News Column

MARINE PRODUCTS CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

April 29, 2014

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, 2013 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 costs, 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 net sales were higher during the first quarter of 2014 compared to the first quarter of 2013 and the fourth quarter of 2013 because of strong dealer demand for our larger Robalo models, our larger Chaparral H2O models, and our large SSX sportsboats introduced for the 2014 model year. In addition, industry indicators such as attendance at the recent winter boat shows, industry reports regarding 2014 retail boat sales, and the increased availability of floorplan financing for our dealers, have given us a favorable outlook for the near-term selling environment for our products. This favorable outlook is tempered by the prolonged winter weather in many markets that we believe have negatively impacted sales.

Operating income increased by 88.0 percent during the first quarter of 2014 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 due to costs that vary with sales and profitability, such as officer incentive compensation, warranty expense and sales commissions. Dealer inventory in units as of March 31, 2014 was higher than at the end of the fourth quarter of 2013 and the first quarter of 2013. We believe that prolonged winter weather during the first quarter of the current year has caused dealer inventories to be slightly higher than normal, but we anticipate that retail sales will improve during the latter part of the retail selling season.

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The discussion on the outlook for 2014 is incorporated herein by reference from the Company's annual report on Form 10-K for the fiscal year ended December 31, 2013.

We believe that recreational boating retail demand in many segments of the industry is improving. Attendance and sales during the recent winter boat shows have been moderately higher than the prior season, residential real estate markets and consumer confidence have stabilized, and fuel prices have declined slightly. 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 financial crisis, sales volumes expanded in 2013 and the first three months of 2014, and we expect this to continue for the remainder of 2014. We believe 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, although fuel prices have declined somewhat during the first quarter of 2014, which could encourage consumers to participate in recreational boating. Furthermore, recent improvements within selected housing markets could have positive effects on sales. 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 2014 model year which began on July 1, 2014. We are continuing to emphasize the value-priced Chaparral and Robalo models, as well as larger models in the Chaparral line-up including the SSX's, and new Robalo bay boat models. In addition, we produced and sold our first Vortex jet boats in the first quarter of 2014 and plan to introduce two additional larger models for the 2015 model year for production during the second and third quarters of 2014. We believe that these jet boat models will expand our customer base, and leverage our strong dealer network and reputation for quality and styling. We will continue to develop and produce additional new products for the upcoming 2015 model year.

Our financial results for the full year of 2014 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.

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RESULTS OF OPERATIONS

Key operating and financial statistics for the three months ended March 31, 2014 and 2013 are as follows: Three months ended March 31, 2014 2013 Total number of boats sold 923 976 Average gross selling price per boat (in thousands) $ 48.3$ 42.6 Net sales (in thousands) $ 47,702$ 44,283 Percentage of cost of goods sold to net sales 81.5 % 83.9 % Gross profit margin percent 18.5 % 16.1 %



Percentage of selling, general and administrative expenses to net sales 12.7 % 12.7 % Operating income (in thousands) $ 2,768$ 1,472 Warranty expense (in thousands) $ 801$ 749

THREE MONTHS ENDED MARCH 31, 2014 COMPARED TO THREE MONTHS ENDED MARCH 31, 2013

Net sales for the three months ended March 31, 2014 increased $3.4 million or 7.7 percent compared to the comparable period in 2013. The change in net sales during the quarter compared to the prior year was due primarily to a 13.4 percent increase in the average gross selling price per boat and an increase in parts and accessories sales, partially offset by a 5.4 percent decrease in the number of units sold. Average selling prices per boat increased during the quarter due to a favorable model mix that included higher sales of our larger Chaparral H2O models and larger Robalo models and also a significant number of our large SSX Sportsboats, introduced for the 2014 model year. In the first quarter of 2014, sales outside of the United States accounted for 18.4 percent of net sales compared to 22.0 percent of net sales in the prior year first quarter. International net sales decreased 9.7 percent during the first quarter of 2014 to $8.8 million while domestic net sales increased 12.6 percent to $38.9 million.

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Cost of goods sold for the three months ended March 31, 2014 was $38.9 million compared to $37.2 million for the comparable period in 2013, an increase of $1.7 million or 4.6 percent. Cost of goods sold, as a percentage of net sales, decreased primarily due to a favorable model mix, enhanced operating efficiencies, including labor cost controls and improved margins on parts and accessories sales.

Selling, general and administrative expenses for the three months ended March 31, 2014 were $6.1 million compared to $5.6 million for the comparable period in 2013, an increase of $0.5 million or 7.6 percent. This increase was due to expenses that vary with sales and profitability, such as incentive compensation, sales commissions and warranty expense. Selling, general and administrative expenses as a percentage of net sales, was approximately the same in the first quarter of 2014 and the first quarter of 2013.

Operating income for the three months ended March 31, 2014 increased $1.3 million compared to the comparable period in 2013 due to higher gross profit, partially offset by higher selling, general and administrative expenses.

Interest income was $122 thousand during the three months ended March 31, 2014 and $149 thousand for the comparable period in 2013. This decrease was primarily due to a decrease in realized gains, coupled with lower yields, partially offset by a slight increase in the average balance of our marketable securities portfolio.

Income tax provision for the three months ended March 31, 2014 was $912 thousand compared to $172 thousand for the comparable period in 2013. The income tax provision for the three months ended March 31, 2014 reflects an effective tax rate of 31.6 percent compared to an effective tax rate of 10.6 percent for the comparable period in the prior year. The 2014 rate is a result of continued beneficial permanent differences including tax-exempt interest income and a favorable U.S. manufacturing deduction. The 2013 effective tax rate benefited from the impact of research and experimentation credits for both 2013 and the full year of 2012 when the credit was retroactively enacted into law in 2013.

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LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The Company's cash and cash equivalents at March 31, 2014 were $8.7 million compared to $5.1 million at December 31, 2013. In addition, the aggregate of short-term and long-term marketable securities was $40.6 million at March 31, 2014 compared to $36.6 million at December 31, 2013.

The following table sets forth the cash flows for the applicable periods:

Three months ended March 31, (in thousands) 2014 2013 Net cash provided by operating activities $ 9,331$ 6,718 Net cash used for investing activities (4,076 ) (428 ) Net cash used for financing activities $ (1,706 )$ (1,593 )



Cash provided by operating activities for the three months ended March 31, 2014 increased approximately $2.6 million compared to the comparable period in 2013. 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 $0.7 million in inventories due to inventory management and timing of shipments; $0.6 million favorable change in other accrued expenses, largely attributable to timing of payments related to warranties and retail incentives; a $0.8 million favorable change in income tax receivable due primarily to the benefit of research and experimentation tax credits which reduced the estimated tax liability in the first quarter of 2013.

Cash used for investing activities for the three months ended March 31, 2014 was approximately $4.1 million compared to $0.4 million used for investing activities in the same period in 2013. The increase in cash used for investing activities is primarily due to increased purchases of marketable securities in the current period because of increases in cash provided by operations.

Cash used for financing activities for the three months ended March 31, 2014 increased approximately $0.1 million compared to the three months ended March 31, 2013 primarily due an increase in shares purchased for withholding taxes on the vesting of restricted shares.

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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 2014 will be approximately $1.4 million of which $102 thousand has been spent through March 31, 2014.

The Company participates in a multiple employer Retirement Income Plan, sponsored by RPC, Inc. ("RPC"). The Company made a $135 thousand cash contribution to this plan during the first three months of 2014 and does not expect to make any additional contributions for the remainder of 2014.

As of March 31, 2014, the Company has purchased a total of 5,033,785 shares in the open market under the Company stock repurchase program and there are 3,216,215 shares that remain available for repurchase under the current authorization. The Company did not repurchase any shares under this program during the three months ended March 31, 2014.

The Company warrants components of the boat, excluding the engine, against defects in materials and workmanship for a period of one year. Cockpit upholstery is warranted for 2 years. The Company also warrants the structural hull, including its bulkhead and supporting stringer system, against defects in materials and workmanship for as long as the original purchaser owns the boat. The structural deck is warranted for a period of 5 years to the original purchaser. See Note 6 to the Consolidated Financial Statements for a detail of activity in the warranty accruals during the three months ended March 31, 2014 and 2013.

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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 during the year ended December 31, 2013 or the three months ended March 31, 2014.

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 to not exceed 16 percent of the amount of the average net receivables financed by the floor plan lender for dealers during the prior 12 month period, which was $7.3 million as of March 31, 2014. The Company has contractual repurchase agreements with additional lenders with an aggregate maximum repurchase obligation of approximately $7.0 million with various expiration and cancellation terms of less than one year, for an aggregate repurchase obligation with all financing institutions of approximately $14.3 million as of March 31, 2014.

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 $175 thousand in the three months ended March 31, 2014 and $112 thousand in the three months ended March 31, 2013.

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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, 2013. 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.

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 been very volatile as a result of the financial crisis of 2008, the ensuing global recession and the subsequent economic recovery. During the first quarter of 2014, the prices of many of these commodities were constant. Although the potential exists for these costs to remain volatile, we beleive that the Company's material costs will remain relatively stable in 2014. In the event that the prices of these commodities increase in the future and result in higher raw materials costs, we cannot be confident that the Company will be able to institute sufficient price increases to its dealers to compensate for these increased materials costs, or that the Company will be able to implement manufacturing strategies that will significantly reduce usage of raw materials that will compensate for any increased materials costs.

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.

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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 favorable outlook for the near-term selling environment for our products; our belief that retail sales will improve during the latter part of the current selling season; 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 the recent expansion of sales volumes will continue for the remainder of 2014; our belief that improvements in retail boat sales will be modest due to the lack of economic improvement; our belief that the declines in fuel prices and recent improvements within selected housing markets could have positive effects on sales; 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 larger models in the Chaparral line-up including the SSX's and new Robalo bay boat models; our plans to introduce two additional larger Vortex jet boat models for the 2015 model year and the anticipated timing for production of those models; our belief that these jet boat models will expand our customer base and leverage our strong dealer network and reputation for quality and styling; 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 2014; the Company's expectation about contributions to its pension plan in 2014; the Company's belief that material costs will remain relatively stable in 2014; the Company's belief that it may not be able to institute sufficient price increases to compensate for increased material costs or implement manufacturing strategies that will significantly reduce usage of raw materials to compensate for any increased material costs; 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.

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The words "may," "should," "will," "expect," "believe," "anticipate," "intend," "plan," "believe," "seek," "project," "estimate," and similar expressions used in this document that do not relate to historical facts are intended to identify forward-looking statements. Such statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. We caution you that such statements are only predictions and not guarantees of future performance and that actual results, developments and business decisions may differ from those envisioned by the forward-looking statements. Risk factors that could cause such future events not to occur as expected include 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, 2013. The Company does not undertake to update its forward-looking statements.

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Source: Edgar Glimpses