MARINE PRODUCTS CORPORATION Presentation
The following discussion should be read in conjunction with "Selected Financial Data" and the Consolidated Financial Statements included elsewhere in this document. See also "Forward-Looking Statements" on page 2. Discussions of 2019 items and year-to-year comparisons of 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which Item is incorporated herein by reference.
Overview
Marine Products , 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 consumers. These dealers are located throughout the continentalUnited States and in several international markets. Dealers either remit payment upon receipt of the product or finance their inventory through third-party floor plan lenders, who payMarine Products generally within ten days of delivery of the products to the dealers.
We manage our Company by focusing on the execution of the following business and financial strategies:
? Manufacturing high-quality, stylish, and innovative powerboats for our dealers
and retail consumers which are competitive in the market,
Providing our independent dealer network appropriate incentives, training, and
? other support to enhance their success and their customers' satisfaction,
thereby facilitating their continued relationship with us,
? Managing our production and dealer order backlog to optimize operating results
and reduce risk in the event of a downturn in sales of our products,
? Maintaining a flexible, variable cost structure which can be reduced quickly
when deemed appropriate,
Designing our products and marketing strategies to create a positive, memorable
? experience for our customers, within an evolving environment which calls for
the increased use of technology to conduct virtual marketing and product
demonstration,
? Monitoring the recreational boat market for strong complementary product lines
which we may enter through new product development or acquisition,
? Extending our brand name recognition to enhance the success of new boat models
that complement our existing offerings,
? Improving our sales and profits by increasing the utilization of our
manufacturing capacity,
? Monitoring the activities and financial condition of our dealers and of the
third-party floor plan lenders who finance our dealers' inventories,
Maximizing stockholder return by optimizing the balance of cash invested in the
? Company's productive assets, the payment of dividends to stockholders, and the
repurchase of the Company's common stock on the open market, and
? Aligning the interests of our management and stockholders.
In executing 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, evolving customer preferences for socially distanced recreational activities, interest rates, dealer orders placed at our annual dealer conferences, and retail attendance and orders at annual winter boat show exhibitions and through virtual marketing events. 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 and preferences, because pleasure boating is a discretionary expenditure and consumers have many competing activities for their leisure time. Pleasure boating is also impacted by interest rates, the availability of financing and shifting consumer preferences towards safe activities which do not involve large crowds. 22
During 2020, aggregate retail sales of the boating segments in whichMarine Products operates increased by approximately 11.3 percent. Sales in each segment in which we operate increased during the year. Our consolidated net sales declined in 2020 compared to 2019 due to a decrease in unit sales caused by the temporary suspension of operations in our production facility during the second quarter due to the impact of the COVID-19 pandemic as well as declines in our Chaparral H2O models due to our de-emphasis of this product line. These unit sales declines were partially offset by higher average selling prices resulting from a favorable model mix. Unit sales in 2020 decreased by 23.5 percent compared to 2019. Management will continue to monitor retail demand among the various segments in the recreational boat market, the actions of our competitors, dealer inventory levels and the availability of dealer and consumer financing for the purchase of our products and adjust our production levels as deemed appropriate. We periodically monitor our market share in the 19 to 34 foot sterndrive category as one indicator of the success of our strategies and the market's acceptance of our products. For the 12 month period endedSeptember 30, 2020 (latest data available to us), Chaparral's market share in the 19 to 34 foot sterndrive category was 16.5 percent, a slight increase in comparison to the prior year same period, the second highest market share in this category during this period. For the 12-month period endedSeptember 30, 2020 , Robalo's share of the 16 to 36 foot outboard sport fishing boat market was 5.2 percent, the highest market share within this category.Marine Products Corporation's share of the outboard recreational market, including both Robalo and Chaparral's outboard units, was 6.5 percent of the total market within its size range for the 12 months endedSeptember 30, 2020 . Moreover, the Company held the highest share among manufacturers of various outboard brands during the period. We will continue to monitor our market share and believe it to be important, but we believe that maximizing profitability takes precedence over growing our market share. Furthermore, as we continue to expand the breadth of our product offerings within our core category and new categories, we consider our overall market share across the various powerboat categories to be of greater importance to the long-term health of our company than our market share within any specific type of recreational boat. Outlook We believe that retail demand for new recreational boats during 2021 will be higher than demand in 2020 due to the impact on consumer preferences caused by the COVID-19 pandemic. In addition, interest rates have fallen, which decreases the cost of boat ownership and encourage consumers to consider purchasing recreational boats. The Company believes that recreational boating's appeal toU.S. consumers is growing because people perceive it to be a safe outdoor activity which does not involve large groups of people. During 2020, many consumers chose recreational boating when they temporarily left urban areas to spend time in vacation homes or in smaller groups, often located near recreational bodies of water. Preliminary industry data indicate that retail boat sales in 2020 exceeded boat sales generated during the previous cyclical peak in 2007. Fluctuations in fuel prices can impact our industry, and although they declined in 2020, they have remained relatively stable and we do not believe that they have recently impacted sales. In general, the overall cost of boat ownership has increased over the last several years, especially in the sterndrive recreational boat market segment, which comprised approximately 35 percent of the Company's unit sales during 2020. The higher cost of boat ownership can discourage consumers from purchasing recreational boats. For years,Marine Products and other boat manufacturers have been improving their customer service capabilities, marketing strategies and sales promotions 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, includingMarine Products , participate in this program. Management believes that these efforts have incrementally benefited the industry andMarine Products . As in past years,Marine Products enhanced its selection of models for the 2021 model year which began onJuly 1, 2020 by broadening the size range of its product offerings and adding several new models. In a typical year,Marine Products and its dealers present our new models to retail customers during the winter boat show season, which takes place during the fourth and first calendar quarters. During the 2021 model year, however, most winter boat shows have been cancelled due to the COVID-19 pandemic. As a result of these cancellations, the Company and its dealers have replaced their physical boat show presences with virtual marketing efforts. The Company believes that these efforts are effective and competitive with our peers. For the new model year, we continue to emphasize our larger Robalo center console models. In addition, we have introduced two larger Chaparral SSX and Surf Series models for the 2021 model year. We believe that these boat models will appeal to our customer base and dealer network. We plan to continue to develop and produce additional new products for subsequent model years. 23 Our financial results will depend on a number of factors, including health of American consumers and economic recovery from the pandemic, potential changes in consumer behavior as society recovers from the pandemic, 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, the near-term effectiveness of our marketing efforts, the availability and cost of labor and certain of our raw materials and key components used in manufacturing our products. Results of Operations Years ended December 31, ($'s in thousands) 2020 2019 2018 Total number of boats sold to dealers 3,689 4,825 5,340 Average gross selling price per boat$ 56.1 $ 52.6 $ 48.7 Net sales$ 239,825 $ 292,136 $ 298,616 Percentage of gross profit to net sales 22.4 % 22.4 % 22.2 % Percentage of selling, general and administrative expenses to net sales 12.2 % 10.7 % 10.4 % Operating income$ 24,361 $ 34,135 $ 35,387 Warranty expense$ 2,845 $ 3,807 $ 4,178
Year Ended
Net Sales .Marine Products' net sales decreased by$52.3 million or 17.9 percent in 2020 compared to 2019. The decrease was primarily due to a 23.5 percent decrease in the number of boats sold, as well as a decrease in parts and accessories sales, partially offset by 6.7 percent increase in the average gross selling price per boat. Unit sales decreased due to the temporary suspension of operations in our production facility due to the impact of the COVID-19 pandemic during the second quarter, as well as declines in our Chaparral H2O models due to our de-emphasis of this product line. Average selling prices increased primarily due to a favorable model mix which included increased sales of our larger boats and reduced incentive costs. Domestic net sales were$228.1 million , a decrease of 17.1 percent compared to the prior year. International sales decreased 31.0 percent during 2020 compared to 2019 due to continued tariffs imposed on boat imports intoMexico and theEuropean Union . Cost of Goods Sold. Cost of goods sold decreased 17.9 percent in 2020 compared to 2019 consistent with decrease in net sales. As a percentage of net sales, cost of goods sold were 77.6 percent in 2020 and 2019. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by 6.4 percent in 2020 compared to 2019 primarily due to decreases in incentive compensation and warranty expense consistent with the decline in net sales. This decrease was partially offset by a reduction in a research and development state tax credit by$1.2 million in 2020 compared to prior year, as well as$963 thousand in deferred compensation expense associated with the accelerated vesting of restricted stock due to the death of the Company's Chairman in the third quarter of 2020 coupled with a non-cash pension settlement loss of$647 thousand recorded during the fourth quarter of 2020. Selling, general and administrative expenses as a percentage of sales increased to 12.2 percent in 2020 from 10.7 percent in 2019. As a percentage of net sales, warranty expense decreased to 1.2 percent in 2020, compared to 1.3 percent in 2019. Interest Income. Interest income decreased to$95 thousand in 2020 compared to$323 thousand in 2019.Marine Products generated interest income in 2020 primarily from investments in money market funds. This decrease was primarily due to a lower percentage investment yield due to lower interest rates, partially offset by an increase in the average investable balance of cash and cash equivalents. Income Tax Provision. The income tax provision decreased to$5.0 million in 2020 compared to$6.2 million in 2019. The effective tax rate was 20.5 percent in 2020 compared to 18.0 percent in 2019. The increase in the 2020 effective tax rate resulted from a non-deductible permanent item related to stock compensation coupled with a detrimental provision to return discrete adjustment compared to a beneficial discrete adjustment in 2019. 24
Liquidity and Capital Resources
Cash and Cash Flows
The Company's cash and cash equivalents were$31.6 million atDecember 31, 2020 ,$19.8 million atDecember 31, 2019 and$8.7 million atDecember 31, 2018 . The following table sets forth the historical cash flows for the twelve months
endedDecember 31 : (in thousands) 2020 2019 2018
Net cash provided by operating activities$ 29,874 $ 33,917 $ 22,775 Net cash (used for) provided by investing activities (2,065) 5,345 3,060 Net cash used for financing activities (16,040) (28,203) (24,774) Cash provided by operating activities decreased by$4.0 million in 2020 compared to 2019. This decrease is primarily due to a decrease in net income partially offset by a favorable change in working capital. The major components of the net favorable change in working capital were as follows: a favorable change of$1.9 million in accounts receivable due to lower revenues and the timing of receipts in comparison to the prior year; a favorable change of$0.9 million in income taxes receivable; an unfavorable change of$0.8 million in inventories primarily due to the timing of shipments of finished boats and receipts of raw materials and key components; and favorable changes of$2.2 million in accounts payable and$2.4 million in other accrued expenses due to the timing of payments. Cash used for investing activities for 2020 was$2.1 million compared to$5.3 million of cash provided by investing activities for 2019. The unfavorable change in cash used for investing activities is primarily due to net sales of marketable securities during the first quarter of 2019 resulting from a change in investment strategy, partially offset by a decrease in capital expenditures during 2020 in comparison to the prior year. Cash used for financing activities for 2020 decreased$12.2 million compared to 2019 primarily due to a reduction in the cost of open market share repurchases coupled with lower common stock dividends paid to shareholders in 2020 compared to the prior year. Cash Requirements
Management expects that capital expenditures during 2021 will be approximately
The Company participates in a multiple employer Retirement Income Plan,
sponsored by RPC. During 2020, the Company made a cash contribution of
OnJanuary 26, 2021 , the Board of Directors approved a quarterly cash dividend of$0.10 per common share payableMarch 10, 2021 to stockholders of record at the close of business onFebruary 10, 2021 . The Company has a contractual agreement with one employee that provides for a monthly payment equal to 10 percent of profits (defined as pretax income before goodwill amortization and certain allocated corporate expenses). InJanuary 2008 , the Board of Directors authorized an additional 3,000,000 shares that the Company may repurchase for a total aggregate authorization of 8,250,000 shares. The Company repurchased 97,940 shares in the open market during 2020, and 1,570,428 shares remain available for repurchase under this program. The Company has entered into agreements with third-party floor plan lenders where it has agreed, in the event of default by a qualifying dealer, to repurchase MPC boats repossessed from the dealer. These arrangements are subject to maximum repurchase amounts and the associated risk is mitigated by the value of the boats repurchased. The Company had no repurchases of dealer inventory in 2020 and repurchases totaled$3.4 million under contractual agreements during 2019. See further information regarding repurchase obligations in "NOTE 10: COMMITMENTS AND CONTINGENCIES" of the Consolidated Financial Statements which is incorporated herein by reference. The Company believes that the liquidity provided by its existing cash and cash equivalents, marketable securities, and cash expected to be generated from operations will provide sufficient capital to meet its requirements for at
least
the next twelve months.
25
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.
Contractual Obligations
The following table summarizes the Company's contractual obligations as ofDecember 31, 2020 : Payments due by period Less than 1 1-3 3-5 More Contractual Obligations (in thousands) Total year years years than 5 years Long-term debt $ - $ - $ - $ - $ - Capital lease obligation - - - - - Operating leases (1) 127 55 68 4 - Purchase obligations (2) - - - - - Due to floor plan lenders (3) - - - - - Other long-term liabilities (4) 768 192
384 192 - Total$ 895 $ 247 $ 452 $ 196 $ -
(1) Operating leases represent agreements for various office equipment.
As part of the normal course of business the Company enters into purchase (2) commitments to manage its various operating needs. However, the Company does
not have any obligations that are non-cancelable or subject to a penalty if
canceled.
The Company has agreements with various third-party lenders where it (3) guarantees varying amounts of debt for qualifying dealers on boats in dealer
inventory. As of
to floor plan lenders.
(4) Represents amounts related to the usage of a corporate aircraft.
Fair Value Measurements
The Company's assets and liabilities measured at fair value are classified in
the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for
valuation. Assets and liabilities that are traded on an exchange with a quoted
price are classified as Level 1. Assets and liabilities that are valued using
significant observable inputs in addition to quoted market prices are classified
as Level 2. The Company currently has no assets or liabilities measured on a
recurring basis that are valued using unobservable inputs and therefore no
assets or liabilities measured on a recurring basis are classified as Level 3.
For defined benefit plan and Supplemental Executive Retirement Plan ("SERP")
investments measured at net asset value, the values are computed using inputs
such as cost, discounted future cash flows, independent appraisals and market
based comparable data or on net asset values calculated by the fund and not
publicly available.
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 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 typically provide for the return of all repossessed boats in "new and unused" condition subject to normal wear and tear, as defined, to the Company, 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 repurchases of dealer inventory under contractual agreements during 2020 and had repurchases totaled$3.4 million during 2019. Management continues to monitor the risk of additional defaults and resulting repurchase obligation based primarily upon information provided by the third-party floor plan lenders and to adjust the guarantee liability at the end of each reporting period based on information reasonably available at that time. As ofDecember 31, 2020 , the Company believes the fair value of its guarantee liability is immaterial. See further information regarding repurchase obligations in "NOTE 10: COMMITMENTS AND CONTINGENCIES" of the Consolidated Financial Statements which is incorporated herein by reference. 26 The Company currently has an agreement with one of the floor plan lenders whereby the contractual repurchase obligation is limited to a maximum of 16 percent of the average net receivables financed by the floor plan lender for dealers during the prior 12 month period, which was$9.7 million as ofDecember 31, 2020 . The Company has contractual repurchase agreements with additional lenders with an aggregate maximum repurchase obligation of$3.5 million , with various expiration and cancellation terms of less than one year. Accordingly, the aggregate repurchase obligation with all financing institutions is$13.2 million as ofDecember 31, 2020 . Although the Company has these agreements with financial institutions, in certain situations, the Company may decide for business reasons to repurchase boats in excess of these contractual amounts.
Related Party Transactions
See "NOTE 12: RELATED PARTY TRANSACTIONS" of the Consolidated Financial Statements, which is incorporated herein by reference, for a description of related party transactions.
Critical Accounting Policies
The consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America , which require significant judgment by management in selecting the appropriate assumptions for calculating accounting estimates. These judgments are based on our historical experience, terms of existing contracts, trends in the industry, and information available from other outside sources, as appropriate. Senior management has discussed the development, selection and disclosure of its critical accounting policies that require significant judgements or estimates with the Audit Committee of our Board of Directors. The Company believes that, of its significant accounting policies, the following may involve a higher degree of judgment and complexity. Sales recognition - The Company sells its boats through its network of independent dealers and recognizes revenues from contracts with its customers based on the consideration received in exchange for the goods sold. Revenue is recognized when obligations under the terms of a contract with our customer are satisfied. Satisfaction of contract terms occur with the transfer of title of our boats, accessories, and parts to our dealers. Net sale is measured as the amount of consideration we expect to receive in exchange for transferring the goods to the dealer and consists of the sales price adjusted for dealer incentives. Sales incentives and discounts - The Company records incentives as a reduction of sales or as a cost of sales as appropriate. Using historical trends and management estimates, adjusted for current changes, the Company estimates the amount of incentives that will be paid in the future on boats sold and accrues an estimated liability. The Company offers various incentives that promote sales to dealers, and to a lesser extent, retail customers. These incentives are designed to encourage timely replenishment of dealer inventories after peak selling seasons, stabilize manufacturing volumes throughout the year, and improve production model mix. The dealer incentive programs are a combination of annual volume commitment discounts, and additional discounts at time of invoice for those dealers who do not finance their inventory through specified floor plan financing agreements. The annual dealer volume discounts are primarily based onJuly 1 through June 30 model year purchases. In addition, the Company offers at various times other time-specific or model-specific incentives. The factors that complicate the calculation of the cost of these incentives are the ability to forecast sales of the Company and individual dealers, the volume and timing of inventory financed by specific dealers, identification of which boats have been sold subject to an incentive, and the estimated lag time between sales and payment of incentives. Settlement of the incentives generally occurs from three to twelve months after the sale. The Company regularly analyzes the historical incentive trends and adjusts recorded liabilities for changes in trends and terms of incentive programs. Total cost of incentives recorded in net sales as a percentage of gross sales was 6.7 percent in 2020, 7.0 percent in 2019, and 7.2 percent in 2018. A 0.25 percentage point change in cost of incentives as a percentage of gross sales during 2020 would have increased or decreased net sales, gross margin and operating income by approximately$0.5 million . 27 Warranty costs -The Company records as part of selling, general and administrative expenses an experience-based estimate of the future warranty costs to be incurred when sales are recognized. The Company evaluates its warranty obligation for each product line on a model year basis. The Company provides warranties against manufacturing defects for various components of the boats, primarily the fiberglass deck and hull, with warranty periods extending up to a lifetime. Warranty costs, if any, on other components of the boats are generally absorbed by the original component manufacturer. Warranty costs can vary depending upon the size and number of components in the boats sold, the pre-sale warranty claims, and the desired level of customer service. While we focus on high quality manufacturing programs and processes, including actively monitoring the quality of our component suppliers and managing the dealer and customer service warranty experience and reimbursements, our estimated warranty obligation is based upon the warranty terms and the Company's enforcement of those terms over time, manufacturing defects or issues, repair costs, and the volume and mix of boat sales. The estimate of warranty costs is regularly analyzed and is adjusted based on several factors including the actual claims that occur. Warranty expense as a percentage of net sales was 1.2 percent in 2020, 1.3 percent in 2019, and 1.4 percent in 2018. A 0.10 percentage point increase in the estimated warranty expense as a percentage of net sales during 2020 would have increased selling, general and administrative expenses and reduced operating income by approximately$0.2 million .
Impact of Recent Accounting Pronouncements:
See "NOTE 1: SIGNIFICANT ACCOUNTING POLICIES" of the Consolidated Financial Statements, which is incorporated herein by reference, 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.
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