-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EqjnwXBrUpRrgtSQNtrwZFmh7IT9jk1T+E/a3dLRuo4WI8NdzXezCQovzT9hZsyU 2GOGAbwbnxCvvGgu+rBBrA== 0000862255-06-000029.txt : 20061109 0000862255-06-000029.hdr.sgml : 20061109 20061109115308 ACCESSION NUMBER: 0000862255-06-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061109 DATE AS OF CHANGE: 20061109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REINHOLD INDUSTRIES INC/DE/ CENTRAL INDEX KEY: 0000862255 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 132596288 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18434 FILM NUMBER: 061200321 BUSINESS ADDRESS: STREET 1: 12827 EAST IMPERIAL HWY CITY: SANTA FE SPRINGS STATE: CA ZIP: 90670-4713 BUSINESS PHONE: 5629443281 MAIL ADDRESS: STREET 1: 12827 EAST IMPERIAL HWY CITY: SANTA FE SPRINGS STATE: CA ZIP: 90670 FORMER COMPANY: FORMER CONFORMED NAME: KEENE CORP /DE/ DATE OF NAME CHANGE: 19930328 10-Q 1 sept10q.txt 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, 2006 [ ] 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 [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] 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 - 3,292,105 shares as of November 1, 2006.
REINHOLD INDUSTRIES, INC. INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Condensed Consolidated Balance Sheets at September 30, 2006 (Unaudited) and December 31, 2005 3 Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2006 and 2005 4 Unaudited Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2006 and 2005 5 Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005 6 Notes to Unaudited Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 Item 4. Controls and Procedures 24 PART II - OTHER INFORMATION Item 1. Legal Proceedings 25 Item 1A. Risk Factors 25 Item 4. Submission of Matters to a Vote of Security Holders 25 Item 6. Exhibits 25 SIGNATURES 28 EXHIBITS 29
REINHOLD INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share data) September 30, 2006 December 31, 2005 ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 6,168 $ 8,965 Accounts receivable 4,168 4,322 Inventories 4,333 3,167 Prepaid pension 3,070 2,312 Deferred income taxes 411 411 Other current assets 316 395 -------- ------- Total current assets 18,466 19,572 Property, plant and equipment, net 5,670 5,661 Goodwill 2,521 2,521 Deferred income taxes 1,671 1,671 Other assets 54 25 --------- -------- $ 28,382 $ 29,450 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,418 $ 1,890 Accrued expenses 2,269 2,417 Accrued income taxes 552 5,264 Accrued sales price adjustment - 2,278 Current portion of long term debt 800 - -------- ---------- Total current liabilities 5,039 11,849 Long term pension liability 5,797 5,797 Long term debt, less current portion 1,866 - Other long term liabilities 4,468 4,322 ------- ------- Total liabilities 17,170 21,968 Commitments and contingencies Stockholders' equity: Common stock, $0.01 par value: Class A - Authorized: 4,750,000 shares Issued and outstanding: 3,292,105 shares and 3,288,867 shares, respectively 33 33 Additional paid-in capital 4,281 4,209 Retained earnings 10,656 6,998 Accumulated other comprehensive loss (3,758) (3,758) -------- -------- Net stockholders' equity 11,212 7,482 -------- -------- $ 28,382 $ 29,450 ======= ====== See accompanying notes to unaudited condensed consolidated financial statements.
REINHOLD INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) (Unaudited) Three months ended September 30, 2006 2005 - -------------------------------------------------------------------------------------------------- Net sales $8,795 $8,297 Cost of goods sold 5,322 5,094 ----- ----- Gross profit 3,473 3,203 Selling, general and administrative expenses 1,769 2,243 ----- ----- Operating income 1,704 960 Interest expense, net 57 - ------ -------- Income from continuing operations before income taxes 1,647 960 Income tax expense 82 1,411 ------- ------- Income (loss) from continuing operations 1,565 (451) ------ ------ Discontinued operations: Income from operations of discontinued component - 2,063 Interest expense - 433 Income tax expense 124 456 ------ ------- (Loss) income on discontinued operations (124) 1,174 ------- ------- Net income $ 1,441 $ 723 ====== ====== Basic earnings (loss) per share - continuing operations $ 0.47 ($ 0.14) Diluted earnings (loss) per share - continuing operations $ 0.47 ($ 0.14) Basic (loss) earnings per share - discontinued operations ($ 0.04) $ 0.36 Diluted (loss) earnings per share - discontinued operations ($ 0.04) $ 0.36 Basic earnings per share $ 0.44 $ 0.22 Diluted earnings per share $ 0.44 $ 0.22 Weighted average common shares outstanding - basic 3,306 3,263 Weighted average common shares outstanding - diluted 3,306 3,292 Dividends per common share $0.00 $0.50 See accompanying notes to unaudited condensed consolidated financial statements.
REINHOLD INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) (Unaudited) Nine months ended September 30, 2006 2005 - -------------------------------------------------------------------------------------------------- Net sales $27,541 $22,974 Cost of goods sold 16,492 14,056 ------ ------ Gross profit 11,049 8,918 Selling, general and administrative expenses 5,634 6,234 ----- ----- Operating income 5,415 2,684 Interest expense, net 72 - -------- -------- Income from continuing operations before income taxes 5,343 2,684 Income tax expense 1,561 3,241 -------- ------- Income (loss) from continuing operations 3,782 (557) ------ ------ Discontinued operations: Income from operations of discontinued component - 7,885 Interest expense - 1,291 Income tax expense 124 1,881 ------ --------- (Loss) income on discontinued operations (124) 4,713 -------- ------- Net income $ 3,658 $ 4,156 ====== ======== Basic earnings (loss) per share - continuing operations $ 1.15 ($ 0.17) Diluted earnings (loss) per share - continuing operations $ 1.15 ($ 0.17) Basic (loss) earnings per share - discontinued operations ($ 0.04) $ 1.44 Diluted (loss) earnings per share - discontinued operations ($ 0.04) $ 1.43 Basic earnings per share $ 1.11 $ 1.27 Diluted earnings per share $ 1.11 $ 1.26 Weighted average common shares outstanding - basic 3,303 3,262 Weighted average common shares outstanding - diluted 3,303 3,292 Dividends per common share $0.00 $1.50 See accompanying notes to unaudited condensed consolidated financial statements.
REINHOLD INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) Nine months ended September 30, 2006 2005 - ------------------------------------------------------------------------------------------------- Cash flow from operating activities: Net income (loss) from continuing operations $ 3,782 ($557) Adjustments to reconcile net income (loss) from continuing operations to net cash (used in) provided by operating activities: Depreciation 639 767 Deferred income taxes - 2,525 Non-cash compensation 72 102 Changes in assets and liabilities: Accounts receivable 154 1,320 Inventories (1,166) (557) Other current assets (679) (1,031) Accounts payable (472) 624 Accrued expenses (148) (547) Accrued income taxes (4,712) - Other, net 109 25 Net cash flows (used in) provided by discontinued operations (2,402) 5,782 ------- ----- Net cash (used in) provided by operating activities (4,823) 8,453 - Cash flows from investing activities: Capital expenditures (640) (407) Net cash flows used in discontinued operations - (1,030) ------ -------- Net cash used in investing activities (640) (1,437) Cash flows from financing activities: Dividends paid - (4,892) Proceeds from long-term debt 3,000 - Repayments of long-term debt (334) - Cash flows used in discontinued operations - (3,506) --------- -------- Net cash provided by (used in) financing activities 2,666 (8,398) Net decrease in cash and cash equivalents (2,797) (1,382) Cash and cash equivalents, beginning of period 8,965 4,015 ----- ------- Cash and cash equivalents, end of period $ 6,168 $ 2,633 ===== ======= See accompanying notes to unaudited condensed consolidated financial statements.
REINHOLD INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2006 (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 condensed 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 condensed consolidated financial statements of the Company 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 consolidated financial statements and notes are presented as permitted by Form 10-Q requirements and, therefore, should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 2005. Due to the classification of NP Aerospace Ltd. as a discontinued operation, prior year comparative information has been adjusted to conform with the current presentation. 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 inventories are as follows (in thousands): September 30, 2006 December 31, 2005 - ------------------------------------------------------------------------------- Raw material $ 2,855 $2,087 Work-in-process 925 804 Finished goods 553 276 - ------------------------------------------------------------------------------- Total $ 4,333 $3,167 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 Nine Months Ended September 30, September 30, 2006 2005 2006 2005 - ------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations $ 1,565 ($ 451) $3,782 ($ 557) ======= ======= ====== ======= Net income $ 1,441 $ 723 $3,658 $ 4,156 ======= ===== ====== ======= Weighted average shares used in basic computation 3,306 3,263 3,303 3,262 Dilutive effect of stock options - 29 - 30 ------ ----- ----- ----- Weighted average shares used for diluted calculation 3,306 3,292 3,303 3,292 ===== ===== ===== ===== Stock options outstanding - 39 - 39 Range of exercise price - $7.32-$11.36 - $7.32-$11.36
Notes to Condensed Consolidated Financial Statements (Continued) STOCK OPTION PLAN Prior to January 1, 2006, the Company accounted for its stock-based compensation plan in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations. Under APB 25, no compensation expense was recognized for stock option grants if the exercise price of the Company's stock option grants was at or above the fair market value of the underlying stock on the date of the grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standard ("SFAS") No. 123 (R), "Share-Based Payment" using the modified-prospective transition method. Under this transition method, compensation costs recognized includes: a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value used for pro-forma disclosures and b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123 (R). Results for prior periods have not been restated. As of December 31, 2005 and September 30, 2006, the Company does not have any stock options outstanding. Accordingly, no compensation expense has been recorded for the three and nine months ended June 30, 2006 as a result of adopting SFAS 123 (R). Prior to January 1, 2006, the Company had 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 for the three and nine months ended September 30, 2005 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 Nine Months Ended September 30, 2005 September 30, 2005 - ---------------------------------------------------------------------------------------------------------- Net income as reported $ 723 $4,156 Deduct, total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (26) (79) - ----------------------------------------------------------------------------------------------------------- Net income, as adjusted $ 697 $4,077 ======= ====== Earnings per share: Basic - as reported $0.22 $1.27 Basic - as adjusted $0.21 $1.25 Diluted - as reported $0.22 $1.26 Diluted - as adjusted $0.21 $1.24
Notes to Condensed Consolidated Financial Statements (Continued) The fair values per share of stock options granted in connection with the Company's stock option plan have been estimated using the following assumptions: Three and nine months ended September 30, 2005 - ------------------------------------------------------------------------------- Expected life (in years) 4.1 Volatility 70% Risk free interest rate 6.0% Dividend yield 0.00 OTHER COMPREHENSIVE INCOME (LOSS) The Company reports other comprehensive income (loss) under Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income". The difference between net income and total comprehensive loss during the three months ended September 30, 2005 was a loss on foreign currency translation of $251,000. The difference between net income and total comprehensive loss during the nine months ended September 30, 2005 was a loss on foreign currency translation of $671,000. On November 21, 2005, the Company sold 100% of the capital stock of NP Aerospace Ltd., to The Carlyle Group ("TCG"). In conjunction with the sale, foreign currency transactions that were previously included as part of "accumulated other comprehensive loss" in the balance sheet were recognized in the income statement as a component of discontinued operations. 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 Nine Months Ended September 30, Ended September 30, 2006 2005 2006 2005 - ----------------------------------------------------------------------------------------------------------------- Statutory Federal rate 34% 34% 34% 34% State taxes, net of Federal benefit 6% 3% 6% 3% Rate difference on foreign income - 108% - 82% Adjustments on sale of subsidiary (35%) - (11%) - Other - 2% - 2% - ----------------------------------------------------------------------------------------------------------------- Effective tax rate on income from continuing operations 5% 147% 29% 121%
During the three months ended September 30, 2006, the Company performed an earnings and profits computation to determine the amount of foreign tax credits available to offset Federal income taxes on the gain on the sale of NP Aerospace. The Company determined that $558,000 in additional credits were available than was previously estimated as December 31, 2005. This adjustment to income from continuing operations is described as "adjustments on sale of subsidiary" in the table above. In determining the effective tax rate which is applied to income from continuing operations for the nine months ended September 30, 2005, the Company had recorded federal income tax expense ($2.2 million) on distributed NP Aerospace Ltd. earnings of approximately $6.4 million. Foreign tax credits are normally available to offset the federal tax liability associated with the repatriated income. However, since the Company was in a significant net operating loss carryforward position, the Company was unable to utilize these foreign tax credits in determining its effective tax rate. However, as of December 31, 2005, the Notes to Condensed Consolidated Financial Statements (Continued) Company was able to utilize all its net operating loss carryforwards and tax credits primarily related to the gain on the sale of NP Aerospace Ltd. LONG TERM DEBT On March 20, 2002, the Company entered into a revolving credit facility with LaSalle Bank National Association ("LaSalle"). On December 7, 2004, the Company amended the existing credit facility with LaSalle. The credit facility consisted of a five-year term loan in the amount of $24,500,000 and a revolving credit facility of up to $12,000,000. 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. On November 21, 2005, in conjunction with the proceeds received from the sale of NP Aerospace, the entire outstanding balance with LaSalle approximating $25,757,000 was repaid. On November 18, 2005 and March 31, 2006, the Company further amended the credit facility. The current credit facility consists of a 45 month term loan in the amount of $3,000,000 and a revolving credit facility of up to $4,500,000 and is secured by all of the Company's financial assets. The term loan is payable in equal monthly principal installments of $66,700 plus accrued interest. Interest is at a rate which approximates LIBOR plus 2.5%. 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 2.5%. 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 $4,500,000 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 September 30, 2006 was approximately $4.5 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 September 30, 2006 were $300,000. The amount available under the revolving credit facility at September 30, 2006 was approximately $4.2 million. The outstanding balance with LaSalle was $2,666,000 at September 30, 2006. 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 was in compliance with all covenants as of September 30, 2006. 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. Notes to Condensed Consolidated Financial Statements (Continued)
Net pension cost included the following (in thousands): Three Months Nine Months Ended September 30, Ended September 30, 2006 2005 2006 2005 - ----------------------------------------------------------------------------------------------------------------- Service cost $ - $ - $ - $ - Interest cost on benefits earned in prior years 348 220 788 659 Expected return on assets (559) (233) (1,024) (697) Amortization of net loss 147 113 372 338 - ----------------------------------------------------------------------------------------------------------------- Net pension cost ($64) $100 $136 $300
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 when acquired to be cash equivalents. DISCONTINUED OPERATIONS On November 21, 2005, the Company sold 100% of the capital stock of its wholly-owned subsidiary, NP Aerospace Ltd., to The Carlyle Group ("TCG") for $53.2 million, subject to a post-closing working capital adjustment. TCG required that NP Aerospace be cash free, free of all debt and delivered with a normal level of working capital. The purchase price was reduced by $2.3 million during the first quarter 2006 to $50.9 million based on the final computation of closing date working capital. The purchase price adjustment has been reflected in the December 31, 2005 financial statements. The sale of NP Aerospace Ltd. meets the criteria defined in FASB No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" as discontinued operations and is presented herein as such. Operating results of the discontinued operations for the three and nine months ended September 30, 2006 and 2005 are summarized as follows (in thousands):
Three Months Nine Months Ended September 30, Ended September 30, 2006 2005 2006 2005 - ---------------------------------------------------------------------------------------------------------------- Net sales $ - $10,840 $ - $36,701 - ---------------------------------------------------------------------------------------------------------------- Income from operations - 2,063 - 7,885 Interest expense - 433 - 1,291 Income tax expense 124 456 124 1,881 - ---------------------------------------------------------------------------------------------------------------- (Loss) income on discontinued operations ($124) $1,174 ($124) $4,713
Notes to Condensed Consolidated Financial Statements (Continued) During the three months ended September 30, 2006, the Company filed its 2005 Federal income tax return and determined that its estimated income tax provision at December 31, 2005 associated with APB 23 was understated by approximately $124,000. This adjustment was recorded as a component of loss from discontinued operations as of September 30, 2006. 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 three operating segments: Aerospace, Seating Products, and Commercial. 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. Seating Products produces components for the commercial aircraft seating industry. The Commercial segment produces lighting housings and pool filter tanks. Due to the status of the NP Aerospace business unit as discontinued operations, historical segment data has been removed from the presentation for all periods presented. The information in the following tables is derived directly from the segments' internal financial reporting for corporate management purposes (in thousands).
Three Months Nine Months Ended September 30, Ended September 30, 2006 2005 2006 2005 - ------------------------------------------------------------------------------------------------------------------ Net sales Aerospace $5,850 $6,083 $17,221 $16,255 Seating Products 1,987 1,396 7,483 4,092 Commercial 958 818 2,837 2,627 - ------------------------------------------------------------------------------------------------------------------ Total sales $8,795 $8,297 $27,541 $22,974 Income from continuing operations before income taxes Aerospace $1,843 $1,781 $ 5,281 $ 4,625 Seating Products 138 (300) 908 (737) Commercial 195 56 596 292 Unallocated corporate expenses (529) (577) (1,442) (1,496) - ------------------------------------------------------------------------------------------------------------------ Total income from continuing operations before income taxes $1,647 $ 960 $ 5,343 $ 2,684
September 30, 2006 December 31, 2005 - ------------------------------------------------------------------------------------------------------ Total assets Aerospace $12,521 $11,156 Seating Products 2,648 3,253 Commercial 1,524 1,479 Unallocated corporate 11,689 13,562 - ------------------------------------------------------------------------------------------------------ Total assets $28,382 $29,450
Notes to Condensed Consolidated Financial Statements (Continued) LEGAL PROCEEDINGS On August 11, 2000, the Environmental Protection Agency ("EPA") notified the Company that it may be a potentially responsible party ("PRP") under the Comprehensive Environmental Notes to Condensed Consolidated Financial Statements (Continued) Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"), with respect to certain environmental liabilities arising at a site formerly known as the Casmalia Resources Hazardous Waste Management Facility, located in Santa Barbara County, California ("Casmalia 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 condensed 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 Inventory Costs In November 2004, the Financial Accounting Standards Board ("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 was determined to be immaterial. Share-Based Payment In December 2004, the FASB revised SFAS No. 123 (SFAS 123R), "Share-Based Payment." SFAS 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 was adopted by the Company effective January 1, 2006. The impact to the Company was determined to be immaterial. Accounting Changes and Error Corrections On June 7, 2005, the FASB issued Statement No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements" (FAS 154). FAS 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle. Previously, most voluntary Notes to Condensed Consolidated Financial Statements (Continued) changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. FAS 154 requires retrospective application to prior periods' financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. FAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the Statement does not change the transition provisions of any existing accounting pronouncements. The adoption of FAS 154 did not have any effect on our consolidated financial position, results of operations or cash flows. Accounting for Uncertainty in Income Taxes In July 2006, the FASB issued interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN48"). This interpretation, among other things, creates a two step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006, in which the impact of adoption should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. The Company is evaluating FIN 48 and has not yet determined the impact the adoption will have on the consolidated financial statements. SUBSEQUENT EVENT On November 2, 2006 the Company announced that it and an affiliate of The Jordan Company, L.P., a leading private equity investor, had signed a definitive merger agreement pursuant to which The Jordan Company will acquire Reinhold through a tender offer for all outstanding shares of common stock of the Company for $12.50 per share. Pursuant to the terms of the merger agreement, Reinhold Acquisition Corp., an affiliate of The Jordan Company, L.P., will commence a tender offer within five business days to acquire all outstanding shares of Reinhold common stock at a price of $12.50 per share in cash or an aggregate value of approximately $41.3 million. Following receipt of at least 51% of Reinhold's outstanding shares in the tender offer, all remaining shares will convert into the right to receive $12.50 per share in cash through a merger. In addition to the tender of at least 51% of the outstanding shares, the closing of the transaction is subject to certain other conditions set forth in the Merger Agreement. Reinhold intends to file a Schedule 14D-9 Recommendation Statement with the Securities and Exchange Commission relating to the transaction with a copy of the Merger Agreement as an exhibit. REINHOLD INDUSTRIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS September 30, 2006 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, 2005. 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. Our business, financial condition, results of operations and cash flows may be affected by known and unknown risks, uncertainties and other factors. Any of these risks, uncertainties and other factors could cause the Company's future financial results to differ materially from recent financial results or from currently anticipated future financial results. In addition to those noted elsewhere in this report, the Company is subject to the following risks and uncertainties: Our markets are cyclical, leading to periodic declines in sales. The markets in which we sell our products are cyclical and have experienced periodic declines. Our sales are, therefore, unpredictable and tend to fluctuate based on a number of factors, including economic conditions and developments affecting the aerospace industry and the customers served. Although the market for our products sold for new commercial aircraft production currently appears to be experiencing a slight improvement, any downturn in commercial aircraft production could have a negative impact on our business, financial condition and operating results. We are dependent on a limited number of customers, which makes us vulnerable to the continued relationship with and financial health of those customers. Because a substantial portion of our business has been as a supplier to government contractors, we depend on a limited number of customers with which we do significant amounts of business. Our future prospects will depend on the continued business of such customers and on our continued status as a qualified supplier to such customers. We cannot guarantee that our current significant customers will continue to buy products from us at current levels. The loss of a key customer could have a material adverse effect on us. We compete with many companies that have greater financial, technical and operating resources than we do, and with whom we may not be able to compete successfully. We compete with many companies in the sale of ablative and structural composite products. The markets we serve are specialized and competitive. Several of our competitors have greater financial, technical and operating resources than we do. We cannot assure you that we will be able to continue to manufacture and sell our products profitably in competitive markets. Our products and processes are subject to risks from changes in technology. Our products and processes are subject to risks of obsolescence as a result of changes in technology. To address this risk, we invest in product design and development, and in capital expenditures. We cannot guarantee that our Management's Discussion and Analysis (cont'd) product design and development efforts will be successful, or that the amounts of money required to be invested for product design and development and capital expenditures will not increase materially in the future. Goodwill could be impaired in the future. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," we assess the fair value and recoverability of our long-lived assets, including goodwill. We make assessments whenever events and circumstances indicate the carrying value of an asset may not be recoverable from estimated future cash flows expected to result from the asset's 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. In assessing the recoverability of our goodwill at September 30, 2006 and December 31, 2005, we were required to make certain critical estimates and assumptions. These estimates and assumptions included that during the next several years we would make improvements in manufacturing efficiency, achieve reductions in operating costs, and obtain increases in sales and backlog. If any of these or other estimates and assumptions are not realized in the future, the Company may be required to record an impairment charge for the goodwill. The goodwill of the Company was $2,521,000 at September 30, 2006 and December 31, 2005. Significant consolidation in the aerospace industry could adversely affect our business and financial results. The aerospace industry is experiencing significant consolidation, including among our customers, competitors and suppliers. Consolidation among our customers may result in delays in the award of new contracts and losses of existing business. Consolidation among our competitors may result in larger competitors with greater resources and market share, which could adversely affect our ability to compete successfully. Consolidation among our suppliers may result in fewer sources of supply and increased cost to us. Our manufacturing operations may be adversely affected by the availability and increases in prices of raw materials and components. The failure of our suppliers to deliver on a timely basis raw materials and components to us, and increases in the prices of raw materials, may adversely affect our results of operations and cash flows. The supply of rayon used to make carbon fiber cloth typically used in ablative composites is highly dependent upon the qualification of the rayon supplier by the United States Department of Defense. North American Rayon has ceased production of the rayon used in our ablative products. This could have an effect on the rayon supply in the coming years. Also, a European company has become the world's sole supplier of graphite and carbon used in our ablative applications. We cannot assure you that these developments will not have a significant impact on price or supply. Product liability claims in excess of insurance could adversely affect our financial results and financial condition. We face potential liability for personal injury or death as a result of the failure of products designed or manufactured by us. Although we maintain product liability insurance, any material product liability not covered by insurance could have a material adverse effect on our financial condition, results of operations and cash flows. Management's Discussion and Analysis (cont'd) Damage or destruction of our facilities caused by earthquake or other causes could adversely affect our financial results and financial condition. Although we maintain standard property casualty insurance covering our properties, we do not carry any earthquake insurance because of the cost of such insurance. Our main property is located in California, an area subject to frequent and sometimes severe earthquake activity. Even if covered by insurance, any significant damage or destruction of our facilities could result in the inability to meet customer delivery schedules and may result in the loss of customers and significant additional costs to us. As a result, any significant damage or destruction of our properties could have a material adverse effect on our business, financial condition or results of operations. 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, and the realizability of deferred tax assets. 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) 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. Additionally, this assessment is also performed on an annual basis for goodwill. 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." On November 21, 2005, the Company sold 100% of the capital stock of NP Aerospace Ltd., to The Carlyle Group ("TCG"). In conjunction with the sale, foreign currency transactions that were previously included as part of "accumulated other comprehensive loss" in the balance sheet were recognized in the income statement as a component of discontinued operations. 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. Management's Discussion and Analysis (cont'd) Comparison of Third Quarter 2006 to 2005 In the third quarter of 2006, net sales increased $0.5 million (6%) to $8.8 million, compared to third quarter 2005 sales of $8.3 million. Sales in the Aerospace business unit decreased by $0.2 million (4%) to $5.9 million due primarily to lower sales of rocket nozzles related to the Ballistic Missile Defense System. Sales in the Seating Products business unit increased by $0.6 million (42%) to $1.4 million compared with the third quarter of 2005 due to revenues related to two new customers previously serviced by NP Aerospace. Sales in the Commercial business unit increased by $0.1 million (17%) due primarily to additional shipments of in-ground lighting housings. Gross profit margin in the third quarter of 2006 increased to 40% from 39% in 2005. Gross profit margin for Aerospace decreased from 48% to 45% due to increased manufacturing overhead expenses. Gross profit margin for Seating Products increased from 7% to 25% due to increased selling prices and the absorption of fixed overhead costs on higher sales volume. Gross profit margin for Commercial increased from 26% to 35% due primarily to higher selling prices. Selling, general and administrative expenses for the third quarter 2006 were $1.8 million (20% of sales) compared to $2.2 million (27% of sales) for the same quarter of 2005 due to lower pension, recruiting and employee relocation expenses. Interest expense was $57 thousand in the third quarter of 2006 compared to interest expense of zero in the third quarter of 2005 due to borrowings against the LaSalle credit facility. Income from continuing operations before income taxes increased to $1.6 million (19% of sales) in the third quarter of 2006 from $1.0 million (12% of sales) in the same period of 2005. Income from continuing operations before income taxes for Aerospace was $1.8 million (32% of sales) in 2006 compared to $1.8 million (29% of sales) in 2005 due to lower selling, general and administrative expenses. Income from continuing operations before income taxes was $0.1 million for Seating Products in the third quarter of 2006 (7% of sales) compared to a loss from continuing operations of $0.3 million (-21% of sales) in 2005 due to higher sales and increased selling prices. Income from continuing operations before income taxes for Commercial increased to $0.2 million (20% of sales) in 2006 from $0.1 million (7% of sales) in 2005 due to higher selling prices. Income tax expense of $0.1 million (5% effective rate) was recorded in the third quarter of 2006 due primarily to additional tax benefits related to the sale of NP Aerospace. Income tax expense of $1.4 million (147% effective rate) was recorded in the third quarter of 2005 due to the tax impact of the repatriation of foreign funds from NP Aerospace used for debt service and dividends in 2005. 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. In determining the effective tax rate which is applied to income from continuing operations for the three months ended September 30, 2005, the Company had recorded federal income tax expense ($2.2 million) on distributed NP Aerospace Ltd. earnings of approximately $6.4 million. Foreign tax credits are normally available to offset the federal tax liability associated with the repatriated income. However, since the Company was in a significant net operating loss carryforward position, the Company was unable to utilize these foreign tax credits in determining its effective tax rate. However, as of December 31, 2005, the Management's Discussion and Analysis (cont'd) Company was able to utilize all its net operating loss carryforwards and tax credits primarily related to the gain on the sale of NP Aerospace Ltd. Income from discontinued operations, net of income tax, was a loss of $0.1 million in the third quarter of 2006 compared to income of $1.2 million in the third quarter of 2005. The financial results from discontinued operations relate to NP Aerospace Ltd., the Company's former U.K. subsidiary. Comparison of First Nine Months 2006 to 2005 In the first nine months of 2006, net sales increased $4.6 million (20%) to $27.5 million, compared to first nine months 2005 sales of $23.0 million. Sales in the Aerospace business unit increased by $1.0 million (6%) to $17.2 million due primarily to additional sales of components related to the Minuteman III Propulsion Replacement Program. Sales in the Seating Products business unit increased by $3.4 million (83%) to $7.5 million due to a surge in aircraft seating demand from our largest customer, production quantity sales to a new customer, and revenues related to two new customers previously serviced by NP Aerospace. Sales in the Commercial business unit increased by $0.2 million (8%) to $2.8 million due to additional shipments of in-ground lighting housings and increased selling prices. Gross profit margin in the first nine months of 2006 increased to 40% from 39% in 2005. Gross profit margin for Aerospace decreased from 47% to 45% due to increased manufacturing overhead expenses. Gross profit margin for Seating Products increased from 11% to 30% due to increased selling prices and the absorption of fixed overhead costs on higher sales volume. Gross profit margin for Commercial increased from 30% to 36% due primarily to higher selling prices. Selling, general and administrative expenses for the first nine months of 2006 were $5.6 million (21% of sales) compared to $6.2 million (27% of sales) for the first nine months of 2005 due primarily to lower pension, marketing and compensation related costs. Interest expense was $72 thousand in the first nine months of 2006 compared to interest expense of zero in the first nine months of 2005 due to borrowings against the LaSalle credit facility. Income from continuing operations before income taxes increased to $5.3 million (19% of sales) in the first nine months of 2006 from $2.7 million (12% of sales) in the same period of 2005. Income from continuing operations before income taxes for Aerospace was $5.3 million (31% of sales) in 2006 compared to $4.6 million (28% of sales) in 2005 due to increased sales and lower selling, general and administrative expenses. Income from continuing operations before income taxes was $0.9 million for Seating Products in 2006 (12% of sales) compared to a loss from continuing operations of $0.7 million (-18% of sales) in 2005 due to increased sales. Income from continuing operations before income taxes for Commercial was $0.6 million (21% of sales) in 2006 compared to $0.3 million (11% of sales) in 2005 due primarily to higher selling prices. Income tax expense of $1.6 million (29% effective rate) was recorded in the first nine months of 2006 as compared to $3.2 million (121% effective rate) in the nine six months of 2005 due to the tax impact of the repatriation of foreign funds from NP Aerospace used for debt service and dividends in 2005. 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. Management's Discussion and Analysis (cont'd) In determining the effective tax rate which is applied to income from continuing operations for the nine months ended September 30, 2005, the Company had recorded federal income tax expense ($2.2 million) on distributed NP Aerospace Ltd. earnings of approximately $6.4 million. Foreign tax credits are normally available to offset the federal tax liability associated with the repatriated income. However, since the Company was in a significant net operating loss carryforward position, the Company was unable to utilize these foreign tax credits in determining its effective tax rate. However, as of December 31, 2005, the Company was able to utilize all its net operating loss carryforwards and tax credits primarily related to the gain on the sale of NP Aerospace Ltd. Income from discontinued operations, net of income tax, was $0.1 million in the first nine months of 2006 compared to $4.7 million in the first nine months of 2005. The financial results from discontinued operations relate to NP Aerospace Ltd., the Company's former U.K. subsidiary. As of December 31, 2005, the Company was able to utilize all its net operating loss carryforwards and tax credits primarily related to the gain on the sale of NP Aerospace Ltd. As more fully described in Note 3 to the 2005 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, 2006, working capital was $13.4 million, up $5.7 million from December 31, 2005. Cash and cash equivalents of $6.2 million held at September 30, 2006 were $2.8 million lower than cash and cash equivalents held at December 31, 2005 primarily due to the payment of the purchase price adjustment to TCG and the payment of accrued income taxes. Net cash used in operating activities totaled $4.8 million for the nine months ended September 30, 2006 as compared to net cash provided by operating activities of $8.5 million for the comparable period in 2005. The decrease over the prior period is due primarily to increased working capital levels and payment of accrued federal and state income taxes primarily resulting from the gain on the sale of NP Aerospace in November 2005. Cash flows used in discontinued operations for the nine months ended September 30, 2006 of $2.2 million consisted of the payment of the purchase price adjustment to TCG related to the NPA sale ($2.3 million) offset by an income tax benefit of $0.1 million. Cash flows provided by discontinued operations in 2005 of $5.8 million were operating cash flows from NP Aerospace. Net cash used in investing activities for the nine months ended September 30, 2006 totaled $0.6 million consisting of capital expenditures. Net cash used in investing activities for the nine months ended September 30, 2005 totaled $1.4 million consisting primarily of capital expenditures of $0.4 million and cash flows used in discontinued operations of $1.0 million. Cash flows used in discontinued operations consisted primarily of capital expenditures. Net cash provided by financing activities for the nine months ended September 30, 2006 totaled $2.7 million and consisted of the proceeds from long-term debt of $3.0 million less subsequent repayments of $0.3 million. The debt was used primarily to pay income taxes related to the sale of NP Aerospace. Net cash used in financing activities for the nine months ended September 30, 2005 totaled $8.4 million and consisted of dividends paid of $4.9 million and cash flows used in discontinued operations of $3.5 million. Cash flows used in discontinued operations consisted of the repayment of long-term debt. Management's Discussion and Analysis (cont'd) Expenditures in 2006 and 2005 related to investing and financing activities were financed by existing cash and cash equivalents and the available credit facility. On March 20, 2002, the Company entered into a revolving credit facility with LaSalle Bank National Association ("LaSalle"). On December 7, 2004, the Company amended the existing credit facility with LaSalle. The credit facility consisted of a five-year term loan in the amount of $24,500,000 and a revolving credit facility of up to $12,000,000. 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. On November 21, 2005, in conjunction with the proceeds received from the sale of NP Aerospace, the entire outstanding balance with LaSalle approximating $25,757,000 was repaid. On November 18, 2005 and March 31, 2006, the Company further amended the credit facility. The current credit facility consists of a 45 month term loan in the amount of $3,000,000 and a revolving credit facility of up to $4,500,000 and is secured by all of the Company's financial assets. The term loan is payable in equal monthly principal installments of $66,700 plus accrued interest. Interest is at a rate which approximates LIBOR plus 2.5%. 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 2.5%. 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 $4,500,000 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 September 30, 2006 was approximately $4.5 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 September 30, 2006 were $300,000. The amount available under the revolving credit facility at September 30, 2006 was approximately $4.2 million. The outstanding balance with LaSalle was $2,666,000 at September 30, 2006. 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 was in compliance with all covenants as of September 30, 2006. 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 December 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, Management's Discussion and Analysis (cont'd) 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 September 30, 2006, approximately $2.7 million, is at variable interest rates based on LIBOR plus 2.50%. Short-term LIBOR rates have increased from approximately 2.55% at December 31, 2004 to 5.40% at September 30, 2006. This trend is expected to continue in the foreseeable future. A hypothetical 1% additional increase in interest rates would have a $30,000 impact on interest expense for the year ending December 31, 2006. Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures As of September 30 2006, 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 quarterly 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". Item1A. Risk Factors NONE 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, toKeene 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 referenceto 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. 10.14 Share Sale Agreement dated as of September 26, 2005 by and among Reinhold Industries, Inc. and TCG Guardian 2 Limited incorporated by reference to Annex A to the Company's Report on Form DEFM14A filed with the Commission on October 21, 2005. 10.15 First Amendment to Amended and Restated Credit Agreement dated as of November 18, 2005 among Reinhold Industries, Inc., as borrower, and LaSalle Bank National Association on Form 10-K filed with the Commission on March 31, 2006. 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 was filed on August 10, 2006 announcing the second quarter 2006 financial results for the Company. Form 8-K was filed on November 8, 2006 announcing entry into an Agreement and Plan of Merger, by and among Reinhold Holdings, Inc., a Delaware corporation ("Holdings"), Reinhold Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Holdings ("Purchaser"), and Reinhold. Holdings and Purchaser are affiliates of The Jordan Company, L.P. 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: November 9, 2006 By: /S/ Brett R. Meinsen -------------------- Brett R. Meinsen Vice President - Finance and Administration, Treasurer and Secretary (Principal Financial Officer) EX-31 2 ceo302sept.txt Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Michael T. Furry, President and Chief Executive Officer of Reinhold Industries, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Reinhold Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ MICHAEL T. FURRY Michael T. Furry President and Chief Executive Officer (Principal Executive Officer) November 9, 2006 EX-31 3 cfo302sept.txt Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Brett Meinsen, Vice President - Finance and Administration, Secretary and Treasurer of Reinhold Industries, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Reinhold Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ BRETT MEINSEN Brett Meinsen Vice President - Finance and Administration, Secretary, Treasurer (Principal Financial Officer) November 9, 2006 EX-32 4 ceo906sept.txt Exhibit 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Michael T. Furry, President and Chief Executive Officer of Reinhold Industries, Inc. (the "Company"), hereby certifies that to the best of his knowledge: 1. The Quarterly Report on Form 10-Q for the period ended September 30, 2006 of the Company (the "Report") fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated The foregoing certification is being furnished pursuant to 18 U.S.C. ss. 1350 and is not being filed as part of the Report or as a separate disclosure document. /s/ MICHAEL T. FURRY Michael T. Furry President and Chief Executive Officer (Principal Executive Officer) November 9, 2006 A signed copy of this written statement required by section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 5 cfo906sept.txt Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Brett Meinsen, Vice President - Finance and Administration, Secretary and Treasurer of Reinhold Industries, Inc. (the "Company"), hereby certifies that to the best of his knowledge: 1. The Quarterly Report on Form 10-Q for the period ended September 30, 2006 of the Company (the "Report") fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated The foregoing certification is being furnished pursuant to 18 U.S.C. ss. 1350 and is not being filed as part of the Report or as a separate disclosure document. /s/ BRETT MEINSEN Brett Meinsen Vice President - Finance and Administration, Secretary, Treasurer (Principal Financial Officer) November 9, 2006 A signed copy of this written statement required by section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----