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EMPLOYEE BENEFIT PLANS

12 Months Ended

Dec. 31, 2017

NOTE 10: EMPLOYEE BENEFIT PLANS

Supplemental Executive Retirement Plan (“SERP”) - The Company permits selected highly compensated employees to defer a portion of their compensation into the SERP. The SERP assets are invested primarily in company-owned life insurance (“COLI”) policies as a funding source to satisfy the obligation of the SERP. The assets are subject to claims by creditors, and the Company can designate them to another purpose at any time. Investments in COLI policies consist of variable life insurance policies of $6.6 million as of December 31, 2017 and $6.0 million as of December 31, 2016. In the COLI policies, the Company is able to allocate assets across a set of choices provided by the insurance underwriter, including fixed income securities and equity funds. The COLI policies are recorded at their net cash surrender values, which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s credit rating was A+.

The Company classifies the SERP assets as trading securities as described in Note 1. The fair value of these assets totaled $6,031,000 as of December 31, 2017 and $5,547,000 as of December 31, 2016. 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 $470,000 in 2017, $106,000 in 2016 and $(84,000) in 2015. The SERP liabilities are recorded on the balance sheet in pension liabilities with any change in the fair value of the SERP liabilities recorded as selling, general and administrative expenses in the consolidated statements of operations.

In connection with death of an executive officer during 2016, the Company recorded tax free gains of approximately $751 thousand comprised of the following: $556 thousand generated by the insurance death proceeds under a Company-owned life insurance contract of approximately $1.9 million less cash surrender value of approximately $1.4 million, and $195 thousand as a result of insurance death benefits from a key-man life insurance policy. The net gain is reflected as part of selling, general and administrative expenses in 2016.

Retirement Income Plan — Marine Products participates in the tax-qualified, defined benefit, noncontributory, trusteed retirement income plan sponsored by RPC, Inc. (“RPC”) that covers substantially all employees with at least one year of service prior to 2002.

The Company’s fair value of the plan assets exceeded the projected benefit obligation for its Retirement Income Plan by $343,000 and thus the plan was over-funded as of December 31, 2017.

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,	2017			2016
(in thousands)
ACCUMULATED BENEFIT OBLIGATION, END OF YEAR	$	6,379		$	6,083

CHANGE IN PROJECTED BENEFIT OBLIGATION:
Benefit obligation at beginning of year	$	6,083		$	5,703
Service cost		—			—
Interest cost		266			274
Actuarial loss		273			342
Benefits paid		(243	)		(236	)
Projected benefit obligation at end of year	$	6,379		$	6,083
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year	$	6,032		$	5,813
Actual return on plan assets		933			275
Employer contributions		—			180
Benefits paid		(243	)		(236	)
Fair value of plan assets at end of year	$	6,722		$	6,032
Funded status at end of year	$	343		$	(51	)

December 31,	2017		2016
(in thousands)
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF:
Noncurrent assets	$	343	$	—
Current liabilities		—		—
Noncurrent liabilities		—		(51	)
	$	343	$	(51	)

The funded status of the Retirement Income Plan was recorded in the consolidated balance sheets in pension liabilities as of December 31, 2017 and in other assets as of December 31, 2016.

December 31,	2017		2016
(in thousands)
AMOUNTS (PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE LOSS CONSIST OF:
Net loss	$	2,997	$	3,335
Prior service cost (credit)		—		—
Net transition obligation (asset)		—		—
	$	2,997	$	3,335

The accumulated benefit obligation for the Retirement Income Plan as of December 31, 2017 and 2016 has been disclosed above. The Company uses a December 31 measurement date for this qualified plan.

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

December 31,	2017			2016
(in thousands)
SERP liability	$	(6,732	)	$	(5,563	)
Funded status of Retirement Income Plan		—			(51	)
Pension liabilities	$	(6,732	)	$	(5,614	)

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 were no contributions to the plan during 2017. Contributions to the plan totaled $180,000 during 2016.

The components of net periodic benefit cost of the Retirement Income Plan are summarized as follows:

Years ended December 31,	2017			2016			2015
(in thousands)
Service cost for benefits earned during the period	$	—		$	—		$	—
Interest cost on projected benefit obligation		266			274			259
Expected return on plan assets		(415	)		(406	)		(421	)
Amortization of net loss		91			84			76
	$	(58	)	$	(48	)	$	(86	)

The Company recognized a pre-tax increase to the funded status in accumulated other comprehensive income of $334,000 in 2017 compared to a pre-tax decrease of $390,000 in 2016 and a pre-tax increase of $195,000 in 2015. There were no previously unrecognized prior service costs during 2017, 2016 and 2015. The pre-tax amounts recognized in other comprehensive income for the years ended December 31, 2017, 2016 and 2015 are summarized as follows:

(in thousands)	2017			2016			2015
Net loss (gain)	$	(242	)	$	474		$	(119	)
Amortization of net loss		(91	)		(84	)		(76	)
Net transition obligation (asset)		—			—			—
Amount recognized in accumulated other comprehensive income	$	(334	)	$	390		$	(195	)

The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost in 2018 are as follows:

(in thousands)	2018
Amortization of net loss	$	81
Prior service cost (credit)		—
Net transition obligation (asset)		—
Estimated net periodic cost	$	81

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

December 31,	2017			2016			2015
PROJECTED BENEFIT OBLIGATION:
Discount rate		4.05	%		4.50	%		4.75	%
Rate of compensation increase		N/A			N/A			N/A
NET BENEFIT COST:
Discount rate		4.50	%		4.75	%		4.25	%
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, 2017 and 2016 by asset category along with the target allocation for 2018 are as follows:

Asset Category	Target Allocation for 2018			Percentage of Plan Assets as of December 31, 2017			Percentage of Plan Assets as of December 31, 2016
Cash and Cash Equivalents		0% - 3%			2.9	%		3.3	%
Domestic Equity Securities		0% - 40%			42.3			25.5
International Equity Securities		0% - 20%			20.7			20.8
Fixed Income Securities		15% - 25%			23.8			25.3
Investments measured at net asset value		0% - 12%			10.3			25.1
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 small-cap companies domiciled domestically and internationally. Fixed-income securities include corporate bonds, mortgage-backed securities, sovereign bonds, and U.S. Treasuries. Other types of investments include real estate 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 plan utilizes a number of investment approaches, including but not limited to individual market securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds to achieve this target allocation. Company management expects to make a contribution to the pension plan of approximately $100,000 during fiscal year 2018.

Some of our assets, primarily our private equity and real estate funds, do not have readily determinable market values given the specific investment structures involved and the nature of the underlying investments. For plan asset reporting as of December 31, 2017, publicly traded asset pricing was used where possible. For assets without readily determinable values, estimates were derived from investment manager statements combined with discussions focusing on underlying fundamentals and significant events. Additionally, these investments are valued based on the net asset value per share calculated by the funds in which the plan has invested and the valuation is based on significant non-observable inputs which do not have a readily determinable fair value. These assets have been excluded from the fair value hierarchy applied retrospectively based on the accounting guidance recently adopted. The valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements for reasonableness.

The following tables present our plan assets using the fair value hierarchy as of December 31, 2017 and 2016. 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, 2017:

Investments (in thousands)			Total		Level 1		Level 2
Cash and Cash Equivalents	(1	)	$	192	$	192	$	—
Fixed Income Securities	(2	)		1,601		—		1,601
Domestic Equity Securities	(3	)		2,844		1,047		1,797
International Equity Securities	(4	)		1,394		—		1,394
Total Assets in the Fair Value Hierarchy			$	6,031	$	1,239	$	4,792
Investments measured at Net Asset Value				691
Investments at Fair Value			$	6,722

Fair Value Hierarchy as of December 31, 2016:

Investments (in thousands)			Total		Level 1		Level 2
Cash and Cash Equivalents	(1	)	$	200	$	200	$	—
Fixed Income Securities	(2	)		1,529		—		1,529
Domestic Equity Securities	(3	)		1,539		775		764
International Equity Securities	(4	)		1,252		—		1,252
Total Assets in the Fair Value Hierarchy			$	4,520	$	975	$	3,545
Investments measured at Net Asset Value				1,512
Investments at Fair Value			$	6,032

(1)

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

(2)

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

(3)

Domestic equity securities are valued using a market approach based on the quoted market prices of identical instruments in their respective markets.

(4)

International equity securities are valued using a market approach based on the quoted market prices of identical instruments in their respective markets.

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

(in thousands)
2018	$	297
2019		303
2020		293
2021		298
2022		295
2023-2027	$	1,657

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 $317,000 in 2017, $270,000 in 2016 and $250,000 in 2015.

Stock Incentive Plan— 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. All future equity compensation awards by the Company will be issued under the 2014 plan. This plan provides for the issuance of various forms of stock incentives, including among others, incentive and non-qualified stock options and restricted shares. As of December 31, 2017, there were approximately 2,062,600 shares available for grant.

The Company recognizes compensation expense for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these awards will be based on their fair value at grant date less the cost of estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. 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 $2,682,000 ($1,729,000 after tax) for 2017, $2,624,000 ($1,692,000 after tax) for 2016 and $1,993,000 ($1,285,000 after tax) for 2015.

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

The Company estimates the fair value of stock options as of the date of grant using the Black-Scholes option pricing model. The Company has not granted stock options to employees since 2004.

There were no options exercised in 2017 and there have been no stock options outstanding since December 31, 2014. There was no tax benefit associated with the exercise of non-qualified stock options during 2017, 2016 or 2015.

Restricted Stock— Marine Products grants selected employees time lapse restricted stock that vest after a certain stipulated number of years from the grant date, depending on the terms of the issue. The Company has currently issued time lapse restricted shares that vest in 20 percent increments starting with the second anniversary of the grant, over the six year period beginning on the date of grant. During these years, grantees receive all dividends declared and retain voting rights for the shares.

The agreements under which the restricted stock is issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans have lapsed. Upon termination of employment from the Company, with the exception of death (fully vests), disability or retirement (partially vests based on duration of service), shares with restrictions are forfeited in accordance with the plan.

The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2017:

	Shares			Weighted Average Grant-Date Fair Value
Non-vested shares at January 1, 2017		1,200,900		$	6.58
Granted		202,400			13.39
Vested		(344,250	)		6.92
Forfeited		(18,250	)		8.47
Non-vested shares at December 31, 2017		1,040,800		$	7.76

The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2016:

	Shares			Weighted Average Grant-Date Fair Value
Non-vested shares at January 1, 2016		1,254,200		$	6.80
Granted		371,950			5.77
Vested		(422,533	)		6.52
Forfeited		(2,717	)		6.21
Non-vested shares at December 31, 2016		1,200,900		$	6.58

The fair value of restricted stock awards is based on the market price of the Company’s stock on the date of grant and is amortized to compensation expense on a straight line basis over the requisite service period. The weighted average grant date fair value of these restricted stock awards was $13.39 in 2017, $5.77 in 2016 and $7.08 in 2015. The total fair value of shares vested was approximately $4,432,032 in 2017, $2,686,000 in 2016 and $2,254,000 during 2015.

Pursuant to the adoption of ASU 2016-09 in 2017, the excess tax benefits realized from tax compensation deductions in excess of compensation expense have been reflected as follows:

•

Approximately $718,000 during 2017 has been recorded as a discrete tax adjustment and classified within operating activities as part of net income in the consolidated statements of cash flows; and

•

Approximately $160,000 during 2016 were credited to capital in excess of par value and classified within financing activities as an inflow in addition to being disclosed as an outflow within operating activities in the consolidated statements of cash flows.

Other Information— As of December 31, 2017 total unrecognized compensation cost related to non-vested restricted shares was approximately $6,458,000 which is expected to be recognized over a weighted-average period of 3.2 years.