10-Q 1 sept10q.txt 9/30/2001 10-Q 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: September 30, 2001 [ ] 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. -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in charter) Delaware 13-2596288 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12827 East Imperial Hwy, Santa Fe Springs, CA 90670 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code (562) 944-3281 -------------------------------------------------------------------------------- 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 $0.01 - 2,416,722 shares as of November 9, 2001. REINHOLD INDUSTRIES, INC. AND SUBSIDIARIES 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 16 PART II - OTHER INFORMATION 22 SIGNATURES 25 REINHOLD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) (Unaudited) Three Months Ended September 30, 2001 2000 ---- ---- Net sales $12,096 $13,281 Cost of goods sold 8,813 9,286 ----- ------ Gross profit 3,283 3,995 Selling, general and administrative expenses 2,765 2,660 Write-down of long-lived assets 5,351 - ----- ------ Operating income (loss) (4,833) 1,335 Interest expense, net 113 183 ------ ------ Income (loss) before income taxes (4,946) 1,152 Income tax expense (benefit) (217) 438 ------ ------ Net income (loss) ($ 4,729) $ 714 ====== ====== Earnings (loss) per share - basic ($ 1.96) $ 0.30 Earnings (loss) per share - diluted ($ 1.96) $ 0.29 Weighted average common shares outstanding - basic 2,417 2,417 Weighted average common shares outstanding - diluted 2,417 2,462 See accompanying notes to condensed consolidated financial statements REINHOLD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) (Unaudited) Nine Months Ended September 30, 2001 2000 ---- ---- Net sales $37,594 $36,784 Cost of goods sold 27,227 25,708 ------ ------ Gross profit 10,367 11,076 Selling, general and administrative expenses 7,686 6,755 Write-down of long-lived assets 5,351 - ------ ------- Operating income (loss) (2,670) 4,321 Interest expense, net 396 358 ------ ------ Income (loss) before income taxes (3,066) 3,963 Income tax expense 503 1,506 ------ ------- Net income (loss) ($ 3,569) $ 2,457 ======= ====== Earnings (loss) per share - basic ($ 1.48) $ 1.02 Earnings (loss) per share - diluted ($ 1.48) $ 1.00 Weighted average common shares outstanding - basic 2,417 2,417 Weighted average common shares outstanding - diluted 2,417 2,467 See accompanying notes to condensed consolidated financial statements REINHOLD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data) Unaudited September 30, 2001 December 31, 2000 ------------------ ----------------- ASSETS Current assets: Cash and cash equivalents $ 2,853 $ 7,121 Accounts receivable 6,812 6,984 Inventories 6,354 6,065 Other current assets 3,853 3,053 ------- ------- Total current assets 19,872 23,223 Property, plant and equipment, net 11,605 11,280 Cost in excess of fair value of net assets of acquired companies, net 3,876 5,948 Other assets 712 258 ------- -------- $ 36,065 $ 40,709 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion - long term debt $ 2,715 $ 2,778 Accounts payable 3,055 2,278 Accrued expenses 2,186 3,578 ------ ------ Total current liabilities 7,956 8,634 Long term debt - less current portion 7,693 8,721 Other long term liabilities 438 449 Stockholders' equity: Preferred stock Authorized: 250,000 shares Issued and outstanding: None - - Common stock Class A - Authorized: 4,750,000 shares Issued and outstanding: 2,416,722 shares and 2,198,058 shares, respectively 24 22 Additional paid-in capital 18,328 15,931 Retained earnings 2,810 7,972 Accumulated comprehensive loss (1,184) (1,020) ------- ------- Net stockholders' equity 19,978 22,905 ------ ------ $ 36,065 $ 40,709 ====== ====== See accompanying notes to condensed consolidated financial statements REINHOLD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) Nine months ended September 30, 2001 2000 ----- ----- Cash flow from operating activities: Net income (loss) ($ 3,569) $ 2,457 Adjustments to reconcile net income to net cash provided by operating activities (net of effects of acquisition): Depreciation and amortization 1,228 1,084 Additions to paid-in capital resulting from tax benefits 813 1,100 Write-down of long-lived assets 5,351 - Foreign currency translation (164) (635) Changes in assets and liabilities: Accounts receivable 423 461 Inventories (61) 547 Other current assets (797) (674) Accounts payable 578 (1,328) Accrued expenses (1,392) (294) Deferred tax asset (505) - Other, net (11) 162 ------- ------- Net cash provided by operating activities 1,894 2,880 ------ ------- Cash flow from investing activities: Acquisitions (2,654) (15,030) Proceeds from sale of assets 198 - Capital expenditures (2,081) (882) ------- ------- Net cash used in investing activities (4,537) (15,912) ------- ------- Cash flow from financing activities: Proceeds from long-term debt - 11,000 Repayment of long term debt (1,617) (700) Dividends paid (8) (7) ------ ------- Net cash provided by (used in) financing activities (1,625) 10,293 ------ ------- Net decrease in cash and cash equivalents (4,268) (2,739) Cash and cash equivalents, beginning of period 7,121 9,419 ------- ------- Cash and cash equivalents, end of period $ 2,853 $ 6,680 ======= ======= See accompanying notes to condensed consolidated financial statements. REINHOLD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) DESCRIPTION OF BUSINESS Reinhold Industries, Inc. and subsidiaries ("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. BASIS OF PRESENTATION The accompanying financial statements of the Company for the three and nine months ended September 30, 2001 and 2000 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, 2000. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and income and expense and disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. ACQUIRED BUSINESSES On April 20, 2001, Reinhold, purchased certain assets and assumed certain liabilities of Edler Industries, Inc. ("Edler"). Edler is a manufacturer of structural and ablative composite components mainly for subcontractors of the U.S. defense industry. The operation has been renamed the "Thermal Insulation" division of Reinhold. The purchase price was $2.6 million consisting of $1.6 million cash paid at closing and a $1.0 million, 8% interest bearing note paid in September 2001. The cost in excess of fair value of net assets acquired of $2.2 million is being amortized over twenty years. On March 9, 2000, the Company, through its wholly-owned subsidiary, Samuel Bingham Enterprises, Inc., an Indiana corporation, purchased substantially all of the assets, including real, personal and intellectual properties, and assumed certain liabilities of Samuel Bingham Company ("Bingham"), an industrial and graphic arts roller manufacturing and supplying business, headquartered in Bloomingdale, Illinois. The purchase price paid was $14,742,000 plus expenses of $406,000. The cost in excess of fair value of net assets acquired, as of the acquisition date, was $5,555,000 and is currently being amortized over forty years (see Long-Lived Assets note). A significant source of funds for the purchase price was a five-year bank loan for $11,000,000 with the balance being paid from cash on hand. The acquisitions of Edler and Bingham have been accounted for by the purchase method and, accordingly, the results of operations have been included in the consolidated financial statements from the date of each acquisition. REINHOLD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) The pro forma unaudited results of operations for the nine months ended September 30, 2000, assuming consummation of the purchase of Bingham as of January 1, 2000 are as follows (in thousands, except earnings per share data): Nine Months Ended September 30, 2000 ------------------- Net sales $41,110 Net income $2,692 Earnings per share - basic $1.11 Earnings per share - diluted $1.09 LONG-LIVED ASSETS The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. In the third quarter of 2001, the Company recorded a charge of approximately $5.3 million to write-down long-lived assets associated with the Bingham operating segment. Included in the $5.3 million charge was $1.3 million write-down of fixed assets related to the seven manufacturing and administrative locations of Bingham that were closed or are in the process of being closed. The fixed assets were written down to their estimated fair value which was determined based on the proceeds received and estimated to be received from the sales of the respective facilities. The Company then determined that the estimated future undiscounted operating cash flows of the remaining Bingham operations were less than the carrying amount of Bingham's remaining long-lived assets. Based on its evaluation, the Company determined Bingham's long-lived assets, with a carrying value of $10.7 million, were impaired and wrote them down by $4.0 million to their estimated fair value. This write-down was charged to goodwill. Fair value was based on estimated discounted future operating cash flows of the Bingham operations. 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 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): September 30, 2001 December 31, 2000 -------------------------------------------------------------------------------- Raw material $ 4,630 $ 4,205 Work-in-process 1,039 744 Finished goods 685 1,116 -------------------------------------------------------------------------------- Total $ 6,354 $ 6,065 ===== ===== REINHOLD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) 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. On May 8, 2001, the Board of Directors approved the distribution of a 10% stock dividend to shareholders of record as of July 13, 2001. As a result, an additional 218,664 shares were issued on July 31, 2001. 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. REPORTING COMPREHENSIVE INCOME The Company reports 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 September 30, 2001 and 2000 was a gain (loss) on foreign currency translation of $273,000 and ($147,000), respectively. The difference between net income and total comprehensive income during the nine months ended September 30, 2001 and 2000 was a loss on foreign currency translation of ($164,000) and ($635,000), respectively. REINHOLD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 addresses financial accounting and reporting for business combination and requires all business combinations to be accounted for using the purchase method. SFAS No. 141 is effective for any business combinations initiated after June 30, 2001. SFAS No. 142, effective for the Company January 1, 2002, addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Goodwill and other intangible assets with indefinite lives will no longer be amortized but instead subject to impairment tests at least annually. The Company has determined that the impact of adopting SFAS No. 142 will be immaterial to its financial position and results of operations. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144, effective for the Company January 1, 2002, supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that opinion). SFAS 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions than were included under the previous standards. The Company has determined that the impact of adopting SFAS No. 144 will be immaterial to its financial position and results of operations. INCOME TAXES Income taxes for interim periods are computed using the estimated effective tax rate to be applicable for the current year. LONG TERM DEBT On April 22, 1998, the Company borrowed $2,268,000 from The CIT Group Credit/Finance ("CIT") to fund a portion of the purchase consideration due to Courtaulds Aerospace. The Company had previously entered into a Five Year Loan and Security Agreement with CIT in the amount of Four Million Dollars ($4,000,000). The term portion of the loan ($2,268,000) was payable in equal monthly principal payments of $37,800 plus interest at prime plus 1.75% and was secured by fixed assets and land. The remainder of the CIT credit facility was a revolver of One Million Seven Hundred Thirty-Two Thousand Dollars ($1,732,000), which had not been used as of April 15, 1999. On April 16, 1999, the Company repaid the outstanding loan with the CIT Group Credit/Finance through a refinancing with Bank of America National Trust and Savings Association ("B of A") and cancelled the revolver. The new credit facility with B of A is a term loan in the amount of $1,861,478 payable in 48 equal monthly principal installments of $38,780 plus interest at a rate which approximates LIBOR plus 1.75% and is secured by fixed assets. Effective November 1, 2001, the interest rate will change to approximate LIBOR plus 3.50%. On March 9, 2000, the Company borrowed $11,000,000 from B of A to fund a portion of the purchase consideration due to Samuel Bingham Company. The principal portion of the loan is payable in twenty successive quarterly installments beginning June 30, 2000. Interest is payable quarterly at a rate which approximates LIBOR plus 1.75% and is secured by all financial assets of the Company. Effective November 1, 2001, the interest rate will change to approximate LIBOR plus 3.50%. Both loan agreements with B of A are subject to various financial covenants to which the Company must comply. The covenants require the Company to maintain certain ratios of profitability or cash flow to total outstanding debt, minimum net worth and limits on capital expenditures. The Company has breached certain covenants at September 30, 2001 due to lower than expected earnings and higher than expected capital expenditures for its new administrative and production building. The Company requested and has received waivers to these covenants from B of A. 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. REINHOLD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) 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 income 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". Thermal Insulation data for 2001 has been added to the disclosure below due to the April 20, 2001 purchase of its predecessor, Edler. 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 six operating segments: Aerospace, CompositAir, Commercial, Thermal Insulation, 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. Thermal Insulation produces composite components mainly for subcontractors of the U.S. defense industry. 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. REINHOLD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) 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 Nine Months Ended September 30, September 30, 2001 2000 2001 2000 -------------------------------------------------------------------------------- Net sales Aerospace $ 2,886 $ 2,538 $ 7,210 $ 6,090 CompositAir 1,478 1,668 4,712 5,923 Commercial 716 771 2,320 2,231 Thermal Insulation 466 - 1,342 - NP Aerospace 2,342 2,629 7,386 9,575 Bingham 4,208 5,675 14,624 12,965 -------------------------------------------------------------------------------- Total sales $12,096 $13,281 $ 37,594 $ 36,784 -------------------------------------------------------------------------------- Income (loss) before income taxes Aerospace $ 942 $ 790 $ 2,248 $ 1,868 CompositAir (97) 136 (62) 739 Commercial 46 101 250 328 Thermal Insulation 30 - 313 - NP Aerospace 342 210 798 1,231 Bingham (5,970) 64 (6,079) 222 Unallocated corporate expenses (239) (149) (534) (425) -------------------------------------------------------------------------------- Total income (loss) before income taxes ($ 4,946) $ 1,152 ($ 3,066) $ 3,963 -------------------------------------------------------------------------------- September 30, 2001 December 31, 2000 -------------------------------------------------------------------------------- Total assets Aerospace $ 5,457 $ 4,963 CompositAir 2,865 2,613 Commercial 1,039 1,091 Thermal Insulation 2,999 - NP Aerospace 6,478 9,612 Bingham 13,080 18,077 Unallocated corporate 4,147 4,353 -------------------------------------------------------------------------------- Total assets $36,065 $40,709 -------------------------------------------------------------------------------- REINHOLD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) 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. On June 16, 2000 the U.S. Department of Justice notified the Company that it may be a PRP with respect to the Valley Forge Site and demanded payment for past costs incurred by the United States in connection with the site, which the Department of Justice estimated at $1,753,726 incurred by the National Park Service ("NPS") as of May 31, 2000 and $616,878 incurred by the United States Environmental Protection Agency ("EPA") as of November 30, 1999. Payment of these past costs would not release the Company from a claim for future response costs. The Company understands that, currently, the Commonwealth of Pennsylvania is conducting a remedial investigation/feasibility study for the potential remediation of the Valley Forge Site. The Commonwealth, which once owned a portion of the site, and the NPS, which is the current site owner, are also PRPs potentially liable for the remediation costs at the site. On March 1, 2001, the Company commenced an action against the EPA and the NPS in the United States District Court for the Southern District of New York seeking a declaratory judgment that any claims asserted against it in connection with the Valley Forge site were barred as a matter of law due to two injunctions issued in 1996 in the bankruptcy case against its predecessor, Keene Corporation. On July 20, 2001, the United States served its answer and counterclaim to the Company's complaint on behalf of the NPS. In its answer, the government withdrew its request for reimbursement of the EPA's CERCLA response costs ($616,878) and objected to the relief sought by the Company. Its counterclaim seeks the recovery of past and present CERCLA response costs incurred by the NPS at the Valley Forge site and a declaratory judgement on liability that will be binding in future actions to recover future response costs. On August 3, 2001, the Company served a motion for summary judgment requesting judgment in its favor on its complaint and dismissal of the counterclaim. REINHOLD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) With respect to the Casmalia Site, on August 11, 2000, the EPA notified the Company that it is a PRP by virtue of waste materials deposited at the site. The EPA has designated the Company as a "de minimis" waste generator at this site, based on the amount of waste at the Casmalia Site attributed to the Company. As of November 9, 2001, it is uncertain if any material negative determination will be made against the Company in either of these matters. The Company has evaluated its potential environmental liability exposure at 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. With respect to the Valley Forge Site, if a court were to determine that the Company was liable for recoverable costs under CERCLA, the resulting liability could have a material adverse impact on the Company's consolidated financial position and results of operations. Future developments in the Company's pending lawsuit, including the outcome of the Company's motion for summary judgment and the results of the remedial investigation/feasibility study, will require the Company to continually reassess the expected impact of this matter. As of September 30, 2001, no liability has been recorded for future costs related to these environmental matters. Further details are available on Form 8-K filed with the Securities and Exchange Commission on November 1, 2000. REINHOLD INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS September 30, 2001 The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this filing, the financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Reinhold Industries, Inc. and subsidiaries ("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 primarily in the United States and Europe. Reinhold derives revenues from the defense contract industry, the aircraft industry, the printing industry and other commercial industries. Comparison of Third Quarter 2001 to 2000 In the third quarter of 2001, net sales decreased $1.2 million (9%), to $12.1 million, compared to third quarter 2000 sales of $13.3 million. The April 20, 2001 acquisition of Edler Industries, Inc. ("Edler"), renamed Thermal Insulation, added $0.5 million to third quarter 2001 sales. Sales decreased by $0.2 million (11%) at CompositAir due to lower sales to its largest customer, B/E Aerospace. Sales increased $0.3 million (14%) in the Aerospace business unit due to increased shipments of missile components. Sales at NP Aerospace decreased by $0.3 million (11%) due to softness in all product segments. Bingham sales declined by $1.5 million (26%) due to the closure of three manufacturing facilities. Sales in the Commercial business unit decreased by $0.1 million (7%) due to lower sales of pool filter tanks. Gross profit margin decreased to 27% in the third quarter of 2001 compared to 30% in the third quarter 2000. Bingham's gross profit margin declined to 21% from 29% due primarily to unabsorbed overhead costs caused by reduced sales volume. CompositAir's gross profit margin declined to 14% from 31% due to these same factors. Selling, general and administrative expenses for the third quarter 2001 were $2.8 million (23% of sales) compared to $2.7 million (20% of sales) for the same quarter of 2000. In the third quarter of 2001, the Company recorded a charge of approximately $5.3 million to write-down long-lived assets associated with the Bingham operating segment. Included in the $5.3 million charge was $1.3 million write-down of fixed assets related to the seven manufacturing and administrative locations of Bingham that were closed or are in the process of being closed. The fixed assets were written down to their estimated fair value which was determined based on the proceeds received and estimated to be received from the sales of the respective facilities. Interest expense for the quarter was $0.1 million compared to $0.3 million in the third quarter 2000 due to lower effective interest rates and lower total debt. Interest income was $0.02 million for the third quarter 2001 compared to $0.07 million for the third quarter of 2000 due to lower cash balances. Management's Discussion and Analysis (cont'd) A loss before income taxes of $4.9 million (-41% of sales) was realized in the third quarter of 2001 compared to a profit of $1.2 million (9% of sales) in the same period of 2000. Income before income taxes for CompositAir was a loss of $0.1 million (-7% of sales) in 2001 compared with $0.1 million of profit (8% of sales) in 2000 due to lower revenues. Income before income taxes at NP Aerospace was $0.3 million (15% of sales) in 2001 compared to $0.2 million (8% of sales) in 2000 due to sales of higher margin products and lower compensation expense. Income before income taxes for Bingham was a loss of $6.0 million (-142% of sales) in 2001 compared with $0.1 million of profit (1% of sales) in 2000 due to lower sales and charges of $5.3 million to write-down long-lived assets to fair value. Income before income taxes for Aerospace was $0.9 million (33% of sales) in 2001 compared with $0.8 million (31% of sales) in 2000 due to increased sales. The new Thermal Insulation business unit contributed $0.03 million of income before income taxes (6% of sales). A tax benefit of ($217,000) was recorded in the third quarter of 2001 as compared to a tax provision of $438,000 in the third quarter of 2000. Income taxes for interim periods are computed using the effective tax rate estimated to be applicable for the full financial year, which is subject to ongoing review and evaluation by management. At December 31, 2000, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $26,788,000 and net operating loss carryforwards for State income tax purposes of approximately $1,704,000. The Company may utilize the Federal net operating losses by carrying them forward to offset future Federal taxable income, if any, through 2011. The Company may utilize the State net operating losses by carrying them forward to offset future State taxable income, if any, through 2001. As more fully described in Note 3 to the 2000 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. Comparison of First Nine Months 2001 to 2000 In the first nine months of 2001, sales increased $0.8 million, or 2%, to $37.6 million, compared to the first nine months 2000 sales of $36.8 million. The April 20, 2001, acquisition of Edler, renamed Thermal Insulation, added $1.3 million to 2001 sales. Sales decreased by $1.2 million (20%) at CompositAir due to lower sales to its largest customer, B/E Aerospace. Sales increased $1.1 million (18%) in the Aerospace business unit due to increased shipments of missile components. Sales at NP Aerospace decreased by $2.2 million (23%) due to softness in all product segments. Bingham sales rose by $1.7 million (13%) due to the March 9, 2000 acquisition date. Sales in the Commercial business unit were $0.1 million higher (4%) due to increased tooling shipments. Gross profit margin decreased to 28% for the first nine months of 2001 compared to 30% in the first nine months of 2000. CompositAir's gross profit margin declined to 18% from 31% due primarily to unabsorbed overhead costs caused by reduced sales volume. Selling, general and administrative expenses for the first nine months of 2001 were $7.7 million (20% of sales) compared to $6.8 million (18% of sales) for the first nine months of 2000. In the third quarter of 2001, the Company recorded a charge of approximately $5.3 million to write-down long-lived assets associated with the Bingham operating segment. Included in the $5.3 million charge was $1.3 million write-down of fixed assets related to the seven manufacturing and administrative locations of Bingham that were closed or are in the process of being closed. The fixed assets were written down to their estimated fair value which was determined based on the proceeds received and estimated to be received from the sales of the respective facilities. Bingham selling, general and administrative expenses rose by $0.9 million due to the March 9, 2000 acquisition date. Management's Discussion and Analysis (cont'd) Interest expense for the first nine months of 2001 was unchanged at $0.6 million compared to 2000. 2001 includes nine months of interest expense on the Bingham acquisition loan versus seven months in 2000. Bingham was acquired on March 9, 2000. Interest income for the nine month period was $0.17 million for 2001 compared to $0.23 million for 2000 due to lower cash balances. A loss before income taxes of $3.1 million (-8% of sales) was realized during the first nine months of 2001 compared to a profit of $4.0 million (11% of sales) in the same period of 2000. Income before income taxes at NP Aerospace was $0.8 million (11% of sales) in 2001 compared to $1.2 million (13% of sales) in 2000 due to lower sales across all product segments. Income before income taxes for Bingham was a loss of $6.1 million (-42% of sales) in 2001 compared with a profit of $0.2 million (2% of sales) in 2000. This is due primarily to a non-cash charge of approximately $5.3 million recorded in the third quarter 2001 to write-down long-lived assets to their fair value. Income before income taxes for Aerospace was $2.2 million (31% of sales) in 2001 compared with $1.9 million (31% of sales) in 2000. The new Thermal Insulation business unit contributed $0.3 million of income before income taxes (23% of sales). A tax provision of $503,000 was recorded in the first nine months of 2001 as compared to $1,506,000 in the first nine months of 2000. Income taxes for interim periods are computed using the effective tax rate estimated to be applicable for the full financial year, which is subject to ongoing review and evaluation by management. At December 31, 2000, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $26,788,000 and net operating loss carryforwards for State income tax purposes of approximately $1,704,000. The Company may utilize the Federal net operating losses by carrying them forward to offset future Federal taxable income, if any, through 2011. The Company may utilize the State net operating losses by carrying them forward to offset future State taxable income, if any, through 2001. As more fully described in Note 3 to the 2000 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 September 30, 2001, working capital was $11.9 million, down $2.7 million from December 31, 2000. Cash and cash equivalents of $2.9 million held at September 30, 2001 were $4.2 million lower than cash and cash equivalents held at December 31, 2000 primarily due to $2.6 million in cash paid for the Edler acquisition and $2.1 million of capital expenditures. Net cash provided by operating activities totaled $1.9 million for the nine months ended September 30, 2001. Net cash provided by operating activities totaled $2.9 million for the comparable period in 2000. The decrease from the prior period relates primarily to lower profitability of the Company. Net cash used in investing activities for the nine months ended September 30, 2001 totaled $4.5 million and consisted of the acquisition of Edler Industries, Inc. for $2.6 million and capital expenditures of $2.1 million. Net cash used in investing activities for the nine months ended September 30, 2000 totaled $15.9 million and consisted of the acquisition of Bingham for $15.0 million and capital expenditures totaling $0.9 million. Management's Discussion and Analysis (cont'd) Net cash used in financing activities for the nine months ended September 30, 2001 totaled $1.6 million, representing $1.6 million repayment of long-term debt. Net cash provided by financing activities for the nine months ended September 30, 2000 totaled $10.3 million, representing the $11.0 million proceeds of the B of A loan less $0.7 million repayment of long-term debt. Expenditures in 2001 and 2000 related to investing and financing activities were financed by existing cash and cash equivalents and proceeds from the B of A loan. The Company has commitments of capital expenditures of approximately $0.2 million at September 30, 2001 relating to construction of a new 50,000 sq. ft. manufacturing/administration building at its Santa Fe Springs, California location. On March 9, 2000, the Company borrowed $11,000,000 from B of A to fund a portion of the purchase consideration due to Samuel Bingham Company. The principal portion of the loan is payable in twenty successive quarterly installments beginning June 30, 2000. Interest is payable quarterly at a rate which approximates LIBOR plus 1.75% and is secured by all financial assets of the Company. Effective November 1, 2001, the interest rate will change to approximate LIBOR plus 3.50%. Both loan agreements with B of A are subject to various financial covenants to which the Company must comply. The covenants require the Company to maintain certain ratios of cash flow to total outstanding debt, minimum net worth and limits on capital expenditures. The Company has breached certain covenants at September 30, 2001 due to lower than expected earnings and higher than expected capital expenditures for its new administrative and production building. The Company has received waivers to these covenants from B of A. Management's Discussion and Analysis (cont'd) Management believes that the available cash and cash flows from operations will be sufficient to fund the Company's operating and capital expenditure requirements for the next twelve months. Stock Dividend On May 8, 2001, the Board of Directors approved the distribution of a 10% stock dividend to shareholders of record on July 13, 2001. As a result, an additional 218,664 shares were issued on July 31, 2001. 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. 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 Form 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. 2001 Outlook In the third quarter, the Company recorded a non-cash charge of approximately $5.3 million to write-down long-lived assets associated with the Bingham operating segment to their fair value. Included in the $5.3 million charge was $1.3 million to write-down fixed assets related to the seven manufacturing and administrative locations of Bingham that were closed or are in the process of being closed and a $4.0 million goodwill impairment charge. As a result of the September 11, 2001 terrorist action, CompositAir's sales to its two largest customers have been impacted. A large percentage of CompositAir's backlog has been either postponed to an unknown future date or cancelled. We are forecasting approximately $1.0 million in sales for the fourth quarter for CompositAir, which equates to an operating loss of approximately $0.2 million. NP Aerospace has recently reduced headcount by 20%. This is expected to save approximately $0.5 million in 2002. The Aerospace business unit should continue its excellent financial performance for the balance of 2001 and the Thermal Insulation and Commercial business units should contribute positively for the balance of the year. Management's Discussion and Analysis (cont'd) Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 addresses financial accounting and reporting for business combination and requires all business combinations to be accounted for using the purchase method. SFAS No. 141 is effective for any business combinations initiated after June 30, 2001. SFAS No. 142, effective for the Company January 1, 2002, addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Goodwill and other intangible assets with indefinite lives will no longer be amortized but instead subject to impairment tests at least annually. The Company has determined that the impact of adopting SFAS No. 142 will be immaterial to its financial position and results of operations. PART II - OTHER INFORMATION Item 1. Legal Proceedings The information required in this section is included in Part I under the heading "LEGAL PROCEEDINGS". Item 6. Exhibits and Reports on Form 8-K a. Exhibits 2.1 Keene Corporation's Fourth Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code dated March 11, 1996, incorporated herein by reference to Exhibit 99(a) to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 2.2 Motion to Approve Modifications to the Keene Corporation Fourth Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code dated June 12, 1996, incorporated herein by reference to Exhibit 99(b) to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 2.3 Finding of Fact, Conclusions of Law and Order Confirming Keene's Fourth Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, as modified, entered June 14, 1996, incorporated herein by reference to Exhibit 99(c) to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 3.1 Amended and restated Certificate of Incorporation of Reinhold Industries, Inc., incorporated herein by reference to Exhibit 99(a), Exhibit A to the Plan, to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 3.2 Amended and restated By-laws of Reinhold Industries, Inc. (Formerly Keene Corporation), incorporated herein by reference to Exhibit 99(a), Exhibit B to the Plan, to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 3.3 Certificate of Merger of Reinhold Industries, Inc. into Keene Corporation, incorporated herein by reference to Exhibit 99(a), Exhibit C to the Plan, to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 3.4 Second amended and restated Certificate of Incorporation and amended By-laws of Reinhold Industries, Inc., on Form DEFS14A filed with the Commission on September 24, 1999. 3.5 Third amended and restated Certificate of Incorporation of Reinhold Industries, Inc., on Form DEF14C filed with the Commission on October 10, 2000. 4.1 Share Authorization Agreement, incorporated herein by reference to Exhibit 99(a), Exhibit H to the Plan, to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 4.2 Registration Rights Agreement, incorporated herein by reference to Exhibit 99(a), Exhibit G to the Plan, to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 9.1 Creditors' Trust Agreement, incorporated herein by reference to Exhibit 99(a), Exhibit D to the Plan, to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 10.1 Reinhold Industries, Inc. Stock Incentive Plan, on Form S-8, filed with the Commission on November 10, 1997. 10.2 Reinhold Management Incentive Compensation Plan, incorporated by reference to Page 34 to Keene's (Predecessor Co.) Form 10, dated April 4, 1990, as amended by Form 8, Exhibit 10(e), dated July 19, 1990. 10.3 Lease, dated January 4, 1990, by and between Imperial Industrial Properties, Inc. and Reinhold Industries, incorporated by reference to Exhibit 10(b) to Keene's Form 10 dated April 4, 1990, as amended by Form 8, dated July 19, 1990. 10.4 Reinhold Industries, Inc. Retirement Plan (formerly Keene Retirement Plan), incorporated by reference to Exhibit 10(i) to Keene's Form 10 dated April 4, 1990, as amended by Form 8, dated July 19, 1990. 10.5 Management Agreement between Reinhold Industries, Inc. and Hammond, Kennedy, Whitney & Company, Inc. dated May 31, 1999 on Form 10-QSB filed with the Commission on August 16, 1999. 10.6 Stock Option Agreement between Reinhold Industries, Inc. and Michael T. Furry dated June 3, 1999 on Form 10-QSB filed with the Commission on August 16, 1999. 10.7 Stock Price Deficiency Payment Agreement between Reinhold Industries, Inc. and various stockholders dated June 16, 1999 on Form 10-QSB filed with the Commission on August 16, 1999. 10.8 Asset Purchase Agreement by and between Samuel Bingham Company, a Delaware corporation, and Samuel Bingham Enterprises, Inc. dated February 3, 2000 on Form 8-K/A filed with the Commission on May 23, 2000. 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. b. Reports on Form 8-K None REINHOLD INDUSTRIES, INC. AND SUBSIDIARIES 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: November 19, 2001 By: /S/ Brett R. Meinsen Brett R. Meinsen Vice President - Finance and Administration, Treasurer and Secretary (Principal Financial Officer)