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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: June 30, 2004
[ ] 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 - 2,961,336 shares as of August 10, 2004.
REINHOLD INDUSTRIES, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1.
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3.
Quantitative and Qualitative Disclosures About Market Risk 21
Item 4.
Controls and Procedures 21
PART II - OTHER INFORMATION 22
SIGNATURES 26
EXHIBITS 27
REINHOLD INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended
June 30,
2004 2003
---- ----
Net sales $19,534 $17,703
Cost of goods sold 13,532 11,643
------ ------
Gross profit 6,002 6,060
Selling, general and administrative expenses 3,534 3,122
------ ------
Operating income 2,468 2,938
Interest income, net 21 11
------- -----
Income before income taxes 2,489 2,949
Income taxes 803 1,069
------ ------
Net income $ 1,686 $ 1,880
====== ======
Basic earnings per share $ 0.57 $ 0.64
Diluted earnings per share $ 0.53 $ 0.61
Weighted average common shares outstanding - basic 2,954 2,926
Weighted average common shares outstanding - diluted 3,186 3,083
See accompanying notes to condensed consolidated financial statements
REINHOLD INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
Six Months Ended
June 30,
2004 2003
---- ----
Net sales $36,426 $34,078
Cost of goods sold 25,613 22,828
------ ------
Gross profit 10,813 11,250
Selling, general and administrative expenses 6,520 5,881
------ ------
Operating income 4,293 5,369
Interest (expense) income, net 34 (23)
------ -------
Income before income taxes 4,327 5,346
Income taxes 1,462 1,942
------ ------
Net income $ 2,865 $ 3,404
====== =======
Basic earnings per share $ 0.97 $ 1.16
Diluted earnings per share $ 0.90 $ 1.11
Weighted average common shares outstanding - basic 2,947 2,927
Weighted average common shares outstanding - diluted 3,180 3,062
See accompanying notes to condensed consolidated financial statements
REINHOLD INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
(Unaudited)
June 30, 2004 December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents $ 9,039 $ 6,172
Accounts receivable 9,779 8,584
Inventories 8,811 7,472
Other current assets 2,668 3,024
------- -------
Total current assets 30,297 25,252
Property, plant and equipment, net 12,526 12,664
Goodwill 3,786 3,786
Deferred charges 1,930 1,915
Other assets 154 173
------- -------
$48,693 $43,790
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,049 $ 3,414
Accrued expenses 3,532 3,881
Current portion - long term debt 67 102
------ ---
Total current liabilities 8,648 7,397
Long-term pension liability 6,978 6,978
Long term debt - less current portion - 30
Other long term liabilities 315 319
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: 2,956,944 shares
and 2,935,201 shares, respectively 29 29
Additional paid-in capital 28,939 28,303
Retained earnings 10,586 7,721
Accumulated other comprehensive loss (6,802) (6,987)
------- --------
Net stockholders' equity 32,752 29,066
------ -------
$48,693 $43,790
====== ======
See accompanying notes to condensed consolidated financial statements
REINHOLD INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months Ended
June 30,
2004 2003
---- ----
Cash flow from operating activities:
Net income $ 2,865 $ 3,404
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 915 846
Additions to paid-in capital resulting from
tax benefits 475 863
Non-cash compensation 54 36
Changes in assets and liabilities:
Accounts receivable (1,195) 2,020
Inventories (1,339) (2,049)
Other current assets 356 509
Accounts payable 1,635 (95)
Accrued expenses (349) 623
Other, net - 66
------ ------
Net cash provided by operating activities 3,417 6,223
Cash flows used in investing activities:
Capital expenditures (734) (864)
----- -----
Net cash used in investing activities (734) (864)
Cash flows used in financing activities:
Dividends paid - (9)
Repayments on line of credit - (3,000)
Proceeds from exercise of stock options 107 8
Repayment of long-term debt (65) (75)
---- -------
Net cash provided by (used in) financing activities 42 (3,076)
Effect of exchange rate changes on cash 142 162
----- ------
Net increase (decrease) in cash and cash equivalents 2,867 2,445
Cash and cash equivalents, beginning of period 6,172 3,037
----- ------
Cash and cash equivalents, end of period $ 9,039 $ 5,482
====== ======
See accompanying notes to condensed consolidated financial statements
REINHOLD INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(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 and six
months ended June 30, 2004 and 2003 are unaudited. The financial statements
consolidate the accounts of the Company and its wholly- owned subsidiaries. All
significant 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, 2003.
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):
June 30, 2004 December 31, 2003
- --------------------------------------------------------------------------------
Raw material $6,476 5,236
Work-in-process 1,864 1,843
Finished goods 471 393
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Total $ 8,811 7,472
EARNINGS PER COMMON SHARE
The Company presents basic and diluted earnings per share ("EPS"). 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 April 30, 2003, the Board of Directors approved the distribution of a 10%
stock dividend to shareholders of record as of May 16, 2003. As a result, an
additional 265,418 shares were issued on May 29, 2003. All common stock
information and earnings per share computations for all periods presented have
been adjusted for the 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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-------------------------------------------------------------
Net income $1,686 $1,880 $2,865 $ 3,404
====== ====== ====== =======
Weighted average shares used
in basic computation 2,954 2,926 2,947 2,927
Dilutive effect of stock options 226 152 228 133
Other dilutive shares 6 5 5 2
----- ----- ----- -----
Weighted average shares used
for diluted calculation 3,186 3,083 3,180 3,062
===== ===== ===== =====
Stock options outstanding 336 365 336 365
Range of exercise price $5.63-$11.36 $5.63-$11.36 $5.63-$11.36 $5.63-$11.36
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", and has adopted the disclosure-only alternative of Statement of
Financial Accounting Standard SFAS No. 123 "Accounting For Stock-Based
Compensation", 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 (in thousands except for per share
data):
Three Months Six Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------
Net income as reported $1,686 $1,880 $2,865 $3,404
Deduct, total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (27) (53) (53) (56)
- -----------------------------------------------------------------------------------------------------
Net income, as adjusted $1,659 $1,827 $2,812 $3,348
====== ====== ====== ======
Earnings per share:
Basic - as reported $ 0.57 $ 0.64 $0.97 $ 1.16
Basic - as adjusted $ 0.56 $ 0.62 $0.95 $ 1.14
Diluted - as reported $ 0.53 $ 0.61 $0.90 $ 1.11
Diluted - as adjusted $ 0.52 $ 0.59 $0.88 $ 1.09
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 June 30, 2004 and 2003 was a gain on foreign currency translation
of $21,000 and $264,000, respectively. The difference between net income and
total comprehensive income during the six months ended June 30, 2004 and 2003
was a gain on foreign currency translation of $185,000 and $162,000,
respectively.
INCOME TAXES
Income taxes for interim periods are computed using the estimated effective tax
rate to be applicable for the current year.
Notes to Condensed Consolidated Financial Statements (Continued)
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
June 30, 2004, 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.
On June 20, 2003 the Company amended the credit facility to extend the
termination date to June 20, 2004. The line of credit under the facility has
been reduced from $10,000,000 to $8,000,000.
On June 19, 2003 the Company paid off the remaining outstanding balance
pertaining to the LaSalle credit facility.
On October 31, 2003, the Company amended the LaSalle credit facility to extend
the termination date to October 31, 2004.
PENSION PLANS
The Company currently has four pension plans covering substantially all
employees. The benefits paid under the pension plans generally are based on an
employee's years of service and compensation during the last years of employment
(as defined). Annual contributions made to the pension plans are determined in
compliance with the minimum funding requirements of ERISA, using a different
actuarial cost method and different actuarial assumptions than are used for
determining pension expense for financial reporting purposes. Plan assets
consist principally of publicly traded equity and debt securities.
Net pension cost included the following (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------
Service cost $ 64 $ 54 $130 $108
Interest cost on benefits earned in prior years 270 226 545 452
Expected return on assets (242) (203) (488) (406)
Amortization of net obligation at transition 1 - 1 -
Amortization of net loss 129 109 260 218
- -------------------------------------------------------------------------------------------------------
Net pension cost $222 $186 $448 $372
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.
Notes to Condensed Consolidated Financial Statements (Continued)
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 subsidiaries are
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.
The information in the following tables is derived directly from the segment's
internal financial reporting for corporate management purposes (in thousands).
Notes to Condensed Consolidated Financial Statements (Continued)
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------
Net sales
Aerospace $ 5,395 $ 6,355 $10,538 $10,727
CompositAir 1,130 1,519 2,427 3,275
Commercial 794 832 1,570 1,571
NP Aerospace 8,212 4,820 13,612 9,916
Bingham 4,003 4,177 8,279 8,589
- ----------------------------------------------------------------------------------------------------------------
Total sales $19,534 $17,703 $36,426 $34,078
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes
Aerospace $ 1,663 $ 2,091 $ 3,205 $ 3,479
CompositAir (140) 145 (155) 397
Commercial 108 27 173 34
NP Aerospace 1,924 1,107 2,690 2,280
Bingham (389) (151) (672) (317)
Unallocated corporate expenses (677) (270) (914) (527)
- ----------------------------------------------------------------------------------------------------------------
Total income before income taxes $ 2,489 $ 2,949 $ 4,327 $ 5,346
June 30, 2004 December 31, 2003
- ----------------------------------------------------------------------------------------------------------------
Total assets
Aerospace $12,391 $ 11,077
CompositAir 2,450 2,635
Commercial 1,575 1,598
NP Aerospace 14,877 11,220
Bingham 9,802 9,763
Unallocated corporate 7,598 7,497
- ----------------------------------------------------------------------------------------------------------------
Total assets $48,693 $43,790
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.
Notes to Condensed Consolidated Financial Statements (Continued)
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
June 30, 2004
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, 2003.
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 Assets
In accordance with Statement of Financial Accounting Standard SFAS No. 142 and
Statement of Financial Accounting Standard 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."
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.
Management's Discussion and Analysis (cont'd)
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
cumulative foreign currency translation losses of approximately $542,000 and
$727,000 that were included as part of "accumulated other comprehensive loss"
within our balance sheets at June 30, 2004 and December 31, 2003, 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.
Comparison of Second Quarter 2004 to 2003
In the second quarter of 2004, net sales increased by $1.8 million, or 10%
to $19.5 million compared to second quarter 2003 sales of $17.7 million. Sales
in the Aerospace business unit decreased by $1.0 million (15%) to $5.4 million
due to decreased shipments of components related to the Minuteman III Propulsion
Replacement Program. Sales in the CompositAir business unit declined by $0.4
million (26%) to $1.1 million due to severe economic problems in the airline
industry. Commercial sales were flat at $0.8 million. Sales at NP Aerospace
increased by $3.4 million (70%) to $8.2 million due primarily to retrofitting of
light armored vehicles for the U.K. Ministry of Defense. Sales for the Bingham
business unit decreased by $0.2 million (4%) to $4.0 million.
Gross profit margin in the second quarter decreased from 34% in 2003 to
31% in 2004. Gross profit margin for Aerospace increased from 45% to 46% due to
product mix. Gross profit margin for CompositAir decreased from 25% to 8% due to
reduced sales volume. Gross profit margin for Commercial increased from 21% to
31% due primarily to increased selling prices. Gross profit margin for NP
Aerospace decreased from 34% to 31% due to changes in product mix. Gross profit
margin for Bingham decreased from 24% to 16% due primarily to higher overhead
expenses.
Selling, general and administrative expenses for the second quarter 2004
were $3.5 million (18% of sales) compared to $3.1 million (18% of sales) for the
same quarter of 2003. The increase is due to professional costs associated with
identifying and exploring strategic alternatives for the Company.
Interest income, net of $0.02 million was realized in the second quarter
of 2004 compared to interest income, net of $0.01 million in the second quarter
of 2003.
Management's Discussion and Analysis (cont'd)
Income before income taxes decreased to $2.5 million (13% of sales) in the
second quarter of 2004 from $2.9 million (17% of sales) in the same period of
2003 due to lower gross profit margins and higher selling, general and
administrative expenses. Income before income taxes for Aerospace was $1.7
million (31% of sales) in 2004 compared to $2.1 million (33% of sales) in 2003
due to decreased shipments of components related to the Minuteman III Propulsion
Replacement Program. Income before income taxes for CompositAir decreased in
2004 to a loss of $0.14 million (-12% of sales) from income of $0.15 million
(10% of sales) in 2003 due to reduced sales caused by severe economic problems
in the airline industry. Income before income taxes for Commercial rose to $0.1
million (14% of sales) from $0.03 million (3% of sales) due primarily to higher
selling prices. Income before income taxes for NP Aerospace increased to $1.9
million (23% of sales) from $1.1 million (23% of sales) due to increased sales.
Bingham incurred a loss before income taxes of $0.39 million (-10% of sales) in
2004 compared to a loss of $0.15 million (-4% of sales) in 2003 due primarily to
higher overhead costs.
A tax provision of $0.8 million was recorded in the second quarter of 2004
compared to $1.1 million in the second quarter of 2003. 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.
Comparison of Six Months 2004 to 2003
In the first six months of 2004, net sales increased $2.3 million, or 7%,
to $36.4 million, compared to 2003 sales of $34.1 million. Sales in the
Aerospace business unit decreased by $0.2 million (2%) to $10.5 million. Sales
in the CompositAir business unit declined by $0.8 million (26%) to $2.4 million
due to severe economic problems in the airline industry. Sales in the Commercial
business unit were flat at $1.6 million. Sales at NP Aerospace rose $3.7 million
(37%) to $13.6 million due primarily to retrofitting of light armored vehicles
for the U.K. Ministry of Defense. Sales for the Bingham business unit decreased
by $0.3 million (4%) to $8.3 million due to soft market conditions.
Gross profit margin in the first six months decreased from 33% in 2003 to
30% in 2004. Gross profit margin for Aerospace was flat at 45%. Gross profit
margin for CompositAir decreased from 26% to 11% due to reduced sales volume.
Gross profit margin for Commercial rose from 19% to 28% due primarily to higher
selling prices. Gross profit margin for NP Aerospace decreased from 33% to 29%
due to changes in product mix. Gross profit margin for Bingham declined from 23%
to 18% due to higher overhead expenses.
Selling, general and administrative expenses for the first six months of
2004 were $6.5 million (18% of sales) compared to $5.9 million (17% of sales)
for the first six months of 2003. The increase is due to professional costs
associated with identifying and exploring strategic alternatives for the
Company.
Interest income, net in the first six months of 2004 was $0.03 million
compared with interest expense, net in 2003 of $0.02 million in 2003 due to
lower outstanding debt.
Management's Discussion and Analysis (cont'd)
Income before income taxes decreased to $4.3 million (12% of sales) in the first
six months of 2004 from $5.3 million (16% of sales) in the same period of 2003
due to lower gross profit margins and higher selling, general and administrative
expenses. Income before income taxes for Aerospace was $3.2 million (30% of
sales) in 2004 compared to $3.5 million (32% of sales) in 2003 due to higher
allocated selling, general and administrative expenses. CompositAir sustained a
loss before income taxes in 2004 of $0.15 million (-6% of sales) compared to
income before income taxes of $0.4 million (12% of sales) in 2003 due to reduced
sales caused by severe economic problems in the airline industry. Income before
income taxes for Commercial increased to $0.17 million (11% of sales) from $0.03
million (2% of sales) due primarily to higher selling prices. Income before
income taxes for NP Aerospace rose to $2.7 million (20% of sales) from $2.3
million (23% of sales) due to increased sales. The loss before income taxes for
Bingham increased to $0.7 million (-8% of sales) from $0.3 million (-3% of
sales) due to generally poor economic conditions and higher overhead costs.
A tax provision of $1.5 million was recorded in the first six months of
2004 as compared to $1.9 million in the first six months of 2003. 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, 2003, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $18.9 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 2003 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 June 30, 2004, working capital was $21.6 million, up $3.8 million
from December 31, 2003. Cash and cash equivalents of $9.0 million held at June
30, 2004 were $2.8 million higher than cash and cash equivalents held at
December 31, 2003 due to the increased profitability of the Company.
Net cash provided by operating activities totaled $3.4 million for the six
months ended June 30, 2004. Net cash provided by operating activities totaled
$6.2 million for the comparable period in 2003. The decrease compared to the
prior period is due primarily to increases in account receivable due to higher
sales during the second quarter of 2004.
Net cash used in investing activities for the six months ended June 30,
2004 totaled $0.7 million and consisted of capital expenditures. Net cash used
in investing activities for the six months ended June 30, 2003 totaled $0.9
million and also consisted of capital expenditures.
Net cash provided by financing activities for the six months ended June
30, 2004 totaled $0.04 million, consisting of $0.1 million in proceeds from the
exercise of stock options and $0.06 million of long-term debt repayment. Net
cash used in financing activities for the six months ended June 30, 2003 totaled
$3.1 million and consisted of repayment of the $3.0 million line of credit and
repayment of long-term debt of $0.1 million.
Management's Discussion and Analysis (cont'd)
Expenditures in 2004 and 2003 related to investing and financing activities were
financed by existing cash and cash equivalents.
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 June 30, 2004, 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 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.
On June 20, 2003 the Company amended the credit facility to extend the
termination date to June 20, 2004. The line of credit under the facility has
been reduced from $10,000,000 to $8,000,000.
On June 19, 2003 the Company paid off the remaining outstanding balance
pertaining to the LaSalle credit facility.
On October 31, 2003, the Company amended the LaSalle credit facility to
extend the termination date to October 31, 2004.
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 June 30, 2005.
Stock Dividend
On April 30, 2003, the Board of Directors approved the distribution of a
10% stock dividend to shareholders of record as of May 16, 2003. As a result, an
additional 265,418 shares were issued on May 29, 2003. All common stock
information and earnings per share computations for all periods presented have
been adjusted for the stock dividend. The number of stock options outstanding
and the exercise price were also adjusted for the impact of the 10% stock
dividend.
Management's Discussion and Analysis (cont'd)
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.
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.
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, 2003.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of June 30, 2004, 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 4. Results of Votes of Security Holders
On May 6, 2004, the Annual Meeting of Stockholders of the Corporation
was convened at its offices in Santa Fe Springs, CA. for the
following purposes:
1) To elect six members of the Board of Directors for Class A Common
Stockholders
Results of the voting for election of directors were as follows:
NAME FOR WITHHELD
---- --- --------
RALPH R. WHITNEY, JR. 2,434,738 222,140
ANDREW McNALLY, IV 2,434,738 222,140
MICHAEL T. FURRY 2,494,301 162,577
GLENN SCOLNIK 2,494,310 162,568
THOMAS A. BRAND 2,581,195 75,683
RICHARD A. PLACE 2,586,424 70,454
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.
31.1 Certification Of CEO Pursuant To Section 302 Of The Sarbanes-Oxley Act
Of 2002
31.2 Certification Of CFO Pursuant To Section 302 Of The Sarbanes-Oxley Act
Of 2002
32.1 Certification Of CEO Pursuant To Section 906 Of The Sarbanes-Oxley Act
Of 2002
32.2 Certification Of CFO Pursuant To Section 906 Of The Sarbanes-Oxley Act
Of 2002
b. Reports on Form 8-K
Form 8-K was filed on May 6, 2004 announcing first quarter
financial results for the company under Item 12 - Results of
Operations and Financial Condition.
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: August 12, 2004
By: /S/ Brett R. Meinsen
Brett R. Meinsen
Vice President - Finance and Administration,
Treasurer and Secretary
(Principal Financial Officer)