NOTE 10: EMPLOYEE BENEFIT PLANS

Retirement Income Plan — Marine Products participates in the tax-qualified, defined benefit, noncontributory, trusteed retirement income plan sponsored by RPC that covers substantially all employees with at least one year of service prior to 2002. The Company’s Board of Directors approved a resolution to cease all future retirement benefit accruals under the Retirement Income Plan effective March 31, 2002. In lieu thereof, the Company began providing enhanced benefits in the form of cash contributions for certain longer serviced employees that had not reached the normal retirement age of 65 as of March 31, 2002. These discretionary contributions were made over a seven year period which ended in 2008 to either the non-qualified SERP established by the Company or to the 401(k) plan for each employee that is entitled to the enhanced benefit. The expenses related to the enhanced benefits were $94,000 in 2008.

The Company permits selected highly compensated employees to defer a portion of their compensation into the SERP. The SERP assets are invested primarily in company-owned life insurance (“COLI”) policies as a funding source for the deferred compensation obligations in the SERP. The assets are subject to claims by creditors, and the Company can designate them to another purpose at any time. Investments in COLI policies consist of variable life insurance policies of $7.2 million as of December 31, 2011 and $10.8 million as of December 31, 2010. In the COLI policies, the Company is able to allocate investment of the assets across a set of choices provided by the insurance company, including fixed income securities and equity funds. The COLI policies are recorded at their net cash surrender values, which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s credit rating was A+. During 2011, as a result of COLI policy claims, the Company received $3.7 million in proceeds and recorded a tax-free gain of $2.0 million; this gain is reflected in Other Income.

The Company classifies the SERP assets as trading securities as described in Note 1. The SERP assets are marked to market and totaled $6,510,000 as of December 31, 2011 and $4,445,000 as of December 31, 2010. The SERP assets are reported in other assets on the consolidated balance sheets and changes related to the fair value of the assets are included in selling, general and administrative expenses in the consolidated statements of operations. Trading gains (losses) related to the SERP assets totaled $(38,000) in 2011, $(5,000) in 2010 and $598,000 in 2009. The SERP deferrals and the contributions are recorded on the balance sheet in pension liabilities with any change in the fair value of the SERP liabilities are recorded as selling, general and administrative expenses in the consolidated statements of operations.

The Company’s projected benefit obligation exceeded the fair value of the plan assets for its Retirement Income Plan by $978,000 and thus the plan was under-funded as of December 31, 2011. The following table sets forth the funded status of the Retirement Income Plan and the amounts recognized in Marine Products’ consolidated balance sheets:


December 31,	2011			2010
(in thousands)
ACCUMULATED BENEFIT OBLIGATION, END OF YEAR	$	5,292		$	4,987

CHANGE IN PROJECTED BENEFIT OBLIGATION:
Benefit obligation at beginning of year	$	4,986		$	4,746
Service cost		—			—
Interest cost		267			266
Actuarial (gain) loss		266			200
Benefits paid		(228	)		(225	)
Projected benefit obligation at end of year	$	5,291		$	4,987
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year	$	4,672		$	4,365
Actual return on plan assets		(231	)		446
Employer contributions		100			86
Benefits paid		(228	)		(225	)
Fair value of plan assets at end of year	$	4,313		$	4,672
Funded status at end of year	$	(978	)	$	(315	)

December 31,		2011			2010
(in thousands)
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF:
Noncurrent assets	$	—		$	—
Current liabilities		—			—
Noncurrent liabilities		(978	)		(315	)
	$	(978	)	$	(315	)

The funded status of the Retirement Income Plan was recorded in the consolidated balance sheets in long-term pension liabilities as of December 31, 2011 and 2010.


December 31,	2011		2010
(in thousands)
AMOUNTS (PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CONSIST OF:
Net loss (gain)	$	2,585	$	1,803
Prior service cost (credit)		—		—
Net transition obligation (asset)		—		—
	$	2,585	$	1,803

The accumulated benefit obligation for the Retirement Income Plan at December 31, 2011 and 2010 has been disclosed above. The Company uses a December 31 measurement date for this qualified plan.

Amounts recorded in the consolidated balance sheet under pension liabilities consist of:


December 31,	2011			2010
(in thousands)
SERP employer contributions/employee deferrals	$	(5,337	)	$	(5,266	)
Long-term pension liability		(978	)		(315	)
	$	(6,315	)	$	(5,581	)

Marine Products’ funding policy is to contribute to the Retirement Income Plan the amount required, if any, under the Employee Retirement Income Security Act of 1974. There was a contribution of $100,000 made to this plan during 2011 and an $86,000 contribution made during 2010.

The components of net periodic benefit cost are summarized as follows:


Years ended December 31,	2011			2010			2009
(in thousands)
Service cost for benefits earned during the period	$	—		$	—		$	—
Interest cost on projected benefit obligation		267			266			282
Expected return on plan assets		(324	)		(302	)		(265	)
Amortization of net (gain) loss		38			34			235
	$	(19	)	$	(2	)	$	252

The Company recognized pre-tax decreases (increases) to the funded status in comprehensive income of $782,000 in 2011, $22,000 in 2010 and $(632,000) in 2009. There were no previously unrecognized prior service costs during 2011, 2010 and 2009. The pre-tax amounts recognized in comprehensive income for the years ended December 31, 2011, 2010 and 2009 are summarized as follows:


(in thousands)	2011			2010			2009
Net loss (gain)	$	820		$	56		$	(397	)
Amortization of net (loss) gain		(38	)		(34	)		(235	)
Net transition obligation (asset)		—			—			—
Amount recognized in other comprehensive income	$	782		$	22		$	(632	)

The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost in 2012 are as follows:


(in thousands)	2012
Amortization of net loss (gain)	$	67
Prior service cost (credit)		—
Net transition obligation (asset)		—
Estimated net periodic cost	$	67

The weighted average assumptions as of December 31 used to determine the projected benefit obligation and net benefit cost were as follows:


December 31,	2011			2010			2009
PROJECTED BENEFIT OBLIGATION:
Discount rate		5.09	%		5.58	%		6.05	%
Rate of compensation increase		N/A			N/A			N/A
NET BENEFIT COST:
Discount rate		5.58	%		6.05	%		6.43	%
Expected return on plan assets		7.00	%		7.00	%		7.00	%
Rate of compensation increase		N/A			N/A			N/A

The Company’s expected return on assets assumption is derived from a detailed periodic assessment by its management and investment advisor. It includes a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation strategy given the anticipated requirements of the plan to determine the average rate of earnings expected on the funds invested to provide for the pension plan benefits. While the assessment gives appropriate consideration to recent fund performance and historical returns, the rate of return assumption is derived primarily from a long-term, prospective view. Based on its recent assessment, the Company has concluded that its expected long-term return assumption of seven percent is reasonable.

The plan’s weighted average asset allocation at December 31, 2011 and 2010 by asset category along with the target allocation for 2012 are as follows:


Asset Category	Target Allocation for 2012		Percentage of Plan Assets as of December 31, 2011		Percentage of Plan Assets as of December 31, 2010
Cash and Cash Equivalents		0% - 5%	0.7	%	0	%
Debt Securities – Core Fixed Income		15% - 50%	23.2		26.0
Tactical – Fund of Equity and Debt Securities		10% - 20%	16.3		10.0
Domestic Equity Securities		20% - 40%	15.2		26.0
Global Equity Securities		10% - 20%	14.8		4.0
International Equity Securities		10% - 20%	14.6		14.0
Real Estate		0% - 10%	5.6		5.0
Real Return		0% - 10%	9.6		6.0
Other		0% - 5%	0.0		9.0
Total		100.0%	100.0	%	100.0	%

The Company’s overall investment strategy is to achieve a mix of approximately 70 percent of investments for long-term growth and 30 percent for near-term benefit payments, with a wide diversification of asset types, fund strategies and fund managers. Equity securities primarily include investments in large-cap and mid-cap companies. Fixed-income securities include corporate bonds of companies in diversified securities, mortgage-backed securities, and U.S. Treasuries. Other types of investments include hedge funds and private equity funds that follow several different investment strategies. For each of the asset categories in the pension plan, the investment strategy is identical – maximize the long-term rate of return on plan assets with an acceptable level of risk in order to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset class which is rebalanced as required. The plans utilize a number of investment approaches, including individual market securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds to achieve this target allocation. The Company and management are considering making a contribution to the pension plans of approximately $100,000 during fiscal year 2012.

Some of our assets, primarily our private equity, real estate and hedge funds, do not have readily determinable market values given the specific investment structures involved and the nature of the underlying investments. For the December 31, 2011 plan asset reporting, publicly traded asset pricing was used where possible. For assets without readily determinable values, estimates were derived from investment manager discussions focusing on underlying fundamentals and significant events.

Included among the asset categories for the Plans’ investments are real estate and other investments comprised of investments in real estate and hedge funds. These investments are categorized as level 3 investments and are valued using significant non-observable inputs which do not have a readily determinable fair value. In accordance with ASU No. 2009-12 “Investments In Certain Entities That Calculate Net Asset Value per Share (Or Its Equivalent),” these investments are valued based on the net asset value per share calculated by the funds in which the plan has invested. These valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate against these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements for reasonableness.

The following tables present our plan assets using the fair value hierarchy as of December 31, 2011 and 2010. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. See Note 8 for a brief description of the three levels under the fair value hierarchy.

Fair Value Hierarchy as of December 31, 2011:
Investments (in thousands)			Total		Level 1		Level 2		Level 3
Cash and Cash Equivalents	(1	)	$	32	$	32	$	—	$	—
Fixed Income Securities	(2	)		1,000		—		1,000		—
Domestic Equity Securities				656		656		—		—
Global Equity Securities	(3	)		636		636		—		—
International Equity Securities	(3	)		631		298		333		—
Real Estate	(4	)		241		—		—		241
Real Return	(6	)		415		—		415		—
Tactical Composite	(7	)		702		—		702		—
			$	4,313	$	1,622	$	2,450	$	241

Fair Value Hierarchy as of December 31, 2010:
Investments (in thousands)			Total		Level 1		Level 2		Level 3
Cash and Cash Equivalents	(1	)	$	367	$	367	$	—	$	—
Fixed Income Securities	(2	)		1,222		—		1,222		—
Domestic Equity Securities				1,236		1,236		—		—
Global Equity Securities	(3	)		203		—		203		—
International Equity Securities	(3	)		647		288		359		—
Real Estate	(4	)		213		—		—		213
Alternative Investments	(5	)		49		—		—		49
Real Return	(6	)		263		—		263		—
Tactical Composite	(7	)		473		—		473		—
			$	4,673	$	1,891	$	2,520	$	262

(1)	Cash and cash equivalents, which are used to pay benefits and plan administrative expenses, are held in Rule 2a-7 money market funds.

(2)	Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades.

(3)	Global equity securities and certain international securities are valued using a market approach based on the quoted market prices of similar instruments in their respective markets.

(4)	Real estate fund values are primarily reported by the fund manager and are based on valuation of the underlying investments, which include inputs such as cost, discounted future cash flows, independent appraisals and market based comparable data.

(5)

Alternative investments are hedge funds that consist of fund-of-fund LLC or commingled fund structures. The LLCs are primarily valued based on Net Asset Values [NAVs] calculated by the fund and are not publicly available. The commingled fund NAV is calculated by the manager on a daily basis and has monthly liquidity. The Company is in the process of liquidating the Plans’ hedge funds.

(6)

Real return funds invest in global equities, commodities and inflation protected core bonds that are valued primarily using a market approach based on the quoted market prices of identical instruments in their respective markets.

(7)

Tactical composite funds invest in stocks, bonds and cash, both domestic and international. These assets are valued primarily using a market approach based on the quoted market prices of identical instruments in their respective markets.

The following table presents a reconciliation of Level 3 assets held during the year ended December 31, 2011:

Investments	Balance at December 31, 2010		Net Realized and Unrealized Gains/(Losses)		Net Purchases, Issuances and Settlements			Net Transfers In to (Out of) Level 3		Balance at December 31, 2011
(in thousands)
Real Estate	$	213	$	25	$	—		$	—	$	238
Alternative Investments		49		—		(49	)		—		0
	$	262	$	25	$	(49	)	$	—	$	238

The following table presents a reconciliation of Level 3 assets held during the year ended December 31, 2010:


Investments	Balance at December 31, 2009		Net Realized and Unrealized Gains/(Losses)			Net Purchases, Issuances and Settlements			Net Transfers In to (Out of) Level 3			Balance at December 31, 2010
(in thousands)
Real Estate	$	182	$	31		$	—		$	—		$	213
Alternative Investments		763		(39	)		(373	)		(303	)		49

	$	945	$	(8	)	$	(373	)	$	(303	)	$	262

The Company expects to contribute approximately $100,000 to the Retirement Income Plan in 2012.

The Company estimates that the future benefits payable for the Retirement Income Plan over the next ten years are as follows:


(in thousands)
2012	$	238
2013		256
2014		259
2015		274
2016		283
2017-2021		1,371

401(k) Plan— Marine Products participates in a defined contribution 401(k) plan sponsored by RPC that is available to substantially all full-time employees with more than 90 days of service. This plan allows employees to make tax-deferred contributions of up to 25 percent of their annual compensation, not exceeding the permissible deduction imposed by the Internal Revenue Code. The Company matches 50 percent of each employee’s contributions that do not exceed six percent of the employee’s compensation, as defined by the 401(k) plan. Employees vest in the Company’s contributions after three years of service. The charges to expense for Marine Products’ contributions to the 401(k) plan were approximately $130,000 in 2011, $114,000 in 2010 and $101,000 in 2009.

Stock Incentive Plan— The Company has granted various awards to employees under two stock incentive plans (the “Plans”) that were approved by the stockholders in 2001 and 2004. The Company reserved a total of 5,250,000 shares of common stock under both Plans, each of which expires 10 years from approval. The Plans provide for the issuance of various forms of stock incentives, including, among others, incentive and non-qualified stock options and restricted stock. As of December 31, 2011, shares totaling 973,000 were available for grants. The Company issues new shares from its authorized but unissued share pool.

The Company recognizes compensation expense for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these awards will be based on their fair value at grant date less the cost of estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. Cash flows related to share-based awards to employees that result in tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) are classified as financing cash flows.

Pre-tax stock-based employee compensation expense was approximately $1,296,000 ($836,000 after tax) for 2011, $1,542,000 ($995,000 after tax) for 2010 and $1,645,000 ($1,071,000 after tax) for 2009.

Stock Options— Stock options are granted at an exercise price equal to the fair market value of the Company’s common stock at the date of grant except for grants of incentive stock options to owners of greater than 10 percent of the Company’s voting securities which must be made at 110 percent of the fair market value of the Company’s common stock. Options generally vest ratably over a period of five years and expire in 10 years, except to owners of greater than 10 percent of the Company’s voting securities, which expire in five years.

The Company estimates the fair value of stock options as of the date of grant using the Black-Scholes option pricing model. The Company has not granted stock options to employees since 2004. Transactions involving the Marine Products stock options for the year ended December 31, 2011 were as follows:


	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at January 1, 2011	668,785		$	3.71	1.4 years
Granted	—			—	N/A
Exercised	(104,050	)		1.72	N/A
Forfeited	—			—	N/A
Expired	—			—	N/A
Outstanding and exercisable at December 31, 2011	564,735		$	4.08	0.6 years	$	497,000

The total intrinsic value of share options exercised was approximately $602,000 in 2011, $32,000 in 2010 and $994,000 in 2009. There were no tax benefits associated with the exercise of stock options during 2011, because all of the options exercised were incentive stock options which do not generate tax deductions for the Company. There were no tax benefits associated with the exercise of non-qualified stock options during 2011 and 2010. Tax benefits associated with the exercise of non-qualified stock options were $256,000 during 2009.

Restricted Stock— Marine Products has granted employees two forms of restricted stock; time lapse restricted and performance restricted. Time lapse restricted shares vest after a certain stipulated number of years from the grant date, depending on the terms of the issue. Prior to 2004, the Company issued time lapse restricted shares that vest over ten years. Beginning in 2004, the Company issued time lapse restricted shares that vest in 20 percent increments starting with the second anniversary of the grant, over the six year period beginning on the date of grant. During these years, grantees receive all dividends declared and retain voting rights for the shares. The performance restricted shares are granted, but not earned and issued, until certain five-year tiered performance criteria are met. The performance criteria are predetermined market prices of Marine Products’ common stock. On the date the common stock appreciates to each level (determination date), 20 percent of performance shares are earned. Once earned, the performance shares vest five years from the determination date. After the determination date, the grantee will receive all dividends declared and also voting rights to the shares.

The agreements under which the restricted stock is issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans have lapsed. Upon termination of employment from the Company (other than due to death, disability or retirement on or after age 65), shares with restrictions must be returned to the Company.

The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2011:


	Shares			Weighted Average Grant-Date Fair Value
Non-vested shares at January 1, 2011		876,800		$	6.16
Granted		311,000			7.33
Vested		(180,000	)		8.21
Forfeited		(36,800	)		6.03
Non-vested shares at December 31, 2011		971,000		$	6.16

The fair value of restricted stock awards is based on the market price of the Company’s stock on the date of grant and is amortized to compensation expense on a straight line basis over the requisite service period. The weighted average grant date fair value of these restricted stock awards was $7.33 in 2011, $5.16 in 2010 and $4.26 in 2009. The total fair value of shares vested was approximately $1,312,000 in 2011, $814,000 in 2010 and $666,000 during 2009. Tax benefits for compensation tax deductions in excess of compensation expense related to restricted shares credited to capital in excess of par value was approximately $77,000 in 2011, $0 in 2010 and $197,000 in 2009. The excess tax deductions are classified as financing cash flows in the accompanying statements of cashflows.

Other Information— As of December 31, 2011 total unrecognized compensation cost related to non-vested restricted shares was approximately $5,034,000 which is expected to be recognized over a weighted-average period of 2.1 years.

The Company received cash from options exercised of $54,000 in 2011, $45,000 in 2010 and $24,000 in 2009. These cash receipts are classified as financing cash flows in the accompanying consolidated statements of cash flows. The fair value of shares tendered to exercise employee stock options totaled approximately $125,000 in 2011 and $157,000 in 2009 and have been excluded from the consolidated statements of cash flows. There were no shares tendered to exercise employee stock options in 2010.