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MPX > SEC Filings for MPX > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for MARINE PRODUCTS CORP

Form 10-Q for MARINE PRODUCTS CORP


1-Nov-2012

Quarterly Report


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, 2011 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 and profitability of its various models, and indications of near term demand such as consumer confidence, interest rates, fuel prices, dealer orders placed at our annual dealer conferences, and retail attendance and orders at annual winter boat show exhibitions. We also consider trends related to certain key financial and other data, including our market share, unit sales of our products, average selling price per unit, and gross profit margins, among others, as indicators of the success of our strategies. Marine Products' financial results are affected by consumer confidence - because pleasure boating is a discretionary expenditure, interest rates and credit availability - 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 sales during the third quarter of 2012 were slightly higher than the second quarter of 2012 and significantly higher than the third quarter of 2011. We operated at higher production levels during the third quarter of 2012 because of strong dealer demand for our new entry-level Chaparral and Robalo models.

Operating income increased compared to the prior year due to higher gross profit, which was the result of higher net sales and increased production efficiencies from higher production levels. Dealer inventories are higher at September 30, 2012 than both this time last year and June 30, 2012, however unit order backlog was higher at the end of the third quarter than at the end of the second quarter of 2012 or the third quarter of 2011, indicating strong dealer and customer orders.

OUTLOOK

The discussion on the outlook for 2012 is incorporated herein by reference from the Company's annual report on Form 10-K for the fiscal year ended December 31, 2011.

Management believes that net sales will increase in 2012 compared to 2011 and that our operating results will improve as well. We increased production to meet dealer demand during the retail selling season for the new 2013 model year. Industry sources indicate that our market share in the small sterndrive market increased significantly during the first six months of 2012 as compared to the twelve months of 2011, and we believe that this increase was due to higher sales volumes of our value priced chaparral H20 and Robalo models, lengths ranging from 18 to 20 feet. Although these models carry lower average selling prices than our other Chaparral and Robalo models, we believe these sales will increase consolidated net sales, gross profit, operating income, and net income for the full year of 2012, by increasing unit sales and spreading our fixed production costs over higher production volume.


MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

In general, retail boat sales have increased over the past year. However, we believe that overall industry retail sales increases will be modest due to a slow recovery from the recession, continued high unemployment, depressed real estate values and continued weak consumer confidence. We believe that these factors tend to discourage consumers from purchasing large discretionary goods such as pleasure boats. Near-term fluctuations in fuel prices impact our sales as well, and we believe that the stable fuel prices during the 2012 retail selling season compared to the first quarter of 2012 and the third quarter of 2011 have had a positive impact on our 2012 sales. Over the long term, the lower expected returns on financial assets may have long-term effects on consumer behavior with regard to pleasure boating. Because of these lower returns, consumers may have less money for large discretionary purchases such as recreational boats because of greater need for retirement savings. For a number of years, Marine Products as well as other 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. 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 is enhancing its selection of models for the 2013 model year which began on July 1, 2012. We are enhancing the value-priced Chaparral and Robalo models that was initially introduced for model year 2012, as well as developing two new Chaparral models and one new Robalo model which we believe will appeal to our target markets. We believe that the value-priced models we are producing will continue to enhance the achievement of our objectives related to improved manufacturing cost efficiencies, meeting dealer requests for entry-level models and increasing retail market share.

Our financial results for the remainder of 2012 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 certain of our raw materials and key components.

RESULTS OF OPERATIONS

Key operating and financial statistics for the three and nine months ended
September 30, 2012 and 2011 are as follows:

                                              Three months ended           Nine months ended
($ in thousands)                                 September 30                September 30
                                              2012          2011          2012         2011
Total number of boats sold                        878           390         2,627         1,509
Average gross selling price per boat       $     41.1     $    54.0     $    41.1     $    49.7
Net sales                                  $   38,494     $  22,254     $ 114,797     $  78,500
Percentage of Cost of Goods Sold to net
sales                                            80.8 %        79.2 %        81.1 %        82.2 %
Gross profit margin percent                      19.2 %        20.8 %        18.9 %        17.8 %
Percentage of selling, general and
administrative expenses to net sales             12.0 %        14.1 %        12.3 %        13.6 %
Operating income                           $    2,773     $   1,494     $   7,586     $   3,317
Warranty expense                           $      597     $      14     $   1,789     $   1,040


MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2011

Net sales for the third quarter ended September 30, 2012 increased $16.2 million or 73.0 percent compared to the third quarter of 2011. The change in net sales was due primarily to a 125.1 percent increase in the number of boats sold partially offset by a 23.9 percent decrease in the average gross selling price per boat. Unit sales increased dramatically due to sales of our recently introduced Chaparral H2O Sport and Fish & Ski Boats, as well as our Robalo 180 and 200 outboard sport fishing boat. Average selling prices and unit sales of our other models increased slightly compared to the prior year due to changes in model mix. In the third quarter of 2012, sales outside of the United States accounted for 18.4 percent of net sales compared to 19.9 percent of net sales in the prior year third quarter. Domestic sales increased 76.4 percent and international sales increased 59.4 percent during the quarter compared to the prior year. The majority of the increase in international sales was due to increased sales in Canada due to improvement in the Canadian economy while most other international markets experienced a slight improvement.

Cost of goods sold for the third quarter ended September 30, 2012 was $31.1 million compared to $17.6 million for the third quarter in 2011, an increase of $13.5 million or 76.6 percent. Cost of goods sold, as a percentage of net sales increased primarily due to increased sales of the smaller models which carry lower margins partially offset by increased production efficiencies due to higher production levels.

Selling, general and administrative expenses for the third quarter ended September 30, 2012 were $4.6 million compared to $3.1 million for the third quarter in 2011, an increase of $1.5 million or 46.5 percent. This increase was due to expenses that vary with sales and profitability, such as incentive compensation, sales commissions and warranty expense coupled with increased advertising costs. Selling, general and administrative expenses, as a percentage of net sales, decreased primarily due to leverage of fixed costs over higher net sales. Warranty expense was 1.6 percent of net sales for the three months ended September 30, 2012 compared to .06 percent in the prior year quarter. This is primarily due to a favorable adjustment to the warranty accrual in the third quarter of last year, due to positive claims experience.

Operating income for the third quarter ended September 30, 2012 increased $1.3 million compared to the third quarter in 2011 due to increased net sales and gross profit in the third quarter of 2012 compared to the prior year quarter, partially offset by higher selling, general and administrative expenses.

Interest income was $196 thousand during the third quarter ended September 30, 2012 and $233 thousand for the third quarter in 2011. The slight decrease was primarily due to lower market returns on the Company's investments during the period compared to the prior year offset by an increase in the average investment balance compared to the prior year.

Income tax provision for the third quarter ended September 30, 2012 was $859 thousand compared to $527 thousand for the third quarter in 2011. The income tax provision for the third quarter ended September 30, 2012 reflects an effective tax rate of 28.9 percent compared to an effective tax rate of 30.5 percent for the third quarter in 2011. The change in the effective tax rate is a result of normal fluctuations in the relationship of our annual pre-tax income to permanent differences, including tax-exempt interest income earned on municipal securities and the beneficial effect of the U.S. manufacturing deduction.

NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2011

Net sales for the nine months ended September 30, 2012 increased $36.3 million or 46.2 percent compared to the nine months ended September 30, 2011. The change in net sales was due primarily to a 74.1 percent increase in the number of boats sold partially offset by a 17.3 percent decrease in the average gross selling price per boat. Unit sales increased dramatically due to sales of our recently introduced Chaparral H2O Sport and Fish & Ski Boats, as well as our Robalo 180 and 200 outboard sport fishing boat. The increased sales of these smaller models also resulted in the decrease in overall average selling prices during the nine months ended September 30, 2012 as compared to the comparable period in 2011. During the first nine months of 2012, sales outside of the United States accounted for 21.2 percent of net sales, unchanged compared to 21.2 percent of net sales in the prior year. Domestic sales increased 46.3 percent and international sales increased 45.9 percent during the period compared to the prior year. The majority of the increase in international sales was due to increased sales in Canada due to increases in the number of dealers and improvement in the Canadian economy while most other international markets have struggled.


MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

Cost of goods sold for the nine months ended September 30, 2012 was $93.1 million compared to $64.5 million for the nine months ended September 30, 2011, an increase of $28.6 million or 44.4 percent. Cost of goods sold, as a percentage of net sales, decreased primarily due to production efficiencies related to higher production volumes during the first nine months of 2012 compared to the prior period.

Selling, general and administrative expenses for the nine months ended September 30, 2012 were $14.1 million compared to $10.7 million for the nine months ended September 30, 2011, an increase of $3.4 million or 31.8 percent. This increase was due to expenses that vary with sales and profitability, such as incentive compensation, sales commissions and warranty expense coupled with increased advertising costs. Selling, general and administrative expenses, as a percentage of net sales, decreased primarily due to leverage of fixed costs over higher net sales. Warranty expense was 1.6 percent of net sales for the nine months ended September 30, 2012 compared to 1.3 percent in the prior year.

Operating income for the nine months ended September 30, 2012 increased $4.3 million compared to the nine months ended September 30, 2011 due to increased net sales and gross profit during the first nine months of 2012 compared to the first nine months of 2011, partially offset by higher selling, general and administrative expenses.

Interest income was $688 thousand during the nine months ended September 30, 2012 and $741 thousand for the nine months ended September 30, 2011. The slight decrease was primarily due to lower market returns on the company's investments during the period compared to the prior year offset by an increase in the average investment balance compared to the prior year.

Income tax provision for the nine months ended September 30, 2012 was $2.4 million compared to $963 thousand for the nine months ended September 30, 2011. The income tax provision for the nine months ended September 30, 2012 reflects an effective tax rate of 28.5 percent compared to an effective tax rate of 23.7 percent for the nine months ended September 30, 2011. The change in the effective tax rate is a result of normal fluctuations in the relationship of our annual estimated pretax income to permanent differences between book and taxable income including tax-exempt interest earned on municipal securities, and the beneficial effect of the U.S. manufacturing deduction.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The Company's cash and cash equivalents at September 30, 2012 were $6.6 million
compared to $1.0 million at December 31, 2011. In addition, the aggregate of
short-term and long-term marketable securities were $55.9 million at September
30, 2012 compared to $54.1 million at December 31, 2011. The following table
sets forth the cash flows for the applicable periods:

                                                Nine months ended September 30,
  (in thousands)                                    2012                  2011

  Net cash provided by operating activities    $       10,214       $          6,588
  Net cash used for investing activities               (1,867 )              (10,354 )
  Net cash used for financing activities       $       (2,728 )     $           (316 )


MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

Cash provided by operating activities for the nine months ended September 30, 2012 increased approximately $3.6 million compared to the comparable period in 2011. This increase is primarily due to a significant increase in net income during the first nine months of 2012 partially offset by higher working capital requirements during 2012 consistent with increased production volumes and the timing of adding critical manufacturing components into inventory.

Cash used for investing activities for the nine months ended September 30, 2012 decreased approximately $8.5 million compared to the comparable period in 2011 due to higher sales of marketable securities in the current period partially offset by increased purchases coupled with lower maturities of marketable securities.

Cash used for financing activities for the nine months ended September 30, 2012 increased approximately $2.4 million primarily due to the reinstatement of a cash dividend to commons stockholders and higher cost of stock repurchases.

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 2012 will be approximately $435 thousand, of which $273 thousand has been spent through September 30, 2012.

The Company participates in a multiple employer Retirement Income Plan, sponsored by RPC, Inc. ("RPC"). During the nine months ended September 30, 2012, the Company made a contribution of $684 thousand to this plan in order to achieve the Company's funding objective and plans to make no further cash contribution to this plan during the remainder of 2012.

As of September 30, 2012, the Company has purchased an aggregate total of 4,981,773 shares in the open market under the Company stock repurchase program and there are 3,268,227 shares that remain available for repurchase. The Company repurchased 1,781 shares under this program during the quarter ended September 30, 2012, increasing the total shares repurchased for the first nine months of 2012 to 56,616 shares. The Company may repurchase additional outstanding common shares periodically based on market conditions. The stock buyback program does not have a predetermined expiration date.

On October 24, 2012, the Board of Directors approved a $0.02 per share cash dividend in addition to a special dividend of $0.55 per common share, both payable December 10, 2012 to stockholders of record at the close of business November 9, 2012. This special dividend which is estimated to be $20.1 million will be funded in part by liquidating a portion of our marketable securities investment portfolio. The Company's balance sheet will remain strong and liquid following payment of this dividend and continue to support sales growth and allow it to pursue strategic opportunities to enhance shareholder value over the long term. The Company expects to continue to pay cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors.

The Company 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 the Consolidated Financial Statements for a detail of activity in the warranty accruals during the nine months ended September 30, 2012 and 2011.


MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

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 became contractually obligated to repurchase inventory of approximately $0.8 million during the year ended December 31, 2011 all of which were redistributed among existing and replacement dealers. There was no material repurchases of inventory under contractual agreements during the nine months ended September 30, 2012.

Management continues to monitor the risk of additional 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 to not exceed 15 percent of the amount of the average net receivables financed by the floor plan lender for dealers during the prior 12 month period. The Company has contractual repurchase agreements with additional lenders with an aggregate maximum repurchase obligation of approximately $6.0 million with various expiration and cancellation terms of less than one year, for an aggregate repurchase obligation with all financing institutions of approximately $10.8 million as of September 30, 2012.

RELATED PARTY TRANSACTIONS

In conjunction with its spin-off from RPC in 2001, the Company and RPC entered into various agreements that define their relationship after the spin-off. A detailed discussion of the various agreements in effect is contained in the Company's annual report on Form 10-K for the year ended December 31, 2011. RPC charged the Company for its allocable share of administrative costs incurred for services rendered on behalf of Marine Products totaling approximately $383 thousand in the nine months ended September 30, 2012 and $500 thousand in the nine months ended September 30, 2011.

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, 2011. 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 estimated effects on results of operations and financial condition.

SEASONALITY

Marine Products' quarterly operating results are affected by weather and general economic conditions. 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.


MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

INFLATION

The market prices of certain material and component costs used in manufacturing the Company's products, especially resins that are made with hydrocarbon feedstocks, copper and stainless steel, have historically experienced volatility. The prices of these commodities fell dramatically due to the global recession and financial crisis in late 2008. During 2009, these commodity prices began to rise, and continued to rise throughout 2011. By the end of 2011, the prices of some of these commodities, such as copper, were higher than the peak market prices reached during 2008. Prices of these commodities, while still volatile, have moderated during the second and third quarters of 2012 and have not adversely affected our financial results during 2012. We institute price increases to our dealers to compensate for these cost increases when they occur, but these price increases historically have not been enough to compensate fully for the increases in commodity costs. Due to the intense competition in our business, we do not believe that we will be able to institute sufficient price increases to our dealers to compensate for these increased materials costs. It is likely that any continued increases in commodity costs would negatively impact the Company's operating results.

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. 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 boat purchase.

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; enhance the Company's belief that there exists a favorable outlook for the near-term selling environment for our products; management's belief that net sales will increase in 2012 compared to 2011; the Company's belief that sales of the Company's new models will increase consolidated net sales, gross profit, operating income and net income during the remainder of 2012, by increasing unit sales and spreading our fixed production costs over higher production volume; the Company's belief that retail boat sales have started to increase over the past several quarters; the Company's belief that this increase in retail sales will be modest; our belief that a slow recovery from the recession, continued high unemployment, depressed real estate values and continued weak consumer confidence will tend to discourage consumers from purchasing large discretionary goods such as pleasure boats; the lower expected returns on financial assets may have long term effects on consumer behavior with regard to pleasure boating; the Company's belief that the recreational boating industry promotional program have incrementally benefited the industry and Marine Products; our plans to enhance the value-priced Chaparral and Robalo models we initially introduced in 2012 as well as developing new Chaparral and Robalo models which we believe will appeal to our target markets; our belief that the value-priced models introduced last . . .

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