large discretionary goods such as pleasure boats.
Fluctuations in fuel prices can impact our sales, and during 2016 and 2017 fuel prices decreased, and have declined to some
of the lowest inflation-adjusted levels recorded during the past 10 years. In general, however, the overall cost of boat
ownership has increased, especially in the sterndrive recreational boat market segment, which comprises approximately 39
percent of the Company’s unit sales. The higher cost of boat ownership discourages consumers from purchasing
recreational boats. For a number of years, Marine Products as well as other boat manufacturers have been improving their
customer service capabilities, marketing strategies and sales promotions in order to attract more consumers to recreational
boating as well as improve consumers’ boating experiences. The Company provides financial incentives to its dealers for
receiving favorable customer satisfaction surveys. In addition, the recreational boating industry conducts a promotional
program which involves advertising and consumer targeting efforts, as well as other activities designed to increase the
potential consumer market for pleasure boats. Many manufacturers, including Marine Products, participate in this program.
Management believes that these efforts have incrementally benefited the industry and Marine Products. As in past years,
Marine Products enhanced its selection of models for the 2018 model year which began on July 1, 2017. We continue to
emphasize the value-priced Chaparral and Robalo models, as well as the Surf Series, a new line of Chaparral models first
introduced for the 2017 model year. In addition, we are experiencing a favorable consumer reception to our new for 2017
Chaparral H2O outboard boats. We believe that these boat models will expand our customer base, and
leverage our strong dealer network and reputation for quality and styling. During 2017 we expanded our nationally advertised
fixed retail pricing to include more of our models. We plan to continue to develop and produce additional new products for
subsequent model years.
Our financial results for the full year
of 2017 will depend on a number of factors, including interest rates, consumer confidence, the availability of credit to our dealers
and consumers, fuel costs, the continued acceptance of our new products in the recreational boating market, our ability to compete
in the competitive pleasure boating industry, and the costs of labor and certain of our raw materials and key components.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
Key operating and financial statistics
for the three and six months ended June 30, 2017 and 2016 are as follows:
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Total number of boats sold
|
|
1,392
|
|
|
1,348
|
|
|
2,883
|
|
|
2,678
|
|
Average gross selling price per boat
(in thousands)
|
|
$
|
45.0
|
|
|
$
|
42.8
|
|
|
$
|
43.4
|
|
|
$
|
42.7
|
|
Net sales
(in thousands)
|
|
$
|
71,484
|
|
|
$
|
65,066
|
|
|
$
|
142,524
|
|
|
$
|
128,731
|
|
Percentage of cost of goods sold to net sales
|
|
|
77.2
|
%
|
|
|
78.8
|
%
|
|
|
78.1
|
%
|
|
|
79.4
|
%
|
Gross profit margin percent
|
|
|
22.8
|
%
|
|
|
21.2
|
%
|
|
|
21.9
|
%
|
|
|
20.6
|
%
|
Percentage of selling, general and administrative expenses to net sales
|
|
|
10.6
|
%
|
|
|
10.9
|
%
|
|
|
10.9
|
%
|
|
|
11.0
|
%
|
Operating income
(in thousands)
|
|
$
|
8,722
|
|
|
$
|
6,712
|
|
|
$
|
15,620
|
|
|
$
|
12,357
|
|
Warranty expense
(in thousands)
|
|
$
|
934
|
|
|
$
|
834
|
|
|
$
|
1,856
|
|
|
$
|
1,376
|
|
THREE MONTHS ENDED JUNE 30, 2017 COMPARED
TO THREE MONTHS ENDED JUNE 30, 2016
Net sales
for the three months ended June 30, 2017 increased
$6.4 million or 9.9 percent compared to the comparable period in 2016. The change in net sales during the quarter compared to the
prior year was due primarily to a 3.3 percent increase in the number of units sold, coupled with a 5.1 percent increase in the
average selling price per boat. The increase in unit sales was due to higher Robalo unit sales during the quarter as compared to
the prior year, as well as increased unit sales of our Chaparral H2O boats, partially offset by decreases in sales of our SunCoast
outboards and Vortex jet boats. In the second quarter of 2017, net sales outside of the United States accounted for 7.1 percent
of net sales compared to 9.6 percent of net sales in the second quarter of 2016. Domestic net sales increased 12.9 percent to $66.4
million compared to the second quarter of the prior year, while international net sales decreased 18.5 percent to $5.1 million.
Cost of goods
sold
for the three
months ended June 30, 2017 was $55.2 million compared to $51.3 million for the comparable period in 2016, an increase of $3.9 million
or 7.7 percent. Cost of goods sold decreased to 77.2 percent of net sales for the three months ended June 30, 2017 from 78.8 percent
of net sales for the comparable period in 2016, primarily due to production efficiencies.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
Selling, general and administrative expenses
for the three months ended June 30, 2017 were $7.6 million compared to $7.1 million for the comparable period in 2016, an increase
of $0.5 million or 6.6 percent. This increase was due primarily to expenses that increase with higher activity levels, as well
as increased compensation expense consistent with improved profitability. Selling, general and administrative expenses as a percentage
of net sales decreased slightly to 10.6 percent in the second quarter of 2017 from 10.9 percent in the second quarter of 2016.
Operating income
for the three months
ended June 30, 2017 increased $2.0 million or 29.9 percent compared to the comparable period in 2016 due to higher gross profit,
partially offset by higher selling, general and administrative expenses.
Interest income
was $57 thousand during
the three months ended June 30, 2017 compared to $151 thousand for the comparable period in 2016. This decrease was primarily due
to a decrease in the average balance of our marketable securities portfolio primarily due to the liquidation of marketable securities
to fund a portion of the tender offer completed in the fourth quarter of 2016.
Income tax provision
for the three
months ended June 30, 2017 was $2.7 million compared to $2.0 million for the comparable period in 2016. Income tax provision for
the second quarter of 2017 reflects an effective tax rate of 30.3 percent, compared to an effective tax rate of 29.8 percent for
the comparable period in the prior year. The effective rate in both periods includes the effect of beneficial permanent differences
including tax-exempt interest income and favorable U.S. manufacturing deductions. The second quarter 2016 effective tax rate reflects
certain beneficial permanent tax differences generated from life insurance proceeds.
SIX MONTHS ENDED JUNE 30, 2017 COMPARED
TO SIX MONTHS ENDED JUNE 30, 2016
Net sales
for the six months ended June 30, 2017 increased
$13.8 million or 10.7 percent compared to the comparable period in 2016. The change in net sales during the quarter compared to
the prior year was due primarily to a 7.7 percent increase in the number of units sold, coupled with a 1.6 percent increase in
the average selling price per boat. The increase in unit sales was due to higher Robalo unit sales during the quarter as compared
to the prior year, as well as increased unit sales of our Chaparral H2O boats, partially offset by decreases in sales of our SunCoast
outboards and Vortex jet boats. In the first six months of 2017, net sales outside of the United States accounted for 6.2 percent
of net sales compared to 10.3 percent of net sales in the comparable period of 2016. Domestic net sales increased 15.7 percent
to $133.6 million compared to the second quarter of the prior year, while international net sales decreased 32.9 percent to $8.9
million.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
Cost of goods
sold
for the six
months ended June 30, 2017 was $111.3 million compared to $102.2 million for the comparable period in 2016, an increase of $9.1
million or 8.9 percent. Cost of goods sold decreased to 78.1 percent of net sales for the six months ended June 30, 2017 from 79.4
percent of net sales for the comparable period in 2016, primarily due to production efficiencies.
Selling, general and administrative expenses
for the six months ended June 30, 2017 were $15.6 million compared to $14.1 million for the comparable period in 2016, an increase
of 1.5 million or 10.1 percent. This increase was due primarily to expenses that vary with sales and profitability, such as warranty
expense and sales commissions. Selling, general and administrative expenses as a percentage of net sales decreased slightly to
10.9 percent in the second quarter of 2017 from 11.0 percent in the second quarter of 2016.
Operating income
for the six months
ended June 30, 2017 increased $3.3 million or 26.4 percent compared to the comparable period in 2016 due to higher gross profit,
partially offset by higher selling, general and administrative expenses.
Interest income
was $108 thousand during
the six months ended June 30, 2017 compared to $243 thousand for the comparable period in 2016. This decrease was primarily due
to a decrease in the average balance of our marketable securities portfolio primarily due to the liquidation of marketable securities
to fund a portion of the tender offer completed in the fourth quarter of 2016.
Income tax provision
for the
six months ended June 30, 2017 was $4.3 million compared to $3.9 million for the comparable period in 2016. Income tax
provision for the second quarter of 2017 reflects an effective tax rate of 27.6 percent, compared to an effective tax rate of
30.6 percent for the comparable period in the prior year. The effective rate in both periods includes the effect of
beneficial permanent differences including tax-exempt interest income and favorable U.S. manufacturing deductions. The
Company adopted the provisions of ASU 2016-09 in the first quarter of 2017 that requires excess tax benefits and deficiencies
to be recognized as a component of income tax expense rather than equity. This resulted in a beneficial discrete adjustment
of approximately $650 thousand to the provision for income taxes in the first six months of 2017. The 2016 effective tax rate
reflects certain beneficial permanent tax differences generated from life insurance proceeds.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The Company’s cash and cash equivalents at June 30, 2017
were $3.8 million compared to $2.6 million at December 31, 2016. In addition, the aggregate of short-term and long-term marketable
securities was $17.8 million at June 30, 2017 compared to $9.3 million at December 31, 2016.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
The following table sets forth the cash flows for the applicable
periods:
|
|
Three months ended June 30,
|
|
(
in thousands
)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
17,850
|
|
|
$
|
10,778
|
|
Net cash used for investing activities
|
|
|
(9,497
|
)
|
|
|
(13,216
|
)
|
Net cash used for financing activities
|
|
$
|
(7,138
|
)
|
|
$
|
(5,252
|
)
|
Cash provided by operating activities for the six months ended
June 30, 2017 increased approximately $7.1 million compared to the comparable period in 2016. This increase is primarily due to
an increase in net income, coupled with a favorable change in working capital. The major components of the net favorable change
in working capital were as follows: a favorable change of $3.2 million in inventories primarily due to the timing of shipments
of finished boats; a favorable change of $2.2 million in other long-term liabilities due primarily to employee deferrals in the
supplemental retirement plan; and a $2.8 million favorable change in accounts payable, due primarily to timing of payments.
Cash used for investing activities for the six
months ended June 30, 2017 was approximately $9.5 million compared to $13.2 million used for investing activities for the
same period in 2016. The decrease in cash used for investing activities is primarily due to increased proceeds generated
from sales of marketable securities in the current period.
Cash used for financing activities for the six months ended
June 30, 2017 increased approximately $1.9 million compared to the six months ended June 30, 2016 primarily due to an increase
in open market share repurchases, coupled with an increase in the value of shares repurchased to fund the taxes related
to vesting of restricted shares.
Financial Condition and Liquidity
The Company believes that the liquidity provided by existing
cash, cash equivalents and marketable securities, its overall strong capitalization and cash generated by operations will provide
sufficient capital to meet the Company’s requirements for at least the next twelve months. The Company’s decisions
about the amount of cash to be used for investing and financing purposes are influenced by its capital position and the expected
amount of cash to be provided by operations.
Cash Requirements
The Company currently expects that capital expenditures during
2017 will be approximately $1.8 million, of which $0.9 million has been spent through June 30, 2017.
The Company participates in a multiple employer Retirement Income
Plan, sponsored by RPC, Inc. (“RPC”). The Company did not make a cash contribution to this plan during the first six
months of 2017 and does not expect to make any contributions for the remainder of 2017.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
As of June 30, 2017, the Company has repurchased a total of
5,443,067 shares in the open market under the Company stock repurchase program and there are 2,806,933 shares that remain available
for repurchase under the current authorization. There were 51,797 shares repurchased under this program during the six months ended
June 30, 2017.
For our Chaparral products, Marine Products provides a lifetime
limited structural hull warranty, a five-year limited structural deck warranty, and a transferable one-year limited warranty on
certain components to the original owner. Warranties for additional items are provided for periods of one to five years and are
not transferrable. Additionally, as it relates to the second subsequent owner, a five-year transferrable hull warranty and the
remainder of the original one-year limited warranty on certain components are available. The five-year transferable hull warranty
terminates five years after the date of the original retail purchase. Claim costs related to components are generally absorbed
by the original component manufacturer.
For our Robalo products, Marine Products provides a ten-year
limited structural hull warranty and a transferable one-year limited warranty on certain components to the original owner. Warranties
on additional items are provided for periods of one to five years and are not transferrable. Additionally, as it relates to the
second subsequent owner, a five-year transferrable hull warranty and the remainder of the original one-year limited warranty on
certain components are available. The five-year transferable hull warranty terminates five years after the date of the original
retail purchase. Claim costs related to components are generally absorbed by the original component manufacturer.
OFF BALANCE SHEET ARRANGEMENTS
To assist dealers in obtaining financing for the purchase of
its boats for inventory, the Company has entered into agreements with various third-party floor plan lenders whereby the Company
guarantees varying amounts of debt for qualifying dealers on boats in inventory. The Company’s obligation under these guarantees
becomes effective in the case of a default under the financing arrangement between the dealer and the third-party lender. The agreements
provide for the return of all repossessed boats to the Company in a new and unused condition as defined, in exchange for the Company’s
assumption of specified percentages of the debt obligation on those boats, up to certain contractually determined dollar limits
which vary by lender. The Company had no material repurchases of inventory under contractual agreements during the six months ended
June 30, 2017 and June 30, 2016.
Management continues to monitor the risk of defaults and resulting
repurchase obligations based in part on information provided by the third-party floor plan lenders and will adjust the guarantee
liability at the end of each reporting period based on information reasonably available at that time.
The Company currently has an agreement with one of the floor
plan lenders whereby the contractual repurchase limit is 16 percent of the amount of the average net receivables financed by the
floor plan lender for our dealers during the prior 12 month period, which was $11.1 million as of June 30, 2017. The Company has
contractual repurchase agreements with additional lenders with an aggregate maximum repurchase obligation of approximately $5.5
million with various expiration and cancellation terms of less than one year, for an aggregate repurchase obligation with all financing
institutions of approximately $16.6 million as of June 30, 2017.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
RELATED PARTY TRANSACTIONS
In conjunction with its spin-off from RPC in 2001, the Company
and RPC entered into various agreements that define their relationship after the spin-off. RPC charged the Company for its allocable
share of administrative costs incurred for services rendered on behalf of Marine Products totaling approximately $386 thousand
for the six months ended June 30, 2017 and $391 thousand for the six months ended June 30, 2016.
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, 2016. There have
been no significant changes in the critical accounting policies since year-end.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 of the Consolidated Financial
Statements for a description of recent accounting pronouncements, including the expected dates of adoption and expected effects
on results of operations and financial condition, if known.
SEASONALITY
Marine Products’ quarterly operating results are affected
by weather and general economic conditions. Quarterly operating results for the second quarter have historically recorded the highest
sales volume for the year because this corresponds with the highest retail sales volume period. The results for any quarter are
not necessarily indicative of results to be expected in any future period.
INFLATION
The market prices of certain materials used
in manufacturing the Company’s products, especially resins that are made with hydrocarbon feedstocks, copper and steel, have
been volatile in the years following the financial crisis of 2008. During the fourth quarter of 2016 and the first two quarters
of 2017, the costs of several of these raw materials have begun to increase. In addition, the cost of certain components used in
the manufacturing of the Company’s products has increased due to high demand and limited supplier capacity. As a result,
it is possible the Company will incur higher materials purchase costs in 2017. These higher prices of materials would increase
the costs of manufacturing the Company’s products, and could negatively affect our profit margins, due to the competitive
nature of the selling environment for recreational boats. Furthermore, the costs of these raw materials remain volatile, and may
decrease in the future.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
New boat buyers typically finance their purchases. Higher inflation
typically results in higher interest rates that could translate into an increased cost of boat ownership. Should higher inflation
and increased interest rates occur, prospective buyers may choose to forego or delay their purchases or buy a less expensive boat
in the event that interest rates rise or credit is not available to finance their boat purchases.
FORWARD-LOOKING STATEMENTS
Certain statements made in this report that are not historical
facts are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements may include, without limitation, the expected effect of recent accounting pronouncements on the Company’s consolidated
financial statements; the Company’s estimate for warranty accruals; our belief that recreational boating retail demand in
many segments of the industry is improving; our belief that there is improved demand from consumers who have delayed purchasing
a boat over the past few years due to economic uncertainty; our belief that improvements in retail boat sales will be modest due
to the lack of economic improvement; the Company’s belief that the recreational boating industry promotional program has
incrementally benefited the industry and Marine Products; our plans to continue to emphasize the value-priced Chaparral and Robalo
models as well as the Surf Series; the Company’s belief that its newer boat models will expand its customer base and leverage
its strong dealer network and reputation for quality and styling; our plans to continue to develop and produce additional new products
for subsequent model years; the Company’s belief that its liquidity, capitalization and cash expected to be generated from
operations, will provide sufficient capital to meet the Company’s requirements for at least the next twelve months; the Company’s
expectations about capital expenditures during 2017; the Company’s expectation about contributions to its pension plan in
2017; the Company’s belief about the amount and timing of inventory repurchases; the Company’s belief that it is possible
that it will incur higher material purchase costs in 2017; the Company’s belief that these higher costs could negatively
affect its profit margins; the Company’s expectation regarding market risk of its investment portfolio; and the Company’s
expectations about the effect of litigation on the Company’s financial position or results of operations.
The words “may,” “should,” “will,”
“expect,” “believe,” “anticipate,” “intend,” “plan,” “seek,”
“project,” “estimate,” and similar expressions used in this document that do not relate to historical facts
are intended to identify forward-looking statements. Such statements are based on certain assumptions and analyses made by our
management in light of its experience and its perception of historical trends, current conditions, expected future developments
and other factors it believes to be appropriate. We caution you that such statements are only predictions and not guarantees of
future performance and that actual results, developments and business decisions may differ from those envisioned by the forward-looking
statements. Risk factors that could cause such future events not to occur as expected include the following: economic conditions,
unavailability of credit and possible decreases in the level of consumer confidence impacting discretionary spending, business
interruptions due to adverse weather conditions, increased interest rates, unanticipated changes in consumer demand and preferences,
deterioration in the quality of Marine Products’ network of independent boat dealers or availability of financing of their
inventory, our ability to insulate financial results against increasing commodity prices, the impact of rising gasoline prices
and a weak housing market on consumer demand for our products, competition from other boat manufacturers and dealers, and insurance
companies that insure a number of Marine Products’ marketable securities have been downgraded, which may cause volatility
in the market price of Marine Products’ marketable securities. Additional discussion of factors that could cause actual results
to differ from management’s projections, forecasts, estimates and expectations is contained in Marine Products Form 10-K
filed with the Securities and Exchange Commission for the year ended December 31, 2016. The Company does not undertake to update
its forward-looking statements.
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES