NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation and Presentation
— The consolidated financial statements include the accounts of Marine Products Corporation (a Delaware corporation)
and its wholly owned subsidiaries (“Marine Products” or the “Company”).
The consolidated financial statements included
herein may not necessarily be indicative of the future results of operations, financial position and cash flows of Marine Products.
The Company has only one reportable segment
— its Powerboat Manufacturing business. The Company’s results of operations and its financial condition are not significantly
reliant upon any single customer or product model. No single dealer accounted for more than 10 percent of net sales during 2018,
2017 or 2016. Net sales to the Company’s international dealers were approximately $19 million in 2018, $17 million in 2017,
and $21 million in 2016.
Common Stock
— Marine Products
is authorized to issue 74,000,000 shares of common stock, $0.10 par value. Holders of common stock are entitled to receive dividends
when, as, and if declared by our Board of Directors out of legally available funds. Each share of common stock is entitled to one
vote on all matters submitted to a vote of stockholders. Holders of common stock do not have cumulative voting rights. In the event
of any liquidation, dissolution or winding up of the Company, holders of common stock are entitled to ratable distribution of the
remaining assets available for distribution to stockholders.
Preferred Stock
— Marine Products
is authorized to issue up to 1,000,000 shares of preferred stock, $0.10 par value. As of December 31, 2018, there were no shares
of preferred stock issued. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the
issuance of preferred stock as a class without series or, if so determined from time to time, in one or more series, and by filing
a certificate pursuant to the applicable laws of the state of Delaware and to fix the designations, powers, preferences and rights,
exchangeability for shares of any other class or classes of stock. Any preferred stock to be issued could rank prior to the common
stock with respect to dividend rights and rights on liquidation.
Share Repurchases
— The Company
records the cost of share repurchases in stockholders’ equity as a reduction to common stock to the extent of par value of
the shares acquired and the remainder is allocated to capital in excess of par value and retained earnings if capital in excess
of par value is depleted. The Company tracks capital in excess of par value on a cumulative basis and for each reporting period,
discloses the excess over capital in excess of par value as part of stock purchased and retired in the consolidated statements
of stockholders’ equity.
Dividend
— On January 22, 2019,
the Board of Directors declared a 20.0 percent increase to the regular cash dividend from $0.10 per share to $0.12 per share payable
March 11, 2019 to stockholders of record at the close of business on February 11, 2019. Subject to industry conditions and Marine
Products’s earnings, financial condition, and other relevant factors, the Company expects to continue to pay regular quarterly
cash dividends to common stockholders.
Use of Estimates in the Preparation of
Financial Statements
— The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of sales and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are
used in the determination of sales incentives and discounts, warranty costs, and income taxes.
Sales Recognition –
Marine
Products recognizes revenues from contract with its customers based on the amount of consideration it receives in exchange for
the goods sold. See Note 2 for additional information.
Advertising
— Advertising expenses
are charged to expense during the period in which they are incurred. Expenses associated with product brochures and other inventoriable
marketing materials are deferred and amortized over the related model year which approximates the consumption of these materials.
As of December 31, 2018 and 2017, the Company had approximately $243,000 and $342,000 in prepaid expenses related to unamortized
product brochure costs. Advertising expenses totaled approximately $2,468,000 in 2018, $2,305,000 in 2017 and $2,545,000 in 2016
and are recorded in selling, general and administrative expenses.
Cash and Cash Equivalents
—
Highly liquid investments with original maturities of three months or less when acquired are considered to be cash equivalents.
The Company maintains its cash in bank accounts, which at times, may exceed federally insured limits.
Marketable Securities
— Marine
Products maintains investments at a large, well-capitalized financial institution. Marine Products’ investment policy does
not allow investment in any securities rated less than “investment grade” by national rating services.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
Management determines the appropriate classification
of debt securities at the time of purchase and re-evaluates 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 taxes, 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. Net realized (losses) gains on marketable securities totaled $(81,000) in 2018, 30,000 in 2017 and $(39,000) in 2016. Of
the total (losses) gains realized, reclassification from other comprehensive income totaled approximately ($81,000) in 2018, 30,000
in 2017, and $(39,000) in 2016. There were $3,000 gross unrealized gains on marketable securities as of December 31, 2018 and none
as of December 31, 2017. Gross unrealized losses on marketable securities totaled $12,000 as of December 31, 2018 and $70,000 as
of December 31, 2017. The net unrealized loss on marketable securities totaled $9,000 as of December 31, 2018 and $70,000 as of
December 31, 2017. The amortized cost basis, fair value and net unrealized loss of the available-for-sale securities are as follows:
December 31,
|
|
2018
|
|
|
2017
|
|
Type of Securities
|
|
Amortized
Cost Basis
|
|
|
Fair
Value
|
|
|
Net
Unrealized
Loss
|
|
|
Amortized
Cost
Basis
|
|
|
Fair
Value
|
|
|
Net
Unrealized
Loss
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Obligations
|
|
$
|
1,490
|
|
|
$
|
1,490
|
|
|
$
|
—
|
|
|
$
|
13,101
|
|
|
$
|
13,031
|
|
|
$
|
(70
|
)
|
Corporate Obligations
|
|
|
6,184
|
|
|
|
6,175
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
7,674
|
|
|
$
|
7,665
|
|
|
$
|
(9
|
)
|
|
$
|
13,101
|
|
|
$
|
13,031
|
|
|
$
|
(70
|
)
|
Municipal obligations consist primarily
of municipal notes rated AA- or higher ranging in maturity from less than one year to over 20 years. Corporate obligations consist
primarily of debentures and notes issued by other companies ranging in maturity from one to five years. These securities are rated
BBB or higher. 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 2020 and 2022.
Accounts Receivable
— The majority
of the Company’s accounts receivable is due from dealers located in markets throughout the United States. Approximately 68
percent of Marine Products’ domestic shipments are made pursuant to “floor plan financing” programs in which
Marine Products’ subsidiaries participate on behalf of their dealers with various major third-party financing institutions.
Under these arrangements, a dealer establishes lines of credit with one or more of these third-party lenders for the purchase of
boat inventory for sales to retail customers in their show room or during boat show exhibitions. When a dealer purchases and takes
delivery of a boat pursuant to a floor plan financing arrangement, it draws against its line of credit and the lender pays the
invoice cost of the boat directly to Marine Products within approximately ten business days. The Company determines its allowance
for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due,
the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition
of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible,
and payments subsequently received on such receivables are credited to the allowance.
Inventories
— Inventories are
stated at the lower of cost (determined on a first-in, first-out basis) and net realizable value. When evidence exists that the
net realizable value of inventory is lower than its cost, the Company recognizes the difference as a loss in earnings in the period
in which it occurs. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable
costs of completion, disposal, and transportation.
Property, Plant and Equipment
—
Property, plant and equipment is carried at cost. Depreciation is provided principally on a straight-line basis over the estimated
useful lives of the assets. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated
from the accounts in the year of disposal with the resulting gain or loss credited or charged to income. Expenditures for additions,
major renewals, and betterments are capitalized while expenditures for routine maintenance and repairs are expensed as incurred.
Depreciation expense on operating equipment used in production is included in cost of goods sold in the accompanying consolidated
statements of operations. All other depreciation is included in selling, general and administrative expenses in the accompanying
consolidated statements of operations. Property, plant and equipment are reviewed for impairment when indicators of impairment
exist.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
Goodwill and Other Intangibles
—
Intangibles consist primarily of goodwill and trade names related to businesses acquired. Goodwill represents the excess of the
purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill was $3,308,000 as of December
31, 2018 and 2017. The Company evaluates whether goodwill is impaired by comparing its market capitalization based on its closing
stock price (Level 1 input) to the book value of its equity on the annual evaluation date. The Company also periodically performs
a valuation of its trade names and has concluded that the fair value of these assets is not impaired. Based on these evaluations,
the Company concluded that no impairment of its goodwill or trade names has occurred for the years ended December 31, 2018, 2017
and 2016.
Investments
— The Company maintains
certain securities in the non-qualified Supplemental Executive Retirement Plan that have been classified as trading. See Note 11
for further information regarding these securities.
Warranty Costs
— The Company
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 first 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 Company accrues for estimated future warranty costs at the time of the sale based on its historical
claims experience. An analysis of the warranty accruals for the years ended December 31, 2018 and 2017 is as follows:
(in thousands)
|
|
2018
|
|
|
2017
|
|
Balance at beginning of year
|
|
$
|
5,373
|
|
|
$
|
4,629
|
|
Less: Payments made during the year
|
|
|
(3,944
|
)
|
|
|
(2,599
|
)
|
Add: Warranty provision for the current year
|
|
|
3,901
|
|
|
|
3,436
|
|
Changes to warranty provision for prior years
|
|
|
277
|
|
|
|
(93
|
)
|
Balance at end of year
|
|
$
|
5,607
|
|
|
$
|
5,373
|
|
Insurance Accruals
— The Company
fully insures its risks related to general liability, product liability, workers’ compensation, and vehicle liability, whereas
the health insurance plan is self-funded up to a maximum annual claim amount for each covered employee and related dependents.
The estimated cost of claims under the self-insurance program is accrued as the claims are incurred and may subsequently be revised
based on developments relating to such claims.
Research and Development Costs
—
The Company expenses research and development costs for new products and components as incurred. Research and development costs
are included in selling, general and administrative expenses and totaled $822,000 in 2018, $960,000 in 2017, and $858,000 in 2016.
Repurchase Obligations
— The
Company has entered into agreements with third-party floor plan lenders where it has agreed, in the event of default by the 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 accrues estimated losses when a loss, due primarily to the
default of one of our dealers, is determined to be probable and the amount of the loss is reasonably estimable.
Income Taxes
— Deferred tax
liabilities and assets are determined based on the difference between the financial and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation
allowance against the carrying value of deferred tax assets if the Company concludes that it is more likely than not that the asset
will not be realized through future taxable income. In 2017, the Company revalued its deferred tax assets and liabilities to reflect
the change in Federal income tax rates from 35 percent to 21 percent, as enacted by the Tax Cuts and Jobs Act (TCJA).
Stock-Based Compensation
—
Stock-based compensation expense is recognized for all share-based payment awards, net of an estimated forfeiture rate. Thus, compensation
cost is amortized for those shares expected to vest on a straight-line basis over the requisite service period of the award. See
Note 11 for additional information.
Earnings per Share
— Basic
and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during
the respective periods. In addition, the Company has periodically issued share-based payment awards that contain non-forfeitable
rights to dividends and are therefore considered participating securities. See Note 11 for further information on restricted stock
granted to employees.
Restricted shares of common stock (participating
securities) outstanding and a reconciliation of weighted average shares outstanding is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
(In thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net income available for stockholders
|
|
$
|
28,488
|
|
|
$
|
19,300
|
|
|
$
|
16,745
|
|
Less: Adjustments for earnings attributable to participating securities
|
|
|
(762
|
)
|
|
|
(595
|
)
|
|
|
(535
|
)
|
Net income used in calculating earnings per share
|
|
$
|
27,726
|
|
|
$
|
18,705
|
|
|
$
|
16,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (including participating securities)
|
|
|
34,529
|
|
|
|
34,843
|
|
|
|
37,857
|
|
Adjustment for participating securities
|
|
|
(959
|
)
|
|
|
(1,091
|
)
|
|
|
(1,224
|
)
|
Shares used in calculating diluted earnings per share
|
|
|
33,570
|
|
|
|
33,752
|
|
|
|
36,633
|
|
Fair Value of Financial Instruments
—
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable
and marketable securities. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate
their fair values because of the short-term nature of such instruments. The Company’s marketable securities are classified
as available-for-sale securities with the exception of investments held in the non-qualified Supplemental Executive Retirement
Plan (“SERP”) which are classified as trading securities. All of these securities are carried at fair value in the
accompanying consolidated balance sheets. See Note 9 for further information regarding the fair value measurement of assets and
liabilities.
Concentration of Suppliers
— The Company has only
four suppliers for the three types of engines it purchases. This concentration of suppliers could impact our sales and profitability
in the event of a sudden interruption in the delivery of these engines.
Recent Accounting Pronouncements
During the year ended December 31, 2018, the FASB
issued
the following Accounting Standards Updates (ASUs):
Recently Adopted Accounting Pronouncements:
|
·
|
Accounting Standards Update (ASU) No. 2014-09, Revenue from Contacts with Customers (Topic 606)
-
On January
1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue
standard”) for all contracts using the modified retrospective method, with no cumulative-effect adjustment to retained earnings
upon adoption. The comparative information has not been restated and continues to be reported under the accounting standards that
were in effect for those periods. The adoption of the new revenue standard did not have a material impact on our consolidated financial
statements. See note 2 Net Sales in the Notes to Consolidated Financial Statements for expanded disclosures.
|
|
·
|
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 Company adopted these provisions in the first
quarter of 2018 and the adoption did not have a material impact 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 Company adopted these provisions in the first quarter of 2018 and will
present cash flow statements in conformity with these provisions when such issues arise. The Company does not expect the adoption
of these provisions to have an ongoing material impact 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. The Company
adopted these provisions in the first quarter of 2018, and the adoption did not have a material impact on its consolidated financial
statements.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
|
·
|
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. The Company adopted these provisions in the first quarter of 2018 and will apply these provisions as it completes future
acquisitions. The Company does not expect the adoption of these provisions to have an ongoing material impact on its consolidated
financial statements.
|
·
|
|
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 Company adopted these provisions in the first quarter of 2018 and will apply these provisions if changes to the terms
or conditions of a share-based payment award are made. The Company does not expect the adoption of these provisions to have an
ongoing material impact on its consolidated financial statements.
|
Recently Issued Accounting Standards Not Yet Adopted:
To be adopted in 2019:
|
·
|
Leases (Topic 842).
Under this 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 certain adjustments, including initial direct costs and
lessor provided incentives. The Company has very few leases which are all currently classified as operating leases. The
Company adopted the standard on January 1, 2019 using the optional transition method and the cumulative-effect adjustment to
the opening balance of retained earnings, or the amount to be recorded as right-of–use assets and lease liabilities,
upon adoption was not material.
|
|
·
|
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.
|
|
·
|
ASU No. 2018-02—Income Statement—Reporting Comprehensive Income (Topic 220)—
Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments provide an option to reclassify stranded tax
effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income
tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded and require expanded disclosures regarding the Company’s
accounting policy decisions on such reclassification. The amendments are effective starting in the first quarter of 2019, with
early adoption permitted. The Company is currently evaluating the impact of adopting these provisions on its consolidated financial
statements.
|
·
|
|
ASU No. 2018-07 —Compensation —Stock Compensation (Topic 718) —
Improvements
to Nonemployee Share-Based Payment Accounting. The amendments expand the scope of ASU 718 to include share-based payments issued
to nonemployees for goods or services, thereby substantially aligning the accounting for share-based payments to nonemployees
and employees. The amendments are effective starting in the first quarter of 2019. The Company currently does not expect the adoption
of these provisions to have a material impact on its consolidated financial statements.
|
To be adopted in 2020 and later:
|
·
|
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 to be 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.
The Company is currently evaluating the impact of adopting these provisions on its consolidated financial statements.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
|
·
|
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.
|
|
·
|
ASU No. 2018-15 —Intangibles —Goodwill and Other —Internal-Use Software (Subtopic 350-40):
Customer's
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments reduce
the complexity for the accounting for costs of implementing a cloud computing service arrangement and align the requirements for
capitalizing implementation costs that are incurred in a hosting arrangement that is a service contract with the costs incurred
to develop or obtain internal-use software. The provisions may be applied prospectively or retrospectively. The amendments are
effective starting in the first quarter of 2020, with early adoption permitted. The Company is currently evaluating the impact
of adopting these provisions on its consolidated financial statements
.
|
NOTE 2:
Net
Sales
Accounting Policy
-
MPC’s
contract revenues are generated principally from selling: (1) fiberglass motorized boats and accessories and (2) parts to independent
dealers. 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. The amount of consideration
we expect to receive consists of the sales price adjusted for dealer incentives. The expected costs associated with our base warranties
continue to be recognized as expense when the products are sold as they are deemed to be assurance-type warranties (see Note 1).
Incidental promotional items that are immaterial in the context of the contract are recognized as expense. Fees charged to customers
for shipping and handling are included in net sales in the accompanying consolidated statements of operations and the related costs
incurred by the Company are included in cost of goods sold.
Nature of goods
-
MPC’s
performance obligations within its contracts consists of: (1) boats and accessories and (2) parts. The Company transfers control
and recognizes revenue on the satisfaction of its performance obligations (point in time) as follows:
|
·
|
Boats and accessories (domestic sales) – upon delivery and acceptance by the dealer
|
|
·
|
Boats and accessories (international sales) – upon delivery to shipping port
|
|
·
|
Parts – upon shipment/delivery to carrier
|
Payment terms
-
For
most domestic customers, MPC manufactures and delivers boats and accessories and parts ahead of payment - i.e., MPC has fulfilled
its performance obligations prior to submitting an invoice to the dealer. MPC invoices the customer when the products are delivered
and receives the related compensation, typically within seven to ten business days after invoicing. For some domestic customers
and all international customers, MPC requires payment prior to transferring control of the goods. These amounts are classified
as deferred revenue and recognized when control has transferred, which generally occurs within three months of receiving the payment.
When the Company enters into contracts with its customers, it
generally expects there to be no significant timing difference between the date the goods have been delivered to the customer (satisfaction
of the performance obligation) and the date cash consideration is received. Accordingly, there is no financing component to the
Company’s arrangements with its customers.
Significant judgments
Determining the
transaction price -
The transaction price for MPC’s boats and accessories is the invoice price adjusted for dealer incentives.
The Company utilizes the expected value method to estimate the variable consideration related to dealer incentives. Key inputs
and assumptions in determining variable consideration includes:
|
·
|
Inputs:
Current model year boat sales, total potential program incentive percentage, prior
model year results of dealer incentive activity (i.e., incentive earned as a percentage of total incentive potential)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
|
·
|
Assumption:
Current model year incentive activity will closely reflect prior model year
actual results, adjusted as necessary for dealer purchasing trends or economic factors
|
Other
- Our
contracts with dealers do not provide them with a right of return. Accordingly, we do not have any obligations recorded for returns
or refunds.
Disaggregation of revenues
The following table disaggregates our sales
by major source:
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Boats and accessories
|
|
$
|
294,537
|
|
|
$
|
263,275
|
|
|
$
|
237,403
|
|
Parts
|
|
|
4,079
|
|
|
|
4,041
|
|
|
|
3,927
|
|
Net sales
|
|
$
|
298,616
|
|
|
$
|
267,316
|
|
|
$
|
241,330
|
|
The following table disaggregates our revenues
between domestic and international:
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Domestic
|
|
$
|
279,175
|
|
|
$
|
250,394
|
|
|
$
|
220,139
|
|
International
|
|
|
19,441
|
|
|
|
16,922
|
|
|
|
21,191
|
|
Net sales
|
|
$
|
298,616
|
|
|
$
|
267,316
|
|
|
$
|
241,330
|
|
Timing of revenue recognition for each of
the periods presented is shown below:
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Products transferred at a point in time
|
|
$
|
298,616
|
|
|
$
|
267,316
|
|
|
$
|
241,330
|
|
Products transferred over time
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net sales
|
|
$
|
298,616
|
|
|
$
|
267,316
|
|
|
$
|
241,330
|
|
Contract balances -
Amounts received from international
and certain domestic dealers toward the purchase of boats are classified as deferred revenue and are included in Accrued expenses
and other liabilities on the Consolidated Balance Sheets.
(in thousands)
|
|
2018
|
|
|
2017
|
|
Deferred revenue
|
|
$
|
496
|
|
|
$
|
864
|
|
Substantially all of the amounts of deferred revenue as of December
31, 2018 and December 31, 2017 were recognized as sales during the following quarter, when control transferred.
NOTE 3: ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
December 31,
|
|
2018
|
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
$
|
2,397
|
|
|
$
|
1,377
|
|
Other
|
|
|
1,500
|
|
|
|
1,699
|
|
Total
|
|
|
3,897
|
|
|
|
3,076
|
|
Less: allowance for doubtful accounts
|
|
|
(25
|
)
|
|
|
(25
|
)
|
Net accounts receivable
|
|
$
|
3,872
|
|
|
$
|
3,051
|
|
Trade receivables consist primarily of balances
related to the sales of boats which are shipped pursuant to “floor-plan financing” programs with qualified lenders.
Other receivables consist primarily of rebate receivables from various suppliers. Changes in the Company’s allowance for
doubtful accounts are disclosed in Schedule II on page 61 of this report.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
NOTE 4: INVENTORIES
Inventories consist of the following:
December 31,
|
|
2018
|
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
26,874
|
|
|
$
|
20,116
|
|
Work in process
|
|
|
10,671
|
|
|
|
8,300
|
|
Finished goods
|
|
|
9,225
|
|
|
|
9,590
|
|
Total inventories
|
|
$
|
46,770
|
|
|
$
|
38,006
|
|
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are presented
at cost, net of accumulated depreciation, and consist of the following:
December 31,
|
|
Estimated
Useful Lives
|
|
2018
|
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
N/A
|
|
$
|
878
|
|
|
$
|
878
|
|
Buildings
|
|
7-40
|
|
|
19,705
|
|
|
|
19,611
|
|
Operating equipment and property
|
|
3-15
|
|
|
11,016
|
|
|
|
10,360
|
|
Furniture and fixtures
|
|
5-7
|
|
|
1,785
|
|
|
|
1,488
|
|
Vehicles
|
|
5-10
|
|
|
7,381
|
|
|
|
6,276
|
|
Gross property, plant and equipment
|
|
|
|
|
40,765
|
|
|
|
38,613
|
|
Less: accumulated depreciation
|
|
|
|
|
(26,213
|
)
|
|
|
(24,395
|
)
|
Net property, plant and equipment
|
|
|
|
$
|
14,552
|
|
|
$
|
14,218
|
|
Depreciation expense was $1,820,000 in 2018,
$1,526,000 in 2017 and $1,382,000 in 2016. The Company’s accounts payable for purchases of property and equipment was immaterial
as of December 31, 2018, December 31, 2017 and December 31, 2016.
NOTE 6: ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist
of the following:
December 31,
|
|
2018
|
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Accrued payroll and related expenses
|
|
$
|
3,257
|
|
|
$
|
3,116
|
|
Accrued sales incentives and discounts
|
|
|
3,547
|
|
|
|
3,969
|
|
Accrued warranty costs
|
|
|
5,607
|
|
|
|
5,373
|
|
Deferred revenue
|
|
|
496
|
|
|
|
864
|
|
Other
|
|
|
587
|
|
|
|
677
|
|
Total accrued expenses and other liabilities
|
|
$
|
13,494
|
|
|
$
|
13,999
|
|
NOTE 7: INCOME TAXES
The Tax Cuts and Jobs Act (“the Act”),
effective January 1, 2018, included a reduction to the US federal tax rate from 35 percent to 21 percent, adjustment of deferred
tax assets and liabilities for the new corporate income tax rate, and adjustments to deductible compensation of our executive officers.
Included among other international provisions, the Act provides for a deduction on certain qualifying income related to export
sales of property or services referred to as Foreign Derived Intangible Income (“FDII”), and the elimination of the
US manufacturing deduction.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
In 2017, and the first nine months of 2018,
the Company recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in SAB 118. In
2017, the Company recorded tax expense of $1.7 million related to the enactment-date effects of the Act that included adjusting
deferred tax assets and liabilities for the new corporate income tax rate as well as accounting for the effects on executive compensation
arrangements. In 2018, the Company adjusted the enactment-date provisional amounts by decreasing tax expense by $0.1 million. These
adjustments were recorded as components of income tax expense from continuing operations.
The Company applied the guidance in SAB 118 when accounting
for the enactment-date effects of the Act in 2017 and throughout 2018 and as of December 31, 2018, has completed its accounting
for all of the enactment-date income tax effects of the Act.
As of December 31, 2018, the Company has
analyzed the provisions of the Act that have been in effect from January 1, 2018 forward and incorporated its best estimates of
these provisions, within the annual effective tax rate for 2018. Additionally, the Company estimated a tax benefit associated with
FDII of $128 thousand, which has been reflected in the 2018 tax expense. The FDII benefit is based on current guidance and is subject
to change, based upon future guidance being issued, in addition to the refinement of the calculations to be completed in connection
with the filing of the Company’s 2018 US federal income tax return.
The following table lists the components
of the provision for income taxes:
Years ended December 31,
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,173
|
|
|
$
|
8,623
|
|
|
$
|
7,263
|
|
State
|
|
|
616
|
|
|
|
546
|
|
|
|
261
|
|
Deferred (benefit) provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
384
|
|
|
|
1,511
|
|
|
|
(507
|
)
|
State
|
|
|
(6
|
)
|
|
|
8
|
|
|
|
(355
|
)
|
Total income tax provision
|
|
$
|
7,167
|
|
|
$
|
10,688
|
|
|
$
|
6,662
|
|
A reconciliation between the federal statutory
rate and Marine Products’ effective tax rate is as follows:
Years ended December 31,
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Federal statutory rate
|
|
|
21.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
|
|
1.5
|
|
|
|
1.1
|
|
|
|
0.7
|
|
Research and experimentation credit
|
|
|
(0.8
|
)
|
|
|
(0.8
|
)
|
|
|
(1.0
|
)
|
Tax-exempt interest
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
(0.4
|
)
|
Tax-exempt loss (gain) on SERP assets
|
|
|
0.3
|
|
|
|
(0.6
|
)
|
|
|
(1.3
|
)
|
Manufacturing deduction
|
|
|
—
|
|
|
|
(3.0
|
)
|
|
|
(3.0
|
)
|
FDII deduction
|
|
|
(0.4
|
)
|
|
|
—
|
|
|
|
—
|
|
Change in valuation allowance
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(1.4
|
)
|
Adjustments related to the Act
|
|
|
(0.3
|
)
|
|
|
5.6
|
|
|
|
—
|
|
Adjustments related to vesting of restricted stock
|
|
|
(1.8
|
)
|
|
|
(2.4
|
)
|
|
|
—
|
|
Other
|
|
|
0.8
|
|
|
|
1.0
|
|
|
|
(0.1
|
)
|
Effective tax rate
|
|
|
20.1
|
%
|
|
|
35.6
|
%
|
|
|
28.5
|
%
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
Significant components of the Company’s
deferred tax assets and liabilities are as follows:
December 31,
|
|
2018
|
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Warranty costs
|
|
$
|
1,233
|
|
|
$
|
1,182
|
|
Sales incentives and discounts
|
|
|
317
|
|
|
|
348
|
|
Stock-based compensation
|
|
|
667
|
|
|
|
611
|
|
Pension
|
|
|
1,337
|
|
|
|
1,406
|
|
Uniform capitalization
|
|
|
44
|
|
|
|
47
|
|
All others
|
|
|
515
|
|
|
|
479
|
|
State credits and NOL’s
|
|
|
3,382
|
|
|
|
6,124
|
|
Valuation allowance
|
|
|
(2,794
|
)
|
|
|
(5,447
|
)
|
Total deferred tax assets
|
|
|
4,701
|
|
|
|
4,750
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(1,009
|
)
|
|
|
(781
|
)
|
Basis differences in joint venture
|
|
|
(367
|
)
|
|
|
(320
|
)
|
Net deferred tax assets
|
|
$
|
3,325
|
|
|
$
|
3,649
|
|
Total net income tax payments were $6,290,000
in 2018, $9,733,000 in 2017, and $6,546,000 in 2016. As of December 31, 2018, the Company had net operating loss carry forwards
related to state income taxes of approximately $12.3 million and other state credits of approximately $3.5 million (gross) that
will expire between 2020 and 2036. The Company does not have a valuation allowance related to net operating loss carryforwards
due to implemented tax planning strategies. The Company has a valuation allowance against the corresponding deferred tax asset
on all state tax credits because, at this time, the Company does not expect to utilize them.
The Company’s policy is to record
interest and penalties related to income tax matters as income tax expense. Accrued interest and penalties were immaterial as of
December 31, 2018 and 2017.
During 2018, the Company recognized an increase
in its liability for unrecognized tax benefits related primarily to state income taxes, settlements, and voluntary disclosure agreements.
The liability, if recognized, would affect our effective rate. A reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows:
|
|
2018
|
|
|
2017
|
|
Balance at January 1
|
|
$
|
243,000
|
|
|
$
|
15,000
|
|
Additions based on tax positions related to the current year
|
|
|
81,000
|
|
|
|
12,000
|
|
Additions for tax positions of prior years
|
|
|
69,000
|
|
|
|
216,000
|
|
Balance at December 31
|
|
$
|
393,000
|
|
|
$
|
243,000
|
|
It is reasonably possible that the amount
of the unrecognized benefits with respect to the Company’s unrecognized tax positions will increase or decrease in the next
12 months. These changes may be the result of, among other things, state tax settlements under voluntary disclosure agreements.
However, quantification of an estimated range cannot be made at this time.
The Company and its subsidiaries are subject
to U.S. federal and state income tax in multiple jurisdictions. In many cases, the uncertain tax positions are related to tax years
that remain open and subject to examination by the relevant taxing authorities. The Company’s 2015 through 2018 tax years
remain open to examination. Additional years may be open to the extent attributes are being carried forward to an open year.
NOTE 8: ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consists
of the following:
|
|
Pension
Adjustment
|
|
|
Unrealized
Gain (Loss)
on
Securities
|
|
|
Total
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
(2,151
|
)
|
|
$
|
(31
|
)
|
|
$
|
(2,182
|
)
|
Change during 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before-tax amount
|
|
|
241
|
|
|
|
9
|
|
|
|
250
|
|
Tax expense
|
|
|
(85
|
)
|
|
|
(3
|
)
|
|
|
(88
|
)
|
Reclassification adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
|
|
59
|
|
|
|
—
|
|
|
|
59
|
|
Net realized gain
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
(19
|
)
|
Total activity in 2017
|
|
|
215
|
|
|
|
(13
|
)
|
|
|
202
|
|
Balance at December 31, 2017
|
|
$
|
(1,936
|
)
|
|
$
|
(44
|
)
|
|
$
|
(1,980
|
)
|
Change during 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before-tax amount
|
|
|
(390
|
)
|
|
|
(20
|
)
|
|
|
(410
|
)
|
Tax benefit
|
|
|
85
|
|
|
|
4
|
|
|
|
89
|
|
Reclassification adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
|
|
63
|
|
|
|
—
|
|
|
|
63
|
|
Net realized loss
|
|
|
—
|
|
|
|
63
|
|
|
|
63
|
|
Total activity in 2018
|
|
|
(242
|
)
|
|
|
47
|
|
|
|
(195
|
)
|
Balance at December 31, 2018
|
|
$
|
(2,178
|
)
|
|
$
|
3
|
|
|
$
|
(2,175
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
NOTE 9: 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 December 31, 2018 and 2017:
|
|
Fair Value Measurements at December 31, 2018 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
|
|
$
|
1,490
|
|
|
$
|
—
|
|
|
$
|
1,490
|
|
|
$
|
—
|
|
Corporate Obligations
|
|
|
6,175
|
|
|
|
—
|
|
|
|
6,175
|
|
|
|
—
|
|
|
|
$
|
7,665
|
|
|
$
|
—
|
|
|
$
|
7,665
|
|
|
$
|
—
|
|
Investments measured at Net Asset Value- Trading securities
|
|
$
|
5,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 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
|
|
$
|
13,031
|
|
|
$
|
—
|
|
|
$
|
13,031
|
|
|
$
|
—
|
|
Corporate Obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
13,031
|
|
|
$
|
—
|
|
|
$
|
13,031
|
|
|
$
|
—
|
|
Investments measured at Net Asset Value- Trading securities
|
|
$
|
6,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company determines the fair value of
the marketable securities that are available-for-sale through quoted prices for similar instruments in active markets or quoted
prices for identical or similar instruments in markets that are not active. The trading securities are comprised of SERP assets,
as described in Note 11, and are recorded primarily at their net cash surrender values calculated using their net asset values,
which approximate fair value, as provided by the issuing insurance company. S
ignificant 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 year ended December 31, 2018 there were no significant
transfers in or out of levels 1, 2 or 3.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
The carrying amount of other financial instruments
reported in the balance sheet for current assets and current liabilities approximate their fair values because of the short-term
maturity of these instruments. The Company currently does not use the fair value option to measure any of its existing financial
instruments and has not determined whether or not it will elect this option for financial instruments it may acquire in the future.
NOTE 10: COMMITMENTS AND CONTINGENCIES
Lawsuits
— The Company is a
defendant in certain lawsuits which allege that plaintiffs have been damaged as a result of the use of the Company’s products.
The Company is vigorously contesting these actions. Management, after consultation with legal counsel, is of the opinion that the
outcome of these lawsuits will not have a material adverse effect on the financial position, results of operations or liquidity
of Marine Products.
Dealer Floor Plan Financing
—
To assist dealers in obtaining financing for the purchase of its boats for inventory, the Company has entered into agreements with
various dealers and selected third-party floor plan lenders to guarantee varying amounts of qualifying dealers’ debt obligations.
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 lender.
There were no material repurchases of inventory
under contractual agreements during 2018 or 2017. 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 16 percent of the
average net receivables financed by the floor plan lender for dealers during the prior 12 month period, which was $15.0 million
as of December 31, 2018. T
he Company has contractual repurchase agreements with additional lenders with an aggregate maximum
repurchase obligation of approximately $5.7 million, with various expiration and cancellation terms of less than one year, for
an aggregate repurchase obligation with all financing institutions of approximately $20.7 million as of December 31, 2018. This
repurchase obligation risk is mitigated by the value of the boat repurchased.
Minimum annual operating lease obligations
with terms in excess of one year, in effect at December 31, 2018, are summarized in the following table:
(in thousands)
|
|
|
|
2019
|
|
$
|
55
|
|
2020
|
|
|
54
|
|
2021
|
|
|
52
|
|
2022
|
|
|
52
|
|
2023
|
|
|
10
|
|
Thereafter
|
|
|
—
|
|
Total rental commitments
|
|
$
|
223
|
|
Total rent expense charged to operations
was approximately $191,000 in 2018, $183,000 in 2017 and $181,000 in 2016.
Income Taxes
— The amount
of income taxes the Company pays is subject to ongoing audits by federal and state tax authorities, which often result in proposed
assessments. Other long-term liabilities included the Company’s estimated liabilities for these probable assessments and
totaled approximately $393,000 as of December 31, 2018 compared to $191,000 as of December 31, 2017.
Employment Agreements
— The
Company has an agreement with one employee, that provides for a monthly payment to the employee equal to 10 percent of profits
(defined as pretax income before goodwill adjustments and certain allocated corporate expenses) in addition to a base salary. The
expense under this agreement totaled approximately $4,630,000 in 2018, $4,068,000 in 2017 and $4,202,000 in 2016 and is included
in selling, general and administrative expenses in the accompanying consolidated statements of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
NOTE 11: EMPLOYEE BENEFIT PLANS
Supplemental Executive Retirement Plan (“SERP”)
- The Company permits selected highly compensated employees to defer a portion of their compensation into the SERP. The SERP assets
are invested primarily in company-owned life insurance (“COLI”) policies as a funding source to satisfy the obligation
of the SERP. The assets are subject to claims by creditors, and the Company can designate them to another purpose at any time.
Investments in COLI policies consist of variable life insurance policies of $5.9 million as of December 31, 2018 and $6.6 million
as of December 31, 2017. In the COLI policies, the Company is able to allocate assets across a set of choices provided by the insurance
underwriter, including fixed income securities and equity funds. The COLI policies are recorded at their net cash surrender values,
which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s credit rating was
A+.
The Company classifies the SERP assets as
trading securities as described in Note 1. The fair value of these assets totaled $5,518,000 as of December 31, 2018 and $6,031,000
as of December 31, 2017. The SERP assets are reported in other assets on the consolidated balance sheets and changes related to
the fair value of the assets are included in selling, general and administrative expenses in the consolidated statements of operations.
Trading (losses) gains related to the SERP assets totaled ($544,000) in 2018, $470,000 in 2017 and $106,000 in 2016. The SERP liabilities
are recorded on the balance sheet in pension liabilities with any change in the fair value of the SERP liabilities recorded as
selling, general and administrative expenses in the consolidated statements of operations.
In connection with death of an executive
officer during 2016, the Company recorded tax free gains of approximately $751 thousand comprised of the following: $556 thousand
generated by the insurance death proceeds under a Company-owned life insurance contract of approximately $1.9 million less cash
surrender value of approximately $1.4 million, and $195 thousand as a result of insurance death benefits from a key-man life insurance
policy. The net gain is reflected as part of selling, general and administrative expenses in 2016.
Retirement Income Plan
— Marine
Products participates in the tax-qualified, defined benefit, noncontributory, trusteed retirement income plan sponsored by RPC,
Inc. (“RPC”) that covers substantially all employees with at least one year of service prior to 2002.
The Company’s fair value of the plan
assets exceeded the projected benefit obligation for its Retirement Income Plan by $969,000 and thus the plan was over-funded as
of December 31, 2018.
The following table sets forth the funded status of the Retirement
Income Plan and the amounts recognized in Marine Products’ consolidated balance sheets:
December 31,
|
|
2018
|
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
ACCUMULATED BENEFIT OBLIGATION, END OF YEAR
|
|
$
|
5,833
|
|
|
$
|
6,379
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN PROJECTED BENEFIT OBLIGATION:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
6,379
|
|
|
$
|
6,083
|
|
Service cost
|
|
|
—
|
|
|
|
—
|
|
Interest cost
|
|
|
251
|
|
|
|
266
|
|
Actuarial loss
|
|
|
(554
|
)
|
|
|
273
|
|
Benefits paid
|
|
|
(243
|
)
|
|
|
(243
|
)
|
Projected benefit obligation at end of year
|
|
$
|
5,833
|
|
|
$
|
6,379
|
|
CHANGE IN PLAN ASSETS:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
6,722
|
|
|
$
|
6,032
|
|
Actual return on plan assets
|
|
|
(447
|
)
|
|
|
933
|
|
Employer contributions
|
|
|
770
|
|
|
|
—
|
|
Benefits paid
|
|
|
(243
|
)
|
|
|
(243
|
)
|
Fair value of plan assets at end of year
|
|
$
|
6,802
|
|
|
$
|
6,722
|
|
Funded status at end of year
|
|
$
|
969
|
|
|
$
|
343
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
December 31,
|
|
2018
|
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF:
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
969
|
|
|
$
|
343
|
|
Current liabilities
|
|
|
—
|
|
|
|
—
|
|
Noncurrent liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
969
|
|
|
$
|
343
|
|
The funded status of the Retirement Income
Plan was recorded in the consolidated balance sheets in other assets as of both December 31, 2018 and December 31, 2017.
December 31,
|
|
2018
|
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
AMOUNTS (PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE LOSS CONSIST OF:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
3,311
|
|
|
$
|
2,997
|
|
Prior service cost (credit)
|
|
|
—
|
|
|
|
—
|
|
Net transition obligation (asset)
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
3,311
|
|
|
$
|
2,997
|
|
The accumulated benefit obligation for the
Retirement Income Plan as of December 31, 2018 and 2017 has been disclosed above. The Company uses a December 31 measurement date
for this qualified plan.
Amounts recorded in the consolidated balance
sheet as pension liabilities consist of:
December 31,
|
|
2018
|
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
SERP liability
|
|
$
|
(7,045
|
)
|
|
$
|
(6,732
|
)
|
Funded status of Retirement Income Plan
|
|
|
—
|
|
|
|
—
|
|
Pension liabilities
|
|
$
|
(7,045
|
)
|
|
$
|
(6,732
|
)
|
Marine Products’ funding policy is
to contribute to the Retirement Income Plan the amount required, if any, under the Employee Retirement Income Security Act of 1974.
Contributions to the plan totaled $770,000 during 2018. There were no contributions to the plan during 2017.
The components of net periodic benefit cost
of the Retirement Income Plan are summarized as follows:
Years ended December 31,
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost for benefits earned during the period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost on projected benefit obligation
|
|
|
251
|
|
|
|
266
|
|
|
|
274
|
|
Expected return on plan assets
|
|
|
(501
|
)
|
|
|
(415
|
)
|
|
|
(406
|
)
|
Amortization of net loss
|
|
|
81
|
|
|
|
91
|
|
|
|
84
|
|
|
|
$
|
(169
|
)
|
|
$
|
(58
|
)
|
|
$
|
(48
|
)
|
The Company recognized a pre-tax increase
to the funded status in accumulated other comprehensive income of $314,000 in 2018 compared to a pre-tax increase of $334,000 in
2017 and a pre-tax decrease of $390,000 in 2016. There were no previously unrecognized prior service costs during 2018, 2017 and
2016. The pre-tax amounts recognized in other comprehensive income for the years ended December 31, 2018, 2017 and 2016 are summarized
as follows:
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net loss (gain)
|
|
$
|
395
|
|
|
$
|
(243
|
)
|
|
$
|
474
|
|
Amortization of net loss
|
|
|
(81
|
)
|
|
|
(91
|
)
|
|
|
(84
|
)
|
Net transition obligation (asset)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amount recognized in accumulated other comprehensive income
|
|
$
|
314
|
|
|
$
|
(334
|
)
|
|
$
|
390
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
The amounts in accumulated other comprehensive
income expected to be recognized as components of net periodic benefit cost in 2019 are as follows:
(in thousands)
|
|
2019
|
|
Amortization of net loss
|
|
$
|
94
|
|
Prior service cost (credit)
|
|
|
—
|
|
Net transition obligation (asset)
|
|
|
—
|
|
Estimated net periodic cost
|
|
$
|
94
|
|
The weighted average assumptions as of December
31 used to determine the projected benefit obligation and net benefit cost were as follows:
December 31,
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
PROJECTED BENEFIT OBLIGATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.65
|
%
|
|
|
4.05
|
%
|
|
|
4.50
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
NET BENEFIT COST:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.05
|
%
|
|
|
4.50
|
%
|
|
|
4.75
|
%
|
Expected return on plan assets
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
The Company’s expected return on assets
assumption is derived from a detailed periodic assessment by its management and investment advisor. It includes a review of anticipated
future long-term performance of individual asset classes and consideration of the appropriate asset allocation strategy given the
anticipated requirements of the plan to determine the average rate of earnings expected on the funds invested to provide for the
pension plan benefits. While the assessment gives appropriate consideration to recent fund performance and historical returns,
the rate of return assumption is derived primarily from a long-term, prospective view. Based on its recent assessment, the Company
has concluded that its expected long-term return assumption of seven percent is reasonable.
The plan’s weighted average asset
allocation at December 31, 2018 and 2017 by asset category along with the target allocation for 2019 are as follows:
Asset Category
|
|
Target
Allocation
for 2019
|
|
|
Percentage of
Plan Assets as of
December 31,
2018
|
|
|
Percentage of
Plan Assets as of
December 31,
2017
|
|
Cash and Cash Equivalents
|
|
|
0% - 3%
|
|
|
|
3.0
|
%
|
|
|
2.9
|
%
|
Domestic Equity Securities
|
|
|
0% - 40%
|
|
|
|
39.5
|
|
|
|
42.3
|
|
International Equity Securities
|
|
|
0% - 30%
|
|
|
|
19.0
|
|
|
|
20.7
|
|
Fixed Income Securities
|
|
|
15% - 100%
|
|
|
|
29.1
|
|
|
|
23.8
|
|
Investments measured at net asset value
|
|
|
0% - 12%
|
|
|
|
9.4
|
|
|
|
10.3
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
For each of the asset categories in the
pension plan, the investment strategy is identical – maximize the long-term rate of return on plan assets with an acceptable
level of risk in order to minimize the cost of providing pension benefits. The investment policy establishes a target allocation
for each asset class which is rebalanced as required. The plan utilizes a number of investment approaches, including but not limited
to individual market securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds
to achieve this target allocation. Although not required, the Company is currently evaluating its contribution to the pension plan
during fiscal year 2019.
Some of our assets, primarily our private
equity and real estate funds, do not have readily determinable market values given the specific investment structures involved
and the nature of the underlying investments. For plan asset reporting as of December 31, 2018, publicly traded asset pricing was
used where possible. For assets without readily determinable values, estimates were derived from investment manager statements
combined with discussions focusing on underlying fundamentals and significant events. Additionally, these investments are valued
based on the net asset value per share calculated by the funds in which the plan has invested and the valuation is based on significant
non-observable inputs which do not have a readily determinable fair value. The valuations are subject to judgments and assumptions
of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks
to mitigate these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial
data included in the funds’ financial statements for reasonableness.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
The following tables present our plan assets
using the fair value hierarchy as of December 31, 2018 and 2017. The fair value hierarchy has three levels based on the reliability
of the inputs used to determine fair value. See Note 8 for a brief description of the three levels under the fair value hierarchy.
Fair Value Hierarchy as of December 31, 2018:
Investments (in thousands)
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
Cash and Cash Equivalents
|
|
|
(1
|
)
|
|
$
|
202
|
|
|
$
|
202
|
|
|
$
|
—
|
|
Fixed Income Securities
|
|
|
(2
|
)
|
|
|
1,979
|
|
|
|
—
|
|
|
|
1,979
|
|
Domestic Equity Securities
|
|
|
(3
|
)
|
|
|
2,693
|
|
|
|
993
|
|
|
|
1,700
|
|
International Equity Securities
|
|
|
(4
|
)
|
|
|
1,290
|
|
|
|
—
|
|
|
|
1,290
|
|
Total Assets in the Fair Value Hierarchy
|
|
|
|
|
|
$
|
6,164
|
|
|
$
|
1,195
|
|
|
$
|
4,969
|
|
Investments Measured at Net Asset Value
|
|
|
|
|
|
|
638
|
|
|
|
|
|
|
|
|
|
Investments at Fair Value
|
|
|
|
|
|
$
|
6,802
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy as of December 31, 2017:
Investments (in thousands)
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
Cash and Cash Equivalents
|
|
|
(1
|
)
|
|
$
|
192
|
|
|
$
|
192
|
|
|
$
|
—
|
|
Fixed Income Securities
|
|
|
(2
|
)
|
|
|
1,601
|
|
|
|
—
|
|
|
|
1,601
|
|
Domestic Equity Securities
|
|
|
(3
|
)
|
|
|
2,844
|
|
|
|
1,047
|
|
|
|
1,797
|
|
International Equity Securities
|
|
|
(4
|
)
|
|
|
1,394
|
|
|
|
—
|
|
|
|
1,394
|
|
Total Assets in the Fair Value Hierarchy
|
|
|
|
|
|
$
|
6,031
|
|
|
$
|
1,239
|
|
|
$
|
4,792
|
|
Investments Measured at Net Asset Value
|
|
|
|
|
|
|
691
|
|
|
|
|
|
|
|
|
|
Investments at Fair Value
|
|
|
|
|
|
$
|
6,722
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cash and cash equivalents, which are used to pay benefits
and plan administrative expenses, are held in Rule 2a-7 money market funds.
|
|
(2)
|
Fixed income securities are primarily valued using a
market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades.
|
|
(3)
|
Domestic equity securities are valued using a market
approach based on the quoted market prices of identical instruments in their respective markets.
|
|
(4)
|
International equity securities are valued using a market
approach based on the quoted market prices of identical instruments in their respective markets.
|
The Company estimates that the future benefits
payable for the Retirement Income Plan over the next ten years are as follows:
(in thousands)
|
|
|
2019
|
|
$
|
301
|
|
2020
|
|
|
294
|
|
2021
|
|
|
298
|
|
2022
|
|
|
295
|
|
2023
|
|
|
309
|
|
2024-2028
|
|
$
|
1,704
|
|
401(k) Plan
— Marine Products
participates in a defined contribution 401(k) plan sponsored by RPC that is available to substantially all full-time employees
with more than 90 days of service. This plan allows employees to make tax-deferred contributions of up to 25 percent of their annual
compensation, not exceeding the permissible deduction imposed by the Internal Revenue Code. The Company matches 50 percent of each
employee’s contributions that do not exceed six percent of the employee’s compensation, as defined by the 401(k) plan.
Employees vest in the Company’s contributions after three years of service. The charges to expense for Marine Products’
contributions to the 401(k) plan were approximately $319,000 in 2018, $317,000 in 2017 and $270,000 in 2016.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
Effective January 1, 2019, the Company makes
100 percent matching contributions for each dollar of a participant’s contribution to the 401(k) Plan for the first three
percent of his or her annual compensation and fifty cents for each dollar of a participant’s contribution to the 401(k) Plan
for the next three percent of his or her annual compensation.
Stock Incentive Plan
— The Company
reserved 3,000,000 shares of common stock under the 2015 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 2015 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 December 31, 2018, there were approximately 1,871,700 shares available for grant.
The Company recognizes compensation expense
for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these
awards will be based on their fair value at grant date less the cost of estimated forfeitures. Forfeitures are estimated at the
time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures.
Pre-tax stock-based employee compensation expense was approximately
$2,089,000 ($1,629,000 after tax) for 2018, $2,682,000 ($1,729,000 after tax) for 2017 and $2,624,000 ($1,692,000 after tax) for
2016.
Stock Options
— Stock options
are granted at an exercise price equal to the fair market value of the Company’s common stock at the date of grant except
for grants of incentive stock options to owners of greater than 10 percent of the Company’s voting securities which must
be made at 110 percent of the fair market value of the Company’s common stock. Options generally vest ratably over a period
of five years and expire in 10 years, except to owners of greater than 10 percent of the Company’s voting securities, which
expire in five years.
The Company estimates the fair value of
stock options as of the date of grant using the Black-Scholes option pricing model. The Company has not granted stock options to
employees since 2004.
There were no options exercised in 2018
and there have been no stock options outstanding since December 31, 2015. There was no tax benefit associated with the exercise
of non-qualified stock options during 2018, 2017 or 2016.
Restricted Stock
— Marine Products
grants selected employees time lapse restricted stock that vest after a certain stipulated number of years from the grant date,
depending on the terms of the issue. The Company has currently issued time lapse restricted shares that vest in 20 percent increments
starting with the second anniversary of the grant, over the six year period beginning on the date of grant. During these years,
grantees receive all dividends declared and retain voting rights for the shares.
The agreements under which the restricted
stock is issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the stock
plans have lapsed. Upon termination of employment from the Company, with the exception of death (fully vests), disability or retirement
(partially vests based on duration of service), shares with restrictions are forfeited in accordance with the plan.
The following is a summary of the changes
in non-vested restricted shares for the year ended December 31, 2018:
|
|
Shares
|
|
|
Weighted Average
Grant-Date Fair
Value
|
|
Non-vested shares at January 1, 2018
|
|
|
1,040,800
|
|
|
$
|
7.76
|
|
Granted
|
|
|
193,500
|
|
|
|
13.97
|
|
Vested
|
|
|
(283,790
|
)
|
|
|
6.45
|
|
Forfeited
|
|
|
(2,800
|
)
|
|
|
8.54
|
|
Non-vested shares at December 31, 2018
|
|
|
947,710
|
|
|
$
|
9.41
|
|
The following is a summary of the changes
in non-vested restricted shares for the year ended December 31, 2017:
|
|
Shares
|
|
|
Weighted Average
Grant-Date Fair
Value
|
|
Non-vested shares at January 1, 2017
|
|
|
1,200,900
|
|
|
$
|
6.58
|
|
Granted
|
|
|
202,400
|
|
|
|
13.39
|
|
Vested
|
|
|
(344,250
|
)
|
|
|
6.92
|
|
Forfeited
|
|
|
(18,250
|
)
|
|
|
8.47
|
|
Non-vested shares at December 31, 2017
|
|
|
1,040,800
|
|
|
|
7.76
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2018, 2017 and 2016
The fair value of restricted stock awards
is based on the market price of the Company’s stock on the date of grant and is amortized to compensation expense on a straight
line basis over the requisite service period. The weighted average grant date fair value of these restricted stock awards was $13.97
in 2018, $13.39 in 2017 and $5.77 in 2016. The total fair value of shares vested was approximately $4,289,000 in 2018, $4,432,000
in 2017 and $2,686,000 during 2016.
For the year ending December 31, 2018 approximately
$645,000 of excess tax benefit for stock-based compensation awards has been recorded as a discrete tax adjustment and classified
within operating activities in the consolidated statements of cash flows compared to approximately 718,000 as of December 31, 2017.
Other Information
— As
of December 31, 2018 total unrecognized compensation cost related to non-vested restricted shares was approximately $7,073,000
which is expected to be recognized over a weighted-average period of 3.2 years.
NOTE 12: RELATED PARTY TRANSACTIONS
In conjunction with its spin-off from RPC
in 2001, the Company and RPC entered into various agreements that define the companies’ relationship after the spin-off.
The Transition Support
Services Agreement provides for RPC to provide certain services, including financial reporting and income tax
administration, acquisition assistance, etc., to Marine Products until the agreement is terminated by either party. Marine
Products reimbursed RPC for its estimated allocable share of administrative costs incurred for services rendered on behalf of
Marine Products totaling $873,000 in 2018, $849,000 in 2017 and $739,000 in 2016. The Company’s payable due to RPC for
these services was $28,000 as of December 31, 2018 and $47,000 as of December 31, 2017. Many of the Company’s directors
are also directors of RPC and all of the Company’s executive officers are employees of both the Company and RPC.
The Employee Benefits Agreement provides
for, among other things, the Company’s employees to continue participating subsequent to the spin-off in two RPC sponsored
benefit plans, specifically, the defined contribution 401(k) plan and the defined benefit retirement income plan.
RPC and Marine Products own 50 percent
each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate
aircraft. The purchase of the aircraft was completed in January 2016, and the purchase was funded primarily by a
$2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating
lease agreement with 255 RC, LLC for a period of five years. Marine Products recorded certain net operating costs comprised
of rent and an allocable share of fixed costs of approximately $159,000 in 2018 and $157,000 in 2017 and 2016 for the
corporate aircraft. The Company accounts for this investment using the equity method and its proportionate share of income or
loss is recorded in selling, general and administrative expenses. As of December 31, 2018, the investment closely
approximates the underlying equity in the net assets of 255 RC, LLC.
A group that includes the Company’s
Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also director of the Company, and certain companies
under their control, controls in excess of fifty percent of the Company’s voting power.