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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, 2005
[ ] 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 - 3,252,446 shares as of May 6, 2005.
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,
2005 2004
---- ----
Net sales $18,977 $12,616
Cost of goods sold 12,737 8,640
------ -----
Gross profit 6,240 3,976
Selling, general and administrative expenses 2,665 1,868
----- -----
Operating income 3,575 2,108
Interest income (expense), net (421) 13
------ -----
Income before minority interest and income taxes 3,154 2,121
Minority interest, net of income taxes 44 -
-------- -------
Income before income taxes 3,198 2,121
Income tax expense 1,503 772
------ -------
Income from continuing operations 1,695 1,349
------ ------
Discontinued operations:
Loss from operation of discontinued
segment - (283)
Income tax benefit - 113
---- -------
Loss on discontinued operations - (170)
---- ---------
Net income $ 1,695 $ 1,179
====== ========
Basic earnings per share - continuing operations $ 0.52 $ 0.46
Diluted earnings per share - continuing operations $ 0.52 $ 0.42
Basic (loss) per share - discontinued operations $ 0.00 ($ 0.06)
Diluted (loss) per share - discontinued operations $ 0.00 ($ 0.06)
Basic earnings per share $ 0.52 $ 0.40
Diluted earnings per share $ 0.52 $ 0.37
Weighted average common shares outstanding - basic 3,261 2,944
Weighted average common shares outstanding - diluted 3,291 3,177
Dividends per common share $0.50 $0.00
See accompanying notes to condensed consolidated financial statements.
REINHOLD INDUSTRIES, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
(Unaudited)
March 31, 2005 December 31, 2004
ASSETS
Current assets:
Cash and cash equivalents $ 2,937 $ 4,015
Accounts receivable 8,923 8,758
Inventories 9,877 8,214
Deferred income taxes 651 1,312
Other current assets 2,088 1,999
------- -------
Total current assets 24,476 24,298
Property, plant and equipment, net 7,923 8,171
Goodwill 2,521 2,521
Deferred income taxes 3,851 3,851
Other assets 693 605
------- --------
$ 39,464 $ 39,446
====== ======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 6,178 $ 4,030
Accrued expenses 2,438 3,352
Current portion of long term debt,
including capital leases 4,417 4,434
------ -----
Total current liabilities 13,033 11,816
Long-term pension liability 5,879 5,879
Long term debt, less current portion 23,075 24,229
Minority interest 365 409
Other long term liabilities 295 303
--- ---
Total liabilities 42,647 42,636
Commitments and contingencies - -
Stockholders' deficit:
Common stock, $0.01 par value:
Class A - Authorized: 4,750,000 shares
Issued and outstanding: 3,251,846 shares
and 3,251,222 shares, respectively 32 32
Additional paid-in capital 1,413 1,371
Retained earnings 65 -
Accumulated other comprehensive loss (4,693) (4,593)
-------- --------
Net stockholders' deficit (3,183) (3,190)
------- --------
$ 39,464 $ 39,446
====== ======
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,
2005 2004
---- ----
Cash flows from operating activities:
Income from continuing operations $ 1,695 $ 1,349
Adjustments to reconcile income from continuing
operations to net cash provided by (used in)
operating activities:
Depreciation and amortization 375 360
Additions to paid-in capital resulting from
tax benefits - 311
Non-cash compensation 42 18
Changes in assets and liabilities:
Accounts receivable (249) (1,611)
Inventories (1,775) (734)
Other current assets 569 280
Accounts payable 2,212 1,437
Accrued expenses (887) (1,433)
Minority interest (36) -
Other, net (131) -
Cash flows used in discontinued operations - (687)
------- ----
Net cash provided by (used in) operating activities 1,815 (710)
------ ------
Cash flows from investing activities:
Capital expenditures (127) (381)
------ ------
Net cash used in investing activities (127) (381)
------- -----
Cash flows from financing activities:
Proceeds from exercise of stock options - 91
Dividends paid (1,630) -
Repayment of long-term debt (1,171) (34)
------- -------
Net cash provided by (used in) financing activities (2,801) 57
------- -------
Effect of exchange rate changes on cash 35 164
----- ------
Net decrease in cash and cash equivalents (1,078) (870)
Cash and cash equivalents, beginning of period 4,015 6,172
----- -------
Cash and cash equivalents, end of period $ 2,937 $ 5,302
===== =======
See accompanying notes to condensed consolidated financial statements
REINHOLD INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
DESCRIPTION OF BUSINESS
Reinhold Industries, Inc. ("Reinhold" or the "Company") is a manufacturer of
advanced custom composite components and sheet molding compounds for a variety
of applications in the United States and Europe. Reinhold derives revenues from
the defense contract industry, the aircraft 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 U.S. 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 GAAP 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,
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, 2005 and 2004 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, 2004.
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. The Company assesses the inventory carrying value and reduces it
if necessary to its net realizable value based on customer orders on hand, and
internal demand forecasts using management's best estimates given information
currently available. The components of inventory are as follows (in thousands):
March 31, 2005 December 31, 2004
- --------------------------------------------------------------------------------
Raw material $ 7,311 5,921
Work-in-process 1,894 1,506
Finished goods 672 787
- --------------------------------------------------------------------------------
Total $ 9,877 8,214
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.
The reconciliations of basic and diluted weighted average shares are as follows
(in thousands, except exercise price data):
Three Months Ended
March 31,
2005 2004
- --------------------------------------------------------------------------------
Income from continuing operations $1,695 $1,349
====== ======
Net income $1,695 $1,179
====== ======
Weighted average shares used
in basic computation 3,261 2,944
Dilutive effect of stock options 30 233
----- -----
Weighted average shares used
for diluted calculation 3,291 3,177
Stock options outstanding 44 339
Range of exercise price $7.32-$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 No. 123 (in thousands except for per share
data):
Three Months
Ended March 31,
2005 2004
- --------------------------------------------------------------------------------
Net income as reported $1,695 $1,179
- --------------------------------------------------------------------------------
Deduct, total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (26) (26)
- --------------------------------------------------------------------------------
Net income, as adjusted $1,669 $1,153
====== ======
Earnings per share:
Basic - as reported $ 0.52 $ 0.40
Basic - as adjusted $ 0.51 $ 0.39
Diluted - as reported $ 0.52 $ 0.37
Diluted - as adjusted $ 0.51 $ 0.36
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, 2005 and 2004 was a loss on foreign currency translation
of $100,000 and a gain of $164,000, respectively.
INCOME TAXES
Income taxes for interim periods are computed using the estimated effective tax
rate to be applicable for the current year and differ from the statutory Federal
rate as follows:
Three Months
Ended March 31,
2005 2004
- --------------------------------------------------------------------------------
Statutory Federal rate 34% 34 %
State taxes, net of Federal benefit 3% 2 %
Rate difference on foreign income 9% (1)%
Other 1% 1 %
- --------------------------------------------------------------------------------
Effective tax rate on income from continuing operations 47% 36 %
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"). On March 21,
2002, the Company received $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 previous 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 was
reduced from $10,000,000 to $8,000,000. On June 19, 2003 the Company paid off
the remaining outstanding balance.
On December 7, 2004, the Company amended the existing credit facility with
LaSalle. The new credit facility consists of a five-year term loan in the amount
of $24,500,000 and a revolving credit facility of up to $12,000,000.The credit
facility is secured by all of the Company's financial assets. The term loan is
payable in equal monthly principal installments of $367,000 plus accrued
interest. Interest is at a rate which approximates LIBOR plus 3%. Borrowings
against the revolving credit facility are not due until 2009, but are
voluntarily repayable at any time. Accrued interest on the revolving credit
facility is payable monthly and is at a rate which approximates LIBOR plus
2.50%. A monthly fee of 0.5% of the unused revolving credit facility is also
payable. Borrowings under the revolving credit facility are limited to the lower
of $12,000,000 or a baseline amount ("borrowing base") which is computed monthly
and includes qualifying accounts receivable and inventories. If outstanding
borrowings under the revolving credit facility exceed the borrowing base, then a
mandatory repayment of the difference would be required. The borrowing base at
March 31, 2005 was approximately $8.5 million. Letters of credit are included in
the revolving credit facility and are subject to a fee of 2.5% of the face
amount. Outstanding letters of credit at March 31, 2005 were $600,000. Amounts
available under the revolving credit facility at March 31, 2005 were
approximately $0.9 million.
The credit facility is subject to various financial covenants to which the
Company must comply. The covenants require the Company to maintain certain
ratios of profitability, total outstanding debt, and limits on cash dividends.
The Company is in compliance with all covenants as of March 31, 2005.
Prior to December 31, 2004, the Company received $31,500,000 from LaSalle
against this credit facility. The proceeds from the credit facility and
additional cash on hand were used to pay the special cash dividend of $11.75 per
share on December 28, 2004 totaling approximately $38,200,000.
The outstanding balance with LaSalle was $27,479,000 at March 31, 2005.
DERIVATIVE INSTRUMENTS
The Company utilizes interest rate derivatives to mitigate risk associated with
fluctuations in the interest rates on the Company's variable rate borrowings.
The Company does not hold or issue derivative financial instruments for trading
or speculative purposes. The Company has designated its derivative financial
instruments as economic cash flow hedges. The Company's derivatives do not
qualify with the standards required to account for its derivatives as effective
hedges and therefore, changes in the fair value of the Company's derivatives are
recognized in the consolidated statement of operations.
Notes to Condensed Consolidated Financial Statements (Continued)
In accordance with the existing credit facility, on January 6, 2005, the Company
entered into a 5-year fully amortized interest rate swap agreement with LaSalle
Bank for a notional amount of $8.8 million. The agreement has a floor and cap
rate of 2.96% and 6.00%, respectively and is payable monthly based on the
difference between 30 day LIBOR and the respective floor or cap rate. Additional
interest expense paid by the Company during the three month period ended March
31, 2005 related to this agreement totaled approximately $8,000. The fair value
of this derivative at March 31, 2005 was not material.
PENSION PLANS
The Company currently has one defined benefit pension plan and a 401(k) plan
covering substantially all employees. The benefits paid under the defined
benefit pension plan 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 plan 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
Ended March 31,
2005 2004
- --------------------------------------------------------------------------------
Service cost $ - $66
Interest cost on benefits earned in prior years 220 275
Expected return on assets (232) (246)
Amortization of net loss 112 131
- --------------------------------------------------------------------------------
Net pension cost $100 $226
On December 31, 2004, the Reinhold Industries, Inc. Retirement Plan was frozen.
No additional years of service or future salary increases will accrue to active
employees in determining plan benefits. There will be no change in benefit
levels to terminated vested and retired employees.
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 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.
Notes to Condensed Consolidated Financial Statements (Continued)
DISCONTINUED OPERATIONS
During the three months ended September 30, 2004, management committed to a plan
of action to sell its wholly-owned subsidiary, Samuel Bingham Enterprises, Inc.
The decision to sell was based on continuing losses from operations and a
negative long-term outlook in the marketplaces this subsidiary serves. On
September 30, 2004, management determined that the plan of sale criteria in FASB
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," had
been met. Accordingly, the carrying value of its fixed assets and goodwill was
adjusted to its fair value less costs to sell, amounting to $2.9 million. Fair
value was determined based on the highest offer received from several potential
strategic suitors. The resulting $5.7 million impairment charge was included in
"Loss from discontinued operations" in the statement of operations.
On December 17, 2004, Samuel Bingham Enterprises, Inc. sold certain assets and
transferred certain liabilities to Finzer Roller, L.L.C. for $3.1 million cash,
subject to post-closing adjustments. The assets sold included accounts
receivable, inventories, prepaid expenses, equipment, real property, tangible
personal property, intellectual and other intangible property. Liabilities
transferred include accounts payable, accrued expenses and defined benefit
pension plan obligations. The purchase price was adjusted by $0.3 million during
the first quarter 2005 to $2.8 million based on the final computation of closing
date working capital. The purchase price adjustment was accrued as of December
31, 2004.
Operating results of the discontinued operations for the three months ended
March 31, 2005 and 2004 are summarized as follows (in thousands):
Three Months
Ended March 31,
2005 2004
- --------------------------------------------------------------------------------
Net sales $- $4,276
- --------------------------------------------------------------------------------
Loss from operations - (283)
Impairment loss - -
Tax benefit - 113
- --------------------------------------------------------------------------------
Loss on discontinued operations $- ($ 170)
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 and sheet
molding compounds for a variety of applications primarily in the United States
and Europe. The Company generates revenues from four operating segments:
Aerospace, CompositAir, Commercial and NP Aerospace. 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.
Due to the status of the Bingham business unit as a discontinued operation,
historical segment data has been removed from the 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).
Three Months Ended
March 31,
2005 2004
- --------------------------------------------------------------------------------
Net sales
Aerospace $ 5,002 $ 5,142
CompositAir 1,274 1,297
Commercial 905 777
NP Aerospace 11,796 5,400
- --------------------------------------------------------------------------------
Total sales $18,977 $12,616
Income before income taxes from continuing
operations
Aerospace $ 1,359 $ 1,542
CompositAir (217) (15)
Commercial 128 65
NP Aerospace 2,785 766
Unallocated corporate expenses (857) (237)
- --------------------------------------------------------------------------------
Total income before income taxes
from continuing operations $ 3,198 $ 2,121
March 31, 2005 December 31, 2004
- --------------------------------------------------------------------------------
Total assets
Aerospace $10,672 $12,266
CompositAir 2,596 2,564
Commercial 1,553 1,503
NP Aerospace 16,500 13,858
Unallocated corporate 8,143 9,255
- --------------------------------------------------------------------------------
Total assets $39,464 $39,446
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB revised Statement No. 151 (FAS 151) "Inventory Costs,
an amendment of ARB No. 43, Chapter 4." FAS 151 clarifies that abnormal amounts
of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and requires the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The impact to the Company has not yet been
determined.
In December 2004, the FASB revised Statement No. 123 (FAS 123R), "Share-Based
Payment." FAS 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro forma disclosure is no longer an alternative. The new
standard will be effective for public entities (excluding small business
issuers) in the first interim or annual reporting period beginning after
December 15, 2005. The impact to the Company has not yet been determined.
REINHOLD INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
March 31, 2005
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, 2004.
Reinhold Industries, Inc. ("Reinhold" or the "Company") is a manufacturer
of advanced custom composite components and sheet molding compounds for a
variety of applications in the United States and Europe. Reinhold derives
revenues from the defense contract industry, the aircraft 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 U.S. 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 GAAP 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,
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 persuasive evidence of an arrangement
exists, the price is fixed or determinable, collection is reasonably assured and
delivery of products has occurred or services have been rendered. Allowance for
doubtful accounts is 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 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 gains of approximately $921,000 and
$1,021,000 that were included as part of "accumulated other comprehensive loss"
within our balance sheet at March 31, 2005 and December 31, 2004, respectively.
Accounting for Investment in Majority Owned Subsidiary
In August 2004, NP Aerospace Ltd. ("NPA"), the Company's wholly-owned U.K.
subsidiary, and King Abdullah II Design and Development Bureau ("KADDB"), a
Jordanian company, entered into a joint venture agreement to establish a
composites manufacturing facility in the country of Jordan. NP Aerospace Jordan
WLL ("NPAJ"), a Jordanian limited liability company, was created as a result of
the agreement. NPAJ is owned 51% by NPA and 49% by KADDB. In accordance with
SFAS 94," Consolidation of All Majority-Owned Subsidiaries," the Company is
required to consolidate all majority owned subsidiaries unless control is
temporary or does not rest with the majority owner. This Statement requires
consolidation of a majority-owned subsidiary even if it has "nonhomogeneous"
operations, a large minority interest, or a foreign location. As of March 31,
2005 and December 31, 2004, the financial statements of NPAJ have been
consolidated into the financial statements of NP Aerospace.
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 First Quarter 2005 to 2004
In the first quarter of 2005, net sales increased $6.4 million (50%) to
$19.0 million, compared to first quarter 2004 sales of $12.6 million. Sales in
the Aerospace business unit decreased by $0.1 million (3%) to $5.0 million.
Sales in the CompositAir business unit were flat at $1.3 million compared with
the first quarter of 2004. Sales increased $0.1 million (16%) to $0.9 million in
the Commercial business unit due to higher shipments of pool filter tanks. Sales
at NP Aerospace increased by $6.4 million (118%) to $11.8 million due primarily
to retrofitting of light armored vehicles for the U.K. Ministry of Defense and
sales of military helmets by NPA Jordan.
Gross profit margin in the first quarter of 2005 increased to 33% from 32%
in 2004. Gross profit margin for Aerospace increased from 44% to 47% due to
changes in product mix. Gross profit margin for CompositAir was flat at
approximately 13%. Gross profit margin for Commercial increased from 26% to 33%
due primarily to increased selling prices. Gross profit margin for NP Aerospace
increased from 25% to 29% due to increased sales and the resulting absorption of
manufacturing overhead expenses.
Management's Discussion and Analysis (cont'd)
Selling, general and administrative expenses for the first quarter 2005
were $2.7 million (14% of sales) compared to $1.9 million (15% of sales) for the
same quarter of 2005. The increase is primarily due to increased compensation
costs and higher audit and tax compliance fees.
Interest expense, net was $0.4 million in the first quarter of 2005
compared to interest income, net of $13 thousand in the first quarter of 2004
due to borrowings against the bank line of credit in December 2004.
Income before income taxes increased to $3.2 million (17% of sales) in the
first quarter of 2005 from $2.1 million (17% of sales) in the same period of
2004. Income before income taxes for Aerospace was $1.4 million (27% of sales)
in 2005 compared to $1.5 million (30% of sales) in 2004 due to increased
selling, general and administrative expenses. A loss before income taxes was
realized for CompositAir in the first quarter of 2005 of $0.2 million (-17% of
sales) compared to breakeven in 2004 due to the elimination of technology
transfer fee income. Income before income taxes for Commercial increased by 97%
to $128 thousand (14% of sales) compared to $65 thousand (8% of sales) in 2004.
Income before income taxes for NP Aerospace increased to $2.8 million (24% of
sales) from $0.8 million (14% of sales) due to higher sales of retrofitted light
armored vehicles for the U.K. Ministry of Defense and sales of military helmets
by NPA Jordan.
Income tax expense of $1.5 million (47% effective rate) was recorded in
the first quarter of 2005 as compared to $0.7 million (31% effective rate) the
first quarter of 2004 due to the tax impact of the repatriation of foreign
funds. 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.
Loss on discontinued operations, net of income tax benefit, was $0.2
million in the first quarter of 2004. Bingham was sold in December 2004.
At December 31, 2004, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $23.9 million. The Company may
utilize the Federal net operating losses by carrying them forward to offset
future Federal taxable income, if any. These losses will begin to expire in
2011. As more fully described in Note 3 to the 2004 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, 2005, working capital was $11.4 million, down $1.0 million
from December 31, 2004. Cash and cash equivalents of $2.9 million held at March
31, 2005 were $1.1 million lower than cash and cash equivalents held at December
31, 2004 primarily due to the repayment of long term debt and shareholder
dividends.
Net cash provided by operating activities totaled $1.8 million for the
three months ended March 31, 2005. Net cash used in operating activities totaled
$0.7 million for the comparable period in 2004. The increase over the prior
period is due to higher income from continuing operations and the elimination of
cash consumed by Bingham.
Management's Discussion and Analysis (cont'd)
Net cash used in investing activities for the three months ended March 31, 2005
and 2004 totaled $0.1 million and $0.4 million, respectively, and consisted of
capital expenditures.
Net cash used in financing activities for the three months ended March 31,
2005 totaled $2.8 million and consisted of dividends paid of $1.6 million and
the repayment of long term debt of $1.2 million. Net cash provided by financing
activities for the three months ended March 31, 2004 totaled $0.1 million and
consisted of proceeds of stock option exercises less repayment of long-term
debt.
Expenditures in 2005 and 2004 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"). On
March 21, 2002, the Company received $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 previous 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 was reduced from $10,000,000 to $8,000,000. On June 19, 2003 the
Company paid off the remaining outstanding balance.
On December 7, 2004, the Company amended the existing credit facility
with LaSalle. The new credit facility consists of a five-year term loan in the
amount of $24,500,000 and a revolving credit facility of up to $12,000,000.The
credit facility is secured by all of the Company's financial assets. The term
loan is payable in equal monthly principal installments of $367,000 plus accrued
interest. Interest is at a rate which approximates LIBOR plus 3%. Borrowings
against the revolving credit facility are not due until 2009, but are
voluntarily repayable at any time. Accrued interest on the revolving credit
facility is payable monthly and is at a rate which approximates LIBOR plus
2.50%. A monthly fee of 0.5% of the unused revolving credit facility is also
payable. Borrowings under the revolving credit facility are limited to the lower
of $12,000,000 or a baseline amount ("borrowing base") which is computed monthly
and includes qualifying accounts receivable and inventories. If outstanding
borrowings under the revolving credit facility exceed the borrowing base, then a
mandatory repayment of the difference would be required. The borrowing base at
March 31, 2005 was approximately $8.5 million. Letters of credit are included in
the revolving credit facility and are subject to a fee of 2.5% of the face
amount. Outstanding letters of credit at March 31, 2005 were $600,000. Amounts
available under the revolving credit facility at March 31, 2005 were
approximately $0.9 million.
The credit facility is subject to various financial covenants to which
the Company must comply. The covenants require the Company to maintain certain
ratios of profitability, total outstanding debt, and limits on cash dividends.
The Company is in compliance with all covenants as of March 31, 2005.
Management's Discussion and Analysis (cont'd)
Prior to December 31, 2004, the Company received $31,500,000 from
LaSalle against this credit facility. The proceeds from the credit facility and
additional cash on hand were used to pay the special cash dividend of $11.75 per
share on December 28, 2004 totaling approximately $38,200,000.
The outstanding balance with LaSalle was $27,479,000 at March 31, 2005
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, 2006.
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
All of the Company's debt at March 31, 2005, approximately $27.5
million, is at variable interest rates based on LIBOR plus 2.50% - 3.00%.
Short-term LIBOR rates have increased from approximately 2.55% at December 31,
2004 to 3.09% at March 31, 2005. This trend is expected to continue in the
foreseeable future. A hypothetical 1% additional increase in interest rates
would have a $190,000 impact on interest expense for the year ended December 31,
2005.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of March 31, 2005, 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
None
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.
3.6 Amended and restated By-Laws of Reinhold Industries, Inc. on form 8-K
filed with the Commission on August 31, 2004.
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 incorporated by
reference to Exhibit 10.1 to the Company's Report 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 incorporated by reference to Exhibit
10.2 to the Company's Report 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 incorporated by
reference to Exhibit 10.3 to the Company's Report 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 incorporated by
reference to Exhibit 10.9 to the Company's Report on Form 10-Q filed
with the Commission on May 9, 2002.
10.10 Amended and Restated Reinhold Industries, Inc. Stock Incentive
Plan, incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8, filed with the Commission on
December 1, 2002. **
10.11 Directors Deferred Stock Plan dated September 30, 2002
incorporated by reference to Exhibit 10.11 to the Company's Report
on Form 10-K filed with
the Commission on March 28, 2003. **
10.12 Asset Purchase Agreement by and among Reinhold Industries, Inc.,
Samuel Bingham Enterprises, Inc., and Finzer Roller, L.L.C.
incorporated by reference to Exhibit 2 to the Company's Report on
Form 8-K filed with the Commission on December 17, 2004.
10.13 Amended and Restated Credit Agreement dated as of December 8, 2004
among Reinhold Industries, Inc., NP Aerospace Limited, as borrowers,
and LaSalle Bank National Association filed on Form 10-K filed with
the Commission on March 30, 2005.
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
** Management compensation plans and agreements
b. Reports on Form 8-K
Form 8-K/A was filed on March 30, 2005 disclosing pro-forma information
for 2004 for the impact of interest expense on the LaSalle line of
credit and the sale of Samuel Bingham Enterprises, Inc. as if the
transactions had occurred on January 1, 2004.
Form 8-K was filed on February 10, 2005 disclosing non-reliance on the
financial statements for the quarter and nine months ended September
30, 2004.
Form 8-K was filed on January 3, 2005 announcing the completion of
payment of the $11.75 per share special dividend on December 28, 2005.
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 12, 2005
By: /S/ Brett R. Meinsen
Brett R. Meinsen
Vice President - Finance and Administration,
Treasurer and Secretary
(Principal Financial Officer)