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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2020

Commission File No. 1-16263

MARINE PRODUCTS CORPORATION

(exact name of registrant as specified in its charter)


Delaware	58-2572419
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

2801 Buford Highway, Suite 300, Atlanta, Georgia 30329

(Address of principal executive offices) (zip code)

Registrant’s telephone number, including area code -- (404) 321-7910

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:	Trading Symbol(s)	Name of each exchange on which registered:
Common stock, par value $0.10	MPX	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer,” "accelerated filer,” "smaller reporting company” and "emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐	Accelerated filer	⌧
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧

As of October 23, 2020, Marine Products Corporation had 33,868,624 shares of common stock outstanding.

Table of Contents

Marine Products Corporation

Table of Contents

		Page No.
Part I. Financial Information

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets – As of September 30, 2020 and December 31, 2019	3

	Consolidated Statements of Operations – for the three and nine months ended September 30, 2020 and 2019	4

	Consolidated Statements of Comprehensive Income – for the three and nine months ended September 30, 2020 and 2019	5

	Consolidated Statements of Stockholders’ Equity – for the nine months ended September 30, 2020	6

	Consolidated Statements of Stockholders’ Equity – for the nine months ended September 30, 2019	7

	Consolidated Statements of Cash Flows – for the nine months ended September 30, 2020 and 2019	8

	Notes to Consolidated Financial Statements	9-17

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18-24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	25

Part II. Other Information

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 3.	Defaults upon Senior Securities	26

Item 4.	Mine Safety Disclosures	26

Item 5.	Other Information	26

Item 6.	Exhibits	26

Signatures		27

Table of Contents

MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2020 AND DECEMBER 31, 2019

(In thousands)

(Unaudited)


	September 30,		December 31,
	2020		2019
ASSETS			(Note 1)

Cash and cash equivalents	$	29,014	$	19,804
Accounts receivable, net of allowance for doubtful accounts of $20 in 2020 and 2019		8,517		6,607
Inventories		42,890		41,553
Income taxes receivable		206		907
Prepaid expenses and other current assets		1,883		2,056
Total current assets		82,510		70,927
Property, plant and equipment, net of accumulated depreciation of $29,629 in 2020 and $28,258 in 2019		14,741		14,796
Goodwill		3,308		3,308
Other intangibles, net		465		465
Deferred income taxes		4,181		3,990
Other assets		12,266		11,278
Total assets	$	117,471	$	104,764

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable	$	9,592	$	3,886
Accrued expenses and other liabilities		15,607		13,155
Total current liabilities		25,199		17,041
Pension liabilities		11,289		9,980
Other long-term liabilities		508		531
Total liabilities		36,996		27,552
Common stock		3,387		3,387
Capital in excess of par value		-		—
Retained earnings		79,679		76,573
Accumulated other comprehensive loss		(2,591)		(2,748)
Total stockholders' equity		80,475		77,212
Total liabilities and stockholders' equity	$	117,471	$	104,764

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(In thousands except per share data)

(Unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

Net sales	$	68,778	$	72,212	$	168,715	$	243,961
Cost of goods sold		52,542		56,463		132,541		189,089
Gross profit		16,236		15,749		36,174		54,872
Selling, general and administrative expenses		7,886		6,039		20,896		24,915
Operating income		8,350		9,710		15,278		29,957
Interest income		10		83		86		235
Income before income taxes		8,360		9,793		15,364		30,192
Income tax provision		1,825		1,938		2,914		5,495
Net income	$	6,535	$	7,855	$	12,450	$	24,697

Earnings per share
Basic	$	0.19	$	0.23	$	0.37	$	0.72
Diluted	$	0.19	$	0.23	$	0.37	$	0.72

Dividends paid per share	$	0.08	$	0.12	$	0.28	$	0.36

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(In thousands)

(Unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Net income	$	6,535	$	7,855	$	12,450	$	24,697

Other comprehensive income, net of taxes:
Pension adjustment		19		16		157		50
Unrealized gain on securities, net of reclassification adjustments		—		—		—		7
Comprehensive income	$	6,554	$	7,871	$	12,607	$	24,754

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020

(In thousands)

(Unaudited)


								Accumulated
				Capital in				Other
	Common Stock			Excess of		Retained		Comprehensive
	Shares	Amount		Par Value		Earnings		Income (Loss)		Total
Balance, December 31, 2019	33,870	$	3,387	$	—	$	76,573	$	(2,748)	$	77,212
Stock issued for stock incentive plans, net	175		18		558		—		—		576
Stock purchased and retired	(73)		(8)		(558)		(489)		—		(1,055)
Net income	—		—		—		4,208		—		4,208
Pension adjustment, net of taxes	—		—		—		—		119		119
Dividends paid	—		—		—		(4,074)		—		(4,074)
Balance, March 31, 2020	33,972	$	3,397	$	—	$	76,218	$	(2,629)	$	76,986
Stock issued for stock incentive plans, net	—		—		581		—		—		581
Stock purchased and retired	(3)		—		(581)		552		—		(29)
Net income	—		—		—		1,707		—		1,707
Pension adjustment, net of taxes	—		—		—		—		19		19
Dividends paid	—		—		—		(2,696)		—		(2,696)
Balance, June 30, 2020	33,969	$	3,397	$	—	$	75,781	$	(2,610)	$	76,568
Stock issued for stock incentive plans, net	(2)		(1)		1,501		—		—		1,500
Stock purchased and retired	(98)		(9)		(1,501)		79		—		(1,431)
Net income	—		—		—		6,535		—		6,535
Pension adjustment, net of taxes	—		—		—		—		19		19
Dividends paid	—		—		—		(2,716)		—		(2,716)
Balance, September 30 , 2020	33,869	$	3,387	$	—	$	79,679	$	(2,591)	$	80,475

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

(In thousands)

(Unaudited)


								Accumulated
				Capital in				Other
	Common Stock			Excess of		Retained		Comprehensive
	Shares	Amount		Par Value		Earnings		Income (Loss)		Total
Balance, December 31, 2018	34,328	$	3,433	$	—	$	73,954	$	(2,175)	$	75,212
Adoption of accounting standard (Note 2)	—		—		—		414		(414)		—
Stock issued for stock incentive plans, net	141		14		524		—		—		538
Stock purchased and retired	(344)		(34)		(524)		(4,338)		—		(4,896)
Net income	—		—		—		7,469		—		7,469
Pension adjustment, net of taxes	—		—		—		—		17		17
Unrealized gain on securities, net of taxes and reclassification adjustment	—		—		—		—		7		7
Dividends paid	—		—		—		(4,117)		—		(4,117)
Balance, March 31, 2019	34,125	$	3,413	$	—	$	73,382	$	(2,565)	$	74,230
Stock issued for stock incentive plans, net	(11)		(1)		545		—		—		544
Stock purchased and retired	(69)		(8)		(545)		(443)		—		(996)
Net income	—		—		—		9,373		—		9,373
Pension adjustment, net of taxes	—		—		—		—		17		17
Dividends paid	—		—		—		(4,092)		—		(4,092)
Balance, June 30, 2019	34,045	$	3,404	$	—	$	78,220	$	(2,548)	$	79,076
Stock issued for stock incentive plans, net	—		—		544		—		—		544
Stock purchased and retired	(85)		(8)		(544)		(719)		—		(1,271)
Net income	—		—		—		7,855		—		7,855
Pension adjustment, net of taxes	—		—		—		—		16		16
Dividends paid	—		—		—		(4,083)		—		(4,083)
Balance, September 30, 2019	33,960	$	3,396	$	—	$	81,273	$	(2,532)	$	82,137

The accompanying notes are an integral part of these consolidated statements.

Table of Contents

MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(In thousands)

(Unaudited)


	Nine months ended September 30,
	2020		2019
OPERATING ACTIVITIES
Net income	$	12,450	$	24,697
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,509		1,556
Accretion of discount related to marketable securities, net		—		(5)
Stock-based compensation expense		2,657		1,626
Gain on sale of assets		(30)		—
Deferred income tax benefit		(234)		(1,074)
(Increase) decrease in assets:
Accounts receivable		(1,910)		(11,292)
Inventories		(1,337)		1,757
Prepaid expenses and other current assets		173		254
Income taxes receivable		701		452
Other non-current assets		(788)		(918)
Increase (decrease) in liabilities:
Accounts payable		5,706		4,951
Income taxes payable		737		446
Accrued expenses and other liabilities		1,715		3,502
Other long-term liabilities		1,286		2,122
Net cash provided by operating activities		22,635		28,074

INVESTING ACTIVITIES
Capital expenditures		(1,458)		(2,013)
Proceed from sale of assets		34		—
Purchases of marketable securities		—		(299)
Sales of marketable securities		—		7,530
Maturities of marketable securities		—		448
Net cash (used for) provided by investing activities		(1,424)		5,666

FINANCING ACTIVITIES
Payment of dividends		(9,486)		(12,292)
Cash paid for common stock purchased and retired		(2,515)		(7,163)
Net cash used for financing activities		(12,001)		(19,455)

Net increase in cash and cash equivalents		9,210		14,285
Cash and cash equivalents at beginning of period		19,804		8,745
Cash and cash equivalents at end of period	$	29,014	$	23,030

Supplemental information:
Income tax payments, net	$	1,738	$	5,710

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (all of which consisted of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The consolidated balance sheet at December 31, 2019 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

At the end of the first quarter of 2020, the Company suspended manufacturing operations for five weeks in response to concerns related to the COVID-19 pandemic. We resumed production during the second quarter at a slightly higher production rate than our production rate during the first quarter of 2020, although production increases have been constrained by employment availability and supply chain restrictions caused by the pandemic. This operational suspension negatively impacted our net sales and profits during the second quarter of 2020. At the end of the third quarter of 2020, the Company’s order backlog was at its highest level in several years, and dealer inventories were significantly lower than in previous periods.

For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report of Marine Products Corporation ("Marine Products,” the "Company” or "MPC”) on Form 10-K for the year ended December 31, 2019.

A group that includes the Company’s Chairman of the Board, Gary W. Rollins, who is also a director of the Company, and certain companies under his control, controls in excess of fifty percent of the Company’s voting power.

2. RECENT ACCOUNTING STANDARDS

Recently Adopted Accounting Standards:

ASU No. 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The ASU introduced a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for recognition. The expected credit losses are adjusted each period for changes in expected lifetime. The Company adopted the provisions of the standard in the first quarter of 2020 and the adoption did not have a material impact on its consolidated financial statements.

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 Company adopted these provisions in the first quarter of 2020, on a prospective basis.

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

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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 Company adopted these provisions in the first quarter of 2020 and the adoption did not have a material impact on its consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted:

ASU No. 2019-12 — Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing the exceptions to the incremental approach for intra-period tax allocation in certain situations, requirement to recognize a deferred tax liability for a change in the status of a foreign investment, and the general methodology for computing income taxes in an interim period when year-to date loss exceeds the anticipated loss for the year. The amendments also simplify the accounting for income taxes with regard to franchise tax, evaluation of step up in the tax basis of goodwill in certain business combinations, allocating current and deferred tax expense to legal entities that are not subject to tax and enacted change in tax laws or rates. The amendments are effective beginning in the first quarter of 2021 and the Company is currently evaluating the impact of adopting these provisions on its consolidated financial statements.

3. 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 sales are 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 7). 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.

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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).

●

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):


	Three months ended				Nine months ended
(in thousands)	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Boats and accessories	$	67,127	$	70,927	$	165,001	$	240,296
Parts		1,651		1,285		3,714		3,665
Net sales	$	68,778	$	72,212	$	168,715	$	243,961

The following table disaggregates our revenues between domestic and international (in thousands):


	Three months ended				Nine months ended
(in thousands)	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Domestic	$	66,621	$	69,136	$	161,172	$	229,266
International		2,157		3,076		7,543		14,695
Net sales	$	68,778	$	72,212	$	168,715	$	243,961

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Timing of revenue recognition for each of the periods presented is shown below:


	Three months ended				Nine months ended
(in thousands)	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Products transferred at a point in time	$	68,778	$	72,212	$	168,715	$	243,961
Products transferred over time		—		—		—		—
Net sales	$	68,778	$	72,212	$	168,715	$	243,961

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.


	September 30,		December 31,		September 30,		December 31,
(in thousands)	2020		2019		2019		2018
Deferred revenue	$	1,119	$	295	$	320	$	496

Substantially all of the amounts of deferred revenue disclosed above were recognized as sales during the immediately following quarters, respectively, when control transferred.

4. 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. Restricted shares of common stock (participating securities) outstanding and a reconciliation of weighted average shares outstanding is as follows:


	Three months ended				Nine months ended
	September 30,				September 30,
(In thousands)	2020		2019		2020		2019
Net income available for stockholders:	$	6,535	$	7,855	$	12,450	$	24,697
Less: Adjustments for earnings attributable to participating securities		(139)		(187)		(273)		(594)
Net income used in calculating earnings per share	$	6,396	$	7,668	$	12,177	$	24,103

Weighted average shares outstanding (including participating securities)		33,928		34,001		33,946		34,111
Adjustment for participating securities		(715)		(817)		(752)		(837)
Shares used in calculating basic and diluted earnings per share		33,213		33,184		33,194		33,274

5. STOCK-BASED COMPENSATION

The Company reserved 3,000,000 shares of common stock under the 2014 Stock Incentive Plan with a term of ten years expiring in April 2024. 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 September 30, 2020, there were approximately 1,569,700 shares available for grant.

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Stock-based compensation for the three and nine months ended September 30, 2020 and 2019 were as follows:

Restricted Stock


	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2020		2019		2020		2019
Pre – tax cost	$	1,500	$	544	$	2,657	$	1,626
After tax cost	$	1,170	$	424	$	2,072	$	1,268

The following is a summary of the changes in non-vested restricted shares for the nine months ended September 30, 2020:


		Weighted
		Average
		Grant-Date
	Shares	Fair Value
Non-vested shares at December 31, 2019	815,540	$	11.29
Granted	179,000		4.59
Vested	(310,520)		9.36
Forfeited	(5,800)		9.50
Non-vested shares at September 30, 2020	678,220	$	10.43

The total fair value of shares vested was approximately $4,431,000 during the nine months ended September 30, 2020 and approximately $3,818,000 during the nine months ended September 30, 2019.

Other Information

As of September 30, 2020, total unrecognized compensation cost related to non-vested restricted shares was approximately $7,415,000. This cost is expected to be recognized over a weighted-average period of 3.3 years.

For the nine months ended September 30, 2020, approximately $345,000 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 $456,000 for the nine months ended September 30, 2019.

6. WARRANTY COSTS AND OTHER CONTINGENCIES

Warranty Costs:

For its Chaparral and Robalo products, Marine Products provides a lifetime limited structural hull warranty and a transferable one-year limited warranty to the original owner. Chaparral also includes a five-year limited structural deck warranty. Warranties for additional items are provided for periods of one to five years and are not transferrable. Additionally, as it relates to the second 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 manufacturers of the engines, generators, and navigation electronics included on our boats provide and administer their own warranties for various lengths of time.

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An analysis of the warranty accruals for the nine months ended September 30, 2020 and 2019 is as follows:


(in thousands)	2020		2019
Balance at beginning of period	$	5,410	$	5,607
Less: Payments made during the period		(2,045)		(3,134)
Add: Warranty provision for the period		2,150		3,135
Changes to warranty provision for prior periods		62		93
Balance at September 30	$	5,577	$	5,701

The warranty accruals are reflected in accrued expenses and other liabilities on the consolidated balance sheets.

Repurchase Obligations:

The Company is a party to various agreements with third party lenders that provide floor plan financing to qualifying dealers whereby the Company guarantees varying amounts of debt on boats in dealer inventory. The Company’s obligation under these guarantees becomes effective in the case of a default under the financing arrangement between the dealer and the third-party lender. The agreements 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 the lenders. The Company had no material repurchases during the nine months ended September 30, 2020 and repurchases of inventory for $3.4 million under contractual agreements during the third quarter of 2019.

Management continues to monitor the risk of defaults and resulting repurchase obligations based in part on information provided by 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 based on a specified percentage of the amount of the average net receivables financed by the floor plan lender for our dealers less repurchases during the prior 12 month period, which was a net $12.2 million as of September 30, 2020. The Company has contractual repurchase agreements with additional lenders with an aggregate maximum repurchase obligation of $1.9 million with various expiration and cancellation terms of less than one year, for an aggregate repurchase obligation with all floor plan financing institutions of $14.1 million as of September 30, 2020.

7. BUSINESS SEGMENT INFORMATION

The Company has only one reportable segment, its powerboat manufacturing business; therefore, the majority of segment-related disclosures are not relevant to the Company. In addition, the Company’s results of operations and its financial condition are not significantly reliant upon any single customer or product model.

8. INVENTORIES

Inventories consist of the following:


	September 30,		December 31,
(in thousands)	2020		2019
Raw materials and supplies	$	25,478	$	24,993
Work in process		10,734		7,731
Finished goods		6,678		8,829
Total inventories	$	42,890	$	41,553

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9. INCOME TAXES

The Company determines its periodic income tax provision based upon the current period income and the annual estimated tax rate for the Company adjusted for discrete items including tax credits and changes to prior year estimates. The estimated tax rate is revised, if necessary, as of the end of each successive interim period during the fiscal year to the Company’s current annual estimated tax rate.

Income tax provision for the third quarter of 2020 reflects an effective tax rate of 21.8 percent, compared to an effective rate of 19.8 percent for the comparable period in the prior year. For the nine months ended September 30, 2020, the effective tax rate was 19.0 percent compared to 18.2 percent for the comparable period in the prior year. The effective tax rates in 2020 and 2019 include the effect of beneficial permanent differences including discrete adjustments related to vesting of restricted stock and the associated dividends. The increase in the 2020 effective tax rate is primarily due to a detrimental provision to return discrete adjustment in the third quarter of 2020 compared to a beneficial discrete adjustment in the same period of 2019.

The Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted into law on March 27, 2020, has been evaluated in the Company's tax provision and there is no impact to the tax provision at this time. The impact of the CARES Act will continue to be evaluated throughout 2020.

10. EMPLOYEE BENEFIT PLANS

The Company participates in a multiple employer pension plan. The following represents the net periodic cost (benefit) and related components for the plan for the three and nine months ended September 30, 2020 and 2019.


	Three months ended				Nine months ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Interest cost	$	58	$	64	$	174	$	192
Expected return on plan assets		(73)		(117)		(219)		(352)
Amortization of net losses		24		22		72		66
Net periodic cost (benefit)	$	9	$	(31)	$	27	$	(94)

The Company made a contribution of $550,000 to this plan during the nine months ended September 30, 2020; and no contributions were made during the nine months ended September 30, 2019.

In October 2020, the Company amended its retirement income plan to add a limited lump-sum payment window for vested terminated participants who had terminated employment before July 1, 2020 and for active employees who will have reached age 59 ½ by December 1, 2020, with a vested balance. The participants could elect to receive their vested balance immediately as a lump-sum or a monthly annuity payment. The lump-sum payment window offering is scheduled to end during the fourth quarter of 2020. Plan assets will be utilized to fund the participants’ election and is expected to trigger settlement accounting, which will be recognized when the distributions are made in December 2020. The settlement charges represent the accelerated recognition of actuarial losses held in accumulated other comprehensive income.

The Company permits selected highly compensated employees to defer a portion of their compensation into a non-qualified Supplemental Executive Retirement Plan ("SERP”). The Company maintains certain securities in the SERP that have been classified as trading and are stated at fair value totaling approximately $6,979,000 as of September 30, 2020 and $6,716,000 as of December 31, 2019. The SERP assets are reported in other non-current assets on the consolidated balance sheets and changes to the fair value of the assets are reported in selling, general and administrative expenses in the consolidated statements of operations.

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Trading losses related to the SERP assets totaled approximately $263,000 during the nine months ended September 30, 2020, compared to trading gains of approximately $738,000 during the nine months ended September 30, 2019. The SERP liability includes participant deferrals net of distributions and is recorded on the consolidated balance sheets in long-term pension liabilities with any change in the fair value of the liabilities recorded as compensation cost within selling, general and administrative expenses in the consolidated statements of operations.

11. 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:

Level 1 – Quoted market prices in active markets for identical assets or liabilities.

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.

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 September 30, 2020 and December 31, 2019:

Fair Value Measurements at September 30, 2020 with:

Quoted prices in

Significant

active markets

other

Significant

for

observable

unobservable

(in thousands)

Total

identical assets

inputs

(Level 1)

(Level 2)

(Level 3)

Assets:

Investments measured at Net Asset Value - Trading securities

6,979

—

Fair Value Measurements at December 31, 2019 with:

Quoted prices in

Significant

active markets

other

Significant

for

observable

unobservable

(in thousands)

Total

identical assets

inputs

(Level 1)

(Level 2)

(Level 3)

Assets:

Investments measured at Net Asset Value - Trading securities

6,716

—

The trading securities are comprised of SERP assets, as described in Note 10, 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 or investment company. The carrying amount of other financial instruments reported in the consolidated balance sheets for current assets and current liabilities approximate their fair values because of the short-term nature of these instruments.

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12. ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive loss consists of the following:


		Unrealized
	Pension	Loss On
(in thousands)	Adjustment	Securities	Total