|
|
Item 7.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
(Dollars in thousands, except per share data)
General
The Company is a leading global supplier of lightweighting and noise, vibration solutions to the automotive, commercial vehicle and other industrial markets, capable of delivering solutions in aluminum, magnesium, steel and steel alloys to OEMs. Shiloh delivers these solutions through design, engineering and manufacturing of first operation blanks, engineered welded blanks, complex stampings, modular assemblies and highly engineered aluminum and magnesium die casting and machined components which serve the automotive, commercial vehicle and other industrial markets of OEMs and, as a Tier II supplier, to Tier I automotive part manufacturers who in turn supply OEMs. Additionally, the Company provides a variety of intermediate steel processing services, such as oiling, leveling, cutting-to-length, multi-blanking, slitting, edge trimming of hot and cold-rolled steel coils and inventory control services for automotive and steel industry customers. The Company has locations in Asia, Europe and North America.
Recent Trends and General Economic Conditions Affecting the Automotive Industry
The Company's business and operating results are directly affected by the relative strength of the North American and European automotive industries, which are driven by macro-economic factors such as gross domestic product growth, consumer income and confidence levels, fluctuating commodity, currency and gasoline prices, automobile discounts and incentive offers and perceptions about global economic stability. The automotive industry remains susceptible to these factors that impact consumer spending habits and could adversely impact consumer demand for vehicles.
The Company's products are included in many models of vehicles manufactured by nearly all OEMs that produce vehicles in Europe and North America. The Company’s revenues are dependent upon the production of automobiles and light trucks in both Europe and North America. According to industry statistics (published by IHS Automotive in November 2016), Europe and North America production volumes for the fiscal years ended October 31,
2016
,
2015
, and
2014
were as follows:
|
|
|
|
|
|
|
|
|
|
Production Volumes
|
Year Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Europe
|
21,255
|
|
|
20,802
|
|
|
20,148
|
|
North America
|
17,806
|
|
|
17,423
|
|
|
16,850
|
|
Total
|
39,061
|
|
|
38,225
|
|
|
36,998
|
|
|
|
|
|
|
|
Europe:
|
|
|
|
|
|
Increase from prior year
|
453
|
|
|
654
|
|
|
|
% Increase from prior year
|
2.2
|
%
|
|
3.2
|
%
|
|
|
North America
|
|
|
|
|
|
Increase from prior year
|
383
|
|
|
573
|
|
|
|
% Increase from prior year
|
2.2
|
%
|
|
3.4
|
%
|
|
|
Total
|
|
|
|
|
|
Increase from prior year
|
836
|
|
|
1,227
|
|
|
|
% Increase from prior year
|
2.2
|
%
|
|
3.3
|
%
|
|
|
Both Europe and North America continue to see an increase in production levels, primarily due to increased consumer demand, as a result of an improvement in economic conditions and higher consumer confidence. The Company is cautiously optimistic that consumer demand levels will remain steady and continues to closely monitor customer release volumes even though the overall economic environment reflects improvement and there is evidence that the North American economy is strengthening. However, the Company will continue to monitor changes that could adversely impact consumer demand for vehicles such as government fiscal policy which could impact levels of unemployment and consumer confidence.
The Company operates in an extremely competitive industry, driven by global vehicle production volumes. Business is typically awarded to the supplier offering the most favorable combination of cost, quality, technology and service. Customers continue to demand periodic cost reductions that require the Company to assess, redefine and improve operations, products, and
manufacturing capabilities to maintain and improve profitability. Management continues to develop and execute initiatives designed to meet challenges of the industry and to achieve its strategy for sustainable global profitable growth.
Capacity utilization levels are very important to profitability because of the capital-intensive nature of the Company’s operations. The Company continues to adapt its capacity to meet customer demand, both expanding capabilities in growth areas as well as reallocating capacity between manufacturing facilities as needs arise. The Company employs new technologies to differentiate its products from its competitors and to achieve higher quality and productivity. The Company believes that it has sufficient capacity to meet its current and expected manufacturing needs.
Most of the steel purchased for the Company’s
BlankLight
®
and
Stamplight™
brands is purchased through the customers’ steel buying programs. Under these programs, the customer negotiates the price for steel with the steel suppliers. The Company pays for the steel based on these negotiated prices and passes on those costs to the customer. Although the Company takes ownership of the steel, the customers are responsible for all steel price fluctuations under these programs. The Company also purchases steel directly from domestic primary steel producers and steel service centers. Steel pricing declined during 2015 and 2016. Lagging demand for construction and oil country tubular goods products as well as a decrease in global demand for prime scrap grade have put significant downward price pressure on steel prices in North America. The Company refers to the “net steel impact” as the combination of the change in steel prices that are reflected in the price of our products, the change in the cost to procure steel from the source, and the change in our recovery of offal. Our strategy is to be economically neutral to steel pricing by having these factors offset each other. As the price of steel has declined, so has the scrap metal market, partially impacting our current year performance. The Company blanks and processes steel for some of its customers on a toll processing basis. Under these arrangements, the Company charges a tolling fee for the operations that it performs without acquiring ownership of the steel and being burdened with the attendant costs of ownership and risk of loss. Revenues from operations involving directly owned steel include a component of raw material cost whereas toll processing revenues do not.
For the Company's aluminum and magnesium die casting operations,
CastLight
™ brands, the cost of aluminum and magnesium may be handled in one of two ways. The primary method is to secure quarterly aluminum and magnesium purchase commitments based on customer releases and then pass the quarterly price changes to those customers utilizing published metal indices. The second method is to adjust prices monthly based on a referenced metal index plus additional material cost spreads agreed to by the Company and its customers.
Results of Operations
In 2016, members of finance management engaged in an initial review of certain balance sheet accounts and transactions. With the concurrence of the Audit Committee, it was determined that a more extensive assessment (the "Assessment") was needed. Under the direction of the Audit Committee, who were advised and supported by independent outside counsel, the Assessment was led by the Company's Chief Financial Officer and Principal Accounting Officer and was conducted with the assistance of internal and outside counsel and consultants. As part of the Assessment, detailed inspection of accounting records were conducted to determine if financial reporting was in accordance with GAAP and the extent of any potential misstatement. Additionally, interviews of numerous individuals were conducted to qualitatively assess what had occurred.
As a result of the Assessment, in connection with the preparation of its consolidated financial statements for the fiscal year ending October 31, 2016, the Company determined that the consolidated financial statements of fiscal years 2015, 2014, 2013, 2012 and the first three quarters of fiscal year 2016, included immaterial errors. As a result, the Company has revised its consolidated financial statements (the "Revision") as of October 31, 2015 and for fiscal years ending October 31, 2015, 2014, 2013 and 2012, each of the interim periods of 2015 and the first three quarters of fiscal year 2016. The following information set forth in this Item 7 reflects the correction of these immaterial errors. For more information on these immaterial errors, see Note 2 to the consolidated financial statements "Correction of Immaterial Errors" included elsewhere in this Annual Report on Form 10-K.
Year Ended
October 31, 2016
Compared to Year Ended
October 31, 2015
REVENUES. Sales for fiscal
2016
were
$1,065,834
, a decrease of
$7,218
from fiscal
2015
sales of
$1,073,052
, or
0.7%
. Adjusting for an unfavorable currency translation of $5,782, automotive production sales improved $28,732 and commercial vehicle and industrial market sales were down $18,909. Further, there was a change in the contractual relationship of certain customer sales from owned steel to consigned steel and surcharge recovery of $10,309 and $950 of other sales.
GROSS PROFIT. Gross profit for fiscal
2016
was
$96,176
compared to gross profit of
$86,187
in fiscal
2015
, an increase of
$9,989
, or
11.6%
. Gross profit as a percentage of sales was
9.0%
for fiscal
2016
and
8.0%
fiscal
2015
. Changes in customer
and product mix favorably impacted direct material costs by $32,308 which was negatively offset by a decrease in scrap recoveries and positively offset by an increase in labor and benefits of $4,025, an increase in repairs and maintenance and indirect manufacturing supplies of $3,070, an increase in depreciation expense of $2,878 offset by a savings in utilities of $1,329 and other of $184.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses support the growth in sales opportunities, new technologies, new product launches and acquisition activities. Expenses of
$73,417
for fiscal
2016
were
$10,389
more than selling, general and administrative expenses of
$63,028
for the prior year. As a percentage of sales, these expenses were
6.9%
of sales for fiscal
2016
and
5.9%
for fiscal
2015
. The increase of $10,389 is primarily attributable to an increase in salaries and benefits of $6,665, one-time expenses of approximately $4,063 related to the plant optimization and professional fees offset by cost savings of $339.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets expense of
$2,258
for fiscal
2016
was $37 less than amortization of intangible assets expense of
$2,295
for the prior year.
ASSET IMPAIRMENT AND RECOVERY CHARGES. Asset impairments of
$2,031
were recorded during fiscal 2016 of which $1,282 related to assets held for sale, $476 related to a specific piece of idled equipment and $273 related to the sale of a building. There were no asset impairments or recoveries recorded during fiscal 2015.
INTEREST EXPENSE. Interest expense for fiscal
2016
was
$18,086
, compared to interest expense of
$9,898
during fiscal
2015
. The increase in interest expense was the result of higher average rates and amortization of increased deferred financing fees associated with the Credit Agreement. Borrowed funds averaged
$273,296
during fiscal
2016
and the weighted average interest rate was
4.78%
. During fiscal
2015
, borrowed funds averaged
$278,289
and the weighted average interest rate of debt was
2.82%
.
OTHER INCOME / EXPENSE. Other expense, net was
$1,890
for fiscal
2016
, compared to other expense of
$387
for fiscal
2015
which primarily consisted of currency transaction gains and losses realized by the Company's Asian, European and Mexican subsidiaries.
PROVISION FOR INCOME TAXES. The provision for income taxes in fiscal
2016
was a tax benefit of
$5,152
on a loss before taxes of
$1,483
. In fiscal year
2015
, the provision for income taxes was
$4,710
on income before taxes of
$10,615
for an effective tax rate of
44.4%
. The significant tax benefit in 2016 was favorably impacted due to the removal of valuation allowances related to the Swedish operations net operating loss deferred tax assets, favorable tax deductions and credits offset by certain foreign losses without a tax benefit.
NET INCOME. The net income for fiscal
2016
was
$3,669
, or
$0.21
per share, diluted compared to net income in fiscal year
2015
of
$5,905
, or
$0.34
per share, diluted.
Results of Operations
Year Ended
October 31, 2015
Compared to Year Ended
October 31, 2014
REVENUES. Sales for fiscal
2015
were
$1,073,052
, an increase of
$240,985
over fiscal
2014
sales of
$832,067
, or
29.0%
. Acceptance of leading technologies and the strategic acquisitions completed in fiscal 2014 contributed to the increase in sales revenue of $255,485 in fiscal 2015. Of the increase in sales, $95,445 is from the acquisitions and the remaining increase is from business wins that were successfully launched and organic production increases partially offset by the negative impact of foreign currency translation of $14,500.
GROSS PROFIT. Gross profit for fiscal
2015
was
$86,187
compared to gross profit of
$76,312
in fiscal
2014
, an increase of
$9,875
, or
12.9%
. Gross profit as a percentage of sales was
8.0%
for fiscal
2015
and
9.2%
fiscal
2014
. The strategic acquisitions completed in fiscal 2014 contributed favorably, improving gross profit by $19,298 offset by an increase in labor and benefits of $4,387, an increase of $7,700 due to operating inefficiencies and adjustments to prepaid tooling and an increase of $1,171 in depreciation expense. In addition, gross profit was negatively impacted by scrap pricing of approximately $13,700.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses support the growth in sales opportunities, new technologies, new product launches and acquisition activities. Expenses of
$63,028
for fiscal
2015
were $12,792 more than selling, general and administrative expenses of
$50,236
for the prior year. As a percentage of sales, these expenses were
5.9%
of sales for fiscal
2015
and
6.0%
for fiscal
2014
. The strategic acquisitions completed in fiscal 2014 have incrementally added $10,292 to infrastructure costs incurred in 2015. In addition, the Company recognized additional one-time expenses of approximately $2,500 related to the Wellington facility and financing charges.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets expense of
$2,295
for fiscal
2015
was $131 more than amortization of intangible assets expense of
$2,164
for the prior year. The increase is related to the final purchase price accounting adjustments affecting intangible assets acquired from the fiscal 2014 acquisitions.
ASSET IMPAIRMENT AND RECOVERY CHARGES. Asset recoveries of $4,026 were recorded during fiscal 2014 for cash received upon sales of assets from the Company's former Mansfield Blanking facility, which was impaired in fiscal 2010.
INTEREST EXPENSE. Interest expense for fiscal
2015
was
$9,898
, compared to interest expense of
$4,415
during fiscal
2014
. The increase in interest expense was the result of higher average borrowing of funds and higher average rates for funding acquisition activities. Borrowed funds averaged
$278,289
during fiscal
2015
and the weighted average interest rate was
2.82%
. During fiscal
2014
, borrowed funds averaged
$167,012
and the weighted average interest rate of debt was
2.08%
.
OTHER INCOME / EXPENSE. Other expense, net was
$387
for fiscal
2015
which primarily consisted of currency transaction gains and losses realized by the Company's European and Mexican subsidiaries. Other income, net was
$504
for fiscal
2014
which included a $332 realized gain on the sale of marketable securities and $172 of currency transaction gains and losses realized by the Company's European and Mexican subsidiaries.
PROVISION FOR INCOME TAXES. The provision for income taxes in fiscal
2015
was an expense of
$4,710
on income before taxes of
$10,615
for an effective tax rate of
44.4%
. In fiscal year
2014
, the provision for income taxes was an expense of
$4,137
on income before taxes of
$24,052
for an effective tax rate of
17.2%
. The effective tax rate for fiscal
2015
has increased
27.2
percentage points compared to fiscal
2014
, was favorably impacted due to the removal of a valuation allowance related to the Mexico operation together with additional Research and Development credits (“R&D Credit”) involving multiple years. In addition for 2014 and 2015, foreign tax rates of countries in which the Company operates are in all cases less than the U.S. statutory federal income tax rate, having a favorable impact on the effective tax rate.
NET INCOME. The net income for fiscal
2015
was
$5,905
, or
$0.34
per share, diluted compared to net income in fiscal year
2014
of
$19,915
, or
$1.16
per share, diluted.
Liquidity and Capital Resources
General:
The Company’s ability to obtain cash adequate to fund its needs depends generally on the results of its operations, and the availability of financing. Management believes that cash on hand, cash flow from operations and available borrowings under its Revolving Credit Agreement (defined below) will be sufficient to fund capital expenditures and meet its operating obligations. As of
October 31, 2016
, the Company had available borrowings of approximately
$90,106
, which it believes is adequate to fund
working capital requirements for at least the next twelve months. In the longer term, the Company believes that its expected operations will provide adequate long-term cash flows. However, there can be no assurance that it will meet such expectations. For additional information, refer to the Company's Risk Factors described in Item 1A, included in Part 1 of this report.
Cash Flows and Working Capital:
At
October 31, 2016
, total debt was
$258,945
and total equity was
$132,790
, resulting in a capitalization rate of
66.1%
debt,
33.9%
equity. Current assets were
$293,153
and current liabilities were
$203,047
, resulting in positive working capital of
$90,106
.
The following table summarizes the Company's cash flows from operating, investing, and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Years Ended October 31,
|
|
2016 vs. 2015
|
|
2015 vs. 2014
|
|
2016
|
|
2015
|
|
2014
|
|
change
|
|
change
|
Net cash provided by operating activities
|
$
|
69,361
|
|
|
$
|
3,373
|
|
|
$
|
29,018
|
|
|
$
|
65,988
|
|
|
$
|
(25,645
|
)
|
Net cash used in investing activities
|
$
|
(28,316
|
)
|
|
$
|
(27,701
|
)
|
|
$
|
(159,408
|
)
|
|
$
|
(615
|
)
|
|
$
|
131,707
|
|
Net cash (used for) provided by financing activities
|
$
|
(43,546
|
)
|
|
$
|
26,120
|
|
|
$
|
142,526
|
|
|
$
|
(69,666
|
)
|
|
$
|
(116,406
|
)
|
Net Cash Provided by Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Operational cash flow before changes in operating assets and liabilities
|
$
|
44,163
|
|
|
$
|
46,726
|
|
|
$
|
44,780
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
10,975
|
|
|
(27,607
|
)
|
|
(10,273
|
)
|
Inventories
|
(2,408
|
)
|
|
358
|
|
|
4,734
|
|
Prepaids and other assets
|
14,476
|
|
|
(8,665
|
)
|
|
(8,270
|
)
|
Payables and other liabilities
|
(1,843
|
)
|
|
(5,923
|
)
|
|
3,573
|
|
Accrued income taxes
|
3,998
|
|
|
(1,516
|
)
|
|
(5,526
|
)
|
Total change in operating assets and liabilities
|
$
|
25,198
|
|
|
$
|
(43,353
|
)
|
|
$
|
(15,762
|
)
|
|
|
|
|
|
|
Net cash provided by operating activities
|
$
|
69,361
|
|
|
$
|
3,373
|
|
|
$
|
29,018
|
|
Cash flow from operations before changes in operating assets and liabilities was
$2,563
lower for the year ended
October 31, 2016
compared to the year ended
October 31, 2015
as a result of a foreign tax benefit.
Cash flow from operations before changes in operating assets and liabilities was
$1,946
higher for the year ended
October 31, 2015
compared to the year ended
October 31, 2014
which was driven by higher earnings in fiscal year 2015.
Cash inflow and outflow from changes in operating assets and liabilities:
|
|
•
|
Cash inflows from changes in operating assets and liabilities was
$25,198
for the fiscal year ended
October 31, 2016
and was positively impacted by working capital initiatives. Cash outflows from changes in operating assets and liabilities were
$43,353
and
$15,762
for the fiscal years ended October 31,
2015
and
2014
, respectively. Both 2016 and 2015 were positively impacted by increased sales, acquisition integration and new product launches.
|
|
|
•
|
Cash inflows from changes in accounts receivable for the fiscal year ended
October 31, 2016
was
$10,975
. The improvement was primarily due to increased efforts in collecting receivables and invoicing of customer reimbursed tooling programs as the Company’s product launches have significantly increased since 2014. Cash outflows from changes in accounts receivable for the fiscal years ended October 31,
2015
and
2014
was
$27,607
and
$10,273
, respectively, primarily driven by sales increases, acquisitions.
|
|
|
•
|
Cash outflows from changes in inventory for the fiscal year ended
October 31, 2016
was
$2,408
. The use of cash was primarily driven by a change in customer mix and delivery. Cash inflows for the fiscal years ended October 31,
2015
and
2014
was
$358
and
$4,734
, respectively, were also driven by a change in customer mix and delivery, acquisition integration and improvements in inventory management.
|
|
|
•
|
Cash inflows from changes in prepaids and other assets for the fiscal year ended
October 31, 2016
was
$14,476
and improved from the invoicing of customer reimbursed tooling. Cash outflows from changes in prepaids and other assets for the fiscal years ended October 31, 2015 and 2014 was
$8,665
and
$8,270
, respectively. Significant new program launches in 2014 and 2015 lead to an increase in spending resulting in higher prepaid tooling. As production started on those new awards later in 2015, the Company was able to invoice the customer to recover the investments.
|
|
|
•
|
Cash outflows from changes in payables and other for the fiscal years ended
October 31, 2016
and 2015 was
$1,843
and
$5,923
, respectively, as a result of favorable raw material pricing as well as reductions in tooling investments. Cash inflows from changes in payables and other for the fiscal year ended 2014 was
$3,573
due to acquisitions.
|
|
|
•
|
Cash inflows from changes in accrued income taxes for the fiscal years ended
October 31, 2016
of
$3,998
was primarily driven by federal income tax refunds and cash outflows of
$1,516
and
$5,526
, respectively, for the fiscal year ended
October 31, 2014
were primarily due to tax payments.
|
Net Cash Used For Investing Activities:
Net cash used for investing activities in fiscal years
2016
,
2015
and
2014
was
$28,316
,
$27,701
and
$159,408
, respectively, and consisted mainly of capital expenditures and acquisitions. Cash used for capital expenditures during fiscal years
2016
,
2015
, and
2014
was
$28,324
,
$39,376
, and
$39,593
, respectively. The expenditures are attributed to projects for new awards and product launches. For fiscal years
2016
, 2015 and
2014
, proceeds from the sales of assets generated
$1,508
,
$11,480
and
$5,762
, respectively. The total proceeds from the sale of assets during fiscal 2015 includes
$9,854
from certain sale-leaseback transactions entered into. The assets under the sale-leaseback were for new machinery and equipment which are being leased over a six to seven year period. There was no gain or loss as a result of this sales-leaseback transaction. The Company had unpaid capital expenditures of
$5,604
,
$4,225
and
$5,415
at October 31,
2016
,
2015
and
2014
, respectively, and such amounts were included in accounts payable and excluded from capital expenditures in the accompanying consolidated statement of cash flows.
Cash used for acquisitions in fiscal
2014
, net of cash acquired was
$124,544
. In 2015,
$195
of escrow funds were returned to the Company as a reduction in the final purchase price.
Net Cash Provided By Financing Activities:
Net cash utilized in financing activities was
$43,546
during
2016
and was attributable primarily to an improvement in working capital and lower capital expenditures which resulted in the Company's ability to reduce long-term borrowing. As of
October 31, 2016
, the Company's long-term indebtedness was
$256,922
.
Net cash provided by financing activities was
$26,120
and
$142,526
during
2015
and
2014
, respectively. In fiscal 2015, higher debt levels were the result of working capital needs from the acquisitions plus the unfavorable impact of lower scrap metal market pricing. In fiscal 2014, higher debt levels were the result of the Finnveden Metal Structure and Radar Industries, Inc. acquisitions and capital expenditures.
The Company continues to closely monitor the business conditions affecting the automotive industry. In addition, the Company closely monitors its working capital position to ensure adequate funds for operations. The Company anticipates that funds from operations will be adequate to meet the obligations under the Credit Agreement through maturity of the Credit Agreement in September 2019, as well as scheduled payments for the equipment security note, capital lease and repayment of the other debt totaling
$6,045
over the next five years.
Revolving Credit Facility:
The Company and its subsidiaries are party to a Credit Agreement, dated October 25, 2013, as amended (the "Credit Agreement") with Bank of America, N.A., as Administrative Agent, Swing Line Lender, Dutch Swing Line Lender and L/C Issuer, JPMorgan Chase Bank, N.A. as Syndication Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities, LLC as Joint Lead Arrangers and Joint Book Managers, The PrivateBank and Trust Company, Compass Bank and The Huntington National Bank, N.A., as Co-Documentation Agents, and the other lender parties thereto.
On October 28, 2016, the Company executed the Sixth Amendment which increases the permitted consolidated leverage ratio for periods beginning after July 31, 2016; increases the permitted consolidated fixed charge coverage ratio for periods beginning after April 30, 2017; modifies various baskets related to sale of accounts receivable, disposition of assets, sale-leaseback transactions; and makes other ministerial updates.
On October 30, 2015, the Company executed a Fifth Amendment (the "Fifth Amendment") to the Credit Agreement that increased the permitted leverage ratio with periodic reductions beginning after July 30, 2016. In addition, the Fifth Amendment permitted various investments as well as up to
$40,000
aggregate outstanding principal amount of subordinated indebtedness, subject to certain conditions. Finally, the Fifth Amendment provided for a consolidated fixed charge coverage ratio and provided for up to
$50,000
of capital expenditures by the Company and its subsidiaries throughout the year ending October 31, 2016, subject to certain quarterly baskets.
On April 29, 2015, the Company executed a Fourth Amendment (the "Fourth Amendment") to the Credit Amendment that maintained the commitment period to September 29, 2019 and allowed for an incremental increase of
$25,000
(or if certain ratios are met,
$100,000
) in the original revolving commitments of
$360,000
, subject to the Company's pro forma compliance with financial covenants, the administrative agent's approval, and the Company obtaining commitments for such increase.
The Fourth Amendment included scheduled commitment reductions beginning after January 30, 2016 as well as scheduled commitment reductions totaling
$30,000
allocated proportionately between the Aggregate Revolving A and B commitments. On April 30, 2016, the first committed reduction of
$5,000
decreased the existing revolving commitment to
$355,000
, subject to the Company's pro forma compliance with financial covenants.
Borrowings under the Credit Agreement bear interest, at the Company's option, at LIBOR or the base (or "prime") rate established from time to time by the administrative agent, in each case plus an applicable margin. The current Credit Amendment provides for an interest rate margin on LIBOR loans of
1.5%
to
4.0%
and on base rate loans of
0.50%
to
3.0%
, depending on the Company's leverage ratio.
The Credit Agreement contains customary restrictive and financial covenants, including covenants regarding the Company’s outstanding indebtedness and maximum leverage and interest coverage ratios. The Credit Agreement also contains standard provisions relating to conditions of borrowing. In addition, the Credit Agreement contains customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company. If an event of default occurs, all amounts outstanding under the Credit Agreement may be accelerated and become immediately due and payable. The Company was in compliance with the financial covenants as of
October 31, 2016
and
October 31, 2015
.
After considering letters of credit of
$5,080
that the Company has issued, unused commitments under the Credit Agreement was
$97,020
at
October 31, 2016
.
Borrowings under the Credit Agreement are collateralized by a first priority security interest in substantially all of the tangible and intangible property of the Company and its domestic subsidiaries and
65%
of the stock of foreign subsidiaries.
Other Debt:
On
August 1, 2016
, the Company entered into a finance agreement with an insurance broker for various insurance policies that bears interest at a fixed rate of
1.96%
and requires monthly payments of
$95
through
May 2017
. As of
October 31, 2016
,
$661
of principal remained outstanding under this agreement and was classified as current debt in the Company’s consolidated balance sheets.
On September 2, 2013, the Company entered into an equipment security note that bears interest at a fixed rate of
2.47%
and requires monthly payments of
$44
through September 2018. As of
October 31, 2016
,
$996
of principal remained outstanding under this agreement and
$513
was classified as current debt and
$483
was classified as long-term debt in the Company’s consolidated balance sheets.
The Company maintains capital leases for equipment used in its manufacturing facilities with lease terms expiring between 2018 and 2021. As of
October 31, 2016
, the present value of minimum lease payments under its capital leases amounted to $
4,388
.
Derivatives:
On February 25, 2014, the Company entered into an interest rate swap with an aggregate notional amount of
$75,000
designated as a cash flow hedge to manage interest rate exposure on the Company’s floating rate LIBOR based debt under the Credit Agreement. The interest rate swap is an agreement to exchange payment streams based on the notional principal amount. This agreement fixes the Company’s future interest payments at
2.74%
plus the applicable rate, as described above, on an amount of the Company’s debt principal equal to the then-outstanding swap notional amount. The forward interest rate swap commenced on March 1, 2015 with an initial
$25,000
base notional amount. The second notional amount of
$25,000
commenced on September 1, 2015 and the final notional amount of
$25,000
commenced on March 1, 2016. The base notional amount plus each incremental
addition to the base notional amount have a
five
year maturity of February 29, 2020, August 31, 2020 and February 28, 2021, respectively. On the date the interest swap was entered into, the Company designated the interest rate swap as a hedge of the variability of cash flows to be paid relative to its variable rate monies borrowed. Any ineffectiveness in the hedging relationship is recognized immediately into earnings. The Company determined the mark-to-market adjustment for the interest rate swap to be a gain of
$64
, net of tax, for the fiscal year ended
October 31, 2016
and a loss of
$1,618
, net of tax, for the fiscal year ended
October 31, 2015
, which is reflected in other comprehensive loss. The base notional amounts of
$25,000
each or
$75,000
total that commenced during 2015 and 2016 resulted in realized losses of
$1,530
and
$324
of interest expense related to the interest rate swap settlements. for the fiscal years ended October 31,
2016
and
2015
, respectively. For fiscal
2017
, the Company anticipates recognizing approximately
$1,478
of additional interest expense related to the interest swap.
Scheduled repayments under the terms of the Credit Agreement and repayments of other debt are listed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of Debt Obligations:
|
|
Credit Agreement
|
|
Equipment Security Note
|
|
Capital Lease Obligations
|
|
Other Debt
|
|
Total
|
Less than 1 year
|
|
$
|
—
|
|
|
$
|
513
|
|
|
$
|
849
|
|
|
$
|
661
|
|
|
$
|
2,023
|
|
1-3 years
|
|
252,900
|
|
|
483
|
|
|
1,459
|
|
|
—
|
|
|
254,842
|
|
3-5 years
|
|
—
|
|
|
—
|
|
|
2,080
|
|
|
—
|
|
|
2,080
|
|
After 5 years
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
252,900
|
|
|
$
|
996
|
|
|
$
|
4,388
|
|
|
$
|
661
|
|
|
$
|
258,945
|
|
Critical Accounting Policies
Preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company believes its estimates and assumptions are reasonable; however, actual results and the timing of the recognition of such amounts could differ from those estimates. The Company has identified the following items as critical accounting policies and estimates utilized by management in the preparation of the Company’s following financial statements. These estimates were selected because of inherent imprecision that may result from applying judgment to the estimation process. The expenses and accrued liabilities or allowances related to these policies are initially based on the Company’s best estimates at the time they are recorded. Adjustments are charged or credited to income and the related balance sheet account when actual experience differs from the expected experience underlying the estimates. The Company makes frequent comparisons of actual experience and expected experience in order to mitigate the likelihood that material adjustments will be required.
Revenue Recognition.
The Company recognizes revenue from the sales of products when there is evidence of a sales agreement, the delivery of goods has occurred, the sales price is fixed or determinable and collectability of revenue is reasonably assured. The Company records revenues upon shipment of product to customers and transfer of title under standard commercial terms. Price adjustments, including those arising from resolution of quality issues, price and quantity discrepancies, surcharges for fuel and/or steel and other commercial issues, are recognized in the period when management believes that such amounts become probable, based on management’s estimates. The Company enters into tooling contracts with customers in the development of molds, dies and tools (collectively, "tooling") to be sold to such customers. The Company primarily records tooling revenues and costs net in cost of sales at the time of completion and final billing to the customer. These billings are recorded as progress billings (a reduction of the associated tooling costs) until the appropriate revenue recognition criteria have been met. The tooling contracts are separate arrangements between the Company and customer and are recorded on a gross or net basis in accordance with current applicable revenue recognition accounting literature.
Allowance for Doubtful Accounts.
The Company evaluates the collectability of accounts receivable based on several factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. Additionally, a general allowance for doubtful accounts is estimated based on historical experience of write-offs and the current financial condition of customers. The financial condition of the Company’s customers is dependent on, among other things, the general economic environment, which may substantially change, thereby affecting the recoverability of amounts due to the Company from its customers.
The Company carefully assesses its risk with each of its customers and considers compliance with terms and conditions, aging of the customer accounts, intelligence learned through contact with customer representatives and right of offset of its net account receivable / account payable position with customers, if applicable, in establishing the allowance.
Inventory Reserves.
Inventories are valued at the lower of cost or market. Cost is determined on the first-in, first-out basis. Where appropriate, standard cost systems are used to determine cost and the standards are adjusted as necessary to ensure they approximate actual costs. Estimates of lower of cost or market value of inventory are based upon current economic conditions, historical sales quantities and patterns, and in some cases, the specific risk of loss on specifically identified inventories.
The Company values inventories on a regular basis to identify inventories on hand that may be obsolete or in excess of current future projected market demand. For inventory deemed to be obsolete, the Company provides a reserve for the full value of the inventory, net of estimated realizable value. Inventory that is in excess of current and projected use is reduced by an allowance to a level that approximates expected future demand. Additional inventory reserves may be required if actual market conditions differ from management’s expectations.
The Company monitors purchases of inventory to optimize its supply chain, thereby reducing the economic risk of holding excessive levels of inventory that could result in long holding periods or in unsalable inventory leading to losses in conversion.
Pre-production and development costs.
The Company enters into contractual agreements with certain customers to develop molds, dies and tools (collectively, "tooling"). All such tooling contracts relate to parts that the Company will supply to customers under supply agreements. Tooling costs are capitalized in prepaid expenses and other assets determined by the fact that tooling contracts are separate from standard production contracts. The classification in prepaid or other assets for tooling costs is based upon the period of reimbursement from the customer as either current or non-current.
Income Taxes.
The Company utilizes the asset and liability method in accounting for income taxes. Income tax expense includes U.S. and international income taxes minus tax credits and other incentives that will reduce tax expense in the year they are claimed. Deferred taxes are recognized at currently enacted tax rates for temporary differences between the financial accounting and income tax basis of assets and liabilities and operating losses and tax credit carryforwards. Valuation allowances are recorded to reduce net deferred tax assets to the amount that is more likely than not to be realized. The Company assesses both positive and negative evidence when measuring the need for a valuation allowance. Evidence typically assessed includes the operating results for the most recent three-year period and, to a lesser extent because of inherent uncertainty, the expectations of future profitability, available tax planning strategies, the time period over which the temporary differences will reverse and taxable income in prior carryback years if carryback is permitted under the tax law. The calculation of the Company’s tax liabilities also involves dealing with uncertainties in the application of complex tax laws and regulations. The Company recognizes liabilities for uncertain income tax positions based on the Company’s estimate of whether, and the extent to which, additional taxes will be required. The Company reports interest and penalties related to uncertain income tax positions as income taxes.
Business Combinations.
The Company includes the results of operations of the businesses that it acquires as of the respective dates of acquisition. The Company allocates the fair value of the purchase price of its acquisitions to the tangible and intangible assets acquired, and liabilities assumed, based on their estimated fair values. The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill.
Impairment of Long-lived Assets.
In accordance with Accounting Standards Codification ("ASC") 360, the Company assesses long-lived assets held and used (such as property, plant and equipment and other assets) for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of an asset group to be held and used is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash flows expected to be generated by the group of assets. If the carrying amount of an asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the group of assets exceeds the fair value of the group of assets. When long-lived assets are considered held for sale, they are recorded at the lower of carrying amount or fair value less costs to sell, and depreciation ceases. $2,031 of impairment charges were recognized during the fiscal year ended October 31, 2016 related to a certain asset classified as held for sale, an asset that was idled in 2016 and an impairment of a building that was sold in the second quarter of 2016. See Notes to the Consolidated Financial Statements, Note 4, for a discussion of the impairment charges recorded in fiscal
2016
and a discussion of the recoveries recorded in fiscal
2014
. The Company continues to assess impairment to long-lived assets based on expected orders from the Company’s customers and current business conditions.
Intangible Assets.
Intangible assets with definitive lives are amortized over their estimated useful lives. The Company amortizes its acquired intangible assets with definitive lives on a straight-line basis over periods ranging from three months to 15 years. See Note 11 to the consolidated financial statements for a description of the current intangible assets and their estimated amortization expense.
The Company performs analysis of indefinite-lived intangible assets which are included as a component of the annual impairment of long-lived assets. An impairment analysis of definite-lived intangible assets is performed when indicators of potential impairment exist.
Goodwill.
Goodwill, which represents the excess cost over the fair value of the net assets of businesses acquired, was approximately
$27,490
as of
October 31, 2016
, or
4.4%
of its total assets, and
$27,992
as of
October 31, 2015
, or
4.2%
of its total assets.
In accordance with ASC 350,
"Intangibles-Goodwill and Other,"
the Company assesses goodwill for impairment on an annual basis. Such assessment can be done on a qualitative or quantitative basis. To qualitatively assess the likelihood of goodwill being impaired, the Company considers the following factors at the reporting unit level: the excess of fair value over carrying value as of the last impairment test, the length of time since the last fair value measurement, the carrying value, market and industry metrics, actual performance compared to forecasted performance, and its current outlook on the business. If the qualitative assessment indicated it is more likely than not that goodwill is impaired, the Company will perform quantitative impairment testing at the reporting unit level.
If a quantitative fair value measurement is used, the fair value of goodwill is compared to its carrying value and an impairment charge is recorded if the carrying value exceeds the fair value.If the carrying value exceeds the fair value, then a possible impairment of goodwill may exist and further evaluation is required. Fair values are based on the cash flow projected in the strategic plans and long-range planning forecasts, discounted at a risk-adjusted rate of return. Revenue growth rates included in the plans are generally based on industry specific data and known awarded business. The projected profit margins assumptions included in the plans are based in the current cost structure and anticipated productivity improvements. If different assumptions were used in the plans, the related cash flows used in measuring fair value could be different and impairment of goodwill might be required to be recorded.
Group Insurance and Workers’ Compensation Accruals.
The Company is primarily self-insured for group insurance and workers’ compensation claims in the United States and reviews these accruals on a monthly basis to adjust the balances as determined necessary. The Company is fully insured for workers' compensation at one of its locations. For the self insured plans, the Company reviews historical claims data and lag analysis as the primary indicators of the accruals.
Additionally, the Company reviews specific large insurance claims to determine whether there is a need for additional accrual on a case-by-case basis. Changes in the claim lag periods and the specific occurrences could materially impact the required accrual balance period-to-period. The Company carries excess insurance coverage for group insurance and workers’ compensation claims exceeding a range of $160-170 and $100-500 per plan year, respectively, dependent upon the location where the claim is incurred. At
October 31, 2016
, and
2015
, the amount accrued for group insurance and workers’ compensation claims was
$5,114
and
$4,664
, respectively. The self-insurance reserves established are a result of safety statistics, changes in employment levels, the number of open and active workers’ compensation cases, and group insurance plan design features.
Share-Based Payments.
The Company records compensation expense for the fair value of nonvested stock option awards and restricted stock awards over the remaining vesting period. The Company has elected to use the simplified method to calculate the expected term of the stock options outstanding at five to six years and has utilized historical weighted average volatility. The Company determines the volatility and risk-free rate assumptions used in computing the fair value using the Black-Scholes option-pricing model, in consultation with an outside third party. The expected term for the restricted stock award is between three months and four years.
The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the expected life of the stock-based award and stock price volatility. The assumptions used are management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, the recorded stock-based compensation expense could have been materially different from that depicted in the financial statements. In addition, the Company determines a forfeiture rate at the time of grant. If actual forfeitures materially differ from the estimate, the share-based compensation expense could be materially different.
The restricted stock and restricted stock units are valued based upon a 20 day Exponential Moving Average ("EMA") as of the Friday prior to the grant of an award. In addition, the Company determines a forfeiture rate at the time of grant. Share-based compensation expense is adjusted when actual forfeitures occur.
U.S. Pension and Other Post-retirement Costs and Liabilities
.
The Company has recorded significant pension and other post-retirement benefit liabilities that are developed from actuarial valuations for its U.S. operations. The pension plans were frozen several years ago and therefore contributions are not allowed. The determination of the Company’s pension liabilities
requires key assumptions regarding discount rates used to determine the present value of future benefit payments and the expected return on plan assets. The discount rate is also significant to the development of other post-retirement liabilities. The Company determines these assumptions in consultation with, and after input from, its actuaries.
The discount rate reflects the estimated rate at which the pension and other post-retirement liabilities could be settled at the end of each fiscal year. For its U.S. operations, the Company uses the Principal Pension Discount Yield Curve ("Principal Curve") as the basis for determining the discount rate for reporting pension and retiree medical liabilities. The Principal Curve has several advantages to other methods, including: transparency of construction, lower statistical errors, and continuous forward rates for all years. At
October 31, 2016
, the resulting discount rate from the use of the Principal Curve was
3.70%
,
a decrease
of
0.50%
from a year earlier that contributed to an increase of the benefit obligation of approximately
$51
. A change of 25 basis points in the discount rate at
October 31, 2016
would increase expense on an annual basis by approximately $10 or decrease expense on an annual basis by approximately $14.
The assumed long-term rate of return on pension assets is applied to the market value of plan assets to derive a reduction to pension expense that approximates the expected average rate of asset investment return over ten or more years. A decrease in the expected long-term rate of return will increase pension expense whereas an increase in the expected long-term rate will reduce pension expense. Decreases in the level of plan assets will serve to increase the amount of pension expense whereas increases in the level of actual plan assets will serve to decrease the amount of pension expense. Any shortfall in the actual return on plan assets from the expected return will increase pension expense in future years due to the amortization of the shortfall, whereas any excess in the actual return on plan assets from the expected return will reduce pension expense in future periods due to the amortization of the excess. A change of 25 basis points in the assumed rate of return on pension assets would increase or decrease pension assets by approximately $156.
The Company’s investment policy for assets of the plans is to maintain an allocation generally of 0% to 70% in equity securities, 0% to 70% in debt securities, and 0% to 10% in real estate. Equity security investments are structured to achieve an equal balance between growth and value stocks. The Company determines the annual rate of return on pension assets by first analyzing the composition of its asset portfolio. Historical rates of return are applied to the portfolio. The Company’s investment advisors and actuaries review this computed rate of return. Industry comparables and other outside guidance are also considered in the annual selection of the expected rates of return on pension assets.
For the year ended
October 31, 2016
, the actual return on pension plans’ assets for all of the Company’s plans approximated 3.12%, which is lower than the expected rate of return on plan assets of 7.50% used to derive pension expense. The long-term expected rate of return takes into account years with exceptional gains and years with exceptional losses.
Non-U.S. Pension.
For the Company's Swedish operations, the majority of the pension obligations are covered by insurance policies with insurance companies. Pension commitments in the Company's Polish operations at
October 31, 2016
were not material. The liability for these obligations comprise the present value of future obligations and is calculated on an actuarial basis.
Actual results that differ from these estimates may result in more or less future Company funding into the pension plans than is planned by management. Based on current market investment performance, historically the Company has conservatively contributed to the defined benefit plans and therefore contributions for fiscal 2017 are not required until second quarter of 2018, and that pension expense will increase in fiscal 2017.
Derivative Instruments and Hedging Activities.
The Company records derivative instruments in the consolidated balance sheet as either an asset or liability
and as a component of other comprehensive income
and measured at fair value. Changes in derivative instruments' fair value are recognized currently in earnings, unless the derivative instrument has been designated as a cash flow hedge and specific cash flow hedge accounting criteria are met. Under the cash flow hedge accounting, unrealized gains and losses are reflected in stockholder's equity as accumulated other comprehensive income (AOCI) until the forecasted transaction occurs. If the cash flow hedge is deemed ineffective, the derivative's gains or losses are then recognized in the consolidated statement of income.
Foreign Currency Translation.
Two of the Company's subsidiaries (Shiloh De Mexico S.A. DE C.V. and Shiloh International, S.A. DE C.V.), the Company's Netherlands and Swedish holding companies, and the Company's U.S. subsidiaries have the U.S. dollar as their functional currency. All of the Company's other direct and indirect subsidiaries use their respective local currency as their functional currency. The translation from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate for the period. The resulting translation adjustments are recorded as a component of Other Comprehensive Income (Loss) ("OCI"). The Company engages in foreign currency denominated transactions with customers and
suppliers, as well as between subsidiaries with different functional currencies. Gains and losses resulting from foreign currency transactions are recognized in net income in the consolidated statements of income.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.
Recent Accounting Pronouncements
Recently Issued Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09,
"Revenue from Contracts with Customers,"
which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. The FASB, through the issuance of ASU No. 2015-14, "
Revenue from Contracts with Customers,
" approved a one year delay of the effective date and the new standard now is effective for reporting periods beginning after December 15, 2017 and permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. During the second and third quarter, the FASB issued ASUs 2016-10, 2016-11 and 2016-12. ASUs 2016-10 and 2016-12 provide further clarification on the implementation guidance on principal versus agent considerations. ASU 2016-11 rescinds certain SEC guidance from the FASB ASC in response to announcements made by the SEC at the Emerging Issues Task Force's ("EITF") March 3, 2016 meeting. Finally, ASU 2016-20 makes minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The Company is planning a bottom up approach to analyze the standard's impact on its revenues by looking at historical policies and practices and identifying the differences from applying the new standard to its revenue stream. The Company has not selected a transition date or method nor has it determined the effect of the standard to its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15,
"Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,"
which the intent is to define the Company's responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This ASU will be effective for the Company November 1, 2017. The Company will prospectively apply the guidance to applicable transactions.
In April 2016, the FASB issued ASU No. 2016-10, "
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing."
ASU 2016-10 adds further guidance on identifying performance obligations and also to improve the operability and understandability of the licensing implementation guidance. ASU 2016-10 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-15 on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
"Leases"
which requires a lessee to recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from the previous guidance within ASC Topic 840, Leases. For operating leases, a lessee is required to do the following: (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position, (2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis and (3) classify all cash payments within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. AUS 2016-02 is effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. The Company is currently evaluating the requirements of ASU 2016-02 and has not yet determined its impact on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
"Recognition and Measurement of Financial Assets and Financial Liabilities."
ASU 2016-01 to amend certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the amendments is the requirement for changes in the fair value of the Company's equity investments, with certain exceptions, to be recognized through net income rather than other comprehensive income ("OCI"). ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The application of the amendments will result in a cumulative-effect adjustment to our consolidated balance sheet as of the effective date. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.
In July 2015, the FASB issued ASU 2015-11,
"Inventory."
ASU 2015-11 simplifies the measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. ASU 2015-11 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company does
not
expect ASU 2015-11 will have a material impact on its statement of financial position or financial statement disclosures.
In April 2015, the FASB issued ASU 2015-03,
"Interest - Imputation of Interest."
ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in the ASU. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company does not expect ASU 2015-03 will have a material impact on its statement of financial position or financial statement disclosures.
Recently Adopted Standards
In November 2015, the FASB issued ASU 2015-17,
"Balance Sheet Classification of Deferred Taxes."
ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, although early adoption is permitted, including adoption in an interim period. This guidance simplified the current guidance, which required entities to separately present deferred tax assets and liabilities as current and noncurrent on the balance sheet. The Company has elected to early adopt this standard prospectively as of October 31, 2016, as is permitted under the standard. Due to the prospective treatment, prior periods presented in these financial statements have not been adjusted.
In March 2016, FASB issued ASU 2016-09,
"Compensation - Stock Compensation."
ASU 2016-09 simplified the accounting for share-based payment transactions. This guidance required that excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the consolidated statements of income rather than additional paid-in capital. Additionally, the excess tax benefits will be classified along with other income tax cash flows as an operating activity, rather than a financing activity, on the statement of cash flows. Further, the update allows an entity to make a policy election to recognize forfeitures as they occur or estimate the number of awards expected to be forfeited. The Company has elected to early adopt this standard prospectively, with certain cumulative effect adjustments if applicable, as of October 31, 2016, as is permitted under the standard. There were no unrecognized excess tax benefits that are required to be recorded on a modified retrospective basis through a cumulative effect adjustment to retained earnings upon adoption. The Company has also elected to continue to recognize forfeitures as they occur.
Effect of Inflation, Deflation
Inflation generally affects the Company by increasing the interest expense of floating rate indebtedness and by increasing the cost of labor, equipment and raw materials. The level of inflation has not had a material effect on the Company's consolidated financial results for the past three years.
In periods of decreasing prices, deflation occurs and may also affect the Company's results of operations. With respect to steel purchases, the Company's purchases of steel through customers' steel buying programs protects recovery of the cost of steel through the selling price of the Company's products. For non-steel buying programs, the Company aligns the cost of steel purchases with the related selling price of the product. For the Company's aluminum and magnesium die casting business, the cost of the materials is handled in one of two ways. The primary method is to secure quarterly purchase commitments based on customer releases and then pass the quarterly price changes to those customers utilizing published metal indexes. The second method is to adjust prices monthly, based on a referenced metal index plus additional material cost spreads agreed to by the Company and its customers.
FORWARD-LOOKING STATEMENTS
Certain statements made by Shiloh in this Annual Report on Form 10-K regarding the Company's operating performance, events or developments that the Company believes or expects to occur in the future, including those that discuss strategies, goals,
outlook or other non-historical matters, or which relate to future sales, earnings expectations, cost savings, awarded sales, volume growth, earnings or general belief in the Company's expectations of future operating results are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements are made on the basis of management's assumptions and expectations. As a result, there can be no guarantee or assurance that these assumptions and expectations will in fact occur. The forward-looking statements are subject to risks and uncertainties that may cause actual results to materially differ from those contained in the statements.
Listed below are some of the factors that could potentially cause actual results to differ materially from expected future results. Other factors besides those listed here could also materially affect the Company’s business.
|
|
•
|
The impact on historical financial statements of any known or unknown accounting errors or irregularities; and the magnitude of any adjustments in restated financial statements of the Company’s operating results:
|
|
|
•
|
The Company's ability to accomplish its strategic objectives.
|
|
|
•
|
The Company's ability to obtain future sales.
|
|
|
•
|
Changes in worldwide economic and political conditions, including adverse effects from terrorism or related hostilities.
|
|
|
•
|
Costs related to legal and administrative matters.
|
|
|
•
|
The Company's ability to realize cost savings expected to offset price concessions.
|
|
|
•
|
The Company's ability to successfully integrate acquired businesses
,
including businesses located outside of the United States. Risks associated with doing business internationally, including economic, political and social instability, foreign currency exposure and the lack of acceptance of its products.
|
|
|
•
|
Inefficiencies related to production and product launches that are greater than anticipated; changes in technology and technological risks.
|
|
|
•
|
Work stoppages and strikes at the Company's facilities and that of the Company's customers or suppliers.
|
|
|
•
|
The Company's dependence on the automotive and heavy truck industries, which are highly cyclical.
|
|
|
•
|
The dependence of the automotive industry on consumer spending, which is subject to the impact of domestic and international economic conditions affecting car and light truck production.
|
|
|
•
|
Regulations and policies regarding international trade.
|
|
|
•
|
Financial and business downturns of the Company's customers or vendors, including any production cutbacks or bankruptcies. Increases in the price of, or limitations on the availability of, steel, aluminum or magnesium, the Company's primary raw materials, or decreases in the price of scrap steel.
|
|
|
•
|
The successful launch and consumer acceptance of new vehicles for which the Company supplies parts.
|
|
|
•
|
The occurrence of any event or condition that may be deemed a material adverse effect under the Company’s outstanding indebtedness or a decrease in customer demand which could cause a covenant default under the Company’s outstanding indebtedness.
|
|
|
•
|
Pension plan funding requirements.
|
See "Item 1A. Risk Factors" in this Annual Report on Form 10-K for a more complete discussion of these risks and uncertainties. Any or all of these risks and uncertainties could cause actual results to differ materially from those reflected in the forward-looking statements. These forward-looking statements reflect management's analysis only as of the date of filing this Annual Report on Form 10-K.
The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of filing this Annual Report on Form 10-K. In addition to the disclosures contained herein,
readers should carefully review risks and uncertainties contained in other documents the Company files from time to time with the SEC.
|
|
Item 8.
|
Consolidated Financial Statements and Supplementary Data.
|
|
|
|
|
|
|
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Shiloh Industries, Inc.
We have audited the accompanying consolidated balance sheets of Shiloh Industries, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of October 31 2016 and 2015, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended October 31, 2016. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Shiloh Industries, Inc. and subsidiaries as of October 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of October 31, 2016, based on criteria established in the 2013
Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated January 17, 2017 expressed an adverse opinion thereon.
/s/GRANT THORNTON LLP
Cleveland, Ohio
January 17, 2017
SHILOH INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
2016
|
|
2015
|
ASSETS:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,696
|
|
|
$
|
13,100
|
|
Investment in marketable securities
|
|
174
|
|
|
356
|
|
Accounts receivable, net
|
|
183,862
|
|
|
194,155
|
|
Related-party accounts receivable
|
|
1,235
|
|
|
1,092
|
|
Prepaid income taxes
|
|
1,653
|
|
|
4,515
|
|
Inventories, net
|
|
60,547
|
|
|
57,868
|
|
Deferred income taxes
|
|
—
|
|
|
2,837
|
|
Prepaid expenses and other assets
|
|
36,986
|
|
|
45,706
|
|
Total current assets
|
|
293,153
|
|
|
319,629
|
|
Property, plant and equipment, net
|
|
265,837
|
|
|
279,223
|
|
Goodwill
|
|
27,490
|
|
|
27,992
|
|
Intangible assets, net
|
|
17,279
|
|
|
19,543
|
|
Deferred income taxes
|
|
9,974
|
|
|
2,958
|
|
Other assets
|
|
12,696
|
|
|
11,509
|
|
Total assets
|
|
$
|
626,429
|
|
|
$
|
660,854
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY:
|
|
|
|
|
Current debt
|
|
$
|
2,023
|
|
|
$
|
2,080
|
|
Accounts payable
|
|
158,514
|
|
|
161,123
|
|
Other accrued expenses
|
|
40,824
|
|
|
34,459
|
|
Accrued income taxes
|
|
1,686
|
|
|
—
|
|
Total current liabilities
|
|
203,047
|
|
|
197,662
|
|
Long-term debt
|
|
256,922
|
|
|
298,873
|
|
Long-term benefit liabilities
|
|
23,312
|
|
|
17,376
|
|
Deferred income taxes
|
|
4,734
|
|
|
6,180
|
|
Interest rate swap agreement
|
|
5,036
|
|
|
4,989
|
|
Other liabilities
|
|
588
|
|
|
1,312
|
|
Total liabilities
|
|
493,639
|
|
|
526,392
|
|
Commitments and contingencies
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
Preferred stock, $.01 per share; 5,000,000 shares authorized; no shares issued and outstanding at October 31, 2016 and October 31, 2015, respectively
|
|
—
|
|
|
—
|
|
Common stock, par value $.01 per share; 50,000,000 and 25,000,000 shares authorized at October 31, 2016 and October 31, 2015, respectively; 17,614,057 and 17,309,623 shares issued and outstanding at October 31, 2016 and October 31, 2015, respectively
|
|
176
|
|
|
173
|
|
Paid-in capital
|
|
70,403
|
|
|
69,334
|
|
Retained earnings
|
|
118,673
|
|
|
115,004
|
|
Accumulated other comprehensive loss, net
|
|
(56,462
|
)
|
|
(50,049
|
)
|
Total stockholders’ equity
|
|
132,790
|
|
|
134,462
|
|
Total liabilities and stockholders’ equity
|
|
$
|
626,429
|
|
|
$
|
660,854
|
|
The accompanying notes are an integral part of these consolidated financial statements.
SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Net revenues
|
|
$
|
1,065,834
|
|
|
$
|
1,073,052
|
|
|
$
|
832,067
|
|
Cost of sales
|
|
969,658
|
|
|
986,865
|
|
|
755,755
|
|
Gross profit
|
|
96,176
|
|
|
86,187
|
|
|
76,312
|
|
Selling, general and administrative expenses
|
|
73,417
|
|
|
63,028
|
|
|
50,236
|
|
Amortization of intangible assets
|
|
2,258
|
|
|
2,295
|
|
|
2,164
|
|
Asset impairment (recovery), net
|
|
2,031
|
|
|
—
|
|
|
(4,026
|
)
|
Operating income
|
|
18,470
|
|
|
20,864
|
|
|
27,938
|
|
Interest expense
|
|
18,086
|
|
|
9,898
|
|
|
4,415
|
|
Interest income
|
|
(23
|
)
|
|
(36
|
)
|
|
(25
|
)
|
Other (income) expense, net
|
|
1,890
|
|
|
387
|
|
|
(504
|
)
|
Income (loss) before income taxes
|
|
(1,483
|
)
|
|
10,615
|
|
|
24,052
|
|
Provision (benefit) for income taxes
|
|
(5,152
|
)
|
|
4,710
|
|
|
4,137
|
|
Net income
|
|
$
|
3,669
|
|
|
$
|
5,905
|
|
|
$
|
19,915
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.21
|
|
|
$
|
0.34
|
|
|
$
|
1.16
|
|
Basic weighted average number of common shares
|
|
17,513
|
|
|
17,287
|
|
|
17,145
|
|
Diluted earnings per share
|
|
$
|
0.21
|
|
|
$
|
0.34
|
|
|
$
|
1.16
|
|
Diluted weighted average number of common shares
|
|
17,526
|
|
|
17,310
|
|
|
17,215
|
|
The accompanying notes are an integral part of these consolidated financial statements.
SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Net income
|
$
|
3,669
|
|
|
$
|
5,905
|
|
|
$
|
19,915
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
Defined benefit pension plans & other postretirement benefits
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
1,251
|
|
|
1,214
|
|
|
1,115
|
|
|
|
|
|
Actuarial net gain (loss)
|
(5,081
|
)
|
|
743
|
|
|
(4,113
|
)
|
|
|
|
|
Asset net gain (loss)
|
(3,006
|
)
|
|
(3,008
|
)
|
|
926
|
|
|
|
|
|
Income tax benefit (provision)
|
2,986
|
|
|
(387
|
)
|
|
783
|
|
|
|
|
Total defined benefit pension plans & other post retirement benefits, net of tax
|
(3,850
|
)
|
|
(1,438
|
)
|
|
(1,289
|
)
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities
|
(183
|
)
|
|
(689
|
)
|
|
518
|
|
|
|
|
|
Income tax benefit (provision)
|
58
|
|
|
248
|
|
|
(53
|
)
|
|
|
|
|
Reclassification adjustments for gain on marketable securities included in net income
|
—
|
|
|
—
|
|
|
(365
|
)
|
|
|
|
Total marketable securities, net of tax
|
(125
|
)
|
|
(441
|
)
|
|
100
|
|
|
|
Derivatives and hedging
|
|
|
|
|
|
|
|
|
|
Unrealized loss on interest rate swap agreements
|
(1,577
|
)
|
|
(2,912
|
)
|
|
(2,510
|
)
|
|
|
|
|
Income tax benefit
|
111
|
|
|
861
|
|
|
952
|
|
|
|
|
|
Reclassification adjustments for settlement of derivatives included in net income
|
1,530
|
|
|
433
|
|
|
—
|
|
|
|
|
Change in fair value of derivative instruments, net of tax
|
64
|
|
|
(1,618
|
)
|
|
(1,558
|
)
|
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation loss
|
(3,032
|
)
|
|
(9,671
|
)
|
|
(8,052
|
)
|
|
|
|
|
Reclassification adjustments for settlement of foreign currency included in net income
|
530
|
|
|
—
|
|
|
—
|
|
|
|
|
Unrealized loss on foreign currency translation, net of tax
|
(2,502
|
)
|
|
(9,671
|
)
|
|
(8,052
|
)
|
|
Comprehensive income (loss), net
|
$
|
(2,744
|
)
|
|
$
|
(7,263
|
)
|
|
$
|
9,116
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net income
|
$
|
3,669
|
|
|
$
|
5,905
|
|
|
$
|
19,915
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
37,645
|
|
|
34,267
|
|
|
27,839
|
|
Amortization of deferred financing costs
|
2,505
|
|
|
992
|
|
|
807
|
|
Asset impairment (recoveries), net
|
2,031
|
|
|
—
|
|
|
(4,026
|
)
|
Deferred income taxes
|
(2,704
|
)
|
|
4,263
|
|
|
837
|
|
Stock-based compensation expense
|
1,072
|
|
|
1,025
|
|
|
579
|
|
(Gain) loss on sale of assets
|
(55
|
)
|
|
274
|
|
|
(806
|
)
|
Gain on sale of marketable securities
|
—
|
|
|
—
|
|
|
(365
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable, net
|
10,975
|
|
|
(27,607
|
)
|
|
(10,273
|
)
|
Inventories, net
|
(2,408
|
)
|
|
358
|
|
|
4,734
|
|
Prepaids and other assets
|
14,476
|
|
|
(8,665
|
)
|
|
(8,270
|
)
|
Payables and other liabilities
|
(1,843
|
)
|
|
(5,923
|
)
|
|
3,573
|
|
Accrued income taxes
|
3,998
|
|
|
(1,516
|
)
|
|
(5,526
|
)
|
Net cash provided by operating activities
|
69,361
|
|
|
3,373
|
|
|
29,018
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Capital expenditures
|
(28,324
|
)
|
|
(39,376
|
)
|
|
(39,593
|
)
|
Investment in marketable securities
|
—
|
|
|
—
|
|
|
(2,000
|
)
|
Investment in joint venture
|
(1,500
|
)
|
|
—
|
|
|
—
|
|
Acquisitions, net of cash acquired
|
—
|
|
|
195
|
|
|
(124,544
|
)
|
Proceeds from sale of assets
|
1,508
|
|
|
11,480
|
|
|
5,762
|
|
Proceeds from sale of marketable securities
|
—
|
|
|
—
|
|
|
967
|
|
Net cash used for investing activities
|
(28,316
|
)
|
|
(27,701
|
)
|
|
(159,408
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Payment of capital leases
|
(860
|
)
|
|
(821
|
)
|
|
(382
|
)
|
Proceeds from long-term borrowings
|
145,400
|
|
|
153,900
|
|
|
182,500
|
|
Repayments of long-term borrowings
|
(186,301
|
)
|
|
(121,589
|
)
|
|
(39,877
|
)
|
Payment of deferred financing costs
|
(1,785
|
)
|
|
(5,529
|
)
|
|
(776
|
)
|
Proceeds from exercise of stock options
|
—
|
|
|
159
|
|
|
1,061
|
|
Net cash (used for) provided by financing activities
|
(43,546
|
)
|
|
26,120
|
|
|
142,526
|
|
Effect of foreign currency exchange rate fluctuations on cash
|
(1,903
|
)
|
|
(706
|
)
|
|
(520
|
)
|
Net increase (decrease) in cash and cash equivalents
|
(4,404
|
)
|
|
1,086
|
|
|
11,616
|
|
Cash and cash equivalents at beginning of period
|
13,100
|
|
|
12,014
|
|
|
398
|
|
Cash and cash equivalents at end of period
|
$
|
8,696
|
|
|
$
|
13,100
|
|
|
$
|
12,014
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
Cash paid for interest
|
$
|
15,801
|
|
|
$
|
9,373
|
|
|
$
|
3,862
|
|
Cash paid for (refund of) income taxes
|
$
|
(5,855
|
)
|
|
$
|
1,770
|
|
|
$
|
7,995
|
|
|
|
|
|
|
|
Non-cash Activities:
|
|
|
|
|
|
Equipment acquired under capital lease
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,639
|
|
Capital equipment included in accounts payable
|
$
|
5,604
|
|
|
$
|
4,225
|
|
|
$
|
5,415
|
|
The accompanying notes are an integral part of these consolidated financial statements.
SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock ($.01 Par Value)
|
|
Paid-In Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Total Stockholders' Equity
|
October 31, 2013
|
$
|
170
|
|
|
$
|
66,312
|
|
|
$
|
89,184
|
|
|
$
|
(26,082
|
)
|
|
$
|
129,584
|
|
Net income
|
—
|
|
|
—
|
|
|
19,915
|
|
|
—
|
|
|
19,915
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,799
|
)
|
|
(10,799
|
)
|
Restricted stock and exercise of stock options
|
2
|
|
|
1,059
|
|
|
—
|
|
|
—
|
|
|
1,061
|
|
Stock-based compensation cost
|
—
|
|
|
579
|
|
|
—
|
|
|
—
|
|
|
579
|
|
Income tax effect on stock compensation
|
—
|
|
|
85
|
|
|
—
|
|
|
—
|
|
|
$
|
85
|
|
October 31, 2014
|
$
|
172
|
|
|
$
|
68,035
|
|
|
$
|
109,099
|
|
|
$
|
(36,881
|
)
|
|
$
|
140,425
|
|
Net income
|
—
|
|
|
—
|
|
|
5,905
|
|
|
—
|
|
|
5,905
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,168
|
)
|
|
(13,168
|
)
|
Restricted stock and exercise of stock options
|
1
|
|
|
158
|
|
|
—
|
|
|
—
|
|
|
159
|
|
Stock-based compensation cost
|
—
|
|
|
1,025
|
|
|
—
|
|
|
—
|
|
|
1,025
|
|
Income tax effect on stock compensation
|
—
|
|
|
116
|
|
|
—
|
|
|
—
|
|
|
116
|
|
October 31, 2015
|
$
|
173
|
|
|
$
|
69,334
|
|
|
$
|
115,004
|
|
|
$
|
(50,049
|
)
|
|
$
|
134,462
|
|
Net income
|
—
|
|
|
—
|
|
|
3,669
|
|
|
—
|
|
|
3,669
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,413
|
)
|
|
(6,413
|
)
|
Restricted stock and exercise of stock options
|
3
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation cost
|
—
|
|
|
1,072
|
|
|
—
|
|
|
—
|
|
|
1,072
|
|
October 31, 2016
|
$
|
176
|
|
|
$
|
70,403
|
|
|
$
|
118,673
|
|
|
$
|
(56,462
|
)
|
|
$
|
132,790
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except number of shares and per share data)
Note 1—Summary of Significant Accounting Policies
General
The Company is a leading global supplier of lightweighting, noise and vibration solutions to the automotive, commercial vehicle and industrial markets, capable of delivering solutions in aluminum, magnesium, steel and high-strength steel alloys to automotive, commercial vehicle and industrial markets. The Company offers one of the broadest portfolio of lightweighting solutions to the automotive, commercial vehicle and industrial markets, capable of delivering solutions in aluminum, magnesium, steel and steel alloys. Shiloh delivers these solutions through the design and manufacturing of its
BlankLight®
,
CastLight
™ and
StampLight
™ brands. Shiloh delivers solutions in body, chassis and powertrain systems to original equipment manufacturers ("OEMs") and several "Tier 1" suppliers to the OEMs. The Company has
twenty-eight
wholly-owned subsidiaries at locations in Asia, Europe and North America as well as a
55%
ownership of a joint venture in China with minimal operating activity for the fiscal year ended
October 31, 2016
.
MTD Holdings Inc. (the parent of MTD Products Inc.) and the MTD Products Inc. Master Employee Benefit Trust, a trust fund established and sponsored by MTD Products Inc. owned approximately
47.2%
of the Company's outstanding shares of Common Stock as of
October 31, 2016
, making MTD Holdings Inc. and MTD Products Inc. related parties of the Company.
Principles of Consolidation
The consolidated financial statements include the accounts of Shiloh Industries, Inc. and all wholly-owned subsidiaries. All significant intercompany transactions have been eliminated.
Revenue Recognition
The Company recognizes revenue from the sales of products when there is evidence of a sales agreement, the delivery of goods has occurred, the sales price is fixed or determinable and collectability of revenue is reasonably assured. The Company records revenues upon shipment of product to customers and transfer of title under standard commercial terms. Price adjustments, including those arising from resolution of quality issues, price and quantity discrepancies, surcharges for fuel and/or steel and other commercial issues, are recognized in the period when management believes that such amounts become probable, based on management’s estimates. The Company enters into tooling contracts with customers in the development of tooling to be sold to such customers. The Company primarily records tooling revenues and costs net in cost of sales at the time of completion and final billing to the customer. These billings are recorded as progress billings (a reduction of the associated tooling costs) until the appropriate revenue recognition criteria have been met. The tooling contracts are separate arrangements between the Company and customer and are recorded on a gross or net basis in accordance with current applicable revenue recognition accounting literature.
Allowance for Doubtful Accounts
The Company evaluates the collectability of accounts receivable based on several factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. Additionally, a general allowance for doubtful accounts is estimated based on historical experience of write-offs and the current financial condition of customers. The financial condition of the Company’s customers is dependent on, among other things, the general economic environment, which may substantially change, thereby affecting the recoverability of amounts due to the Company from its customers.
The Company carefully assesses its risk with each of its customers and considers compliance with terms and conditions, aging of the customer accounts, intelligence learned through contact with customer representatives and its right of offset of net account receivable / account payable position with customers, if applicable, in establishing the allowance.
Shipping and Handling Costs
The Company classifies all amounts billed to a customer in a sales transaction related to shipping and handling as revenue and the costs incurred by the Company for shipping and handling are classified as costs of sales.
Inventories
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Inventories are valued at the lower of cost or market, using the first-in first-out ("FIFO") method.
Pre-production and development costs
The Company enters into contractual agreements with certain customers to develop tooling. All such tooling contracts relate to parts that the Company will supply to customers under supply agreements. Tooling costs are capitalized in prepaid expenses and other assets determined by the fact that tooling contracts are separate from standard production contracts. The classification in prepaid or other assets is based upon the period of reimbursement from customer as either current or non-current.
Property, Plant and Equipment
Property, plant and equipment are stated at cost or at fair market value for plant, property and equipment acquired through acquisitions. Expenditures for maintenance, repairs and renewals are charged to expense as incurred, while major improvements are capitalized. The cost of these improvements is depreciated over their estimated useful lives. Useful lives range from
three
to
twelve
years for furniture and fixtures and machinery and equipment, or if the assets are dedicated to a customer program, over the estimated life of that program,
ten
to
twenty
years for land improvements and
twenty
to
forty
years for buildings and their related improvements. Depreciation is computed using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. When assets are retired or otherwise disposed, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is included in the earnings for the current period.
Employee Benefit Plans
The Company accrues the cost of U.S. defined benefit pension plans, which are frozen, in accordance with Statement of FASB ASC Topic 715
"Compensation - Retirement Benefits."
The plans are funded based on the requirements and limitations of the Employee Retirement Income Security Act of 1974. As of
October 31, 2016
, approximately
95%
of its US employees of the Company participated in discretionary profit sharing plans administered by the Company. The Company also provides postretirement benefits to
15
former employees.
For the Company's Swedish operations, the majority of the pension obligations are covered by insurance policies with insurance companies. Pension commitments in the Company's Polish operations at
October 31, 2016
were not material. The liability of these comprise the present value of future obligations and is calculated on an actuarial basis.
Share-Based Compensation
The Company records compensation expense for the fair value of nonvested stock option awards, restricted stock awards and restricted stock units over the remaining vesting period. The Company has elected to use the simplified method to calculate the expected term of the stock options outstanding at five to six years and has utilized historical weighted average volatility. The Company determines the volatility and risk-free rate assumptions used in computing the fair value using the Black-Scholes option-pricing model, in consultation with an outside third party. The expected term for the restricted stock award is between three months and four years.
The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the expected life of the stock-based award and stock price volatility. The assumptions used are management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, the recorded stock-based compensation expense could have been materially different from that depicted in the financial statements. In addition, the Company determines a forfeiture rate at the time of grant. If actual forfeitures materially differ from the estimate, the share-based compensation expense could be materially different.
The restricted stock and restricted stock units are valued based upon a 20 day EMA as of the Friday prior to the grant of an award. In addition, the Company determines a forfeiture rate at the time of grant. Share-based compensation expense is adjusted when actual forfeitures occur.
Income Taxes
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Company utilizes the asset and liability method in accounting for income taxes. Income tax expense includes U.S. and foreign income taxes minus tax credits and other incentives that will reduce tax expense in the year they are claimed. Deferred taxes are recognized at currently enacted tax rates for temporary differences between the financial accounting and income tax basis of assets and liabilities and operating losses and tax credit carryforwards. Valuation allowances are recorded to reduce net deferred tax assets to the amount that is more likely than not to be realized. The Company assesses both positive and negative evidence when measuring the need for a valuation allowance. Evidence typically assessed includes the operating results for the most recent three-year period and expectations of future profitability, available tax planning strategies, the time period over which the temporary differences will reverse and taxable income in prior carryback years if carryback is permitted under the tax law. The calculation of the Company's tax liabilities also involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. The Company recognizes liabilities for uncertain income tax positions based on the Company's estimate of whether, and the extent to which, additional taxes will be required. The Company reports interest and penalties related to uncertain income tax positions as income taxes. U.S. income taxes and foreign withholding taxes are not provided on undistributed earnings of foreign subsidiaries because it is expected such earnings will be permanently reinvested in the operations of such subsidiaries or to pay down third party European debt.
Impairment of Long-Lived and Intangible Assets
The Company evaluates the recoverability of long-lived assets and the related estimated remaining lives whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Events or changes in circumstances that could cause an impairment include significant underperformance relative to the historical or projected future operating results, significant changes in the manner of the use of the assets or the strategy for the overall business or significant negative industry or economic trends. The Company records an impairment or change in useful life whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable or the useful life has changed.
Goodwill.
Goodwill, which represents the excess cost over the fair value of the net assets of businesses acquired, was
$27,490
as of
October 31, 2016
, or
4.4%
of its total assets, and
$27,992
as of
October 31, 2015
, or
4.2%
of its total assets.
In accordance with ASC 350,
"Intangibles-Goodwill and Other,"
the Company assesses goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Such assessment can be done on a qualitative or quantitative basis. To qualitatively assess the likelihood of goodwill being impaired, the Company considers the following factors at the reporting unit level: the excess of fair value over carrying value as of the last impairment test, the length of time since the last fair value measurement, the carrying value, market and industry metrics, actual performance compared to forecasted performance, and its current outlook on the business. If the qualitative assessment indicated it is more likely than not that goodwill is impaired, the Company will perform quantitative impairment testing at the reporting unit level.
If a quantitative fair value measurement is used, the fair value of goodwill is compared to its carrying value and an impairment charge is recorded if the carrying value exceeds the fair value. To quantitatively test goodwill for impairment, the Company's fair value measurement approach combines the income (discounted cash flow method) and market valuation (market comparable method) techniques for each of the Company's reporting units that carry goodwill. These valuation techniques use estimates and assumptions including, but not limited to, the determination of appropriate market comparables, projected future cash flows, including time and profitability, discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, and projected future economic and market conditions.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as net income (loss) less changes in stockholders' equity from non-owner sources which, for the Company in the periods presented, consists of foreign currency translations, interest rate swaps, marketable securities and pension related liability adjustments.
Statement of Cash Flows Information
Cash and cash equivalents include checking accounts and all highly liquid investments with an original maturity of three months or less. A substantial majority of the Company’s cash and cash equivalent bank balances exceeded federally insured limits at
October 31, 2016
. Cash in foreign subsidiaries totaled
$8,219
and
$13,907
at
October 31, 2016
and
October 31, 2015
, respectively.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Concentration of Risk
The Company sells products to customers primarily in the automotive, commercial vehicle and industrial markets. Financial instruments, which potentially subject the Company to concentration of credit risk, are primarily accounts receivable. The Company performs on-going credit evaluations of its customers' financial condition. The allowance for non-collection of accounts receivable is based on the expected collectability of all accounts receivable. Losses have historically been within management's expectations. The Company does not have financial instruments with off-balance sheet risk. Refer to Note 20-Business Segment Information for discussion of concentration of revenues.
The Company believes that the concentration of credit risk in its trade receivables is substantially mitigated by the Company's ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade receivables and payables approximate fair value because of the short maturity of those instruments. The carrying value of the Company's debt and derivative instruments are considered to approximate the fair value of these instruments based on the borrowing rates currently available to the Company for loans with similar terms and maturities.
Derivative Financial Instruments
The Company uses interest rate swaps to manage volatility of underlying exposures. The Company recognizes all of its derivative instruments as either assets or liabilities at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated, and is effective, as a hedge and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. Gains and losses related to a hedge are either recognized in income immediately to offset the gain or loss on the hedged item or are deferred and reported as a component of Comprehensive Income (Loss) and subsequently recognized in earnings when the hedged item affects earnings. The change in fair value of the ineffective portion of a hedging instrument, determined using the hypothetical derivative method, is recognized in earnings immediately. The gain or loss related to financial instruments that are not designated as hedges are recognized immediately in earnings. Cash flows related to hedging activities are included in the operating section of the consolidated statements of cash flows. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company’s objective for holding derivatives is to minimize risk using the most effective and cost-efficient methods available.
Foreign Currency Translation
Two of the Company's Mexican subsidiaries (Shiloh De Mexico S.A. DE C.V. and Shiloh International, S.A. DE C.V.), the Company's Netherlands and Swedish holding companies, and all the Company's U.S. subsidiaries have the U.S. dollar as their functional currency. For all other entities, the functional currency is their respective local currency. The translation from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate for the period. The resulting translation adjustments are recorded as a component of Other Comprehensive Income (Loss) ("OCI"). The Company engages in foreign currency denominated transactions with customers and suppliers, as well as between subsidiaries with different functional currencies. Gains and losses resulting from foreign currency transactions are recognized in net income (loss) in the consolidated statements of income.
Guarantees
The Company has certain indemnification clauses within its Credit Agreement (as defined below) and certain lease agreements that are considered to be guarantees within the scope of FASB ASC Topic 460, "Guarantees." The Company does not consider these guarantees to be probable, and the Company cannot estimate their maximum exposure. Additionally, the Company's exposure to warranty-related obligations is not material.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Accounting Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management reviews its estimates based upon current available information. Actual results could differ from those estimates.
Prior Year Reclassification
Certain prior year amounts have been reclassified to conform with current year presentation.
Effective November 1, 2015, the Company changed its classification for recoveries of scrap and tooling as an offset to cost of sales as opposed to net revenues. The Company believes that recoveries of scrap represent the reimbursement of the material it is not able to use in production and, therefore, more appropriately reflected as an offset to cost of sales to allow for better comparability.
For the years ended October 31, 2015 and 2014,
$36,051
and
$46,706
respectively, was reclassified from net revenues to cost of sales in the consolidated statements of income.
Recently Issued Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09,
"Revenue from Contracts with Customers,"
which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. The FASB, through the issuance of ASU No. 2015-14, "
Revenue from Contracts with Customers,
" approved a one year delay of the effective date and the new standard now is effective for reporting periods beginning after December 15, 2017 and permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. During the second and third quarter, the FASB issued ASUs 2016-10, 2016-11 and 2016-12. ASUs 2016-10 and 2016-12 provide further clarification on the implementation guidance on principal versus agent considerations. ASU 2016-11 rescinds certain SEC guidance from the FASB ASC in response to announcements made by the SEC at the Emerging Issues Task Force's ("EITF") March 3, 2016 meeting. Finally, ASU 2016-20 makes minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The Company is planning a bottom up approach to analyze the standard's impact on its revenues by looking at historical policies and practices and identifying the differences from applying the new standard to its revenue stream. The Company has not selected a transition date or method nor has it determined the effect of the standard to its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15,
"Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,"
which the intent is to define the Company's responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This ASU will be effective for the Company November 1, 2017. The Company will prospectively apply the guidance to applicable transactions.
In April 2016, the FASB issued ASU No. 2016-10, "
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing."
ASU 2016-10 adds further guidance on identifying performance obligations and also to improve the operability and understandability of the licensing implementation guidance. ASU 2016-10 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-15 on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
"Leases"
which requires a lessee to recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from the previous guidance within ASC Topic 840, Leases. For operating leases, a lessee is required to do the following: (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position,
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis and (3) classify all cash payments within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. AUS 2016-02 is effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. The Company is currently evaluating the requirements of ASU 2016-02 and has not yet determined its impact on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
"Recognition and Measurement of Financial Assets and Financial Liabilities."
ASU 2016-01 to amend certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the amendments is the requirement for changes in the fair value of the Company's equity investments, with certain exceptions, to be recognized through net income rather than other comprehensive income ("OCI"). ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The application of the amendments will result in a cumulative-effect adjustment to our consolidated balance sheet as of the effective date. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.
In July 2015, the FASB issued ASU 2015-11,
"Inventory."
ASU 2015-11 simplifies the measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. ASU 2015-11 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company does
not
expect ASU 2015-11 will have a material impact on its statement of financial position or financial statement disclosures.
In April 2015, the FASB issued ASU 2015-03,
"Interest - Imputation of Interest."
ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in the ASU. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company does not expect ASU 2015-03 will have a material impact on its statement of financial position or financial statement disclosures.
Recently Adopted Standards
In November 2015, the FASB issued ASU 2015-17,
"Balance Sheet Classification of Deferred Taxes."
ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, although early adoption is permitted, including adoption in an interim period. This guidance simplified the current guidance, which required entities to separately present deferred tax assets and liabilities as current and noncurrent on the balance sheet. The Company has elected to early adopt this standard prospectively as of October 31, 2016, as is permitted under the standard. Due to the prospective treatment, prior periods presented in these financial statements have not been adjusted.
In March 2016, FASB issued ASU 2016-09,
"Compensation - Stock Compensation."
ASU 2016-09 simplified the accounting for share-based payment transactions. This guidance required that excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the consolidated statements of income rather than additional paid-in capital. Additionally, the excess tax benefits will be classified along with other income tax cash flows as an operating activity, rather than a financing activity, on the statement of cash flows. Further, the update allows an entity to make a policy election to recognize forfeitures as they occur or estimate the number of awards expected to be forfeited. The Company has elected to early adopt this standard prospectively, with certain cumulative effect adjustments if applicable, as of October 31, 2016, as is permitted under the standard. There were no unrecognized excess tax benefits that are required to be recorded on a modified retrospective basis through a cumulative effect adjustment to retained earnings upon adoption. The Company has also elected to continue to recognize forfeitures as they occur.
Note 2—Correction of Immaterial Errors
In the fourth quarter of fiscal 2016, the Company became aware of immaterial errors in certain balance sheet accounts of the Saltillo, Mexico manufacturing facility.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Company assessed the cumulative impact of these errors and other immaterial errors on its previously reported annual financial statements for fiscal years 2015 and 2014 pursuant to the guidance in ASC 250 "
Accounting Changes and Error Corrections"
("ASC 250") and SEC Staff Accounting Bulletin ("SAB") No. 99
Materiality
. Immaterial errors were not isolated to a limited number of accounts but were primarily related to prepaid expenses and other assets, property, plant and equipment, net and deferred income taxes. The Assessment concluded that the errors were not material, individually or in the aggregate, to any prior period consolidated financial statements. As such, in accordance with ASC 250 (SAB No. 108,
Considering Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
), the prior period consolidated financial statements have been revised (the "Revision") in the applicable consolidated financial statements. The Company concluded a revision of prior period consolidated financial statements was appropriate the next time they were reported, since the correction of errors would have been material if recorded in fiscal year 2016. Immaterial errors related to periods prior to the fiscal year ended October 31, 2014 are reflected as an adjustment to beginning retained earnings for that year. Periods not presented herein will be revised, as applicable, in future filings.
The following schedules reconcile the amounts as previously reported in the applicable consolidated financial statement captions to the corresponding adjusted amounts under the Revision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2015
|
Balance Sheet
|
As Reported
|
|
Adjustment
|
|
As Adjusted
|
Accounts receivable, net
|
$
|
194,373
|
|
|
$
|
(218
|
)
|
|
$
|
194,155
|
|
Prepaid income taxes
|
3,799
|
|
|
716
|
|
|
4,515
|
|
Inventories, net
|
58,179
|
|
|
(311
|
)
|
|
57,868
|
|
Prepaid expenses and other assets
|
48,267
|
|
|
(2,561
|
)
|
|
45,706
|
|
Total current assets
|
322,003
|
|
|
(2,374
|
)
|
|
319,629
|
|
Property, plant and equipment, net
|
280,260
|
|
|
(1,037
|
)
|
|
279,223
|
|
Goodwill
|
28,843
|
|
|
(851
|
)
|
|
27,992
|
|
Deferred income taxes
|
4,431
|
|
|
(1,473
|
)
|
|
2,958
|
|
Total assets
|
666,589
|
|
|
(5,735
|
)
|
|
660,854
|
|
Accounts payable
|
160,405
|
|
|
718
|
|
|
161,123
|
|
Total current liabilities
|
196,944
|
|
|
718
|
|
|
197,662
|
|
Total liabilities
|
525,674
|
|
|
718
|
|
|
526,392
|
|
Retained earnings
|
121,457
|
|
|
(6,453
|
)
|
|
115,004
|
|
Total stockholders’ equity
|
140,915
|
|
|
(6,453
|
)
|
|
134,462
|
|
Total liabilities and stockholders’ equity
|
666,589
|
|
|
(5,735
|
)
|
|
660,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2015
|
Statement of Income
|
As Reported
|
|
Adjustment
|
|
As Adjusted
|
Net revenues*
|
$
|
1,073,143
|
|
|
$
|
(91
|
)
|
|
$
|
1,073,052
|
|
Cost of sales*
|
986,057
|
|
|
808
|
|
|
986,865
|
|
Gross profit
|
87,086
|
|
|
(899
|
)
|
|
86,187
|
|
Operating income
|
21,763
|
|
|
(899
|
)
|
|
20,864
|
|
Income before income taxes
|
11,514
|
|
|
(899
|
)
|
|
10,615
|
|
Provision for income taxes
|
3,250
|
|
|
1,460
|
|
|
4,710
|
|
Net income
|
8,264
|
|
|
(2,359
|
)
|
|
5,905
|
|
Basic earnings per share
|
$0.48
|
|
$0.14
|
|
$0.34
|
Dilute earnings per share
|
$0.48
|
|
$0.14
|
|
$0.34
|
* See Note 1 - Summary of Significant Accounting Policies pertaining to reclassification.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2014
|
Statement of Income
|
As Reported
|
|
Adjustment
|
|
As Adjusted
|
Net revenues*
|
$
|
832,026
|
|
|
$
|
41
|
|
|
$
|
832,067
|
|
Cost of sales*
|
752,425
|
|
|
3,330
|
|
|
755,755
|
|
Gross profit
|
79,601
|
|
|
(3,289
|
)
|
|
76,312
|
|
Selling, general & administrative expenses
|
50,207
|
|
|
29
|
|
|
50,236
|
|
Amortization of intangible assets
|
2,255
|
|
|
(91
|
)
|
|
2,164
|
|
Operating income
|
31,165
|
|
|
(3,227
|
)
|
|
27,938
|
|
Interest expense
|
4,503
|
|
|
(88
|
)
|
|
4,415
|
|
Income before income taxes
|
27,191
|
|
|
(3,139
|
)
|
|
24,052
|
|
Provision for income taxes
|
4,747
|
|
|
(610
|
)
|
|
4,137
|
|
Net income
|
22,444
|
|
|
(2,529
|
)
|
|
19,915
|
|
Basic earnings per share
|
$1.31
|
|
$(0.15)
|
|
$1.16
|
Dilute earnings per share
|
$1.30
|
|
$(0.14)
|
|
$1.16
|
* See Note 1 - Summary of Significant Accounting Policies pertaining to reclassification.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2015
|
Statement of Comprehensive Loss
|
As Reported
|
|
Adjustment
|
|
As Adjusted
|
Net income
|
$
|
8,264
|
|
|
$
|
(2,359
|
)
|
|
$
|
5,905
|
|
Comprehensive loss
|
(4,904
|
)
|
|
(2,359
|
)
|
|
(7,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2014
|
Statement of Comprehensive Income
|
As Reported
|
|
Adjustment
|
|
As Adjusted
|
Net income
|
$
|
22,444
|
|
|
$
|
(2,529
|
)
|
|
$
|
19,915
|
|
Comprehensive income
|
11,645
|
|
|
(2,529
|
)
|
|
9,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2015
|
Statement of Cash Flows
|
As Reported
|
|
Adjustment
|
|
As Adjusted
|
Net income
|
$
|
8,264
|
|
|
$
|
(2,359
|
)
|
|
$
|
5,905
|
|
Depreciation and amortization
|
34,213
|
|
|
54
|
|
|
34,267
|
|
Deferred income taxes
|
2,997
|
|
|
1,266
|
|
|
4,263
|
|
Accounts receivable
|
(27,595
|
)
|
|
(12
|
)
|
|
(27,607
|
)
|
Inventories
|
989
|
|
|
(631
|
)
|
|
358
|
|
Prepaids and other assets
|
(9,553
|
)
|
|
888
|
|
|
(8,665
|
)
|
Payables and other
|
(6,394
|
)
|
|
471
|
|
|
(5,923
|
)
|
Accrued income taxes
|
(1,711
|
)
|
|
195
|
|
|
(1,516
|
)
|
Net cash provided by operating activities
|
3,501
|
|
|
(128
|
)
|
|
3,373
|
|
Capital expenditures
|
(39,504
|
)
|
|
128
|
|
|
(39,376
|
)
|
Net cash used in investing activities
|
(27,829
|
)
|
|
128
|
|
|
(27,701
|
)
|
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2014
|
Statement of Cash Flows
|
As Reported
|
|
Revision Adjustment
|
|
As Revised
|
Net income
|
$
|
22,444
|
|
|
$
|
(2,529
|
)
|
|
$
|
19,915
|
|
Depreciation and amortization
|
27,893
|
|
|
(54
|
)
|
|
27,839
|
|
Deferred income taxes
|
843
|
|
|
(6
|
)
|
|
837
|
|
Accounts receivable
|
(10,444
|
)
|
|
171
|
|
|
(10,273
|
)
|
Inventories
|
3,795
|
|
|
939
|
|
|
4,734
|
|
Prepaids and other assets
|
(9,542
|
)
|
|
1,272
|
|
|
(8,270
|
)
|
Payables and other
|
3,327
|
|
|
246
|
|
|
3,573
|
|
Accrued income taxes
|
(4,922
|
)
|
|
(604
|
)
|
|
(5,526
|
)
|
Net cash provided by operating activities
|
29,583
|
|
|
(565
|
)
|
|
29,018
|
|
Capital expenditures
|
(40,158
|
)
|
|
565
|
|
|
(39,593
|
)
|
Net cash used in investing activities
|
(159,973
|
)
|
|
565
|
|
|
(159,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Stockholders' Equity
|
As Reported
|
|
Revision Adjustment
|
|
As Revised
|
Total stockholders' equity, Balance at October 31, 2013
|
$
|
131,149
|
|
|
$
|
(1,565
|
)
|
|
$
|
129,584
|
|
Retained earnings, Balance at October 31, 2013
|
90,749
|
|
|
(1,565
|
)
|
|
89,184
|
|
Net income fiscal year 2014
|
22,444
|
|
|
(2,529
|
)
|
|
19,915
|
|
Retained earnings, Balance at October 31, 2014
|
113,193
|
|
|
(4,094
|
)
|
|
109,099
|
|
Total stockholders' equity, Balance at October 31, 2014
|
144,519
|
|
|
(4,094
|
)
|
|
140,425
|
|
Net income fiscal year 2015
|
8,264
|
|
|
(2,359
|
)
|
|
5,905
|
|
Retained earnings, Balance at October 31, 2015
|
121,457
|
|
|
(6,453
|
)
|
|
115,004
|
|
Total stockholders' equity, Balance at October 31, 2015
|
140,915
|
|
|
(6,453
|
)
|
|
134,462
|
|
The Company has also reflected these corrections as applicable in its consolidated financial statements and the related notes thereto.
Note 3—Acquisitions
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Radar Industries, Inc.
On September 30, 2014, the Company, through a wholly-owned subsidiary, consummated the transactions contemplated by the Asset Purchase Agreement, dated September 30, 2014, with Radar Industries, Inc., and Radar Mexican Investments, LLC (collectively "Radar") which produce engineered metal stampings and machined parts for the motor vehicle industry. The Company acquired Radar in order to further its investment in stamping technologies and expand the diversity of its customer base, product offering and geographic footprint. Radar's results of operations are reflected in the Company's consolidated statements of operations from the acquisition date.
During the fourth quarter of fiscal 2016,
$1,093
of the remaining escrow balance was released. As of
October 31, 2016
,
$1,157
of funds remain in escrow, subject to certain claims.
Note 4—Asset Impairment and Restructuring Charges
During fiscal 2016, the Company recorded an asset impairment charge of
$273
to reduce the real property of the Company's former Valley City Steel facility, an asset impairment charge of
$1,282
on an asset held for sale within the Level 2 of the fair value hierarchy and
$476
related to idled equipment.
Asset recoveries of
$4,026
were recorded during fiscal 2014 for cash received upon sales of assets from the Company's former Mansfield Blanking facility, which was impaired in fiscal 2010.
Note 5—Accounts Receivable
Accounts receivable are expected to be collected within one year and are net of an allowance for doubtful accounts in the amount of
$761
and
$821
at
October 31, 2016
and
2015
, respectively. The Company recognized a benefit of
$39
from recoveries of receivables previously expensed and recognized bad debt of expense of
$210
and
$153
during fiscal
2015
, and
2014
, respectively, in the consolidated statements of income.
The Company continually monitors its exposure with its customers and additional consideration is given to individual accounts in light of the market conditions in the automotive, commercial vehicle and industrial markets.
Note 6—Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
Raw materials
|
$
|
26,367
|
|
|
$
|
31,678
|
|
Work-in-process
|
16,149
|
|
|
10,944
|
|
Finished goods
|
18,031
|
|
|
15,246
|
|
Total inventories
|
$
|
60,547
|
|
|
$
|
57,868
|
|
Total cost of inventory is net of lower of cost of market reserves to reduce certain inventory from cost to net realizable value. Such reserves aggregated
$2,946
and
$2,547
at
October 31, 2016
and
2015
, respectively.
Note 7—Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
2016
|
|
2015
|
Tooling (1)
|
|
$
|
19,792
|
|
|
$
|
38,097
|
|
Prepaid expenses and other assets
|
|
10,694
|
|
|
7,609
|
|
Assets held for sale
|
|
6,500
|
|
|
—
|
|
|
Total
|
|
$
|
36,986
|
|
|
$
|
45,706
|
|
The Company invested in stamping equipment for one of its manufacturing facilities. During the fourth quarter of fiscal 2016, the Company determined that a need no longer existed for this type of equipment and is currently recorded as a current asset held for sale. Based on the fair market value of the equipment, the Company recorded an impairment charge of
$1,282
to properly reflect the
$6,500
fair value of the equipment - see Note 4 - Asset Impairment and Restructuring Charges for further details. The Company is actively working with the supplier to identify a buyer over the next several months.
(1) Customer reimbursements for the development of molds, dies and tools (collectively, "tooling") related to new program awards that go into production over the next twelve months.
Note 8—Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
|
2016
|
|
2015
|
Other assets consist of the following:
|
|
|
|
|
|
Deferred financing costs, net
|
|
$
|
6,098
|
|
|
$
|
6,818
|
|
|
Tooling
|
|
881
|
|
|
1,499
|
|
|
Investment in joint venture
|
|
1,300
|
|
|
—
|
|
|
Other
|
|
4,417
|
|
|
3,192
|
|
|
|
Total
|
|
$
|
12,696
|
|
|
$
|
11,509
|
|
|
|
|
|
|
|
|
Deferred financing costs are amortized over the term of the debt. During fiscal
2016
,
2015
, and
2014
, amortization of these costs amounted to
$2,505
,
$992
, and
$807
, respectively. Accumulated amortization was
$6,771
and
$4,266
as of
October 31, 2016
and
2015
, respectively. During fiscal years
2016
and
2015
, the Company capitalized
$1,785
and
$5,529
, respectively, of costs related to the Credit Agreement (as defined below).
Note 9—Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
Land and improvements
|
$
|
11,358
|
|
|
$
|
11,330
|
|
Buildings and improvements
|
117,291
|
|
|
118,166
|
|
Machinery and equipment
|
505,768
|
|
|
494,567
|
|
Furniture and fixtures
|
18,200
|
|
|
13,901
|
|
Construction in progress
|
37,612
|
|
|
51,253
|
|
Total, at cost
|
690,229
|
|
|
689,217
|
|
Less: Accumulated depreciation
|
424,392
|
|
|
409,994
|
|
Property, plant and equipment, net
|
$
|
265,837
|
|
|
$
|
279,223
|
|
Depreciation expense was
$35,387
,
$31,956
, and
$25,675
in fiscal
2016
,
2015
, and
2014
, respectively.
During the years ended
October 31, 2016
and
2015
, interest capitalized as part of property, plant and equipment was
$370
and
$526
, respectively. The Company had unpaid capital expenditures included in accounts payable of approximately
$5,604
,
$4,225
and
$5,415
at
October 31, 2016
,
2015
and 2014, respectively, and consequently such amounts are excluded from capital expenditures in the accompanying consolidated statements of cash flows for the fiscal years
2016
and
2015
. The Company has commitments for capital expenditures of
$45,537
at
October 31, 2016
that are expected to be incurred in
2017
.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Capital Leases:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
Leased Property:
|
|
|
|
Machinery and equipment
|
$
|
7,295
|
|
|
$
|
7,019
|
|
Less: Accumulated depreciation
|
$
|
1,781
|
|
|
$
|
1,142
|
|
Leased property, net
|
$
|
5,514
|
|
|
$
|
5,877
|
|
Future minimum rental payments to be made under capital leases at
October 31, 2016
are as follows:
|
|
|
|
|
Twelve Months Ending October 31,
|
|
2017
|
$
|
849
|
|
2018
|
865
|
|
2019
|
594
|
|
2020
|
372
|
|
2021
|
1,708
|
|
|
4,388
|
|
Plus amount representing interest ranging from 3.05% to 3.77%
|
489
|
|
Total obligations under capital leases
|
$
|
4,877
|
|
Note 10—Financing Arrangements
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2016
|
|
2015
|
Credit Agreement —interest at 5.14% and 4.44% at October 31, 2016 and October 31, 2015, respectively
|
$
|
252,900
|
|
|
$
|
293,300
|
|
Equipment security note
|
996
|
|
|
1,496
|
|
Capital lease obligations
|
4,388
|
|
|
5,434
|
|
Insurance broker financing agreement
|
661
|
|
|
723
|
|
Total debt
|
258,945
|
|
|
300,953
|
|
Less: Current debt
|
2,023
|
|
|
2,080
|
|
Total long-term debt
|
$
|
256,922
|
|
|
$
|
298,873
|
|
At
October 31, 2016
, the Company had total debt, excluding capital leases, of
$254,557
, consisting of a revolving line of credit under the Credit Agreement of floating rate debt of
$252,900
and fixed rate debt of
$1,657
. The weighted average interest rate of all debt was
4.78%
and
2.82%
for fiscal years
2016
and
2015
, respectively.
Revolving Credit Facility:
The Company and its subsidiaries are party to a Credit Agreement, dated October 25, 2013, as amended (the "Credit Agreement") with Bank of America, N.A., as Administrative Agent, Swing Line Lender, Dutch Swing Line Lender and L/C Issuer, JPMorgan Chase Bank, N.A. as Syndication Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities,
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
LLC as Joint Lead Arrangers and Joint Book Managers, The PrivateBank and Trust Company, Compass Bank and The Huntington National Bank, N.A., as Co-Documentation Agents, and the other lender parties thereto.
On October 28, 2016, the Company executed the Sixth Amendment which increases the permitted consolidated leverage ratio for periods beginning after July 31, 2016; increases the permitted consolidated fixed charge coverage ratio for periods beginning after April 30, 2017; modifies various baskets related to sale of accounts receivable, disposition of assets, sale-leaseback transactions and makes other ministerial updates.
On October 30, 2015, the Company executed the Fifth Amendment which increased the permitted leverage ratio with periodic reductions beginning after July 30, 2016. In addition, the Fifth Amendment permitted various investments as well as up to
$40,000
aggregate outstanding principal amount of subordinated indebtedness, subject to certain conditions. Finally, the Fifth Amendment provided for a consolidated fixed charge coverage ratio, and provided for up to
$50,000
of capital expenditures by the Company and its subsidiaries throughout the year ending October 31, 2016, subject to certain quarterly baskets.
On April 29, 2015, the Company executed the Fourth Amendment to the Credit Agreement that maintained the commitment period to September 29, 2019 and allowed for an incremental increase of
$25,000
(or if certain ratios are met,
$100,000
) in the original revolving commitments of
$360,000
, subject to the Company's pro forma compliance with financial covenants, the administrative agent's approval, and the Company obtaining commitments for such increase.
The Fourth Amendment included scheduled commitment reductions beginning after January 30, 2016 totaling
$30,000
, allocated proportionately between the Aggregate Revolving A and B commitments. On April 30, 2016, the first committed reduction of
$5,000
decreased the existing revolving commitment to
$355,000
, subject to the Company's pro forma compliance with financial covenants.
Borrowings under the Credit Agreement bear interest, at the Company's option, at LIBOR or the base (or "prime") rate established from time to time by the administrative agent, in each case plus an applicable margin. The Fifth Amendment provides for an interest rate margin on LIBOR loans of
1.5%
to
4.0%
and of
0.50%
to
3.0%
on base rate loans depending on the Company's leverage ratio.
The Credit Agreement contains customary restrictive and financial covenants, including covenants regarding the Company’s outstanding indebtedness and maximum leverage and interest coverage ratios. The Credit Agreement also contains standard provisions relating to conditions of borrowing. In addition, the Credit Agreement contains customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company. If an event of default occurs, all amounts outstanding under the Credit Agreement may be accelerated and become immediately due and payable. The Company was in compliance with the financial covenants as of
October 31, 2016
and
October 31, 2015
.
After considering letters of credit of
$5,080
that the Company has issued, unused commitments under the Credit Agreement were
$97,020
at
October 31, 2016
.
Borrowings under the Credit Agreement are collateralized by a first priority security interest in substantially all of the tangible and intangible property of the Company and its domestic subsidiaries and
65%
of the stock of foreign subsidiaries.
Other Debt:
On
August 1, 2016
, the Company entered into a finance agreement with an insurance broker for various insurance policies that bears interest at a fixed rate of
1.96%
and requires monthly payments of
$95
through
May 2017
. As of
October 31, 2016
,
$661
of principal remained outstanding under this agreement and was classified as current debt in the Company’s consolidated balance sheets.
On September 2, 2013, the Company entered into an equipment security note that bears interest at a fixed rate of
2.47%
and requires monthly payments of
$44
through September 2018. As of
October 31, 2016
,
$996
of principal remained outstanding under this agreement and
$513
was classified as current debt and
$483
was classified as long term debt in the Company’s consolidated balance sheets.
The Company maintains capital leases for equipment used in its manufacturing facilities with lease terms expiring between 2018 and 2021. As of
October 31, 2016
, the present value of minimum lease payments under its capital leases amounted to
$4,388
.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Derivatives:
On February 25, 2014, the Company entered into an interest rate swap with an aggregate notional amount of
$75,000
designated as a cash flow hedge to manage interest rate exposure on the Company’s floating rate LIBOR based debt under the Credit Agreement. The interest rate swap is an agreement to exchange payment streams based on the notional principal amount. This agreement fixes the Company’s future interest payments at
2.74%
plus the applicable rate (as described above), on an amount of the Company’s debt principal equal to the then-outstanding swap notional amount. The forward interest rate swap commenced on March 1, 2015 with an initial
$25,000
base notional amount. The second notional amount of
$25,000
commenced on September 1, 2015 and the final notional amount of
$25,000
commenced on March 1, 2016. The base notional amount plus each incremental addition to the base notional amount have a
five
year maturity of February 29, 2020, August 31, 2020 and February 28, 2021, respectively. On the date the interest swap was entered into, the Company designated the interest rate swap as a hedge of the variability of cash flows to be paid relative to its variable rate monies borrowed. Any ineffectiveness in the hedging relationship is recognized immediately into earnings. The Company determined the mark-to-market adjustment for the interest rate swap to be a gain of
$64
, net of tax, for the fiscal year ended
October 31, 2016
, a loss of
$1,618
, net of tax, for the fiscal year ended
October 31, 2015
, and a loss of
$1,558
, net of tax, for the fiscal year ended
October 31, 2014
, which is reflected in other comprehensive loss. The base notional amounts of
$25,000
each or
$75,000
total that commenced during 2015 and 2016 resulted in realized losses of
$1,530
and
$433
of interest expense related to the interest rate swap settlements. for the fiscal years ended October 31,
2016
and
2015
, respectively. For fiscal
2017
, the Company anticipates recognizing approximately
$1,478
of additional interest expense related to the interest swap.
Scheduled repayments under the terms of the Credit Agreement and repayments of other debt are listed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ending October 31,
|
|
Credit Agreement
|
|
Equipment Security Note
|
|
Capital Lease Obligations
|
|
Other Debt
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
—
|
|
|
$
|
513
|
|
|
$
|
849
|
|
|
$
|
661
|
|
|
$
|
2,023
|
|
2018
|
|
—
|
|
|
483
|
|
|
865
|
|
|
—
|
|
|
1,348
|
|
2019
|
|
252,900
|
|
|
—
|
|
|
594
|
|
|
—
|
|
|
253,494
|
|
2020
|
|
—
|
|
|
—
|
|
|
372
|
|
|
—
|
|
|
372
|
|
2021
|
|
—
|
|
|
—
|
|
|
1,708
|
|
|
—
|
|
|
1,708
|
|
Total
|
|
$
|
252,900
|
|
|
$
|
996
|
|
|
$
|
4,388
|
|
|
$
|
661
|
|
|
$
|
258,945
|
|
|
|
|
|
|
|
|
|
|
|
|
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 11—Goodwill and Intangible Assets
Goodwill:
In accordance with FASB ASC Topic 350, "Intangibles – Goodwill and Other," goodwill, and any other intangible asset having an indefinite useful life, must be reviewed for impairment annually, or more frequently if events and circumstances arise that suggest the asset may be impaired. The Company conducts its review for goodwill impairments on September 30 of each year. Goodwill impairment testing is performed at the reporting unit. The fair value is determined and compared to the carrying value. If the carrying value exceeds the fair value, then possible goodwill impairment may exist and further evaluation is required. At the time of goodwill impairment testing, values are estimated for goodwill, incorporating discount rates commensurate with the risks involved. An optional qualitative assessment may alleviate the need to perform the quantitative goodwill impairment test when impairment is unlikely. The Company performed a quantitative assessment at the reporting unit level in
2016
and
2015
and concluded that there was no impairment of goodwill in either year.
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
Balance October 31, 2014
|
|
$
|
30,036
|
|
|
Acquisitions, including adjustments on prior year acquisitions
|
|
(488
|
)
|
|
Foreign currency translation and other
|
|
(1,556
|
)
|
Balance October 31, 2015
|
|
27,992
|
|
|
Foreign currency translation and other
|
|
(502
|
)
|
Balance October 31, 2016
|
|
$
|
27,490
|
|
Intangibles:
The changes in the carrying amount of finite intangible assets for the years ended
October 31, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
Developed Technology
|
Non-Compete
|
Trade Name
|
Trademark
|
Total
|
Balance October 31, 2014
|
$
|
15,856
|
|
$
|
4,311
|
|
$
|
62
|
|
$
|
1,624
|
|
$
|
145
|
|
$
|
21,998
|
|
|
Acquisitions and purchase accounting adjustments
|
(320
|
)
|
—
|
|
80
|
|
—
|
|
—
|
|
(240
|
)
|
|
Amortization expense
|
(1,305
|
)
|
(771
|
)
|
(79
|
)
|
(124
|
)
|
(16
|
)
|
(2,295
|
)
|
|
Foreign currency translation and other
|
80
|
|
—
|
|
—
|
|
—
|
|
—
|
|
80
|
|
Balance October 31, 2015
|
14,311
|
|
3,540
|
|
63
|
|
1,500
|
|
129
|
|
19,543
|
|
|
Amortization expense
|
(1,330
|
)
|
(772
|
)
|
(16
|
)
|
(123
|
)
|
(17
|
)
|
(2,258
|
)
|
|
Foreign currency translation and other
|
(6
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(6
|
)
|
Balance October 31, 2016
|
$
|
12,975
|
|
$
|
2,768
|
|
$
|
47
|
|
$
|
1,377
|
|
$
|
112
|
|
$
|
17,279
|
|
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Intangible assets are amortized on the straight-line method over their legal or estimated useful lives. The following summarizes the gross carrying value and accumulated amortization for each major class of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
|
Weighted Average Useful Life (years)
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Foreign Currency Adjustment
|
|
Net
|
|
Customer relationships
|
13.2
|
|
$
|
17,598
|
|
|
$
|
(4,589
|
)
|
|
$
|
(34
|
)
|
|
$
|
12,975
|
|
|
Developed technology
|
7.3
|
|
5,007
|
|
|
(2,239
|
)
|
|
—
|
|
|
2,768
|
|
|
Non-compete
|
2.3
|
|
824
|
|
|
(777
|
)
|
|
—
|
|
|
47
|
|
|
Trade name
|
14.8
|
|
1,875
|
|
|
(498
|
)
|
|
—
|
|
|
1,377
|
|
|
Trademark
|
10.0
|
|
166
|
|
|
(54
|
)
|
|
—
|
|
|
112
|
|
|
Total intangible assets
|
|
|
$
|
25,470
|
|
|
$
|
(8,157
|
)
|
|
$
|
(34
|
)
|
|
$
|
17,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2015
|
|
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Foreign Currency Adjustment
|
|
Net
|
|
Customer relationships
|
|
$
|
17,598
|
|
|
$
|
(3,259
|
)
|
|
$
|
(28
|
)
|
|
$
|
14,311
|
|
|
Developed technology
|
|
5,007
|
|
|
(1,467
|
)
|
|
—
|
|
|
3,540
|
|
|
Non-compete
|
|
824
|
|
|
(761
|
)
|
|
—
|
|
|
63
|
|
|
Trade name
|
|
1,875
|
|
|
(375
|
)
|
|
—
|
|
|
1,500
|
|
|
Trademark
|
|
166
|
|
|
(37
|
)
|
|
—
|
|
|
129
|
|
|
Total intangible assets
|
|
$
|
25,470
|
|
|
$
|
(5,899
|
)
|
|
$
|
(28
|
)
|
|
$
|
19,543
|
|
Total amortization expense for the years ended
October 31, 2016
,
2015
, and
2014
was
$2,258
,
$2,295
, and
$2,164
, respectively. Amortization expense related to intangible assets for the following fiscal years ending is estimated to be as follows:
|
|
|
|
|
|
2017
|
|
2,259
|
|
2018
|
|
2,123
|
|
2019
|
|
1,716
|
|
2020
|
|
1,701
|
|
2021
|
|
1,701
|
|
Thereafter
|
|
7,779
|
|
|
|
$
|
17,279
|
|
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 12—Operating Leases
The Company leases buildings, material handling, manufacturing and office equipment under operating leases with terms that range from one to fifteen years at inception. The leases do not include step rent provisions, escalation clauses, capital improvement funding or other lease concessions that qualify the leases as a contingent rental. Also, the leases do not include a variable related to a published index. The Company's operating leases are charged to expense over the lease term, on a straight-line basis.
The longest lease term of the Company's current leases extends to
May 2029
. Rent expense under operating leases for fiscal years
2016
,
2015
, and
2014
was
$9,544
,
$8,449
and
$4,613
, respectively. Beginning in fiscal 2016, lease expense reflects certain sale-leaseback transactions entered into during the third quarter of fiscal 2015. The assets under the sale-leaseback were for new machinery and equipment which are being leased over a six to seven year period.
Future minimum lease payments under operating leases are as follows at
October 31, 2016
:
|
|
|
|
|
|
|
2017
|
$
|
9,682
|
|
2018
|
8,677
|
2019
|
7,781
|
2020
|
6,501
|
2021
|
4,975
|
Thereafter
|
2,585
|
|
Total commitments under non-cancelable operating leases
|
$
|
40,201
|
|
Note 13—Employee Benefit Plans
The Company maintains pension plans, which are frozen, covering its eligible employees. The Company also provides an unfunded postretirement health care benefit plan for
15
retirees and their dependents. The measurement date for the Company's employee benefit plans coincides with its fiscal year end, October 31.
Obligations and Funded Status U.S. Plans At October 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post Retirement Benefits
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
(86,827
|
)
|
|
$
|
(88,590
|
)
|
|
$
|
(423
|
)
|
|
$
|
(639
|
)
|
Interest cost
|
(3,566
|
)
|
|
(3,466
|
)
|
|
(16
|
)
|
|
(24
|
)
|
Actuarial gain (loss)
|
(5,100
|
)
|
|
563
|
|
|
20
|
|
|
180
|
|
Benefits paid
|
4,709
|
|
|
4,666
|
|
|
47
|
|
|
60
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
(90,784
|
)
|
|
(86,827
|
)
|
|
(372
|
)
|
|
(423
|
)
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
66,655
|
|
|
65,861
|
|
|
—
|
|
|
—
|
|
Actual return on plan assets
|
1,562
|
|
|
1,690
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
950
|
|
|
3,770
|
|
|
47
|
|
|
60
|
|
Benefits paid
|
(4,709
|
)
|
|
(4,666
|
)
|
|
(47
|
)
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
64,458
|
|
|
66,655
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Funded status, benefit obligations in excess of plan assets
|
$
|
(26,326
|
)
|
|
$
|
(20,172
|
)
|
|
$
|
(372
|
)
|
|
$
|
(423
|
)
|
|
|
|
|
|
|
|
|
The above amounts are recorded in the liabilities section of the consolidated balance sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post Retirement Benefits
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Other accrued expenses
|
$
|
(4,120
|
)
|
|
$
|
(3,840
|
)
|
|
$
|
(42
|
)
|
|
$
|
(63
|
)
|
Long-term benefit liabilities
|
(22,206
|
)
|
|
(16,332
|
)
|
|
(330
|
)
|
|
(360
|
)
|
Total
|
$
|
(26,326
|
)
|
|
$
|
(20,172
|
)
|
|
$
|
(372
|
)
|
|
$
|
(423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Net Periodic Benefit Cost U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post Retirement Benefits
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Interest cost
|
$
|
3,566
|
|
|
$
|
3,466
|
|
|
$
|
3,749
|
|
|
$
|
16
|
|
|
$
|
24
|
|
|
$
|
38
|
|
Expected return on plan assets
|
(4,568
|
)
|
|
(4,698
|
)
|
|
(4,281
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of net actuarial loss
|
1,239
|
|
|
1,186
|
|
|
1,074
|
|
|
12
|
|
|
28
|
|
|
41
|
|
Net periodic benefit cost
|
$
|
237
|
|
|
$
|
(46
|
)
|
|
$
|
542
|
|
|
$
|
28
|
|
|
$
|
52
|
|
|
$
|
79
|
|
The Company expects to recognize in the consolidated statements of income the following amounts that will be amortized from accumulated other comprehensive loss in fiscal
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post Retirement Benefits
|
Amortization of net actuarial loss
|
$
|
1,508
|
|
|
$
|
10
|
|
|
|
|
|
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Company has recognized the following cumulative pre-tax actuarial losses, prior service costs and transition obligations in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post Retirement Benefits
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
$
|
51,795
|
|
|
$
|
44,928
|
|
|
$
|
122
|
|
|
$
|
153
|
|
|
|
|
|
|
|
|
|
Recognized in accumulated other comprehensive loss
|
$
|
51,795
|
|
|
$
|
44,928
|
|
|
$
|
122
|
|
|
$
|
153
|
|
|
|
|
|
|
|
|
|
Additional Information on U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post Retirement Benefits
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Increase (decrease) in minimum liability included in other comprehensive income (loss)
|
$
|
6,867
|
|
|
$
|
(1,259
|
)
|
|
$
|
31
|
|
|
$
|
208
|
|
|
|
|
|
|
|
|
|
Assumptions for U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used
to determine benefit obligations at October 31
|
|
Pension Benefits
|
|
Other Post Retirement Benefits
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Discount rate
|
|
3.70
|
%
|
|
4.20
|
%
|
|
4.00
|
%
|
|
3.70
|
%
|
|
4.20
|
%
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post Retirement Benefits
|
Weighted-average assumptions used to determine net
periodic benefit costs for years ended October 31
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Discount rate
|
|
4.20
|
%
|
|
4.00
|
%
|
|
4.50
|
%
|
|
4.20
|
%
|
|
4.00
|
%
|
|
4.50
|
%
|
Expected long-term return on plan assets
|
|
7.50
|
%
|
|
7.50
|
%
|
|
7.50
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
These assumptions are used to develop the projected obligation at fiscal year end and to develop net periodic benefit cost for the subsequent fiscal year. Therefore, for fiscal
2016
, the assumptions used to determine net periodic benefit costs were established at
October 31, 2015
, while the assumptions used to determine the benefit obligations were established at
October 31, 2016
The Company uses the Principal Pension Discount Yield Curve ("Principal Curve") for the U.S. Plans as the basis for determining the discount rate for reporting pension and retiree medical liabilities. The Principal Curve has several advantages to other methods, including: transparency of construction, lower statistical errors, and continuous forward rates for all years.
The Company determines the annual rate of return on the U.S. Plan pension assets by first analyzing the composition of its asset portfolio. Historical rates of return are applied to the portfolio. The Company's outside investment advisors and actuaries review the computed rate of return. Industry comparables and other outside guidance are also considered in the annual selection of the expected rates of return on pension assets. The long-term expected rate of return on plan assets takes into account years with exceptional gains and years with exceptional losses.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
|
|
|
|
|
|
October 31,
|
Assumed health care trend rates
|
2016
|
|
2015
|
Health care cost trend rate assumed for next year
|
7.0%
|
|
7.0%
|
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
|
6.8%
|
|
6.8%
|
Year that the rate reaches the ultimate trend rate
|
2018
|
|
2018
|
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plan. The Company's trend rate was based on reduced health care claims experienced by a small and declining retiree population. A one-percentage point change in assumed healthcare cost trend rates would have the following effects at
October 31, 2016
:
|
|
|
|
|
|
|
|
|
|
One-Percentage
Point Increase
|
|
One-Percentage
Point Decrease
|
Effect on total of service and interest cost components
|
$
|
3
|
|
|
$
|
(3
|
)
|
Effect on post retirement obligation
|
$
|
28
|
|
|
$
|
(24
|
)
|
Plan Assets - U.S. Plan Assets
The Company has established a targeted asset allocation percentage by asset category and rebalances the assets of each U.S. plan when pension contributions are funded. The Company's pension plan weighted-average asset allocations at
October 31, 2016
and
2015
, by asset category and comparison to the target allocation percentage are as follows:
|
|
|
|
|
|
|
Target
Allocation
Percentage
|
Plan Assets at October 31,
|
2016
|
|
2015
|
Asset Category
|
|
|
|
|
Equity securities
|
0-70%
|
59%
|
|
60%
|
Debt securities
|
0-70%
|
35%
|
|
34%
|
Real estate
|
0-10%
|
6%
|
|
6%
|
|
|
|
|
|
Total
|
|
100%
|
|
100%
|
|
|
|
|
|
The Company's investment policy for assets of the U.S. plans is to obtain a reasonable long-term return consistent with the level of risk assumed. The Company also seeks to control the cost of funding the plans within prudent levels of risk through the investment of plan assets and the Company seeks to provide diversification of assets in an effort to avoid the risk of large losses and to maximize the return to the plans consistent with market and economic risk.
Fair Value
The plans' investments are reported at fair value. Purchases and sale of securities are recorded on a trade-date basis. Dividends are recorded on the ex-dividend date.
FASB ASC Topic 820, Fair Value Measurements and Disclosures ("FASB ASC 820"), clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, FASB ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1
: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the plans have the ability to access as of the measurement date.
Level 2
: Significant other observable inputs other than level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Level 3
: Significant unobservable inputs that reflect the plans' own assumptions about the assumptions that market participants would use in pricing an asset or liability.
An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques noted in FASB ASC 820:
|
|
•
|
Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
|
|
|
•
|
Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).
|
|
|
•
|
Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).
|
The following descriptions of the valuation methods and assumptions used by the plans to estimate the fair values of investments apply to investments held directly by the plans.
Mutual funds
: The fair values of mutual fund investments are determined by obtaining quoted prices on nationally recognized securities exchanges (level 1 inputs).
Pooled separate accounts
: The fair values of participation units held in pooled separate accounts are based on their net asset values, as reported by the managers of the pooled separate accounts as supported by the unit prices of actual purchase and sale transactions occurring as of or close to the financial statement date (level 2 inputs). A fund sponsored by Principal Financial Group, investment and actuarial advisors of the Company, each of the pooled separate accounts invests in multiple securities. Each pooled separate account provides for daily redemptions by the plans with no advance notice requirements, and has redemption prices that are determined by the fund's net asset value per unit.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of
different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Investments totaling
$64,458
at
October 31, 2016
and
$66,655
at
October 31, 2015
measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
Fair Value Measurements
|
|
|
|
|
|
|
at October 31, 2016 Using
|
|
at October 31, 2015 Using
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
|
|
|
Valuation Technique
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Large U.S. Equity
|
|
$
|
12,904
|
|
|
$
|
10,294
|
|
|
$
|
9,515
|
|
|
$
|
12,302
|
|
|
Market
|
|
|
Small/Mid U.S. Equity
|
|
7,654
|
|
|
622
|
|
|
6,108
|
|
2,688
|
|
Market
|
|
|
International Equity
|
|
6,420
|
|
|
—
|
|
|
9,478
|
|
—
|
|
|
Market
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
—
|
|
|
309
|
|
|
—
|
|
|
298
|
|
Market
|
|
|
Corporate
|
|
17,738
|
|
|
4,571
|
|
|
17,832
|
|
4,547
|
|
Market
|
|
Real Estate (Primarily Commercial)
|
|
—
|
|
|
3,946
|
|
|
—
|
|
|
3,887
|
|
|
Market
|
Total Investments
|
|
$
|
44,716
|
|
|
$
|
19,742
|
|
|
$
|
42,933
|
|
|
$
|
23,722
|
|
|
|
Cash Flows
Contributions
The Company
does not
expect to contribute to its U.S. pension plans in fiscal
2017
, compared to
$950
funded in fiscal
2016
.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
2017
|
|
$
|
4,120
|
|
|
|
|
$
|
42
|
|
|
2018
|
|
4,000
|
|
|
|
|
41
|
|
|
2019
|
|
4,410
|
|
|
|
|
40
|
|
|
2020
|
|
4,630
|
|
|
|
|
40
|
|
|
2021
|
|
4,340
|
|
|
|
|
29
|
|
|
2022-2025
|
|
24,690
|
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Non-U.S. Plans
For the Company's Swedish operations, the majority of the pension obligations are covered by insurance policies with insurance companies. Pension commitments in the Company's Polish operations are
$826
at the end of fiscal
2016
and
$696
at the end of fiscal
2015
. The liability represents the present value of future obligations and is calculated on actuarial basis. The Polish operations recognized expense of
$162
and
$115
for the fiscal
years ended October 31,
2016
and
2015
, respectively Expense for fiscal
2014
was immaterial.
The insurance contracts guarantee a minimum rate of return. The Company has no input into the investment strategy of the assets underlying the contracts, but they are typically heavily invested in active bond markets and are highly regulated by local law.
Defined Contribution Plans
In addition to the defined benefit plans described above, the Company maintains a number of defined contribution plans for its United States locations. Under the terms of the plans, eligible employees may contribute a selected percentage of their base pay. The Company matches a percentage of the employees' contributions up to a stated percentage, subject to statutory limitations. The Company recorded an expense related to the matching program for the fiscal years ended
2016
,
2015
and
2014
of
$3,959
,
$3,845
and
3,230
, respectively.
Labor Agreements
As of
October 31, 2016
, the Company had approximately
3,100
employees. Organized labor unions represent approximately
20%
of the Company's U.S. hourly employees and approximately
90%
of the Company's non-U.S. employees.
Each of the Company's unionized manufacturing facilities has its own labor agreement with its own expiration date. As a result, no contract expiration date affects more than one facility.
Note 14—Other Fair Value Financial Instruments
The methods used by the Company may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of
different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Assets and liabilities remeasured and disclosed at fair value on a recurring basis at
October 31, 2016
and
2015
are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset (Liability)
|
|
Level 2
|
|
Valuation Technique
|
October 31, 2015:
|
|
|
|
|
|
|
Interest Rate Swap Contracts
|
|
$
|
(4,989
|
)
|
|
$
|
(4,989
|
)
|
|
Income Approach
|
Marketable Securities
|
|
356
|
|
|
356
|
|
|
Income Approach
|
October 31, 2016:
|
|
|
|
|
|
|
Interest Rate Swap Contracts
|
|
(5,036
|
)
|
|
(5,036
|
)
|
|
Income Approach
|
Marketable Securities
|
|
$
|
174
|
|
|
$
|
174
|
|
|
Income Approach
|
The Company calculates the fair value of its interest rate swap contracts, using quoted interest rate curves, to calculate forward values, and then discounts the forward values.
The discount rates for all derivative contracts are based on quoted swap interest rates or bank deposit rates. For contracts which, when aggregated by counterparty, are in a liability position, the rates are adjusted by the credit spread that market participants would apply if buying these contracts from the Company’s counterparties.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Assets and liabilities measured at fair value on a nonrecurring basis at
October 31, 2016
and
2015
are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
Level 3
|
|
Valuation Technique
|
October 31, 2015:
|
|
|
|
|
|
|
Goodwill
|
|
$
|
(488
|
)
|
|
$
|
(488
|
)
|
|
Income Approach
|
Intangible Assets
|
|
(240
|
)
|
|
(240
|
)
|
|
Income Approach
|
October 31, 2016:
|
|
|
|
|
|
|
Goodwill
|
|
—
|
|
|
—
|
|
|
Income Approach
|
Intangible Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Income Approach
|
During 2016 the Company recorded an asset impairment charge or
$1,758
. Refer to Note 4, Asset Impairment and Restructuring Charges, for further information regarding these charges and the associated level of input.
Note 15—Earnings Per Share (amounts and number of shares in thousands except per share data)
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares of Common Stock outstanding during the period. In addition, the shares of Common Stock issuable pursuant to restricted stock units and stock options outstanding under the 2016 Plan are included in the diluted earnings per share calculation to the extent they are dilutive. For the years ended
October 31, 2016
,
2015
, and
2014
, approximately
53
,
143
, and
225
stock awards, respectively, were excluded from the computation of diluted earnings per share because they were anti-dilutive. The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation for net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Net income available to common stockholders
|
$
|
3,669
|
|
|
$
|
5,905
|
|
|
$
|
19,915
|
|
Basic weighted average shares
|
17,513
|
|
|
17,287
|
|
|
17,145
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Restricted stock units and stock options
|
13
|
|
|
23
|
|
|
70
|
|
Diluted weighted average shares
|
17,526
|
|
|
17,310
|
|
|
17,215
|
|
Basic earnings per share
|
$0.21
|
|
$0.34
|
|
$1.16
|
Diluted earnings per share
|
$0.21
|
|
$0.34
|
|
$1.16
|
Note 16—Stock Incentive Compensation (amounts in thousands except number of shares and per share data)
Stock Incentive Compensation falls under the scope of FASB ASC Topic 718
"Compensation – Stock Compensation"
and affects the stock awards that have been granted and requires the Company to expense share-based payment ("SBP") awards with compensation cost for SBP transactions measured at fair value. For stock options, the Company has elected to use the simplified method of calculating the expected term and historical volatility to compute fair value under the Black-Scholes option-pricing model. The risk-free rate for periods within the contractual life of the option is based on the U.S. zero coupon Treasury yield in effect at the time of grant. Forfeitures have been estimated based upon the Company’s historical experience. For restricted stock and restricted stock units, the Company is computing fair value based on a twenty day EMA as of the close of business the Friday preceding the award date.
2016 Equity and Incentive Compensation Plan
On March 9, 2016, stockholders approved and adopted the 2016 Equity and Incentive Compensation Plan ("2016 Plan") which replaced the Amended and Restated 1993 Key Employee Stock Incentive Program. The 2016 Plan authorizes the Compensation Committee of the Board of Directors of the Company to grant to officers and other key employees, including directors, of the Company and its subsidiaries (i) option rights, (ii) appreciation rights, (iii) restricted shares, (iv) restricted stock units, (v) cash incentive awards, performance shares and performance units and (vi) other awards. An aggregate of
1,500,000
shares of Common Stock, subject to adjustment upon occurrence of certain events to prevent dilution or expansion of the rights of participants that might otherwise result from the occurrence of such events, was reserved for issuance pursuant to the Incentive Plan. An individual’s award of options and / or appreciation rights is limited to
500,000
shares during any calendar year. Also, an individual's award of restricted shares, restricted share units and performance based awards is limited to
350,000
shares during any calendar year.
The Compensation Committee of our Board of Directors approved the grant of restricted stock and restricted stock units under both the Amended and Restated 1993 Key Employee Stock Incentive Program and the 2016 Plan shown in the table below for the fiscal year ended October 31,
2016
:
|
|
|
|
|
|
|
Granted
|
|
20-Day EMA
|
Restricted Stock (1)
|
312,251
|
|
|
$4.30
|
Restricted Stock Units (2)
|
21,539
|
|
|
$4.17
|
(1)
32,394
shares issued under the Amended and Restated 1993 Key Employee Stock Incentive Program and
279,857
shares issued under the 2016 Plan.
(2)
21,539
units issued under the 2016 Plan.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table summarizes the Company's Incentive Plan activity during the
years ended October 31,
2016
,
2015
, and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Restricted Stock
|
|
Restricted Stock Units
|
|
Outstanding at:
|
|
Options
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Life
|
|
Restricted Shares
|
|
20 Day EMA (1)
|
|
Weighted Average Remaining Contractual Life
|
|
Restricted Share Units
|
|
20 Day EMA (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2013
|
|
236,134
|
|
|
$9.93
|
|
5.59
|
|
51,571
|
|
|
$10.18
|
|
2.84
|
|
—
|
|
|
—
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
89,500
|
|
|
19.65
|
|
|
|
|
—
|
|
|
—
|
|
|
Options exercised or restricted stock vested
|
|
(100,468
|
)
|
|
$10.55
|
|
|
|
(17,190
|
)
|
|
$10.18
|
|
|
|
—
|
|
|
—
|
|
|
Forfeited or expired
|
|
(12,333
|
)
|
|
$7.19
|
|
|
|
(7,000
|
)
|
|
20.64
|
|
|
|
|
—
|
|
|
—
|
|
|
October 31, 2014
|
|
123,333
|
|
|
$9.69
|
|
5.15
|
|
116,881
|
|
|
$16.81
|
|
2.58
|
|
—
|
|
|
—
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
84,272
|
|
|
$11.22
|
|
|
|
—
|
|
|
—
|
|
|
Options exercised or restricted stock vested
|
|
(19,317
|
)
|
|
$8.19
|
|
|
|
(68,648
|
)
|
|
$14.99
|
|
|
|
—
|
|
|
—
|
|
|
Forfeited or expired
|
|
(13,350
|
)
|
|
$11.80
|
|
|
|
(8,250
|
)
|
|
$20.64
|
|
|
|
—
|
|
|
—
|
|
|
October 31, 2015
|
|
90,666
|
|
|
$9.70
|
|
4.10
|
|
124,255
|
|
|
$13.77
|
|
2.28
|
|
—
|
|
|
—
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
312,251
|
|
|
$4.30
|
|
|
|
21,539
|
|
|
$4.17
|
|
Options exercised or restricted stock vested
|
|
—
|
|
|
—
|
|
|
|
|
(54,349
|
)
|
|
$16.53
|
|
|
|
—
|
|
|
—
|
|
|
Forfeited or expired
|
|
(1,000
|
)
|
|
$12.04
|
|
|
|
(5,817
|
)
|
|
$5.71
|
|
|
|
—
|
|
|
—
|
|
|
October 31, 2016
|
|
89,666
|
|
|
$9.67
|
|
3.09
|
|
376,340
|
|
|
$6.40
|
|
1.83
|
|
21,539
|
|
|
$4.17
|
(1)
20-day EMA effective with commencement of the 2016 Plan on March 9, 2016.
The Company recorded stock compensation expense related to stock options, restricted stock and restricted stock units during the fiscal years ended October 31,
2016
,
2015
and
2014
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Stock options
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
150
|
|
Restricted stock
|
|
1,035
|
|
|
1,010
|
|
|
429
|
|
Restricted stock units
|
|
37
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
1,072
|
|
|
$
|
1,025
|
|
|
$
|
579
|
|
Stock Options
The exercise price of each stock option equals the market price of the Company's common stock on its grant date. Compensation expense is recorded at the grant date fair value, less an estimated forfeiture amount, and is recognized on a straight-line basis over the applicable vesting period. The Company's stock options generally vest over three years, with a maximum term of ten years. Incentive stock options were not granted during fiscal years
2016
,
2015
, and
2014
.
Stock options were not exercised during fiscal year ended October 31, 2016. Cash received from the exercise of options for the fiscal years ended October 31,
2015
and
2014
was
$159
, and
$1,061
, respectively. At
October 31, 2016
, the options outstanding had an intrinsic value of
$72
and the options exercisable had an intrinsic value of
$72
. Options that have an exercise price greater than the market price on
October 31, 2016
were excluded from the intrinsic value computation. The intrinsic value of options exercised during fiscal
2015
and
2014
was
$18
and
$652
, respectively.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table provides additional information regarding options outstanding as of
October 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Prices
|
|
Options Outstanding
|
|
Exercise Price of Options Outstanding and Options Exercisable
|
|
Options Exercisable
|
|
Weighted Average Remaining Contractual Life
|
|
|
|
$14.74
|
|
16,000
|
|
|
$14.74
|
|
16,000
|
|
|
.29
|
|
$2.11
|
|
8,000
|
|
|
$2.11
|
|
8,000
|
|
|
2.12
|
|
$5.30
|
|
19,666
|
|
|
$5.30
|
|
19,666
|
|
|
2.78
|
|
$12.04
|
|
35,000
|
|
|
$12.04
|
|
35,000
|
|
|
4.11
|
|
$8.10
|
|
11,000
|
|
|
$8.10
|
|
11,000
|
|
|
5.14
|
|
Totals
|
|
89,666
|
|
|
|
|
89,666
|
|
|
|
Restricted Stock Awards
The grant date fair value of each restricted stock award equals the fair value of the Company's common stock based on a 20 day exponential moving average as of the close of business on the Friday preceding the award date. Compensation expense is recorded at the grant date fair value, less an estimated forfeiture amount, and is recognized over the applicable vesting periods. The vesting periods range between one to four years. As of
October 31, 2016
, there was approximately
$1,553
of total unrecognized compensation costs related to these restricted stock awards to be recognized over the next three fiscal years.
Restricted Stock Units
The grant date fair value of each restricted stock unit equals the fair value of the Company's common stock based on a 20 day exponential moving average as of the close of business on the Friday preceding the award date. Compensation expense is recorded at the grant date fair value, less an estimated forfeiture amount, and is recognized over the applicable vesting periods. The vesting periods range between one to three years. As of
October 31, 2016
, there was approximately
$48
of total unrecognized compensation expense related to these restricted stock units that is expected to be recognized over the next three fiscal years.
Incentive Bonus Plans
The Company maintains a Management Incentive Plan ("MIP") to provide the Chief Executive Officer and certain eligible employees ("participants") incentives for superior performance. The MIP is administered by the Compensation Committee of the Board of Directors and entitles the participants to be paid a cash bonus based upon varying percentages of their respective salaries, the level of achievement of the corporate goals established by the Compensation Committee and specific individual goals as established by the Chief Executive Officer (for employees other than the CEO). For fiscal year
2016
, the Compensation Committee established goals for participants based on the Company's earnings before interest, taxes, depreciation and amortization. For fiscal years
2015
and
2014
, the Compensation Committee established goals for participants based on the Company's earnings before interest, taxes, depreciation and amortization and return on invested capital. The incentive depends upon meeting the operating targets and, for participants at an operating unit,
50%
is based upon attaining the corporate goals for the Company's performance. For both fiscal
2016
and
2015
, the Company did not meet the established targets and therefore participants were not eligible for a bonus payout under the MIP. For fiscal
2014
, participants in the MIP received an aggregate bonus of
$3,360
under the MIP, which was paid in the first quarter of fiscal
2015
.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 17—Income Taxes
Income (loss) before income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Domestic
|
|
$
|
3,917
|
|
|
$
|
17,063
|
|
|
$
|
26,417
|
|
Foreign
|
|
(5,400
|
)
|
|
(6,448
|
)
|
|
(2,365
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,483
|
)
|
|
$
|
10,615
|
|
|
$
|
24,052
|
|
The components of the provision (benefit) for income taxes from continuing operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(3,900
|
)
|
|
$
|
(545
|
)
|
|
$
|
3,067
|
|
|
State and local
|
|
329
|
|
|
384
|
|
159
|
|
Foreign
|
|
1,123
|
|
|
608
|
|
74
|
|
|
|
|
|
|
|
|
Total current
|
|
(2,448
|
)
|
|
447
|
|
3,300
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
3,289
|
|
|
4,501
|
|
|
3,094
|
|
|
State and local
|
|
156
|
|
|
208
|
|
|
59
|
|
|
Foreign
|
|
(6,149
|
)
|
|
(446
|
)
|
|
(2,316
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
(2,704)
|
|
4,263
|
|
837
|
|
|
|
|
|
|
|
|
|
Provision (benefit)
|
|
$
|
(5,152
|
)
|
|
$
|
4,710
|
|
|
$
|
4,137
|
|
|
|
|
|
|
|
|
|
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Temporary differences and carryforwards which give rise to deferred tax assets and liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
Accrued compensation and benefits
|
$
|
2,091
|
|
|
$
|
1,794
|
|
|
Inventory
|
646
|
|
|
738
|
|
State depreciation adjustments and loss carryforwards
|
2,664
|
|
|
1,803
|
|
Pension obligations and post retirement benefits
|
10,229
|
|
|
6,020
|
|
Foreign net operating loss
|
7,466
|
|
|
4,567
|
|
Other accruals, reserves and tax credits
|
3,668
|
|
|
2,356
|
|
Goodwill and intangible amortization
|
7,234
|
|
8,280
|
|
Foreign currency translation
|
75
|
|
107
|
|
|
Interest rate swap
|
1,922
|
|
1,811
|
|
Total deferred tax assets
|
35,995
|
|
|
27,476
|
|
Less: Valuation allowance
|
(2,782)
|
|
|
(4,986)
|
Net deferred tax assets
|
$
|
33,213
|
|
|
$
|
22,490
|
|
Deferred tax liabilities:
|
|
|
|
|
Fixed assets
|
$
|
(26,800
|
)
|
|
$
|
(21,984
|
)
|
|
Prepaid expenses and other
|
(1,173)
|
|
|
(891)
|
Net deferred tax asset
|
$
|
5,240
|
|
|
$
|
(385
|
)
|
|
|
|
|
|
Change in net deferred tax asset:
|
|
|
|
|
Benefit (provision) for deferred taxes
|
$
|
2,704
|
|
|
$
|
(4,263
|
)
|
Purchase accounting adjustments
|
—
|
|
|
51
|
|
Unrecognized tax benefit adjustments
|
(207
|
)
|
|
(202
|
)
|
Components of other comprehensive income:
|
|
|
|
|
Pension and post retirement benefits
|
2,986
|
|
|
(387
|
)
|
|
Velocys investment
|
58
|
|
|
248
|
|
Interest rate swap
|
111
|
|
|
861
|
|
|
Other adjustments
|
(27
|
)
|
|
3
|
|
|
Total change in net deferred tax asset
|
$
|
5,625
|
|
|
$
|
(3,689
|
)
|
During the fourth quarter of 2016, the Company early adopted ASU 2015-17,
"Balance Sheet Classification of Deferred Taxes."
ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the Company’s consolidated balance sheet starting in 2017 for each jurisdiction. The Company elected to apply this standard prospectively for 2016 financial statements. As a result, prior periods were not retrospectively adjusted.
As required by FASB ASC Topic 740, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Activities and balances of unrecognized tax benefits for
2016
,
2015
, and
2014
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of year
|
$
|
731
|
|
|
$
|
1,068
|
|
|
$
|
1,183
|
|
Additions based on tax positions related to the current year
|
48
|
|
|
125
|
|
|
35
|
|
Additions for tax positions of prior years
|
—
|
|
|
27
|
|
|
—
|
|
Reductions based on tax positions related to the current year
|
—
|
|
|
(39
|
)
|
|
(5
|
)
|
Reductions for tax positions of prior years
|
(53
|
)
|
|
—
|
|
|
(3
|
)
|
Reductions as result of lapse of applicable statute of limitations
|
(165
|
)
|
|
(450
|
)
|
|
(142
|
)
|
|
|
|
|
|
|
Balance at end of year
|
$
|
561
|
|
|
$
|
731
|
|
|
$
|
1,068
|
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective rate was
$368
at
October 31, 2016
and
$480
at
October 31, 2015
. The Company recognizes interest accrued and penalties related to unrecognized tax benefits as part of income tax expense. The Company recognized
$218
of benefit in
2016
and
$163
of benefit in
2015
and an expense of
$136
in 2014 for interest and penalties. The Company had accrued
$513
at
October 31, 2016
and
$730
at
October 31, 2015
for the payment of interest and penalties.
The Company is subject to income taxes in the U.S. federal jurisdiction, and various state, local and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for the years ending prior to October 31, 2012 and no longer subject to non-U.S. income tax examinations for calendar years ending prior to December 31, 2009. The Company does not anticipate that within the next 12 months the total unrecognized tax benefits will significantly change due to the settlement of examinations and the expiration of statute of limitations.
A valuation allowance of
$2,782
remains as of
October 31, 2016
for deferred tax assets whose realization remains uncertain. The comparable amount of the valuation allowance at
October 31, 2015
was
$4,986
. The net decrease in the valuation allowance of
$2,204
relates to an increase of
$622
related to state operating loss carry forwards, a decrease of
$3,106
related to Swedish operating loss carry forwards during the current period, an decrease of
$25
related to Netherlands operating loss carry forwards, an increase of
$254
related to China operating loss carry forwards and an increase of
$51
related to Hong Kong operating loss carry forwards.
The Company assesses both negative and positive evidence when measuring the need for a valuation allowance. A valuation allowance has been established by the Company due to the uncertainty of realizing certain loss carry forwards, other deferred tax assets and foreign tax credits in the United States and various foreign jurisdictions. The Company believes the remaining deferred tax assets will be realizable based on projected book income, the reversals of existing taxable temporary differences and available tax planning strategies that would be implemented and generate ordinary income in the United States or foreign jurisdictions to recognize the deferred tax assets. The Company intends to maintain the valuation allowance against certain deferred tax assets until such time that sufficient positive evidence exists to support realization of the deferred tax assets. In the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
A reconciliation of the statutory federal income tax rate to the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2016
|
|
2015
|
|
2014
|
Federal income tax at statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State and local income taxes, net of federal benefit
|
(4.4
|
)
|
|
4.7
|
|
|
0.6
|
|
Valuation allowance change
|
367.7
|
|
|
12.6
|
|
|
(7.4
|
)
|
Domestic tax credits
|
62.7
|
|
|
(2.1
|
)
|
|
(1.1
|
)
|
Domestic production activities deduction
|
26.4
|
|
|
(3.2
|
)
|
|
(2.9
|
)
|
Foreign operations
|
(151.1
|
)
|
|
13.2
|
|
|
0.7
|
|
Revisions to prior period research and research and development tax credit calculations
|
—
|
|
|
—
|
|
|
(10.2
|
)
|
Adjustment of uncertain tax positions
|
11.7
|
|
|
(3.2
|
)
|
|
(1.0
|
)
|
Provision to return adjustment for tax law extensions subsequent to year-end
|
(13.6
|
)
|
|
(13.0
|
)
|
|
(1.0
|
)
|
Change in legislation - Mexico
|
—
|
|
|
—
|
|
|
2.4
|
|
Other
|
13.1
|
|
|
0.4
|
|
|
2.1
|
|
|
|
|
|
|
|
Effective income tax rate
|
347.5
|
%
|
|
44.4
|
%
|
|
17.2
|
%
|
At
October 31, 2016
, the Company had operating loss carryforwards of
$71,834
in Sweden, Netherlands, China, Hong Kong, Mexico and certain U.S. states. The Swedish foreign operating loss carry forward benefit is approximately
$6,000
which can be carried forward indefinitely. The valuation allowance against the Swedish operating loss was released during the year. The foreign operating loss carry forward benefit for the Netherlands is
$35
and has a full valuation allowance against it. This benefit can be carried forward for
nine
years. The Chinese operating loss carry forward benefit is
$373
and has a full valuation allowance against it. This benefit can be carried forward for
five
years. The Hong Kong operating loss carry forward benefit is
$51
and has a full valuation allowance against it. This benefit can be carried forward indefinitely.
In addition, the Company had Mexican foreign operating loss carry forwards of approximately
$1,007
as of
October 31, 2016
, which will expire between 2019 - 2025. There is no valuation allowance against the Mexican operating loss as the Company expects to fully utilize the benefit within the carry forward period.
Domestically, the Company has various state net operating loss carryforward benefits. As of
October 31, 2016
and
2015
, the Company had state net operating loss carry forward benefits of
$2,138
and
$1,475
with a valuation allowance of
$2,075
and
$1,452
, respectively that will expire between 2017 and 2036. The following table summarizes the various country operating losses, credit carryforwards and associated valuation allowances as of October 31,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
October 31, 2015
|
Jurisdiction
|
|
NOL Carryforward
|
|
NOL Tax Benefit
|
|
Valuation Allowance
|
|
NOL Carryforward
|
|
NOL Tax Benefit
|
|
Valuation Allowance
|
Netherlands
|
|
$
|
174
|
|
|
$
|
35
|
|
|
$
|
35
|
|
|
329
|
|
|
60
|
|
|
60
|
|
Sweden
|
|
27,271
|
|
6,000
|
|
—
|
|
|
14,172
|
|
|
3,118
|
|
|
3,106
|
|
China
|
|
1,494
|
|
|
373
|
|
|
373
|
|
|
478
|
|
|
120
|
|
|
120
|
|
Hong Kong
|
|
206
|
|
|
51
|
|
|
51
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mexico
|
|
3,358
|
|
|
1,007
|
|
|
—
|
|
|
4,234
|
|
|
1,270
|
|
|
—
|
|
U.S. (State)
|
|
39,331
|
|
2,138
|
|
2,075
|
|
33,368
|
|
1,475
|
|
|
1,452
|
|
Total before Foreign Tax Credit
|
|
$
|
71,834
|
|
|
$
|
9,604
|
|
|
$
|
2,534
|
|
|
$
|
52,581
|
|
|
$
|
6,043
|
|
|
$
|
4,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal (Foreign Tax Credit)
|
|
—
|
|
|
—
|
|
|
248
|
|
|
—
|
|
|
—
|
|
|
248
|
|
Total
|
|
$
|
71,834
|
|
|
$
|
9,604
|
|
|
$
|
2,782
|
|
|
$
|
52,581
|
|
|
$
|
6,043
|
|
|
$
|
4,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had a net income tax refund of
$5,855
in 2016 and paid income taxes, net of refunds, of
$1,770
in
2015
. U.S. income taxes and foreign withholding taxes are not provided on undistributed earnings of foreign subsidiaries because such
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
earnings are permanently reinvested in the operations. As of
October 31, 2016
, there was approximately
$7,581
of undistributed foreign subsidiary earnings. The income tax liability that would result had such earnings been repatriated is estimated at
$2,653
.
Note 18—Accumulated Other Comprehensive Loss
The following table provides additional details of the amounts recognized into net earnings from accumulated other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Post Retirement Plan Liability (1)
|
|
Marketable Securities Adjustment
|
|
Interest Rate Swap Adjustment (2)
|
|
Foreign Currency Translation Adjustment (3)
|
|
Accumulated Other Comprehensive Loss
|
Balance at October 31, 2014
|
|
$
|
(27,371
|
)
|
|
$
|
100
|
|
|
$
|
(1,558
|
)
|
|
$
|
(8,052
|
)
|
|
$
|
(36,881
|
)
|
|
Other comprehensive loss
|
|
(2,265
|
)
|
|
(441
|
)
|
|
(2,051
|
)
|
|
(9,671
|
)
|
|
(14,428
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss, net of tax
|
|
827
|
|
|
—
|
|
|
433
|
|
|
—
|
|
|
1,260
|
|
|
Net current-period other comprehensive loss
|
|
(1,438
|
)
|
|
(441
|
)
|
|
(1,618
|
)
|
|
(9,671
|
)
|
|
(13,168
|
)
|
Balance at October 31, 2015
|
|
$
|
(28,809
|
)
|
|
$
|
(341
|
)
|
|
$
|
(3,176
|
)
|
|
$
|
(17,723
|
)
|
|
$
|
(50,049
|
)
|
|
Other comprehensive loss
|
|
(8,087
|
)
|
|
(125
|
)
|
|
(1,466
|
)
|
|
(3,031
|
)
|
|
(12,709
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss, net of tax
|
|
4,237
|
|
|
—
|
|
|
1,530
|
|
|
529
|
|
|
6,296
|
|
|
Net current-period other comprehensive loss
|
|
(3,850
|
)
|
|
(125
|
)
|
|
64
|
|
|
(2,502
|
)
|
|
(6,413
|
)
|
Balance at October 31, 2016
|
|
$
|
(32,659
|
)
|
|
$
|
(466
|
)
|
|
$
|
(3,112
|
)
|
|
$
|
(20,225
|
)
|
|
$
|
(56,462
|
)
|
(1) Amounts reclassified from accumulated other comprehensive loss, net of tax are classified with manufacturing expenses included in cost of goods sold on the statements of income.
(2) Amounts reclassified from accumulated other comprehensive income loss, net of tax are classified with interest expense included on the statements of income.
(3) Amounts reclassified from accumulated other comprehensive income loss, net of tax are classified with other (income) expense, net included on the statements of income.
Note 19—Related Party Transactions
The Company had sales to MTD Products Inc. and its affiliates of
$5,730
,
$6,411
, and
$6,756
for fiscal years
2016
,
2015
, and
2014
, respectively. At
October 31, 2016
and
2015
, the Company had receivable balances of
$1,235
and
$1,092
, respectively, due from MTD Products Inc. and its affiliates.
As of
October 31, 2016
, the Company had one joint venture in China. Operating activities have been insignificant and are not yet consolidated in the Company's statement of operations.
On March 11, 2014, the Company entered into a manufacturing agreement with Velocys. As part of the agreement, the Company invested
$2,000
, which is comprised of Velocys stock with a market value of
$1,527
on the date of acquisition and a premium paid of
$473
, which is being amortized over the remaining life of the related supplier agreement. During fiscal 2014, the Company sold a portion of the Velocys stock and realized a gain of
$365
. The Company re-measures available-for-sale securities at fair value and records the unrealized gain or loss in other comprehensive income until realized. A cumulative mark-to-market favorable adjustment of
$125
, net of tax, was recorded as a gain to other comprehensive loss for the fiscal year ended
October 31, 2016
. A cumulative mark-to-market unfavorable adjustment of
$441
net of tax, was recorded as a loss to other comprehensive income (loss) for the fiscal year ended
October 31, 2015
.
The Company had sales to Velocys of
$12
and
$1,372
for fiscal years
2016
and
2015
, respectively. There were no sales for fiscal year
2014
. At
October 31, 2016
, there was no balance due from Velocys.
Note 20—Business Segment Information
The Company conducts its business and reports its information as one operating segment - Automotive and Commercial Vehicles. The Chief Operating Decision Maker has been identified as the SLT, which includes all Vice Presidents plus the Chief Executive Officer of the Company as this team has the final authority over performance assessment and resource allocation
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
decisions. In determining that one operating segment is appropriate, the Company considered the nature of the business activities, the existence of managers responsible for the operating activities and information presented to the Board of Directors for its consideration and advice. Customers and suppliers are substantially the same in the automotive and commercial vehicle industry.
Revenues of foreign geographic regions are attributed to external customers based upon the location of the entity recording the sale. These foreign revenues represent
16.7%
,
15.9%
, and
10.8%
of total revenues for fiscal years
2016
,
2015
and
2014
, respectively. Long-lived assets consist primarily of net property, plant and equipment, goodwill and intangibles.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
Long-Lived Assets
|
|
2016
|
2015
|
2014
|
|
2016
|
2015
|
2014
|
United States
|
$
|
888,164
|
|
$
|
901,182
|
|
$
|
740,836
|
|
|
$
|
253,160
|
|
$
|
275,556
|
|
$
|
265,975
|
|
Europe
|
143,281
|
|
132,094
|
|
48,414
|
|
|
48,716
|
|
43,166
|
|
43,875
|
|
Rest of World
|
34,389
|
|
39,776
|
|
42,817
|
|
|
20,631
|
|
19,545
|
|
21,602
|
|
Total Company
|
$
|
1,065,834
|
|
$
|
1,073,052
|
|
$
|
832,067
|
|
|
$
|
322,507
|
|
$
|
338,267
|
|
$
|
331,452
|
|
The foreign currency gain or loss is included as a component of other income (expense) in the consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Gain (Loss)
|
|
2016
|
2015
|
2014
|
Europe
|
$
|
(802
|
)
|
$
|
(23
|
)
|
$
|
109
|
|
Rest of World
|
$
|
(772
|
)
|
$
|
(483
|
)
|
$
|
(111
|
)
|
The following details customers that accounted for more than 10% of the Company's revenues in fiscal
2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
Revenues
|
Customer
|
2016
|
2015
|
2014
|
FCA
|
17.1
|
%
|
17.4
|
%
|
13.9
|
%
|
General Motors
|
18.2
|
%
|
15.5
|
%
|
16.4
|
%
|
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 21—Quarterly Results of Operations (Unaudited)
(amounts in thousands except per share data)
The following is a summary of the Company's consolidated quarterly results for each of the fiscal years ended October 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended October 31, 2016
|
|
First Quarter*
|
|
Second Quarter*
|
|
Third Quarter*
|
|
Fourth Quarter
|
Net revenues (1)
|
|
$251,055
|
|
$284,264
|
|
$248,832
|
|
$281,683
|
Gross profit
|
|
15,889
|
|
|
26,281
|
|
|
23,910
|
|
|
30,096
|
|
Operating income (loss)
|
|
(2,292
|
)
|
|
8,724
|
|
|
5,798
|
|
|
6,240
|
|
Provision (benefit) for income taxes
|
|
(1,911
|
)
|
|
364
|
|
|
1,344
|
|
|
(4,949
|
)
|
Net income (loss)
|
|
$(5,127)
|
|
$4,209
|
|
$(678)
|
|
$5,265
|
Net income (loss) per share basic
|
|
$(0.30)
|
|
$0.24
|
|
$(0.04)
|
|
$0.31
|
Net income (loss) per share diluted
|
|
$(0.30)
|
|
$0.24
|
|
$(0.04)
|
|
$0.31
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
Basic
|
|
17,342
|
|
|
17,615
|
|
|
17,614
|
|
|
17,614
|
|
Diluted
|
|
17,342
|
|
|
17,620
|
|
|
17,614
|
|
|
17,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended October 31, 2015
|
|
First Quarter*
|
|
Second Quarter*
|
|
Third Quarter*
|
|
Fourth Quarter*
|
Net revenues (1)
|
|
$245,809
|
|
$272,257
|
|
$266,079
|
|
$288,907
|
Gross profit
|
|
19,374
|
|
27,462
|
|
20,067
|
|
19,284
|
|
Operating income (loss)
|
|
5,127
|
|
9,916
|
|
7,335
|
|
(1,514)
|
|
Provision for income taxes
|
|
844
|
|
|
2,488
|
|
|
2,417
|
|
|
(1,039
|
)
|
Net income (loss)
|
|
$2,923
|
|
$6,037
|
|
$1,862
|
|
$(4,917)
|
Net income (loss) per share basic
|
|
$0.17
|
|
$0.35
|
|
$0.11
|
|
$(0.29)
|
Net income (loss) per share diluted
|
|
$0.17
|
|
$0.35
|
|
$0.11
|
|
$(0.29)
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
Basic
|
|
17,215
|
|
17,211
|
|
17,227
|
|
17,292
|
|
Diluted
|
|
17,255
|
|
17,236
|
|
17,246
|
|
17,292
|
|
* As revised to reflect the correction of immaterial errors - see Note 2 - Correction of Immaterial Errors
(1) See Note 1 - Summary of Significant Accounting Policies pertaining to reclassifications
Note 22—Commitments and Contingencies
Litigation
A securities class action lawsuit was filed on September 21, 2015 in the United States District Court for the Southern District of New York against the Company and certain of its officers (the President and Chief Executive Officer and Vice President of Finance and Treasurer). As amended, the lawsuit claims in part that the Company issued inaccurate information to investors about, among other things, the Company’s earnings and income and its internal controls over financial reporting for fiscal 2014 and the first and second fiscal quarters of 2015 in violation of the Securities Exchange Act of 1934. The amended complaint seeks an award of damages in an unspecified amount on behalf of a putative class consisting of persons who purchased the Company's common stock between January 12, 2015 and September 14, 2015, inclusive. The Company and such officers filed a Motion to Dismiss this lawsuit with the United States District Court for the Southern District of New York on April 18, 2016.
A shareholder derivative lawsuit was filed on April 1, 2016 in the Court of Common Pleas, Medina County, Ohio against the Company's President and Chief Executive Officer and Vice President of Finance and Treasurer and members of the Company’s Board of Directors. The lawsuit claims in part that the defendants breached their fiduciary duties owed to the Company by failing to exercise appropriate oversight over the Company's accounting controls, leading to the accounting issues and the restatement announced in September 2015. The complaint seeks a judgment against the individual defendants and in favor of the Company
for money damages, plus miscellaneous non-monetary relief. On May 2, 2016, the Court entered a stipulated order staying this case pending the outcome of the Motion to Dismiss in the securities class action lawsuit described in the previous paragraph.
In addition, from time to time, the Company is involved in legal proceedings, claims or investigations that are incidental to the conduct of its business. The Company vigorously defends itself against such claims. In future periods, the Company could be subject to cash costs or non-cash charges to earnings if a matter is resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on current information, including its assessment of the merits of the particular claims, the Company does not expect that its legal proceedings or claims will have a material impact on its future consolidated financial condition, results of operations or cash flows.