Description
Filed with the SEC from Aug 23 to Aug 29:
Marine Products (MPX)
Gamco Investors (ticker: GBL) increased its holdings to 2,291,049 shares (6.1%) after it bought 46,579 shares from June 29 through Aug. 22 at prices in a range of $5.60 to $6.00. Gamco also disclosed selling 11,700 shares from July 3 through Aug. 7 at prices ranging from $5.20 to $6.12 each.
BUSINESS OVERVIEW
Organization and Overview
Marine Products is a Delaware corporation incorporated on August 31, 2000, in connection with a spin-off from RPC, Inc. (NYSE: RES) (“RPC”). Effective February 28, 2001, RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products, a newly formed wholly owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders.
Marine Products designs, manufactures and sells recreational fiberglass powerboats in the sportboat, deckboat, cruiser, sport yacht and sport fishing markets. The Company sells its products to a network of 131 domestic and 57 international independent authorized dealers. Marine Products’ mission is to enhance its customers’ boating experience by providing them with high quality, innovative powerboats. The Company intends to remain a leading manufacturer of recreational powerboats for sale to a broad range of consumers worldwide.
The Company manufactures Chaparral sterndrive and inboard-powered pleasure boats including H2O Sport and Fish & Ski boats, SSi and SSX Sportboats, Sunesta Sportdecks and Xtreme Tow boats, Signature Cruisers, Premiere Sport Yachts and Robalo outboard sport fishing boats. The most recent available industry statistics [source: Statistical Surveys, Inc. report dated September 30, 2011] indicate that Chaparral is the fourth largest manufacturer of sterndrive boats in lengths from 18 to 35 feet in the United States.
Chaparral was founded in 1965 in Ft. Lauderdale, Florida. Chaparral’s first boat was a 15-foot tri-hull design with a retail price of less than $1,000. Over time Chaparral grew by offering exceptional quality and consumer value. In 1976, Chaparral moved to Nashville, Georgia, where a manufacturing facility of a former boat manufacturing company was available for purchase. This provided Chaparral an opportunity to obtain additional manufacturing space and access to a trained work force. With almost 46 years of boatbuilding experience, Chaparral continues to improve the design and manufacturing of its product offerings to meet the growing needs of discriminating recreational boaters.
Robalo was founded in 1969 and its first boat was a 19-foot center console salt-water fishing boat, among the first of this type of boat to have an “unsinkable” hull. The Company believes that Robalo’s share of the outboard sport fishing boat market is approximately two percent.
Manufacturing
Marine Products’ manufacturing facilities are located in Nashville, Georgia and Valdosta, Georgia. The Company idled its plant located in Valdosta, Georgia in response to the decline in production volumes but this is expected to be temporary. Marine Products utilizes five different plants to, among other things, manufacture interiors, design new models, create fiberglass hulls and decks, and assemble various end products. Quality control is conducted throughout the manufacturing process. The Company’s manufacturing operations are ISO 9001: 2008 certified, which is an international designation of design, manufacturing, and customer service processes. ISO 9001: 2008 surpasses previous ISO designations. Management believes Chaparral is the third largest sterndrive boat manufacturing brand to hold the ISO 9001: 2008 certification. When fully assembled and inspected, the boats are loaded onto either company-owned trailers or third-party marine transport trailers for delivery to dealers. The manufacturing process begins with the design of a product to meet dealer and customer needs. Plugs are constructed in the research and development phase from designs. Plugs are used to create a mold from which prototype boats can be built. Adjustments are made to the plug design until acceptable parameters are met. The final plug is used to create the necessary number of production molds. Molds are used to produce the fiberglass hulls and decks. Fiberglass components are made by applying the outside finish or gel coat to the mold, then numerous layers of fiberglass and resin are applied during the lamination process over the gel coat. After curing, the hull and deck are removed from the molds and are trimmed and prepared for final assembly, which includes the installation of electrical and plumbing systems, engines, upholstery, accessories and graphics.
Product Warranty
For most of our Chaparral products, Marine Products provides a lifetime limited structural hull warranty against defects in material and workmanship for the original purchaser, and a five-year limited structural hull warranty for one subsequent owner. Additionally, a non-transferable five-year limited structural deck warranty against defects in materials and workmanship is available to the original owner. Warranties on additional items are provided for periods of one to five years.
For our Chaparral Premiere model, Marine Products provides a transferable structural hull and deck warranty against defects in material and workmanship for the original and one subsequent owner. A one-year limited warranty is available on most other components to the original owner and one subsequent owner along with warranties on some additional items ranging from one to five years.
For our Robalo products, Marine Products provides a transferable 10-year limited structural hull warranty against defects in material and workmanship to the original owner, and a five-year limited hull warranty to one subsequent owner. Additionally, Marine Products provides a transferable one-year limited warranty on other components.
The engine manufacturers for our Robalo and Chaparral products warrant engines included in the boats as well.
Suppliers
Marine Products’ two most significant components used in manufacturing its boats, based on cost, are engines and fiberglass. For each of these, there is currently an adequate supply available in the market. Marine Products has not experienced any material shortages in any of these products. Temporary shortages, when they do occur, usually involve manufacturers of these products adjusting model mixes, introducing new product lines or limiting production in response to an industry-wide reduction in boat demand. Marine Products obtains most of its fiberglass from a leading domestic supplier. Marine Products believes that there are several alternative suppliers if this supplier fails to provide adequate quality or quantities at acceptable prices.
Marine Products does not manufacture the engines installed in its boats. Engines are generally specified by the dealers at the time of ordering, usually on the basis of anticipated customer preferences or actual customer orders. Sterndrive engines are purchased through the American Boatbuilders Association (“ABA”), which has entered into engine supply arrangements with Mercury Marine and Volvo Penta, the two currently existing suppliers of sterndrive engines. These arrangements contain incentives and discount provisions, which may reduce the cost of the engines purchased, if specified purchase volumes are met during specified periods of time. Although no minimum purchases are required, Marine Products expects to continue purchasing sterndrive engines through the ABA on a voluntary basis in order to receive volume-based purchase discounts. Marine Products does not have a long-term supply contract with the ABA. Marine Products has an outboard engine supply contract with Yamaha. This engine supply arrangement was not negotiated through the ABA. In the event of a sudden and extended interruption in the supply of engines from these suppliers, our sales and profitability could be negatively impacted. See “Risk Factors” below.
Marine Products uses other raw materials in its manufacturing processes. Among these are stainless steel, copper and resins made from hydrocarbon feedstocks. In response to global economic uncertainties, the prices of these commodities have fluctuated significantly over the past several years. During 2011, these prices stabilized at relatively high levels. See “Inflation” below.
Sales and Distribution
Domestic sales are made through approximately 84 Chaparral dealers, 12 Robalo dealers and 35 dealers that sell both brands located in markets throughout the United States. Marine Products also has 57 international dealers. During 2011 the financial strength of our dealer network improved due to lower field inventories and improved availability of floorplan financing. Most of our dealers inventory and sell boat brands manufactured by other companies, including some that compete directly with our brands. The territories served by any dealer are not exclusive to the dealer; however, Marine Products uses discretion in establishing relationships with new dealers in an effort to protect the mutual interests of the existing dealers and the Company. Marine Products’ seven independent field sales representatives call upon existing dealers and develop new dealer relationships. The field sales representatives are directed by a National Sales Coordinator, who is responsible for developing a full dealer distribution network for the Company’s products. The marketing of boats to retail customers is primarily the responsibility of the dealer. Marine Products supports dealer marketing efforts by supplementing local advertising, sales and marketing follow up in boating magazines, and participation in selected regional, national, and international boat show exhibitions. No single dealer accounted for more than 10 percent of net sales during 2011 or 2010; however, due to significantly lower sales in 2009, one dealer accounted for approximately 13 percent of net sales in 2009.
Marine Products continues to seek new dealers in many areas throughout the U.S., Europe, South America, Asia, Russia and the Middle East. In general, Marine Products requires payment in full before it will ship a boat overseas. Consequently, there is no credit risk associated with its international sales or risk related to foreign currency fluctuation. The volume of sales to international dealers declined in 2011 compared to 2010 due to the persistent economic crisis primarily in Europe. International sales are also affected by the value of the U.S. dollar relative to other currencies. International net sales as a percentage of total net sales were 21.4 percent in 2011, 30.5 percent in 2010, and 29.4 percent in 2009.
Marine Products’ sales orders are indicators of strong interest from its dealers. Historically, dealers have in most cases taken delivery of all their orders. The Company attempts to ensure that its dealers do not accept an excessive amount of inventory by monitoring their inventory levels. During 2009, the Company produced and sold its products to dealers at a much lower level than the level of retail sales in order to facilitate a reduction in field inventory. Knowledge of inventory levels at the individual dealers facilitates production scheduling with shorter lead times in order to maintain flexibility in the event that adjustments need to be made to dealer shipments. In the past, Marine Products has been able to resell any boat for which an order has been cancelled.
Approximately half 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 major third-party financing institutions. The remaining dealers finance their boat inventory with smaller regional financial institutions in local markets or pay cash. Under these established arrangements with qualified lending institutions, a dealer establishes a line of credit with one or more of these lenders for the purchase of boat inventory for sales to retail customers in their showroom or during boat show exhibitions. In general, 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 generally within 5 business days. When the dealer in turn sells the boat to a retail customer, the dealer repays the lender, thereby restoring its available credit line. Each dealer’s floor plan credit facilities are secured by the dealer’s inventory, letters of credit, and perhaps other personal and real property. Until recently, most dealers maintained financing arrangements with more than one lender, although that is less common at the present time, given that there are fewer lenders. In connection with a dealer’s floor plan financing arrangements with a qualified lending institution, Marine Products or its subsidiaries have agreed to repurchase inventory which the lender repossesses from a dealer and returns to Marine Products in a “new and unused” condition subject to normal wear and tear, as defined. The contractual agreements that Marine Products or its subsidiaries have with these qualified lenders contain the Company’s assumption of specified percentages of the debt obligation on repossessed boats, up to certain contractually determined dollar limits set by the lender.
The Company currently has an agreement with one of the floor plan lenders whereby the contractual repurchase limit is to not exceed 15 percent of the amount of the average net receivables financed by the floor plan lender for dealers during the prior 12 month period. The Company has contractual repurchase agreements with additional lenders with an aggregate maximum repurchase obligation of approximately $5.5 million, with various expiration and cancellation terms of less than one year, for an aggregate repurchase obligation with all financing institutions of approximately $9.8 million as of December 31, 2011. In the event that a dealer defaults under a credit line, the qualified lender may then invoke the manufacturers’ repurchase obligation with respect to that dealer. In that event, all repurchase agreements of all manufacturers supplying a defaulting dealer are generally invoked regardless of the boat or boats with respect to which the dealer has defaulted. Unlike Marine Products’ obligation to repurchase boats repossessed by qualified lenders, Marine Products is under no obligation to repurchase boats directly from dealers. Marine Products does not sponsor financing programs to the consumer; any consumer financing promotions for a prospective boat purchaser would be the responsibility of the dealer.
Marine Products’ dealer sales incentive programs are generally designed to promote early replenishment of the stock in dealer inventories depleted throughout the prime spring and summer selling seasons, and to promote the sales of older models in dealer inventory and particular models during specified periods. These programs help to stabilize Marine Products’ manufacturing between the peak and off-peak periods, and promote sales of certain models. For the 2012 model year (which commenced July 1, 2011), Marine Products offered its dealers several sales incentive programs based on dollar volumes and timing of dealer purchases. Program incentives offered include sales discounts, retail sales incentives and payment of floor plan financing interest charged by qualified floor plan lenders to dealers generally through May 1, 2012. After the interest payment programs end, interest costs revert to the dealer at rates set by the lender. A dealer makes periodic curtailment payments (principal payments) on outstanding obligations against its dealer inventory as set forth in the floor plan financing agreements between the dealer and their particular lender.
During 2009 Marine Products assisted our dealers in reducing their inventories using incentive programs to supplement the programs described above. These efforts to liquidate inventory were successful, and in 2010 and 2011, we recorded retail incentive costs that were consistent with historical levels. We believe that our dealers’ inventories are appropriate relative to the current level of customer demand at this time and contain a high level of current model year units.
The sales order backlog as of December 31, 2011 was approximately 900 boats with estimated net sales of approximately $34.9 million. This represents an approximate 14 week backlog based on recent production levels. As of December 31, 2010, the sales order backlog was approximately 490 boats with estimated net sales of $19.5 million, representing an approximate 12 week backlog. The Company will continue to monitor the number of boats in dealer inventory and is prepared to adjust its production levels as it deems necessary to manage dealer inventory levels. The Company typically does not manufacture a significant number of boats for its own inventory. The Company occasionally manufactures boats for its own inventory because the number of boats required for immediate shipment is not always the most efficient number of boats to produce in a given production schedule.
Research and Development
Essentially the same technologies and processes are used to produce fiberglass boats by all boat manufacturers. The most common method is open-face molding. This is usually a labor-intensive, manual process whereby employees hand spray and apply fiberglass and resin in layers on open molds to create boat hulls, decks and other smaller fiberglass components. This process can result in inconsistencies in the size and weight of parts, which may lead to higher warranty costs. A single open-face mold is typically capable of producing approximately three hulls per week.
Marine Products has been a leading innovator in the recreational boating industry. One of the Company’s most innovative designs is the full-length “Extended V-Plane” running surface on its Chaparral boat models. Typically, sterndrive boats have a several foot gap on the bottom rear of the hull where the engine enters the water. With the Extended V-Plane, the running surface extends the full length to the rear of the boat. The benefit of this innovation is more deck space, better planning performance and a more comfortable ride. Although the basic hull designs are similar, the Company has historically introduced a variety of new models each year and periodically replaces, updates or discontinues existing models.
Another hull design is the Hydro Lift TM used on the Robalo boat models. This variable dead rise hull design provides a smooth ride in rough conditions. It increases the maximum speed obtainable by a given engine horsepower and weight of the boat. Robalo’s current models utilize the Hydro Lift TM design and we plan to continue to provide this design on Robalo models.
A bow design known as the Wide Tech TM was first used on the Chaparral Sunesta Wide Tech TM and Xtreme models for the 2008 model year, and for the 2011 model year was being used on Chaparral’s Premiere Sport Yacht, SSi Wide Tech TM Sport Boats, Sunesta Sportdecks, Xtreme Tow Boats and two Signature Cruisers. The Wide Tech TM bow design allows the models to have the Extended V-Plane hull, with the features and benefits that this hull design offers. In addition, the Wide Tech TM bow design provides a larger seating area, as well as additional storage space, in the front of the boat. Furthermore, it allows the models to have a non-skid walkway on the bow, which makes entering and leaving the boat easier than in other boat models. This bow design may be incorporated on other Chaparral boat models in subsequent model years.
In support of its new product development efforts, Marine Products incurred research and development costs of $789 thousand in 2011, $489 thousand in 2010, and $712 thousand in 2009.
Industry Overview
The recreational marine market in the United States is a mature market, with 2010 (latest data available to us) retail expenditures of approximately $30 billion spent on new and used boats, motors and engines, trailers, accessories and other associated costs as estimated by the National Marine Manufacturers Association (“NMMA”). Pleasure boats compete for consumers’ limited free time with all other leisure activities. Non-active boat owners cite the lack of leisure time and increased operational costs as the primary reasons for not using their boats.
The NMMA conducts various surveys of pleasure boat industry trends, and the most recent surveys indicate that 75 million adults in the United States participated in recreational boating in 2010, an increase of 15 percent compared to the prior year. There are currently approximately 17 million boats owned in the United States, including outboard, inboard, sterndrive, sailboats, personal watercraft, and miscellaneous (canoes, kayaks, rowboats, etc.). Marine Products competes in the sterndrive and inboard boating category with its seven lines of Chaparral boats, and in the outboard boating category with its Robalo sport fishing boats. More than 90 percent of the Company’s unit sales are sterndrive boats.
Industry sales of new sterndrive boats in the United States during 2011 totaling 14,412 (source: Info-Link Technologies, Inc.) accounted for approximately 32 percent of the total new fiberglass powerboats sold that were between 18 and 35 feet in hull length. Sales of sterndrive boats had an estimated total retail value of $700 million, or an average retail price per boat of approximately $49,000. Management believes that the five largest states for boat sales at the present time are Florida, Texas, New York, North Carolina and Louisiana. Marine Products has dealers in each of these states.
CEO BACKGROUND
R. Randall Rollins, 80, was elected a Director of Marine Products in 2001. Mr. Rollins has extensive knowledge of the Company’s business and industry serving over 24 years at the Company including the years that it was a subsidiary of RPC before it was spun-off in 2001. Mr. Rollins serves as Chairman of the Board of the Company. He is also Chairman of the Board of RPC, Inc. as well as Rollins, Inc. Mr. Rollins has been a director of Dover Motorsports, Inc. since 1996 and a director of Dover Downs Gaming & Entertainment, Inc. since 2002. Mr. Rollins served as a director of SunTrust Banks, Inc. from 1995 to 2004.
Richard A. Hubbell, 67, was elected a Director of Marine Products in 2001. Mr. Hubbell has extensive knowledge of the Company’s business and industry serving over 24 years at the Company including the years that it was a subsidiary of RPC before it was spun-off in 2001. He has served as the Chief Executive Officer and President of the Company since 2001. Mr. Hubbell is also the President and Chief Executive Officer of RPC, Inc.
Gary W. Rollins, 67, was elected a Director of Marine Products in 2001. Mr. Rollins has extensive knowledge of the Company’s business and industry. In addition, Mr. Rollins serves as the President and Chief Operating Officer of Rollins, Inc. Mr. Rollins has been serving as a director of RPC, Inc. since 1984 and as a director of Rollins, Inc. since 1981. Mr. Rollins has served on the Board of Directors of Genuine Parts Company since 2005.
Henry B. Tippie, 85, was elected a Director of Marine Products in 2001. Mr. Tippie brings extensive financial and management experience to our Board of Directors serving as controller and chief financial officer of Rollins, Inc. from 1953 to 1970. Mr. Tippie has over 61 years of experience including being involved with publicly traded companies during the past 50 years in various positions including founder, CFO, CEO, President, Vice-Chairman and Chairman of the Board. He is currently Chairman of the Board of Dover Downs Gaming & Entertainment, Inc. as well as Dover Motorsports, Inc. and is a director of RPC, Inc. and Rollins, Inc.
Wilton Looney, 92, was elected a Director of Marine Products in 2001. Mr. Looney brings extensive financial and management experience to our Board of Directors serving as a Director for over 24 years including the years that it was a subsidiary of RPC before it was spun-off in 2001. He is the Honorary Chairman of the Board of Genuine Parts Company. Mr. Looney has been a director of Rollins, Inc. since 1975. He has been a director of RPC, Inc. since 1984.
James B. Williams, 78, was elected a Director of Marine Products in 2001. Mr. Williams brings extensive financial and management experience to our Board of Directors serving over 24 years as a Director including the years that it was a subsidiary of RPC before it was spun-off in 2001. He retired in 1998 as Chairman of the Board and Chief Executive Officer of SunTrust Banks, Inc., a bank holding company, which positions he had held for more than five years. He is a director of RPC, Inc., Rollins, Inc. and The Coca-Cola Company. He also previously served as a director of Genuine Parts Company and Georgia Pacific Corporation.
Bill J. Dismuke, 75, was elected a Director of Marine Products in 2005. Mr. Dismuke brings extensive financial, management and manufacturing experience to our Board of Directors. He served as a Senior Vice President of Rollins, Inc. for five years from 1979 until 1984. He retired as President of Edwards Baking Company in 1995. Mr. Dismuke has also been a director of Rollins, Inc. since 1984 and RPC, Inc. since 2005.
Larry L. Prince, 73, was elected a Director of Marine Products in 2009. Mr. Prince brings extensive management experience to our Board of Directors. He served as the Chairman of the Executive Committee of the Board of Directors of Genuine Parts Company until his retirement in 2011. He also served as Chairman of the Board from 1990 until 2005 and as Chief Executive Officer from 1989 until 2004 of Genuine Parts Company. Mr. Prince is also a director of Rollins, Inc. and RPC, Inc. Mr. Prince previously served as a director of SunTrust Banks, Inc., Crawford & Company, Equifax, Inc. and John H. Harland Company.
James A. Lane, Jr., 69, was elected a Director of Marine Products in 2001. Mr. Lane brings extensive financial, management and manufacturing experience to our Board of Directors. He has held the position of President of Chaparral Boats, Inc. (formerly a subsidiary of RPC) since 1976. Mr. Lane has been Executive Vice President and a Director of the Company since it was spun off in 2001. Mr. Lane has been a director of RPC, Inc. since 1987.
Linda H. Graham, 75, was elected a Director of Marine Products in 2001. Ms. Graham brings extensive management experience to our Board of Directors. She has been the Vice President and Secretary of RPC, Inc. since 1987. In addition, Ms. Graham serves as a director of RPC, Inc.
MANAGEMENT DISCUSSION FROM LATEST 10K
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 continental United States and in several international markets. Most of these dealers finance their inventory through third-party floor plan lenders, who pay Marine Products upon delivery of the products to the dealers.
We manage our Company by focusing on the execution of the following business and financial strategies:
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Manufacturing high-quality, stylish, and innovative powerboats for our dealers and retail consumers,
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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,
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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,
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Maintaining a flexible, variable cost structure which can be reduced quickly when deemed appropriate,
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Focusing on the competitive nature of the boating business and designing our products and strategies in order to grow and maintain profitable market share,
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Monitoring the activities and financial condition of our dealers and of the third-party floor plan lenders who finance our dealers’ inventories,
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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
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Aligning the interests of our management and stockholders.
In implementing these strategies and attempting to optimize our financial returns, management closely monitors dealer orders and inventories, the production mix of various models, and indications of near term demand such as consumer confidence, interest rates, dealer orders placed at our annual dealer conferences, and retail attendance and orders at annual winter boat show exhibitions. We also consider trends related to certain key financial and other data, including our historical and forecasted financial results, market share, unit sales of our products, average selling price per boat, and gross profit margins, among others, as indicators of the success of our strategies. Marine Products’ financial results are affected by consumer confidence — because pleasure boating is a discretionary expenditure, interest rates — because many retail customers finance the purchase of their boats, and other socioeconomic and environmental factors such as availability of leisure time, consumer preferences, demographics and the weather.
During 2011, industry retail sales declined slightly, continuing a trend that began in the fourth quarter of 2005. Retail sales have continued to decline due to the financial crisis which began in late 2008 and the resulting recession, decline in residential real estate values, and the associated decline in consumer confidence. In spite of consistently declining industry sales during the past six years, our sales increased significantly in 2010 due to our dealers’ desire to restock their inventory with current-year models as well as their ability to purchase inventory due to the availability of financing from third-party floor plan lenders. During 2011, our production and sales to dealers were comparable to retail sales by dealers, although dealer demand increased significantly towards the end of the retail selling season, as fuel prices moderated and consumer confidence improved. As a result, we generated slightly higher net sales, as well as gross and operating profit in 2011 compared to 2010. At the end of 2011, our dealer inventories were slightly higher than at the end of 2010, but order backlog improved significantly, due to stronger sales at the end of the retail selling season and the level dealer orders placed during this time for several of our new 2012 models. Management will continue to monitor retail demand, dealer inventory levels and the availability of dealer and consumer financing for the purchase of our products.
We monitor our market share in the 18 to 35 foot sterndrive category as one indicator of the success of our strategies and the market’s acceptance of our products. For the nine months ended September 30, 2011 (latest data available to us), Chaparral’s market share in the 18 to 35 foot sterndrive category was 8.3 percent, an increase from our market share in the same category for the twelve months ended December 31, 2010 of 7.3 percent. Our market share increased across a broad size range, but was higher among the larger boats in our market. We believe that our market share increase is the result of several larger models which have updated styling and features, and appeal to consumers who can afford more expensive boats. We also note that market share declined among manufacturers who have undergone bankruptcy reorganization or other financial difficulty, in particular among manufacturers of smaller boats. We will continue to monitor our market share and believe it to be important, but we also believe that maximizing profitability takes precedence over growing our market share.
Outlook
Management believes that net sales will increase moderately in 2012 compared to 2011 and that our operating results will improve. This belief is based on indications that retail demand in recreational boating has stabilized and may be increasing, the fact that our dealer inventories are at more normalized historical levels, and that our order backlog has increased significantly. Indications from winter boat shows are that attendance and sales are consistently higher than in 2011. Our operating results should improve due to higher volumes of boat sales and an improved gross margin from improved production efficiencies and cost absorption.
Although we believe that retail sales will increase in 2012, we believe that the increase will be modest due to slowly improving consumer confidence, continued high unemployment, and continued depressed real estate values. We believe that these factors dampen consumers’ enthusiasm for the purchase of large discretionary goods such as pleasure boats. In addition, fuel prices have increased during the first quarter of 2012, and consumer credit remains tight. Over the long term, the financial crisis and the prolonged low returns on equity and fixed income investments may have long-term effects on consumer behavior with regard to pleasure boating. These conditions may force consumers to save more for retirement or delay retirement, both of which decrease the funds and time available for recreational boating. In such a case, consumers who may be interested in boating as a recreational activity may purchase boats later in their lives, or may purchase smaller, less expensive boats. Over the past several years, Marine Products as well as other manufacturers have improved their customer service capabilities, marketing strategies and sales promotions in order to attract more consumers to recreational boating as well as improve consumers’ boating experiences. In addition, the recreational boating industry began a promotional program a number of years ago which involves advertising and consumer targeting efforts, as well as other activities designed to increase the potential consumer market for pleasure boats. Many manufacturers, including Marine Products, are participating in this program. Management believes that these efforts will benefit the industry and Marine Products. As in past years, Marine Products enhanced the design of a number of boats for the 2012 model year which began around the beginning of July 2011. For the 2012 model year, Marine Products is emphasizing entry-level models in its Chaparral and Robalo product lines, which we believe will appeal to value-conscious boaters who want to buy a new boat, as well as first-time boat buyers who are interested in a smaller investment in boat ownership. We believe that these new products will increase our net sales and enhance our profitability by increasing our cost absorption because of production efficiencies. We also believe that these models will increase our sales in market segments in which we would like to increase our market share, and will encourage consumers of these products to purchase larger, more expensive boats from us in the future.
Our financial results in 2012 will depend on a number of factors, including interest rates, consumer confidence, the availability of credit to our dealers and consumers, fuel costs, the continued acceptance of our new products in the recreational boating market, our ability to compete in the competitive pleasure boating industry, and the costs of certain of our raw materials and key components. We anticipate that the Company will continue to be challenged by the effect of an uncertain level of consumer demand during the winter boat show and 2012 retail selling season.
Net Sales. Marine Products’ net sales increased by $5.4 million or 5.4 percent in 2011 compared to 2010. The increase was primarily due to a 8.3 percent increase in the average gross selling price per boat, partially offset by a 2.1 percent decrease in the number of boats sold. Average gross selling price per boat increased compared to the prior year, with the exception of Robalo, due to higher unit sales of several of the larger boats within the SSi and SSX Sportboats model lineup offset slightly by the sales of our new lower priced Chaparral H2O. Unit sales among all models, except Robalo and H2O, decreased slightly compared to the prior year.
Cost of Goods Sold . Cost of goods sold increased 4.4 percent in 2011 compared to 2010, less than the increase in net sales. As a percentage of net sales, cost of goods sold decreased in 2011 compared to 2010, primarily due to lower retail incentive costs as a percentage of net sales and cost efficiencies resulting from higher production volumes.
Selling, General and Administrative Expenses . Selling, general and administrative expenses increased 1.0 percent in 2011 compared to 2010 primarily as a result of costs, including sales commissions and incentive compensation, that vary with the level of Company sales and profitability. Warranty expense was 1.0 percent of net sales in 2011 compared to 2.0 percent of net sales in 2010. This decrease was due primarily to an adjustment of warranties issued in prior years due to positive trends including a decline in the number of warranty claims during 2011 compared to 2010. Warranty claims declined because of less boat usage and lower field inventories.
Interest Income. Interest income was $1.0 million in 2011 compared to $1.2 million in 2010. Marine Products generates interest income primarily from investments in tax-exempt municipal obligations. The decrease in interest income is primarily due to lower market returns on the Company’s debt investments compared to the prior year.
Other Income . Other income was $2.0 million in 2011 compared to $0 in 2010. The $2.0 million recorded in the fourth quarter of 2011 represents a tax-free gain from an employee benefit plan financing arrangement. We do not expect to report any similar gains during 2012.
Income Tax Provision. The income tax provision was $1.7 million in 2011 compared to $1.0 million in 2010. The effective tax rate in 2011 was 19.8 percent compared to 21.2 percent in 2010. The change in the effective rate was due primarily to the relationship of our annual pretax income to permanent differences between book and taxable income including tax-exempt interest earned on municipal debt securities, coupled with the impact of discrete tax adjustments, including state NOLs expected to be used in the future.
Year Ended December 31, 2010 Compared To Year Ended December 31, 2009
Net Sales. Marine Products’ net sales increased by $61.6 million or 156.1 percent in 2010 compared to 2009. The increase was primarily due to a 122.7 percent increase in the number of boats sold and more typical incentive costs as a percentage of net sales, partially offset by a 2.5 percent decrease in the average gross selling price per boat. Unit sales among all models increased significantly compared to the prior year, as we operated at significantly higher production levels in response to an improved financing environment within our dealer network as well as stable retail demand for our products. Average gross selling price per boat decreased compared to the prior year due primarily to the reduction in number of Premiere Sport Yachts sold in 2010 compared to 2009.
Cost of Goods Sold . Cost of goods sold increased 81.1 percent in 2010 compared to 2009, less than the increase in net sales. As a percentage of net sales, cost of goods sold decreased in 2010 compared to 2009, primarily due to lower retail incentive costs as a percentage of net sales and cost efficiencies resulting from higher production volumes.
Selling, General and Administrative Expenses . Selling, general and administrative expenses increased 11.0 percent in 2010 compared to 2009 primarily as a result of costs, including payroll and incentive compensation, that vary with the level of Company sales and profitability. Warranty expense was 2.0 percent of net sales in 2010 compared to 5.1 percent of net sales in 2009. This decrease was due primarily to the decline in warranty claims during 2010 compared to unfavorable adjustments recognized during 2009 relating to the unusually high number of claims associated with prior model year boats.
Interest Income. Interest income was $1.2 million in 2010 compared to $1.7 million in 2009. Marine Products generates interest income primarily from investments in tax-exempt municipal obligations. The decrease in interest income is primarily due to a decrease in the average investment balance coupled with lower market returns on the Company’s debt investments compared to the prior year.
Income Tax Provision. The income tax provision (benefit) was $1.0 million in 2010 compared to $(6.8) million in 2009. The effective tax rate in 2010 was 21.2 percent compared to 38.9 percent in 2009. The change in the effective rate was due primarily to the relationship of our annual pretax income (loss) to permanent differences between book and taxable income including tax-exempt interest earned on municipal debt securities, coupled with the impact of discrete tax adjustments, including state NOLs expected to be used in the future.
Liquidity and Capital Resources
Cash and Cash Flows
The Company’s cash and cash equivalents were $1.0 million at December 31, 2011, $9.5 million at December 31, 2010 and $2.6 million at December 31, 2009. In addition, the aggregate of short-term and long-term marketable securities was $54.1 million at December 31, 2011, $42.8 million at December 31, 2010 and $39.4 million at December 31, 2009.
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 assets classified as Level 3, 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.
In 2009, the Company transferred trading securities from assets utilizing Level 1 inputs to assets utilizing Level 2 inputs because significant observable inputs in addition to quoted market prices were used to value these trading securities. Also in 2009, due to market disruptions that led to decreased availability of quoted prices for identical assets, the Company classified available-for-sale securities, consisting primarily of municipal bonds, from assets utilizing Level 1 inputs to assets utilizing Level 2 inputs.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
OUTLOOK
The discussion on the outlook for 2012 is incorporated herein by reference from the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011.
Management believes that net sales will increase in 2012 compared to 2011 and that our operating results will improve as well. This belief is based on a strong 2012 retail selling season, favorable dealer and customer reception to our new models, industry reports that retail boat sales during the second quarter of 2012 have increased, and declining fuel prices. Our dealer inventories are higher at the end of the second quarter of 2012 than at the end of the second quarter of 2011, but are lower than at the end of the first quarter of 2012. Our backlog is higher than at the end of the second quarter of 2011, due to significantly higher dealer orders for our value-priced Chaparral H2O and Robalo models. However, our backlog is lower at the end of the second quarter of 2012 than at the end of the first quarter of 2012, since we have increased production to meet dealer demand during the retail selling season. Industry sources indicate that our market share in the small sterndrive market increased at the end of 2011, and we believe that this increase was due to higher sales volumes of these new smaller models. Although these models carry lower average selling prices than our other Chaparral and Robalo models, we believe these sales will increase consolidated net sales, gross profit, operating income, and net income during the remainder of 2012, by increasing unit sales and spreading our fixed production costs over higher production volume.
In general, we believe that retail boat sales have started to increase over the past several quarters. However, we also believe that retail sales increases will be modest due to a slow recovery from the recession, continued high unemployment, depressed real estate values and continued weak consumer confidence. We believe that these factors tend to discourage consumers from purchasing large discretionary goods such as pleasure boats. Near-term fluctuations in fuel prices impact our sales as well, and we believe that the recent decline in fuel prices has had a positive impact on our first and second quarter 2012 sales. Over the long term, the lower expected returns on financial assets may have long-term effects on consumer behavior with regard to pleasure boating. Because of these lower returns, consumers may have less money for large discretionary purchases such as recreational boats because of greater need for retirement savings. For a number of years, Marine Products as well as other manufacturers have been improving their customer service capabilities, marketing strategies and sales promotions in order to attract more consumers to recreational boating as well as improve consumers’ boating experiences. In addition, the recreational boating industry conducts a promotional program which involves advertising and consumer targeting efforts, as well as other activities designed to increase the potential consumer market for pleasure boats. Many manufacturers, including Marine Products, participate in this program. Management believes that these efforts have incrementally benefited the industry and Marine Products. As in past years, Marine Products is enhancing its selection of models for the upcoming 2013 model year which began on July 1, 2012. For the 2013 model year we are expanding the number of value-priced Chaparral and Robalo models that we initially introduced in 2012, as well as developing new Chaparral and Robalo models which we believe will appeal to our target markets. We believe that the value-priced models introduced earlier in the year and the new models being developed will continue to enhance the achievement of our objectives related to improved manufacturing cost efficiencies, meeting dealer requests for entry-level models and increasing retail market share.
Cost of goods sold for the second quarter ended June 30, 2012 was $31.2 million compared to $24.2 million for the second quarter in 2011, an increase of $7.0 million or 28.8 percent. Cost of goods sold, as a percentage of net sales, decreased primarily due to production efficiencies related to higher production volumes during the second quarter of 2012 compared to the same period in 2011.
Selling, general and administrative expenses for the second quarter ended June 30, 2012 were $4.5 million compared to $3.7 million for second quarter in 2011, an increase of $0.8 million or 23.0 percent. This increase was due to expenses that vary with sales and profitability, such as incentive compensation, sales commissions and warranty expense coupled with increased advertising costs. Selling, general and administrative expenses, as a percentage of net sales, decreased primarily due to leverage of fixed costs over higher net sales. Warranty expense was 1.5 percent of net sales for the three months ended June 30, 2012 compared to 1.6 percent in the prior year quarter.
Operating income for the second quarter ended June 30, 2012 increased $1.5 million compared to the second quarter in 2011 due to increased net sales and gross profit in the second quarter of 2012 compared to the prior year quarter, partially offset by higher selling, general and administrative expenses.
Interest income was $253 thousand during the second quarter ended June 30, 2012 and $272 thousand for the second quarter in 2011. The slight decrease was primarily due to lower market returns on the Company’s debt investments during the period compared to the prior year offset by an increase in the average investment balance compared to the prior year.
Income tax provision for the second quarter ended June 30, 2012 was $840 thousand compared to $262 thousand for the second quarter in 2011. The income tax provision for the second quarter ended June 30, 2012 reflects an effective tax rate of 27.9 percent compared to an effective tax rate of 17.6 percent for the second quarter in 2011. The change in the effective tax rate was due primarily to the relationship of our annual estimated pretax income to permanent differences between book and taxable income including primarily tax-exempt interest earned on municipal securities.
SIX MONTHS ENDED JUNE 30, 2012 COMPARED TO SIX MONTHS ENDED JUNE 30, 2011
Net sales for the six months ended June 30, 2012 increased $20.1 million or 35.7 percent compared to the six months ended June 30, 2011. The change in net sales was due primarily to a 56.3 percent increase in the number of boats sold partially offset by a 14.7 percent decrease in the average gross selling price per boat. Unit sales increased dramatically due to sales of our recently introduced Chaparral H2O Sport and Fish & Ski Boats, as well as our Robalo 180 and 200 outboard sport fishing boat. The increased sales of these smaller models also resulted in the decrease in overall average selling prices during the six months ended June 30, 2012 as compared to the comparable period in 2011. During the first six months of 2012, sales outside of the United States accounted for 22.6 percent of net sales compared to 21.7 percent of net sales in the prior year. Increases of 40.9 percent in international sales and 34.2 percent in domestic sales during the period compared to the prior year contributed to the consolidated net sales increase quantified above. The majority of the increase in international sales was due to increased sales in Canada due to increases in the number of dealers and improvement in the Canadian economy while most other international markets continue to struggle.
Cost of goods sold for the six months ended June 30, 2012 was $62.0 million compared to $46.9 million for the six months ended June 30, 2011, an increase of $15.1 million or 32.3 percent. Cost of goods sold, as a percentage of net sales, decreased primarily due to production efficiencies related to higher production volumes during the second quarter of 2012 compared to the same period in 2011.
Selling, general and administrative expenses for the six months ended June 30, 2012 were $9.5 million compared to $7.5 million for the six months ended June 30, 2011, an increase of $1.9 million or 25.6 percent. This increase was due to expenses that vary with sales and profitability, such as incentive compensation, sales commissions and warranty expense coupled with increased advertising costs. Selling, general and administrative expenses, as a percentage of net sales, decreased primarily due to leverage of fixed costs over higher net sales. Warranty expense was 1.6 percent of net sales for the six months ended June 30, 2012 compared to 1.8 percent in the prior year quarter.
Operating income for the six months ended June 30, 2012 increased $3.0 million compared to the six months ended June 30, 2011 due to increased net sales and gross profit during the first six months of 2012 compared to the first six months of 2011, partially offset by higher selling, general and administrative expenses.
Interest income was $492 thousand during the six months ended June 30, 2012 and $508 thousand for the six months ended June 30, 2011. The slight decrease was primarily due to lower market returns on the Company’s debt investments during the period compared to the prior year offset by an increase in the average investment balance compared to the prior year.
Financial Condition and Liquidity
The Company believes that the liquidity provided by existing cash, cash equivalents and marketable securities, its overall strong capitalization and cash generated by operations will provide sufficient capital to meet the Company’s requirements for at least the next twelve months. The Company’s decisions about the amount of cash to be used for investing and financing purposes are influenced by its capital position and the expected amount of cash to be provided by operations.
Cash Requirements
The Company currently expects that capital expenditures during 2012 will be approximately $435 thousand, of which $185 thousand has been spent through June 30, 2012.
The Company participates in a multiple employer Retirement Income Plan, sponsored by RPC, Inc. (“RPC”). During the six months ended June 30, 2012, the Company made a contribution of $637 thousand to this plan in order to achieve the Company’s funding objective and plans to make an additional cash contribution of approximately $94 thousand to this plan during the remainder of 2012.
As of June 30, 2012, the Company has purchased an aggregate total of 4,979,992 shares in the open market under the Company stock repurchase program and there are 3,270,008 shares that remain available for repurchase. The Company repurchased 54,835 shares under this program during the quarter ended June 30, 2012 and may repurchase additional outstanding common shares periodically based on market conditions. The stock buyback program does not have a predetermined expiration date.
On July 24, 2012, the Board of Directors approved a $0.02 per share cash dividend payable September 10, 2012 to stockholders of record at the close of business August 10, 2012. The Company expects to continue to pay cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors.
The Company warrants the entire boat, excluding the engine, against defects in materials and workmanship for a period of one year. The Company also warrants the entire deck and hull, including its bulkhead and supporting stringer system, against defects in materials and workmanship for periods ranging from five to ten years. See Note 6 to the Consolidated Financial Statements for a detail of activity in the warranty accruals during the six months ended June 30, 2012 and 2011.
OFF BALANCE SHEET ARRANGEMENTS
To assist dealers in obtaining financing for the purchase of its boats for inventory, the Company has entered into agreements with various third-party floor plan lenders whereby the Company guarantees varying amounts of debt for qualifying dealers on boats in inventory. The Company’s obligation under these guarantees becomes effective in the case of a default under the financing arrangement between the dealer and the third-party lender. The agreements provide for the return of all repossessed boats to the Company in a new and unused condition as defined, in exchange for the Company’s assumption of specified percentages of the debt obligation on those boats, up to certain contractually determined dollar limits which vary by lender. The Company became contractually obligated to repurchase inventory of approximately $0.8 million during the year ended December 31, 2011 all of which were redistributed among existing and replacement dealers. There were no repurchases of inventory under contractual agreements during the six months ended June 30, 2012.
Management continues to monitor the risk of additional defaults and resulting repurchase obligations based in part on information provided by the third-party floor plan lenders and will adjust the guarantee liability at the end of each reporting period based on information reasonably available at that time.
The Company currently has an agreement with one of the floor plan lenders whereby the contractual repurchase limit is to not exceed 15 percent of the amount of the average net receivables financed by the floor plan lender for dealers during the prior 12 month period. T he Company has contractual repurchase agreements with additional lenders with an aggregate maximum repurchase obligation of approximately $4.4 million with various expiration and cancellation terms of less than one year, for an aggregate repurchase obligation with all financing institutions of approximately $9.0 million as of June 30, 2012.
RELATED PARTY TRANSACTIONS
In conjunction with its spin-off from RPC in 2001, the Company and RPC entered into various agreements that define their relationship after the spin-off. A detailed discussion of the various agreements in effect is contained in the Company’s annual report on Form 10-K for the year ended December 31, 2011. RPC charged the Company for its allocable share of administrative costs incurred for services rendered on behalf of Marine Products totaling approximately $231 thousand in the six months ended June 30, 2012 and $362 thousand in the six months ended June 30, 2011.
CRITICAL ACCOUNTING POLICIES
The discussion of Critical Accounting Policies is incorporated herein by reference from the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011. There have been no significant changes in the critical accounting policies since year-end.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 of the Consolidated Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition.
SEASONALITY
Marine Products’ quarterly operating results are affected by weather and general economic conditions. Quarterly operating results for the second quarter historically have reflected the highest quarterly sales volume during the year with the first quarter being the next highest sales quarter. However, the results for any quarter are not necessarily indicative of results to be expected in any future period.
INFLATION
The market prices of certain material and component costs used in manufacturing the Company’s products, especially resins that are made with hydrocarbon feedstocks, copper and stainless steel, have been extremely volatile since 2008. The prices of these commodities fell dramatically due to the global recession and financial crisis in late 2008. During 2009, these commodity prices began to rise, and continued to rise throughout 2011. By the end of 2011, the prices of some of these commodities, such as copper, were higher than the peak market prices reached during 2008. Prices of these commodities, while still volatile, have moderated during the second quarter of 2012 and have not adversely affected our financial results during the first and second quarters of 2012. We institute price increases to our dealers to compensate for these cost increases when they occur, but these price increases historically have not been enough to compensate fully for the increases in commodity costs. Due to the intense competition in our business, we do not believe that we will be able to institute sufficient price increases to our dealers to compensate for these increased materials costs. It is likely that any continued increases in commodity costs would negatively impact the Company’s operating results.
New boat buyers typically finance their purchases. Higher inflation typically results in higher interest rates that could translate into an increased cost of boat ownership. Prospective buyers may choose to forego or delay their purchases or buy a less expensive boat in the event that interest rates rise or credit is not available to finance boat purchase.
FORWARD-LOOKING STATEMENTS
Certain statements made in this report that are not historical facts are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, the expected effect of recent accounting pronouncements on the Company’s consolidated financial statements; the Company’s estimate for warranty accruals; the Company’s belief that there exists a favorable outlook for the near-term selling environment for our products; management’s belief that net sales will increase in 2012 compared to 2011; the Company’s belief that sales of the Company’s new models will increase consolidated net sales, gross profit, operating income and net income during the remainder of 2012, by increasing unit sales and spreading our fixed production costs over higher production volume; the Company’s belief that retail boat sales have started to increase over the past several quarters; the Company’s belief that this increase in retail sales will be modest; our belief that a slow recovery from the recession, continued high unemployment, depressed real estate values and continued weak consumer confidence will tend to discourage consumers from purchasing large discretionary goods such as pleasure boats; the financial crisis may have long term effects on consumer behavior with regard to pleasure boating; the Company’s belief that the recreational boating industry promotional program will benefit the industry and Marine Products; our plans to expand the selection of value-priced Chaparral and Robalo models we initially introduced in 2012 as well as developing new Chaparral and Robalo models which we believe will appeal to our target markets; our belief that the value-priced models introduced earlier in the year and the new models being developed will continue to enhance the achievement of our objectives related to improved manufacturing cost efficiencies, meeting dealer requests for entry-level models and increasing the retail market share; the Company’s belief that its liquidity, capitalization and cash expected to be generated from operations, will provide sufficient capital to meet the Company’s requirements for at least the next twelve months; the Company’s expectations about capital expenditures during 2012; the Company’s expectation about contributions to its pension plan in 2012; the Company’s belief that it may repurchase additional outstanding common shares periodically based on market conditions; the Company’s expectation to continue to pay cash dividends to common stockholders subject to earnings and financial condition of the Company and other relevant factors; the Company’s belief that it will not be able to institute sufficient price increases to compensate for these increased material costs; the Company’s belief that it is likely that these increased prices will negatively impact the Company’s operating results; the Company’s expectation regarding market risk of its investment portfolio; and the Company’s expectations about the effect of litigation on the Company’s financial position or results of operations. The words “may,” “should,” “will,” “expect,” “believe,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “project,” “estimate,” and similar expressions used in this document that do not relate to historical facts are intended to identify forward-looking statements. Such statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. We caution you that such statements are only predictions and not guarantees of future performance and that actual results, developments and business decisions may differ from those envisioned by the forward-looking statements. Risk factors that could cause such future events not to occur as expected include the following: economic conditions, unavailability of credit and possible decreases in the level of consumer confidence impacting discretionary spending, business interruptions due to adverse weather conditions, increased interest rates, unanticipated changes in consumer demand and preferences, deterioration in the quality of Marine Products’ network of independent boat dealers or availability of financing of their inventory, our ability to insulate financial results against increasing commodity prices, the impact of rising gasoline prices and a weak housing market on consumer demand for our products, competition from other boat manufacturers and dealers, and insurance companies that insure a number of Marine Products’ marketable securities have been downgraded, which may cause volatility in the market price of Marine Products’ marketable securities. Additional discussion of factors that could cause the actual results to differ materially from management’s projections, forecasts, estimates and expectations is contained in Marine Products’ Form 10-K, filed with the Securities and Exchange Commission for the year ended December 31, 2011. The Company does not undertake to update its forward-looking statements.
CONF CALL
Jim Landers - Vice President of Corporate Finance
Thank you and good morning. Before we get started today, I need to remind everyone that we are going to be discussing some things today that are not historical facts. Some of the statements that will be made on this call will be forward-looking in nature and reflect a number of known and unknown risks. I’d like to refer you to our press release issued this morning, our 2007 10-K and other SEC filings that outline those risks; all of these are available on our website at www.marineproductscorp.com.
If you have not received our press release for any reason, please call us at 404-321-7910 and we will fax or email one to you immediately. We will make a few comments about the quarter and then we will be available for your questions.
Now, I’ll turn the call over to our President and CEO, Rick Hubbell.
Rick Hubbell - President and Chief Executive Officer
We issued our earnings press release for the fourth quarter of 2008 this morning. Ben Palmer, our CFO will discuss the financial results in more detail in a moment. At this time, I will briefly discuss a few of our operational highlights.
First, net sales for the quarter decreased approximately 61% compared to the fourth quarter of last year. The decrease in net sales was due to a 63% decrease in the number of boats sold, partially offset by a 7% increase in the average selling price per boat.
The increase in average selling price per boat was due to sales of one new Chaparral, Premiere 400, several larger Signature Cruisers and higher average selling prices of the Sunesta Wide Techs and Xtremes.
Our gross profit margin of 10.3% was lower than the 20.9% gross margin that we realized in the fourth quarter of ‘07. Ben will discuss the reasons for that in a few minute. Operating loss of little less that $1.7 million for the quarter compared to operating income of the a little less that $5 million in the prior year and our diluted earnings per share decrease by $0.14 from $0.11 per share last year to a loss of $0.03 per share this year.
The pleasure boating industry’s downturn continued and in fact deepened during the fourth quarter of ‘08, making three full years of depressed conditions for our industry. Negative consumer sentiment increased during the quarter as the problems in the financial system surfaced and the availability of credit for dealers and consumers became even tighter than in had been.
During the quarter we implemented an attractive retail incentive program to help dealer sell inventory and we’ve reduced our production level significant. The lower unit production levels created manufacturing inefficiencies and caused us to realize an operating loss for the first time in our history.
Additionally, as you may have seen from our other press release this morning, yesterday our Board of Directors reduced the quarterly cash dividend from $6.5 to $0.01 per share, in order to support the operations and the long-term goals of the company during the current industry operating difficulties and stagnant economy.
With that overview, I will turn it over to our CFO, Ben Palmer.
Ben Palmer - Chief Financial Officer
Thanks Rick. For the quarter ending December 31, 2008 we generated net sales of $23.8 million, it was a 61.4% decreased compared to last year. There was a 63.3% decrease in the number of boats sold, partially offset by an increase in average selling price per boat. Although unit sales decreased across all product line, interest in the new Premiere 400 Sport Yachts has been encouraging and average sales prices increases in the Cruisers and Sunesta product lines were positive.
Although, our sales of smaller Sportboats have declined due to increased competition from other manufactures, especially in the 18 to 21 foot range, our market share had increased slightly in the largest Sportboats. Although international sales decreased by a 34% in the fourth quarter of ‘08, compared ‘07, the full-year of ‘08 was still a 3.2% increase over ‘07. International sales were at 34% of total net sales in ‘08, compared to 23% in 2007.
Gross margin as the percentage of net sales was 10.3% for the quarter, compared to 20.9% last year. Our gross profit margin decline compared to the prior year due to cost inefficiencies resulting form the lower production volumes and higher retail incentives that we offered to assets dealers and selling field inventory. In the discussion on gross margin profitability I would like to point out that the prices out that several of the commodities used in our manufacturing process have declined.
Although, this is favorable it’s certainly not enough to offset the lower production volumes and other issues effecting gross margin. Selling, general and administrative expenses decreased 45.8% in fourth quarter of ‘08 compared to ’07, due to the variable nature of many of these expenses including incentive compensation and warranty expense, also our salaries and product development expenses were lower due to cost control measures instituted during past year.
Selling, general and administrative expenses in the fourth quarter include cost associated with repurchasing deal inventory under Marine Product’s agreements with third-party floor plan lenders. As a percentage of net sales SG&A were 17.6% of net sales in the fourth quarter of ‘08 compared to 12.5% last year.
Interest income in the fourth quarter decreased by 5.8% compared to fourth quarter of last year. However, our cash and marketable securities balance increased from $48.1 million last year to $51.4 million this year due principally to carrying lower levels of inventory. Effective income tax rate during the quarter was only 8.2% due to the relatively small pretax loss relative to our permanent items of credit. Diluted loss per share for the quarter was $0.03 with a decrease of $0.14 compared to $0.11 diluted earnings per share in the prior year.
Now, turning to the balance sheet, we continued to maintain a very healthy and liquid balance sheet. Inventories were managed down by $10.7 million or 33.2% compared to the end of ‘07 due to a significant reduction in working capital requirements consistent with lower production volumes. As previously noted, the total cash marketable securities and long-term marketable securities at the end of ‘08 increased 6.6% to $51.4 million.
We are pleased to report the year inventories at year-end decreased by 19.4% compared to one year ago, which is further evidenced of our ongoing efforts to work with our dealers to manage down our field inventories and facilitate the sales of our new products as demand wants. However, our order backlog in early January indicates continuous weak retail demand.
The trend of backlog in units continues to decrease and its down significantly compared to one year ago. Therefore, our production levels are expected to remain low for sometime. As Rick mentioned, we also announced in the press release today that our Board reduced the quarterly cash dividend from $0.065 to a penny per share that’s to get to support our long-term goals during this very difficult operating environment. So, with that I’ll turn it back over to Rick.
Rick Hubbell - President and Chief Executive Officer
Thank you. We are about halfway through the boat show season and at this point, attendance and sales seem to indicate another difficult year in our business. With 2008 impacted by high fuel prices, a drought in South East, economic uncertainty, residential mortgage problems and credit availability issue so prevalent in some of our major markets.
Many consumers were prevented for making discretionary purchases, such as pleasure boats. The backlog information, Ben just reviewed with you does not board well for the near term either and many are cutting production levels further, if the upcoming boat shows do not indicating more favorable trend. Having said that, we are proud of our Chaparral 400 Premiere Sport Yacht and the positive press and consumer interest it has provided.
Ongoing product development remains important as we continue to believe that innovation and customers focus creates advantages for us during the difficult time. Additionally, although attendance has been off at recent large boat exposition such as, New York, Santiago and another states, boats are still being sold at a better than expected rate considering the downturn in the industry.
Lastly as previously mentioned our boats reduction in the quarterly cash dividend demonstrates management’s commitment to the continued future success of Marine Products Corporation. Our physically conservative Board and management team will continue to make decision, so that we remain on financially firm footing in order to weather the current economic and industries trends and take advantage of opportunities that could present themselves in the future.
I’d like to thank you for joining us this morning and we will be happy to take any questions you may have.
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Fund Letters
