Thinly Traded Defense Supplier Looks to Capitalize on Growth
By DANNY KING
Staff Reporter
Reinhold Industries Inc. has been feeling under-appreciated, even though it’s entrenched in a hot industry and boasting rising profits.
What to do? Earlier this month, the Santa Fe Springs manufacturer of defense-related goods from rocket components to military helmets announced it had hired Chicago-based investment banking firm William Blair & Co. LLC to evaluate potential mergers or acquisition targets to “maximize shareholder value.”
“For larger investors in our stock, it’s difficult to sell their shares on the open market because it’s so thinly traded,” said Brett Meinsen, Reinhold’s chief financial officer. “There’s not a lot of activity in the marketplace.”
While no timetable has been set for a possible sale of the company or an acquisition, “we’d like to see something happen before the end of the year,” Meinsen said.
Nevertheless, Reinhold’s stock has shot up 6.5 percent since the announcement, and with shares of target companies generally rising and acquiring firms declining on news of a deal, the market move could be see as a bet that Reinhold may be more a target than buyer.
The rise pushed its shares up last week near an all-time high of $19.10 reached on Sept. 10, and continued a yearlong upward trend.
The last big spike came immediately following the July 30 announcement that net income for the second quarter was $1.9 million (61 cents per diluted share), up from $700,000 (24 cents a share) in the like year-earlier quarter. Its shares are up by a third since the announcement.
Second-quarter revenues were $17.7 million, vs. $13.3 million in the second quarter of 2002.
The recent activity caps a three-fold increase in the share value in the past year.
Meinsen said retaining Blair was part of an effort to create more flexibility for its larger stockholders. There are just 2.6 million shares in the market, 37.4 percent of which are held by Massachusetts Mutual Life Insurance Co. and affiliates, according to the company’s most recent proxy statement.
Bought and sold
The activity marks heady times for the company, founded in Los Angeles in 1928. New York-based asbestos maker Keene Corp. bought the company in 1984 and spun it off as a publicly traded subsidiary six years later. In 1993, Keene filed for Chapter 11 bankruptcy protection amid lawsuits from asbestos victims and was reorganized and renamed Reinhold in 1996.
Meanwhile, Reinhold has been steadily increasing revenues throughout the past decade by purchasing smaller firms. It bought its CompositAir division from Italian conglomerate Montedison Group in 1994 and purchased Courtaulds Aerospace Ltd.’s ballistics and performance division, renamed NP Aerospace, six years later.
Much of the increase in second quarter revenues was attributed to the performance of two divisions: the Coventry, England-based NP Aerospace subsidiary and its locally based Aerospace division. Second quarter revenues at NP Aerospace were up 77 percent from the year-earlier quarter; aerospace division revenues were up 43 percent in the same period.
NP Aerospace produces helmets and bulletproof vests for the armies of several European nations, and Meinsen said it received large orders for its composite (nylon, Kevlar and other non-metal materials) helmets from the Greek and Swiss armies during the quarter.
Meanwhile, its aerospace division benefited from increased demand for missile components stemming from the Department of Defense’s Minuteman III Propulsion Replacement Program.
Those gains made up for a drop in revenues at its CompositAir division. The manufacturer of seatback frames used in airplanes manufactured by Boeing Co. and Airbus has suffered with the decline of the commercial airline industry over the last two years. It was the only Reinhold division to experience a drop in second quarter revenues.
“We’ve announced record results for each of the last four quarters,” said Meinsen, by way of explaining the stock’s surge. “If you look at the last 12 months, the company has never done better.”
Still, Reinhold’s size makes it more susceptible to swings in defense spending than its larger competitors, said Paul Nesbit, aerospace analyst for Newport, R.I.-based JSA Research Inc.
“Typically, defense firms are growing at a 7 percent top-line growth rate, but smaller ones are much more volatile,” said Nesbit. “(Reinhold’s growth) doesn’t surprise me.”
