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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: March 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to _____________
Commission file number: 0-18434
REINHOLD INDUSTRIES, INC.
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(Exact name of small business issuer as specified in charter)
Delaware 13-2596288
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12827 East Imperial Hwy, Santa Fe Springs, CA 90670
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (562) 944-3281
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ X ] NO [ ]
Check whether the issuer has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to distribution of securities under a plan confirmed by the Court.
YES [ X ] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class A Common Stock, Par Value $.01 - 2,662,817 shares as of May 12, 2003.
REINHOLD INDUSTRIES, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1.
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3.
Quantitative and Qualitative Disclosures About Market Risk 20
Item 4.
Controls and Procedures 20
PART II - OTHER INFORMATION 21
SIGNATURES 24
EXHIBITS 25
REINHOLD INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
2003 2002
----- -----
Net sales $16,375 $ 13,930
Cost of goods sold 11,185 9,828
------ -----
Gross profit 5,190 4,102
Selling, general and administrative expenses 2,759 2,658
------ ------
Operating income 2,431 1,444
Interest expense, net 34 115
------- ------
Income before income taxes 2,397 1,329
Income taxes 873 505
------ -------
Net income $ 1,524 $ 824
====== =======
Basic earnings per share $ 0.57 $ 0.31
Diluted earnings per share $ 0.55 $ 0.31
Weighted average common shares outstanding - basic 2,660 2,658
Weighted average common shares outstanding - diluted 2,743 2,658
See accompanying notes to condensed consolidated financial statements
REINHOLD INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
(Unaudited)
March 31, December 31,
2003 2002
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,775 $ 3,037
Accounts receivable 7,986 9,977
Inventories 7,401 5,938
Other current assets 2,188 2,479
------- -------
Total current assets 22,350 21,431
Property, plant and equipment, net 11,167 11,307
Goodwill 3,786 3,786
Other assets 203 210
------- --------
$ 37,506 $ 36,734
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit $ 2,000 $ 3,000
Accounts payable 4,251 4,127
Accrued expenses 3,523 3,660
Current portion - long term debt 149 149
------- --------
Total current liabilities 9,923 10,936
Long-term pension liability 5,596 5,596
Long term debt - less current portion 87 124
Other long term liabilities 307 276
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Authorized: 250,000 shares
Issued and outstanding: None - -
Common stock, $0.01 par value:
Class A - Authorized: 4,750,000 shares
Issued and outstanding: 2,662,817 and
2,659,812 shares, respectively 27 27
Additional paid-in capital 21,582 21,213
Retained earnings 6,397 4,873
Accumulated other comprehensive loss (6,413) (6,311)
-------- --------
Net stockholders' equity 21,593 19,802
------ -------
$ 37,506 $ 36,734
====== ======
See accompanying notes to condensed consolidated financial statements
REINHOLD INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Three Months Ended
March 31,
2003 2002
---- ----
Cash flow from operating activities:
Net income $ 1,524 $ 824
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 428 337
Additions to paid-in capital resulting
from tax benefits 343 334
Non-cash compensation 18 -
Changes in assets and liabilities:
Accounts receivable 1,991 (1,263)
Inventories (1,463) 68
Other current assets 291 92
Accounts payable 124 945
Accrued expenses (137) 501
Other, net 38 (5)
-------- -------
Net cash provided by operating activities 3,157 1,833
Cash flows used in investing activities:
Capital expenditures (288) (389)
Proceeds from sale of assets - 105
------- ---
Net cash used in investing activities (288) (284)
Cash flows used in financing activities:
Repayment of long-term debt (1,037) (9,319)
Borrowings against line of credit - 7,221
Proceeds from exercise of stock options 8 -
------- -------
Net cash used in financing activities (1,029) (2,098)
Effect of exchange rate changes on cash (102) (94)
------- -------
Net increase (decrease) in cash and cash equivalents 1,738 (643)
Cash and cash equivalents, beginning of period 3,037 4,105
----- -------
Cash and cash equivalents, end of period $ 4,775 $ 3,462
======= =======
See accompanying notes to condensed consolidated financial statements
REINHOLD INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
DESCRIPTION OF BUSINESS
Reinhold Industries, Inc. ("Reinhold" or the "Company") is a manufacturer of
advanced custom composite components, sheet molding compounds, and graphic arts
and industrial rollers for a variety of applications in the United States and
Europe. Reinhold derives revenues from the defense contract industry, the
aircraft industry, the printing industry and other commercial industries.
USE OF ESTIMATES
The Company's consolidated financial statements and related public financial
information are based on the application of generally accepted accounting
principles ("GAAP"). GAAP requires the use of estimates, assumptions, judgments
and subjective interpretations of accounting principles that have an impact on
the assets, liabilities, revenue and expense amounts reported. These estimates
can also affect supplemental information contained in the external disclosures
of the Company including information regarding contingencies, risk and financial
condition. The Company believes its use of estimates and underlying accounting
assumptions adhere to generally accepted accounting principles and are
consistently and conservatively applied. Valuations based on estimates are
reviewed for reasonableness and conservatism on a consistent basis throughout
the Company. Primary areas where financial information of the Company is subject
to the use of estimates, assumptions and the application of judgment include
revenues, receivables, inventories, acquisitions, valuation of long-lived and
intangible assets, pension and post-retirement benefits, the realizability of
deferred tax assets, and foreign exchange translation. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ materially from
these estimates under different assumptions or conditions.
BASIS OF PRESENTATION
The accompanying financial statements of the Company for the three months ended
March 31, 2003 and 2002 are unaudited. The financial statements consolidate the
accounts of the Company and its wholly- owned subsidiaries. All intercompany
balances and transactions have been eliminated. In the opinion of management,
all adjustments necessary for a fair presentation of such financial statements
have been included. Such adjustments consisted only of normal recurring items.
Interim results are not necessarily indicative of results for a full year. The
condensed financial statements and notes are presented as permitted by Form 10-Q
and, therefore, should be read in conjunction with the Company's annual report
on Form 10-K for the year ended December 31, 2002.
Notes to Condensed Consolidated Financial Statements (Continued)
INVENTORIES
Inventories are stated at the lower of cost or market on a first-in, first-out
(FIFO) basis. Inventoried costs relating to long-term contracts and programs are
stated at the actual production costs, including factory overhead, initial
tooling and other related non-recurring costs incurred to date, reduced by
amounts related to revenue recognized on units delivered. The components of
inventory are as follows (in thousands):
March 31, 2003 December 31, 2002
- --------------------------------------------------------------------------------
Raw material $ 5,685 $4,625
Work-in-process 923 874
Finished goods 793 439
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Total $ 7,401 $5,938
======== ======
EARNINGS PER COMMON SHARE
The Company presents basic and diluted earnings per share. Basic earnings per
share is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the assumed conversion of all dilutive securities,
consisting of employee stock options and shares to be issued to Directors.
On May 1, 2002, the Board of Directors approved the distribution of a 10% stock
dividend to shareholders of record as of May 31, 2002. As a result, an
additional 240,933 shares were issued on June 21, 2002. All common stock
information and earnings per share computations for all periods presented
reflect this stock dividend. The number of stock options outstanding and the
exercise price were also adjusted for the impact of the 10% stock dividend.
The reconciliations of basic and diluted weighted average shares are as follows
(in thousands, except exercise price data):
Three Months Ended
March 31,
2003 2002
---- ----
Net income $ 1,524 $ 824
======= ======
Weighted average shares used in basic computation 2,660 2,658
Dilutive stock options 81 -
Shares to be issued - Directors' Deferred Stock Plan 2 -
------- ---------
Weighted average shares used for diluted
calculation 2,743 2,658
===== ======
Stock options outstanding 217 225
Range of exercise prices $6.20-$8.06 $6.20-$8.45
Notes to Condensed Consolidated Financial Statements (Continued)
STOCK OPTION PLAN
The Company accounts for its stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" (APB 25), and has adopted the disclosure-only alternative of SFAS No.
123 "Accounting For Stock-Based Compensation" (SFAS 123), as amended by SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
The following table illustrates the effect on net income and earnings per share
had compensation expense for the employee stock-based plans been recorded based
on the fair value method under SFAS 123:
Three Months Ended March 31,
2003 2002
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Net income as reported $1,524 $ 824
Deduct, total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (3) (34)
- --------------------------------------------------------------------------------
Net income, as adjusted $1,521 $790
====== ====
Earnings per share:
Basic - as reported $0.57 $0.31
Basic - as adjusted $0.57 $0.30
Diluted - as reported $0.55 $0.31
Diluted - as adjusted $0.55 $0.30
REPORTING OTHER COMPREHENSIVE INCOME
The Company reports other comprehensive income under Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income". The
difference between net income and total comprehensive income during the three
months ended March 31, 2003 and 2002 was a loss on foreign currency translation
of $102,000 and $94,000, respectively.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred rather than the date an entity commits
to an exit plan. Additionally, it establishes that fair value is the objective
for the initial measurement of the liability.
Notes to Condensed Consolidated Financial Statements (Continued)
The provisions of SFAS No. 146 are effective for exit or disposal activities
that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not
have a material effect on the Company's consolidated financial position or
results of operations.
In December 2002, , the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which amends SFAS No. 123,
"Accounting for Stock Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation and amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The provisions of SFAS
No. 148 are effective for financial statements for years ending after December
15, 2002. The disclosure provisions of SFAS No. 148 have been adopted by the
Company. The Company has elected to continue to apply the intrinsic value method
of accounting as prescribed by Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees", to account for employee stock
options.
INCOME TAXES
Income taxes for interim periods are computed using the estimated effective tax
rate to be applicable for the current year.
LONG TERM DEBT
On March 20, 2002, the Company entered into a one year $10,000,000 revolving
credit facility with LaSalle Bank National Association ("LaSalle"). Interest is
at a rate which approximates LIBOR plus 2.50% and is secured by all financial
assets of the Company. The credit agreement with LaSalle is subject to various
financial covenants to which the Company must comply. The covenants require the
Company to maintain certain ratios of profitability, cash flow, total
outstanding debt, minimum net worth and limits on capital expenditures. As of
March 31, 2003, the Company was in compliance with all applicable covenants.
On March 21, 2002, the Company received approximately $7,200,000 from LaSalle
against this credit facility. The proceeds from the credit facility and
additional cash on hand were used to extinguish all outstanding debt
(approximately $8,700,000) with a prior bank.
On March 21, 2003, the Company amended the credit facility to extend the
termination date to June 20, 2003. No changes were made to any other terms and
conditions.
Notes to Condensed Consolidated Financial Statements (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the following financial instruments approximate fair
value because of the short maturity of those instruments: cash and cash
equivalents, accounts receivable, other current assets, other assets, accounts
payable, accrued expenses and current installments of long-term debt. The
long-term debt bears interest at a variable market rate and, thus, has a
carrying amount that approximates fair value.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
FOREIGN CURRENCY
The reporting currency of the Company is the United States dollar. The
functional currency of NP Aerospace is the UK pound sterling. For consolidation
purposes, the assets and liabilities of the Company's subsidiary is translated
at the exchange rate in effect at the balance sheet date. The consolidated
statement of operations is translated at the average exchange rate in effect
during the period being reported. Exchange differences arise mainly from the
valuation rates of the intercompany accounts and are taken directly to
Stockholders' equity.
OPERATING SEGMENTS
The Company reports operating segment data under SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information."
Reinhold is a manufacturer of advanced custom composite components, sheet
molding compounds, and graphic arts and industrial rollers for a variety of
applications primarily in the United States and Europe. The Company generates
revenues from five operating segments: Aerospace, CompositAir, Commercial, NP
Aerospace and Bingham. Management has determined these to be Reinhold's
operating segments based upon the nature of their products. Aerospace produces a
variety of products for the U.S. military and space programs. CompositAir
produces components for the commercial aircraft seating industry. The Commercial
segment produces lighting housings and pool filters. NP Aerospace, our
subsidiary located in Coventry, England, produces products for law enforcement,
lighting, military, automotive and commercial aircraft. Bingham manufactures
rubber and urethane rollers for graphic arts and industrial applications.
Prior to January 1, 2003, the Company generated revenues from six operating
segments. Due to the similarity of customer base and markets served, on January
1, 2003, the Thermal Insulation and Aerospace operating segments have been
combined. Prior year information has been changed to conform with the current
presentation.
Notes to Condensed Consolidated Financial Statements (Continued)
The information in the following tables is derived directly from the segment's
internal financial reporting for corporate management purposes (in thousands).
March 31, 2003 March 31, 2002
- -------------------------------------------------------------------------------
Net sales
Aerospace $ 4,372 $ 3,759
CompositAir 1,756 1,712
Commercial 739 650
NP Aerospace 5,096 2,924
Bingham 4,412 4,885
- --------------------------------------------------------------------------------
Total sales $ 16,375 $13,930
======== =======
Income (loss) before income taxes
Aerospace $ 1,388 $ 1,176
CompositAir 252 (77)
Commercial 7 52
NP Aerospace 1,173 332
Bingham (166) 159
Unallocated corporate expenses (257) (313)
- --------------------------------------------------------------------------------
Total income before income taxes $ 2,397 $ 1,329
======== ========
March 31, 2003 December 31, 2002
- --------------------------------------------------------------------------------
Total assets
Aerospace $ 10,620 $10,436
CompositAir 3,120 2,749
Commercial 1,360 1,220
NP Aerospace 9,666 8,504
Bingham 10,038 10,311
Unallocated corporate 2,702 3,514
- --------------------------------------------------------------------------------
Total assets $ 37,506 $36,734
======== =======
Notes to Condensed Consolidated Financial Statements (cont'd)
LEGAL PROCEEDINGS
The Company has been informed that it may be a potentially responsible party
("PRP") under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA"), with respect to certain
environmental liabilities arising at the Valley Forge National Historical Park
Site ("Valley Forge Site") located in Montgomery County, Pennsylvania and at a
site formerly known as the Casmalia Resources Hazardous Waste Management
Facility, located in Santa Barbara County, California ("Casmalia Site"). CERCLA
imposes liability for the costs of responding to a release or threatened release
of "hazardous substances" into the environment. CERCLA liability is imposed
without regard to fault. PRPs under CERCLA include current owners and operators
of the site, owners and operators at the time of disposal, as well as persons
who arranged for disposal or treatment of hazardous substances sent to the site,
or persons who accepted hazardous substances for transport to the site. Because
PRPs' CERCLA liability to the government is joint and several, a PRP may be
required to pay more than its proportional share of such costs. Liability among
PRPs, however, is subject to equitable allocation through contribution actions.
On June 16, 2000 the U.S. Department of Justice notified the Company that it may
be a PRP with respect to the Valley Forge Site and demanded payment for past
costs incurred by the United States in connection with the site, which the
Department of Justice estimated at $1,753,726 incurred by the National Park
Service ("NPS") as of May 31, 2000 and $616,878 incurred by the United States
Environmental Protection Agency ("EPA") as of November 30, 1999. Payment of
these past costs would not release the Company from liability for future
response costs.
Management believes that in or about 1977, the Company's predecessor, Keene
Corporation ("Keene"), sold to the U.S. Department of Interior certain real
property and improvements now located within the Valley Forge Site. Prior to the
sale, Keene operated a manufacturing facility on the real property and may have
used friable asbestos, the substance which gives rise to the claim at the Valley
Forge Site.
On December 30, 2002, the United States District Court for the Southern District
of New York approved and entered a Consent Decree agreed upon by the United
States and the Company settling the claims asserted by the National Park Service
against the Company. The United States and the Company stipulated that the EPA
will not seek reimbursement of its response costs with respect to the Valley
Forge Site and that the Company's claim for a declaratory judgment with respect
to those costs may be dismissed with prejudice.
Under the terms of the Consent Decree, the Company was obligated to pay $500,000
to the Department of the Interior. In return, the Company has received from the
United States a covenant not to sue, subject to certain limited exceptions, for
claims under CERCLA Sections 106, 107 and 113 and RCRA Section 7003 relating to
the Site. The payment to the Department of the Interior was made on January 23,
2003.
In September 2002, in accordance with SFAS No. 5, Accounting for Contingencies,
the Company recorded a reserve of $500,000 for the estimated cost to conclude
this matter. These costs were included in the December 31, 2002 balance sheet as
a component of "Accrued Expenses."
Notes to Condensed Consolidated Financial Statements (Continued)
Pursuant to the Consent Decree and CERCLA Section 113(f)(2), the Company's
settlement with the United States bars any other party from asserting claims for
contribution for any response costs incurred with respect to the Valley Forge
Site by the United States, any State or other governmental entity, or any other
party.
With respect to the Casmalia Site, on August 11, 2000, the EPA notified the
Company that it is a PRP by virtue of waste materials deposited at the site. The
EPA has designated the Company as a "de minimis" waste generator at this site,
based on the amount of waste at the Casmalia Site attributed to the Company. The
Company is not currently a party to any litigation concerning the Casmalia Site,
and based on currently available data, the Company believes that the Casmalia
Site is not likely to have a material adverse impact on the Company's
consolidated financial position or results of operations.
The Company is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operations, or liquidity.
REINHOLD INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
March 31, 2003
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in Item 1 of this
filing and the financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
Reinhold Industries, Inc. ("Reinhold" or the "Company") is a manufacturer of
advanced custom composite components, sheet molding compounds, and graphic arts
and industrial rollers for a variety of applications in the United States and
Europe. Reinhold derives revenues from the defense contract industry, the
aircraft industry, the printing industry and other commercial industries.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements and related public financial
information are based on the application of generally accepted accounting
principles ("GAAP"). GAAP requires the use of estimates, assumptions, judgments
and subjective interpretations of accounting principles that have an impact on
the assets, liabilities, revenue and expense amounts reported. These estimates
can also affect supplemental information contained in the external disclosures
of the Company including information regarding contingencies, risk and financial
condition. The Company believes its use of estimates and underlying accounting
assumptions adhere to generally accepted accounting principles and are
consistently and conservatively applied. Valuations based on estimates are
reviewed for reasonableness and conservatism on a consistent basis throughout
the Company. Primary areas where financial information of the Company is subject
to the use of estimates, assumptions and the application of judgment include
revenues, receivables, inventories, acquisitions, valuation of long-lived and
intangible assets, pension and post-retirement benefits, the realizability of
deferred tax assets, and foreign exchange translation. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ materially from
these estimates under different assumptions or conditions.
Revenue Recognition and Allowances For Doubtful Accounts
The Company recognizes revenue when title and risk of ownership have passed to
the buyer. Allowances for doubtful accounts are estimated based on estimates of
losses related to customer receivable balances. Estimates are developed by using
standard quantitative measures based on historical losses, adjusting for current
economic conditions and, in some cases, evaluating specific customer accounts
for risk of loss. The establishment of reserves requires the use of judgment and
assumptions regarding the potential for losses on receivable balances. Though
the Company considers these balances adequate and proper, changes in economic
conditions in specific markets in which the Company operates could have a
material effect on reserve balances required.
Inventories
We value our inventories at lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method, including material, labor and factory
overhead. The Company writes down its inventory for estimated obsolescence equal
to the cost of the inventory. Product obsolescence may be caused by shelf-life
expiration, discontinuance of a product line, replacement products in the
marketplace or other competitive situations.
Management's Discussion and Analysis (cont'd)
Fair Value Of Assets Acquired And Liabilities Assumed In Purchase Combinations
The purchase combinations carried out by us require management to estimate the
fair value of the assets acquired and liabilities assumed in the combinations.
These estimates of fair value are based on our business plan for the entities
acquired including planned redundancies, restructuring, use of assets acquired
and assumptions as to the ultimate resolution of obligations assumed for which
no future benefit will be received. Should actual use of assets or resolution of
obligations differ from our estimates, revisions to the estimated fair values
would be required. If a change in estimate occurs after one year of the
acquisition, the change would be recorded in our statement of operations.
Pensions And Post Retirement Benefits
The valuation of the Company's pension and other post-retirement plans requires
the use of assumptions and estimates that are used to develop actuarial
valuations of expenses and assets/liabilities. These assumptions include
discount rates, investment returns, projected salary increases and benefits, and
mortality rates. The actuarial assumptions used in the Company's pension
reporting are reviewed annually and compared with external benchmarks to assure
that they accurately account for our future pension obligations. Changes in
assumptions and future investment returns could potentially have a material
impact on the Company's pension expenses and related funding requirements.
Valuation Of Long-Lived And Intangible Assets
In accordance with SFAS No. 142 and SFAS No. 144, we assess the fair value and
recoverability of our long-lived assets, including goodwill, whenever events and
circumstances indicate the carrying value of an asset may not be recoverable
from estimated future cash flows expected to result from its use and eventual
disposition. In doing so, we make assumptions and estimates regarding future
cash flows and other factors to make our determination. The fair value of our
long-lived assets and goodwill is dependent upon the forecasted performance of
our business and the overall economic environment. When we determine that the
carrying value of our long-lived assets and goodwill may not be recoverable, we
measure any impairment based upon a forecasted discounted cash flow method. If
these forecasts are not met, we may have to record additional impairment charges
not previously recognized.
Income Taxes
We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities. We regularly review our deferred tax assets for recoverability and
establish a valuation allowance based upon historical losses, projected future
taxable income and the expected timing of the reversals of existing temporary
differences.
Cumulative Foreign Exchange Translation Accounting
In preparing our consolidated financial statements, we are required to translate
the financial statements of NP Aerospace from the currency in which they keep
their accounting records, the British Pound Sterling, into United States
dollars. This process results in exchange gains and losses which are either
included within the statement of operations or as a separate part of our net
equity under the caption "accumulated other comprehensive loss."
Management's Discussion and Analysis (cont'd)
Under the relevant accounting guidance, the treatment of these translation gains
or losses is dependent upon management's determination of the functional
currency of NP Aerospace. Generally, the currency in which the subsidiary
transacts a majority of its transactions, including billings, financing, payroll
and other expenditures would be considered the functional currency but any
dependency upon the parent and the nature of the subsidiary's operations must
also be considered.
If any subsidiary's functional currency is deemed to be the local currency, then
any gain or loss associated with the translation of that subsidiary's financial
statements is included in cumulative translation adjustments. However, if the
functional currency is deemed to be the United States dollar then any gain or
loss associated with the translation of these financial statements would be
included within our statement of operations.
Based on our assessment of the factors discussed above, we consider NP
Aerospace's local currency to be the functional currency. Accordingly, we had
foreign currency translation losses of approximately $992,000 and $890,000 that
were included as part of "accumulated other comprehensive loss" within our
balance sheet at March 31, 2003 and December 31, 2002, respectively.
Environmental Liabilities
With respect to outstanding actions that are in preliminary procedural stages,
as well as any actions that may be filed in the future, insufficient information
exists upon which judgments can be made as to the validity or ultimate
disposition of such actions, thereby making it difficult to reasonably estimate
what, if any, potential liability or costs may be incurred. Accordingly, no
estimate of future liability has been included for such claims. See Notes to
Condensed Consolidated Financial Statements for additional discussion of legal
proceedings.
Comparison of First Quarter 2003 to 2002
In the first quarter of 2003, net sales increased $2.4 million, or 18%, to
$16.4 million, compared to first quarter 2002 sales of $13.9 million. Sales in
the Aerospace business unit increased by $0.6 million (16%) to $4.4 million due
to increased shipments of components related to the Minuteman III Propulsion
Replacement Program. Sales in the CompositAir business unit were flat at $1.8
million. Sales increased $0.1 million (14%) to $0.7 million in the Commercial
business unit due to decreased shipments of pool filter tanks and in-ground
lighting housings. Sales at NP Aerospace increased $2.2 million (74%) to $5.1
million due to increased shipments of body armor and other personal protection
products. Sales for the Bingham business unit decreased by $0.5 million (10%) to
$4.4 million due to soft market conditions.
Gross profit margin in the first quarter increased from 29.4% in 2002 to
31.7% in 2003. Gross profit margin for Aerospace increased from 43.1% to 44.5%
due to increased sales and the resulting absorption of fixed overhead expenses.
Gross profit margin for CompositAir increased from 7.9% to 27.5% due to the
elimination of labor inefficiencies in 2001 caused by the consolidation of
production facilities in Santa Fe Springs, California. Gross profit margin for
Commercial decreased from 22.8% to 16.8% due to higher manufacturing overhead
expenses. Gross profit margin for NP Aerospace increased from 27.3% to 32.3% due
to increased sales and the resulting absorption of fixed overhead expenses.
Gross profit margin for Bingham decreased from 28.6% to 22.5% due to higher
manufacturing overhead expenses.
Management's Discussion and Analysis (cont'd)
Selling, general and administrative expenses for the first quarter 2003
were $2.8 million (16.8% of sales) compared to $2.7 million (19.1% of sales) for
the same quarter of 2002. The increase is due primarily to non-cash, actuarially
determined pension expenses.
Interest expense, net in the first quarter of 2003 decreased to $0.03
million from $0.1 million in 2002 due to lower outstanding debt.
Income before income taxes increased to $2.4 million (14.6% of sales) in
the first quarter of 2003 from $1.3 million (9.5% of sales) in the same period
of 2002 due to higher revenues. Income before income taxes for Aerospace was
$1.4 million (31.7% of sales) in 2003 compared to $1.2 million (34.1% of sales)
in 2002 due to increased shipments of components related to the Minuteman III
Propulsion Replacement Program. Income before income taxes for CompositAir was
$0.3 million (14.4% of sales) in 2003 compared to a loss before income taxes of
$0.1 million in 2002 due to the elimination of labor costs incurred in 2002
related to the consolidation of production facilities in Santa Fe Springs,
California. Income before income taxes for Commercial decreased to break-even in
2003 from $0.052 million (8.0% of sales) in 2002 due to higher manufacturing
overhead expenses. Income before income taxes for NP Aerospace increased to $1.2
million (23.0% of sales) from $0.3 million (11.4% of sales) due to increased
sales. A loss before income taxes of $0.2 million (-3.8% of sales) was realized
at Bingham in 2003 compared to income before income taxes of $0.2 million (3.3%
of sales) in 2002 due to lower sales.
A tax provision of $0.873 million was recorded in the first three months
of 2003 as compared to $0.505 million in the first three months of 2002. Income
taxes for interim periods are computed using the effective tax rate estimated to
be applicable for the full fiscal year, which is subject to ongoing review and
evaluation by management.
At December 31, 2002, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $21.2 million. The Company may
utilize the Federal net operating losses by carrying them forward to offset
future Federal taxable income, if any, through 2011. As more fully described in
Note 3 to the 2002 consolidated financial statements filed on Form 10-K,
benefits realized from loss carryforwards arising prior to the reorganization
have been recorded directly to additional paid-in capital.
Liquidity and Capital Resources
As of March 31, 2003, working capital was $12.4 million, up $1.9 million
from December 31, 2002. Cash and cash equivalents of $4.8 million held at March
31, 2003 were $1.7 million higher than cash and cash equivalents held at
December 31, 2002 primarily due to the increased profitability of the Company.
Net cash provided by operating activities totaled $3.2 million for the
three months ended March 31, 2003. Net cash provided by operating activities
totaled $1.8 million for the comparable period in 2002. The increase over the
prior period relates to improved working capital management and increased
profitability of the Company. Net cash used in investing activities for the
three months ended March 31, 2003 totaled $0.3 million and consisted of capital
expenditures. Net cash used in investing activities for the three months ended
March 31, 2002 totaled $0.3 million and consisted of capital expenditures and
proceeds from sale of assets.
Management's Discussion and Analysis (cont'd)
Net cash used in financing activities for the three months ended March 31,
2003 totaled $1.0 million and consisted primarily of repayments on the line of
credit. Net cash used in financing activities for the three months ended March
31, 2002 totaled $2.1 million and consisted of borrowings against the line of
credit of $7.2 million less repayments of long-term debt of $9.3 million.
Expenditures in 2003 and 2002 related to investing and financing activities were
financed by existing cash and cash equivalents and proceeds from the LaSalle
line of credit.
On March 20, 2002, the Company entered into a one year $10,000,000
revolving credit facility with LaSalle Bank National Association ("LaSalle").
Interest is at a rate which approximates LIBOR plus 2.50% (3.79% at March 31,
2003) and is secured by all financial assets of the Company. The credit
agreement with LaSalle is subject to various financial covenants to which the
Company must comply. The covenants require the Company to maintain certain
ratios of profitability, cash flow, outstanding debt, minimum net worth and
limits on capital expenditures. As of March 31, 2003, the Company was in
compliance with all applicable covenants.
On March 21, 2002, the Company received approximately $7,200,000 from
LaSalle against this credit facility. The proceeds from the credit facility and
additional cash on hand were used to extinguish all outstanding debt
(approximately $8,700,000) with a prior bank. On March 14, 2003, the Company
amended the credit facility to extend the termination date to June 20, 2003. No
changes were made to any other terms and conditions. Management believes that
the available cash, cash flows from operations and cash available under the line
of credit will be sufficient to fund the Company's operating and capital
expenditure requirements through at least March 31, 2004.
Stock Dividend
On May 1, 2002, the Board of Directors approved the distribution of a 10%
stock dividend to shareholders of record as of May 31, 2002. As a result, an
additional 240,933 shares were issued on June 21, 2002. All common stock
information and earnings per share computations for all periods presented
reflect this stock dividend. The number of stock options outstanding and the
exercise price were also adjusted for the impact of the 10% stock dividend.
Forward Looking Statements
This Form 10-Q contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). The words "estimate", "anticipate", "project", "intend",
"expect", and similar expressions are intended to identify forward looking
statements. All forward looking statements involve risks and uncertainties,
including, without limitation, statements and assumptions with respect to future
revenues, program performance and cash flow. Readers are cautioned not to place
undue reliance on these forward looking statements which speak only as of the
date of this 10-Q.
Management's Discussion and Analysis (cont'd)
The Company does not undertake any obligation to publicly release any revisions
to these forward looking statements to reflect events, circumstances or changes
in expectations after the date of this Form 10-Q or to reflect the occurrence of
unanticipated events. The forward looking statements in this document are
intended to be subject to safe harbor protection provided by Sections 27A of the
Securities Act and 21E of the Exchange Act.
2003 Outlook
The Aerospace business unit should outperform 2002 results due mainly to
Minuteman III PRP component shipments and additional sales of rocket nozzles.
The CompositAir business unit is difficult to predict due to the dire financial
situation in the commercial airline industry. The Commercial business unit
should generate financial results comparable to 2002. NP Aerospace has
experienced a significant increase in sales of personal protection products
(military helmets and body armor). Future sales of these products are largely
dependent on unpredictable foreign government spending. At Bingham, our
financial performance continues to suffer due to poor economic conditions in the
printing marketplace. Additional cost reduction efforts are continuing. This
business unit continues to receive the highest levels of management focus.
Recent Accounting Pronouncements
The effective recent accounting pronouncements are included in the notes to
the condensed consolidated financial statements included herein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There are no material changes to the disclosures made in the Annual
Report on Form 10-K for the year ended December 31, 2002.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of March 31, 2003, an evaluation was performed by the Chief
Executive Officer and Chief Financial Officer of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14 and 15d-14. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures were effective in ensuring that all material information
required to be filed in this annual report has been made known to them in a
timely fashion.
(b) Changes in Internal Controls
There have been no significant changes in internal controls or in
factors that could significantly affect internal controls subsequent to the date
the Chief Executive Officer and Chief Financial Officer completed their
evaluation
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information required in this section is included in Part I under
the heading "LEGAL PROCEEDINGS".
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
2.1 Keene Corporation's Fourth Amended Plan of Reorganization Under
Chapter 11 of the Bankruptcy Code dated March 11, 1996, incorporated
herein by reference to Exhibit 99(a) to Keene Corporation's Form 8-K
filed with the Commission on June 28, 1996.
2.2 Motion to Approve Modifications to the Keene Corporation Fourth
Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy
Code dated June 12, 1996, incorporated herein by reference to Exhibit
99(b) to Keene Corporation's Form 8-K filed with the Commission on
June 28, 1996.
2.3 Finding of Fact, Conclusions of Law and Order Confirming Keene's
Fourth Amended Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code, as modified, entered June 14, 1996, incorporated
herein by reference to Exhibit 99(c) to Keene Corporation's Form 8-K
filed with the Commission on June 28, 1996.
3.1 Amended and restated Certificate of Incorporation of Reinhold
Industries, Inc., incorporated herein by reference to Exhibit 99(a),
Exhibit A to the Plan, to Keene Corporation's Form 8-K filed with the
Commission on June 28, 1996.
3.2 Amended and restated By-laws of Reinhold Industries, Inc. (Formerly
Keene Corporation), incorporated herein by reference to Exhibit
99(a), Exhibit B to the Plan, to Keene Corporation's Form 8-K filed
with the Commission on June 28, 1996.
3.3 Certificate of Merger of Reinhold Industries, Inc. into Keene
Corporation, incorporated herein by reference to Exhibit 99(a),
Exhibit C to the Plan, to Keene Corporation's Form 8-K filed with the
Commission on June 28, 1996.
3.4 Second amended and restated Certificate of Incorporation and amended
By-laws of Reinhold Industries, Inc., on Form DEFS14A filed with the
Commission on September 24, 1999.
3.5 Third amended and restated Certificate of Incorporation of Reinhold
Industries, Inc., on Form DEF14C filed with the Commission on October
10, 2000.
4.1 Share Authorization Agreement, incorporated herein by reference to
Exhibit 99(a), Exhibit H to the Plan, to Keene Corporation's Form 8-K
filed with the Commission on June 28, 1996.
4.2 Registration Rights Agreement, incorporated herein by reference
to Exhibit 99(a), Exhibit G to the Plan, to Keene Corporation's
Form 8-K filed with the Commission on June 28, 1996.
9.1 Creditors' Trust Agreement, incorporated herein by reference to
Exhibit 99(a), Exhibit D to the Plan, to Keene Corporation's Form
8-K filed with the Commission on June 28, 1996.
10.1 Reinhold Industries, Inc. Stock Incentive Plan, on Form S-8, filed
with the Commission on November 10, 1997.
10.2 Reinhold Management Incentive Compensation Plan, incorporated by
reference to Page 34 to Keene's (Predecessor Co.) Form 10, dated
April 4, 1990, as amended by Form 8, Exhibit 10(e), dated July 19,
1990.
10.3 Lease, dated January 4, 1990, by and between Imperial Industrial
Properties, Inc. and Reinhold Industries, incorporated by reference
to Exhibit 10(b) to Keene's Form 10 dated April 4, 1990, as amended
by Form 8, dated July 19, 1990.
10.4 Reinhold Industries, Inc. Retirement Plan (formerly Keene
Retirement Plan), incorporated by reference to Exhibit 10(i) to
Keene's Form 10 dated April 4, 1990, as amended by Form 8, dated July
19, 1990.
10.5 Management Agreement between Reinhold Industries, Inc. and Hammond,
Kennedy, Whitney & Company, Inc. dated May 31, 1999 on Form 10-QSB
filed with the Commission on August 16, 1999.
10.6 Stock Option Agreement between Reinhold Industries, Inc. and Michael
T. Furry dated June 3, 1999 on Form 10-QSB filed with the Commission
on August 16, 1999.
10.7 Stock Price Deficiency Payment Agreement between Reinhold Industries,
Inc. and various stockholders dated June 16, 1999 on Form 10-QSB
filed with the Commission on August 16, 1999.
10.8 Asset Purchase Agreement by and between Samuel Bingham Company, a
Delaware corporation, and Samuel Bingham Enterprises, Inc. dated
February 3, 2000 on Form 8-K/A filed with the Commission on May 23,
2000.
10.9 Credit Agreement between Reinhold Industries, Inc., Samuel Bingham
Enterprises, Inc., NP Aerospace Limited (the "Borrowers") and LaSalle
Bank National Association dated March 21, 2002 on Form 10-Q filed
with the Commission on May 9, 2002.
10.10 Amended and Restated Reinhold Industries, Inc. Stock Incentive Plan,
on Form S-8, filed with the Commission on December 1, 2002.
10.11 Directors Deferred Stock Plan, on Form 10-K filed with the Commission
on March 28, 2003.
20.1 New Keene Credit Facility, incorporated herein by reference to
Exhibit 99(a), Exhibit F to the Plan, to Keene Corporation's Form 8-K
filed with the Commission on June 28, 1996.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as added by Section
906 of the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
None.
REINHOLD INDUSTRIES, INC.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
REINHOLD INDUSTRIES, INC.
Registrant
DATE: May 13, 2003
By: /S/ Brett R. Meinsen
Brett R. Meinsen
Vice President - Finance and Administration,
Treasurer and Secretary
(Principal Financial Officer)
CERTIFICATIONS
I, Michael T. Furry, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reinhold
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ MICHAEL T. FURRY
Michael T. Furry
President and Chief Executive Officer
May 13, 2003
CERTIFICATIONS
I, Brett R. Meinsen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reinhold
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ BRETT R. MEINSEN
Brett R. Meinsen
Vice President - Finance and Administration
May 13, 2003