NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except number of shares and per share data)
Note 1—Basis of Presentation
The condensed consolidated financial statements have been prepared by Shiloh Industries, Inc. and its subsidiaries (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the SEC. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended
October 31, 2016
.
Revenues and operating results for the
three
months ended
January 31, 2017
are not necessarily indicative of the results to be expected for the full year.
Revision of Prior Period Financial Statements
In the fourth quarter of fiscal 2016, the Company became aware of immaterial errors in certain balance sheet accounts at one of its manufacturing facilities. An 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. Periods not presented herein will be revised, as applicable, in future filings. Although management has determined that the errors, individually and in the aggregate, were not material to prior periods, the financial statements for the three months ended January 31, 2016, included herein, have been revised to correct for the impact of these items. Unless otherwise indicated, the condensed consolidated financial information as of and for the three months ended January 31, 2017 presented in this Quarterly Report on Form 10-Q reflects these revisions.
The following table summarizes the effects of the Revision on the condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31, 2016
|
Statement of Operations
|
As Reported
|
|
Adjustment
|
|
As Adjusted
|
Cost of sales
|
$
|
235,074
|
|
|
$
|
92
|
|
|
$
|
235,166
|
|
Gross profit
|
15,981
|
|
|
(92
|
)
|
|
15,889
|
|
Selling, general and administrative expenses
|
17,584
|
|
|
(240
|
)
|
|
17,344
|
|
Asset impairment
|
—
|
|
|
273
|
|
|
273
|
|
Operating loss
|
(2,167
|
)
|
|
(125
|
)
|
|
(2,292
|
)
|
Loss before income taxes
|
(6,913
|
)
|
|
(125
|
)
|
|
(7,038
|
)
|
Benefit for income taxes
|
(1,854
|
)
|
|
(57
|
)
|
|
(1,911
|
)
|
Net loss
|
$
|
(5,059
|
)
|
|
$
|
(68
|
)
|
|
$
|
(5,127
|
)
|
Loss per share:
|
|
|
|
|
|
Basic loss per share
|
$(0.29)
|
|
$(0.01)
|
|
$(0.30)
|
Diluted loss per share
|
$(0.29)
|
|
$(0.01)
|
|
$(0.30)
|
The following table summarizes the effects of the Revision on the condensed consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31, 2016
|
Statement of Cash Flows
|
As Reported
|
|
Adjustment
|
|
As Adjusted
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net loss
|
$
|
(5,059
|
)
|
|
$
|
(68
|
)
|
|
$
|
(5,127
|
)
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
9,289
|
|
|
23
|
|
|
9,312
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
40,095
|
|
|
51
|
|
|
40,146
|
|
Inventories
|
(2,753
|
)
|
|
(21
|
)
|
|
(2,774
|
)
|
Payables and other liabilities
|
(27,158
|
)
|
|
(22
|
)
|
|
(27,180
|
)
|
Prepaid and accrued income taxes
|
(2,330
|
)
|
|
(57
|
)
|
|
(2,387
|
)
|
Net cash provided by operating activities
|
18,689
|
|
|
(94
|
)
|
|
18,595
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Capital expenditures
|
(1,891
|
)
|
|
94
|
|
|
(1,797
|
)
|
Net cash used for investing activities
|
(1,756
|
)
|
|
94
|
|
|
(1,662
|
)
|
Note 2—New Accounting Standards
In January 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-04,
"Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,"
which eliminates the need to determine the fair value of individual assets and liabilities of a reporting unit to measure a goodwill impairment. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value. The revised guidance will be applied prospectively, and is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company will prospectively apply the guidance.
In May 2014, the 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 of fiscal 2016, 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 condensed 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 and will prospectively apply the guidance.
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. ASU 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 condensed 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 the Company's condensed 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.
Note 3—Acquisitions
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 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 condensed consolidated statements of operations from the acquisition date.
As of
January 31, 2017
,
$1,157
of funds remained in escrow, subject to certain claims.
Note 4—Asset Impairment and Restructuring Charges
During the first quarter of fiscal
2017
, the Company recorded an asset impairment charge of
$41
related to restructuring initiatives and asset impairments of
$273
were recorded during the first quarter of fiscal
2016
related to the sale of a building.
`Note 5—Related Party Receivables
The Company had sales to MTD Products Inc. and its affiliates of
$1,598
and
$33
for the
three months ended January 31,
2017
and
2016
, respectively. At
January 31, 2017
and
October 31, 2016
, the Company had related party receivable balances of
$1,639
and
$1,235
, respectively, due from MTD Products Inc. and its affiliates.
The Company has one joint venture in China through Shiloh Holdings Hong Kong Limited, a company organized and existing under the laws of Hong Kong ("Shiloh HK"), whereby Shiloh HK owns a
55%
equity interest. On November 30, 2016, Shiloh HK entered into an Equity Transfer Agreement with Suzhou Sanji Foundry Equipment Co., Ltd, a company incorporated and existing under the laws of the People’s Republic of China ("Sanji"), pursuant to which Shiloh HK will sell all of its equity interests in the joint venture to Sanji upon receipt of payment of
$1,170
by Sanji.
On March 11, 2014, the Company entered into a manufacturing agreement with Velocys, plc. 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. The Company re-measures available-for-sale securities at fair value and records the unrealized gain or loss in other comprehensive income (loss)
until realized. A cumulative mark-to-market favorable adjustment
$114
, net of tax, was recorded as a gain to other comprehensive loss for the
three months ended January 31,
2017
and a cumulative mark-to-market unfavorable adjustment of
$140
, net of tax, was recorded as a loss to other comprehensive loss for the
three months ended January 31,
2016
.
Sales to Velocys for the
three months ended January 31,
2017
and 2016, respectively, were immaterial as were the balances due from Velocys at
January 31, 2017
and
October 31, 2016
.
Note 6—Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
January 31, 2017
|
|
October 31, 2016
|
Raw materials
|
$
|
26,759
|
|
|
$
|
26,367
|
|
Work-in-process
|
16,555
|
|
|
16,149
|
|
Finished goods
|
18,783
|
|
|
18,031
|
|
Total inventory
|
$
|
62,097
|
|
|
$
|
60,547
|
|
Total cost of inventory is net of reserves to reduce certain inventory from cost to net realizable value by an allowance for excess and obsolete inventories based on management’s review of on-hand inventories compared to historical and estimated future sales and usage. Such reserves aggregated
$3,775
and
$2,946
at
January 31, 2017
and
October 31, 2016
, respectively.
Note 7—Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2017
|
|
October 31, 2016
|
Tooling (1)
|
|
$
|
17,570
|
|
|
$
|
19,792
|
|
Prepaid expenses and other assets
|
|
11,669
|
|
|
10,694
|
|
Assets held for sale
|
|
6,500
|
|
|
6,500
|
|
|
Total
|
|
$
|
35,739
|
|
|
$
|
36,986
|
|
The Company invested in manufacturing equipment for one of its 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. 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—Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
January 31,
2017
|
|
October 31,
2016
|
Land and improvements
|
$
|
11,358
|
|
|
$
|
11,358
|
|
Buildings and improvements
|
118,289
|
|
|
117,291
|
|
Machinery and equipment
|
509,760
|
|
|
505,768
|
|
Furniture and fixtures
|
18,396
|
|
|
18,200
|
|
Construction in progress
|
42,930
|
|
|
37,612
|
|
Total, at cost
|
700,733
|
|
|
690,229
|
|
Less: Accumulated depreciation
|
433,444
|
|
|
424,392
|
|
Property, plant and equipment, net
|
$
|
267,289
|
|
|
$
|
265,837
|
|
Depreciation expense was
$9,153
and
$8,748
for the
three months ended January 31,
2017
and
2016
, respectively.
Capital Leases:
|
|
|
|
|
|
|
|
|
|
January 31,
2017
|
|
October 31,
2016
|
Leased Property:
|
|
|
|
Machinery and equipment
|
$
|
6,894
|
|
|
$
|
7,295
|
|
Less: Accumulated depreciation
|
1,938
|
|
|
1,781
|
|
Leased property, net
|
$
|
4,956
|
|
|
$
|
5,514
|
|
Total obligations under capital leases and future minimum rental payments to be made under capital leases at
January 31, 2017
are as follows:
|
|
|
|
|
Twelve Months Ending January 31,
|
|
2018
|
$
|
865
|
|
2019
|
862
|
|
2020
|
498
|
|
2021
|
2,048
|
|
|
4,273
|
|
Plus amount representing interest ranging from 3.05% to 3.77%
|
465
|
|
Future minimum rental payments
|
$
|
4,738
|
|
Note 9—Goodwill and Intangible Assets
Goodwill:
The changes in the carrying amount of goodwill for the
three
months ended
January 31, 2017
are as follows:
|
|
|
|
|
|
|
Balance October 31, 2016
|
|
$
|
27,490
|
|
|
Foreign currency translation
|
|
(177
|
)
|
Balance January 31, 2017
|
|
$
|
27,313
|
|
Intangible Assets
The changes in the carrying amount of finite intangible assets for the
three
months ended
January 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
Developed Technology
|
|
Non-Compete
|
|
Trade Name
|
|
Trademark
|
|
Total
|
Balance October 31, 2016
|
$
|
12,975
|
|
|
$
|
2,768
|
|
|
$
|
47
|
|
|
$
|
1,377
|
|
|
$
|
112
|
|
|
$
|
17,279
|
|
|
Amortization expense
|
(333
|
)
|
|
(193
|
)
|
|
(4
|
)
|
|
(31
|
)
|
|
(4
|
)
|
|
(565
|
)
|
|
Foreign currency translation
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Balance January 31, 2017
|
$
|
12,644
|
|
|
$
|
2,575
|
|
|
$
|
43
|
|
|
$
|
1,346
|
|
|
$
|
108
|
|
|
$
|
16,716
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Useful Life (years)
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Foreign Currency Adjustment
|
|
Net
|
|
Customer relationships
|
13.2
|
|
$
|
17,598
|
|
|
$
|
(4,922
|
)
|
|
$
|
(32
|
)
|
|
$
|
12,644
|
|
|
Developed technology
|
7.3
|
|
5,007
|
|
|
(2,432
|
)
|
|
—
|
|
|
2,575
|
|
|
Non-compete
|
2.3
|
|
824
|
|
|
(781
|
)
|
|
—
|
|
|
43
|
|
|
Trade Name
|
14.8
|
|
1,875
|
|
|
(529
|
)
|
|
—
|
|
|
1,346
|
|
|
Trademark
|
10.0
|
|
166
|
|
|
(58
|
)
|
|
—
|
|
|
108
|
|
|
|
|
|
$
|
25,470
|
|
|
$
|
(8,722
|
)
|
|
$
|
(32
|
)
|
|
$
|
16,716
|
|
Total amortization expense was
$565
and
$564
for the
three months ended January 31,
2017
and 2016, respectively. Amortization expense related to intangible assets for the fiscal years ending is estimated to be as follows:
|
|
|
|
|
|
Twelve Months Ending January 31,
|
|
|
2018
|
|
$
|
2,225
|
|
2019
|
|
2,022
|
|
2020
|
|
1,713
|
|
2021
|
|
1,702
|
|
2022
|
|
1,702
|
|
Thereafter
|
|
7,352
|
|
|
|
$
|
16,716
|
|
Note 10—Financing Arrangements
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
January 31,
2017
|
|
October 31, 2016
|
Credit Agreement—interest rate of 5.17% at January 31, 2017 and 5.14% at October 31, 2016
|
$
|
232,900
|
|
|
$
|
252,900
|
|
Equipment security note
|
868
|
|
|
996
|
|
Capital lease obligations
|
4,273
|
|
|
4,388
|
|
Insurance broker financing agreement
|
379
|
|
|
661
|
|
Total debt
|
238,420
|
|
|
258,945
|
|
Less: Current debt
|
1,760
|
|
|
2,023
|
|
Total long-term debt
|
$
|
236,660
|
|
|
$
|
256,922
|
|
At
January 31, 2017
, the Company had total debt, excluding capital leases, of
$234,147
, consisting of a revolving line of credit under the Credit Agreement of floating rate debt of
$232,900
and fixed rate debt of
$1,247
. The weighted average interest rate of all debt was
5.09%
and
4.23%
(as defined below) for the
three
months ended
January 31, 2017
and
October 31, 2016
, 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, 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 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 a Fourth 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 commitment 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 provided for an interest rate margin on LIBOR loans of
1.50%
to
4.00%
and of
0.50%
to
3.00%
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
January 31, 2017
and
October 31, 2016
.
After considering letters of credit of
$5,080
that the Company has issued, unused commitments under the Credit Agreement were
$117,020
at
January 31, 2017
.
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
January 31, 2017
,
$379
of principal remained outstanding under this agreement and was classified as current debt in the Company’s condensed 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
January 31, 2017
,
$868
remained outstanding under this agreement and
$516
was classified as current debt and
$352
was classified as long-term debt in the Company’s condensed 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
January 31, 2017
, the present value of minimum lease payments under its capital leases amounted to
$4,273
.
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 (defined 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 has 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
$1,119
and a loss of
$480
, net of tax, for the
three months ended January 31,
2017
and 2016, respectively, which is reflected in other comprehensive loss. The base notional amounts of
$25,000
each or
$75,000
total that commenced during 2015 and fiscal 2016 resulted in realized losses of
$418
and
$334
of interest expense related to the interest rate swap settlements for the
three months ended January 31,
2017
and
2016
, respectively.
Scheduled repayments of debt for the next five years are listed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ending January 31,
|
|
Credit Agreement
|
|
Equipment Security Note
|
|
Capital Lease Obligations
|
|
Other Debt
|
|
Total
|
2018
|
|
$
|
—
|
|
|
$
|
516
|
|
|
$
|
865
|
|
|
$
|
379
|
|
|
$
|
1,760
|
|
2019
|
|
—
|
|
|
352
|
|
|
862
|
|
|
—
|
|
|
1,214
|
|
2020
|
|
232,900
|
|
|
—
|
|
|
498
|
|
|
—
|
|
|
233,398
|
|
2021
|
|
—
|
|
|
—
|
|
|
2,048
|
|
|
—
|
|
|
2,048
|
|
Total
|
|
$
|
232,900
|
|
|
$
|
868
|
|
|
$
|
4,273
|
|
|
$
|
379
|
|
|
$
|
238,420
|
|
Note 11—Pension and Other Post-Retirement Benefit Matters
U.S. Plans
The components of net periodic benefit cost for the
three
months ended
January 31, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post-Retirement
Benefits
|
|
Three Months Ended January 31,
|
|
Three Months Ended January 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest cost
|
$
|
821
|
|
|
$
|
891
|
|
|
$
|
3
|
|
|
$
|
4
|
|
Expected return on plan assets
|
(864
|
)
|
|
(1,142
|
)
|
|
—
|
|
|
—
|
|
Amortization of net actuarial loss
|
377
|
|
|
310
|
|
|
3
|
|
|
3
|
|
Net periodic cost
|
$
|
334
|
|
|
$
|
59
|
|
|
$
|
6
|
|
|
$
|
7
|
|
The Company did not contribute to its U.S. pension plans during the three months ended January 31, 2017 and made one contribution of
$950
to the defined pension plans during the
three months ended January 31,
2016
. No further contributions for the remainder of fiscal
2017
are required.
Non-U.S. Plans
For the Company's Swedish operations, the majority of the pension obligations are covered by insurance policies with insurance companies. For the Company's Polish operations, the pension obligations for the fiscal year ended
2017
are expected to be
$965
based on actuarial reports. The Polish operations recognized
$38
and
$25
of expense for the
three months ended January 31,
2017
and
2016
, respectively.
Note 12—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 Exponential Moving Average ("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 option 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 following table summarizes the Company’s Incentive Plan activity for the
three
months ended
January 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2015
|
|
90,666
|
|
|
$9.70
|
|
4.10
|
|
124,255
|
|
|
$13.77
|
|
2.28
|
|
—
|
|
|
—
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
32,394
|
|
|
$5.22
|
|
|
|
—
|
|
|
—
|
|
|
Options exercised or restricted stock vested
|
|
—
|
|
|
—
|
|
|
|
|
(15,564
|
)
|
|
$19.36
|
|
|
|
—
|
|
|
—
|
|
|
Forfeited or expired
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
January 31, 2016
|
|
90,666
|
|
|
$9.70
|
|
3.09
|
|
141,085
|
|
|
$11.19
|
|
1.83
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2016
|
|
89,666
|
|
|
$9.67
|
|
3.09
|
|
376,340
|
|
|
$6.40
|
|
1.83
|
|
21,539
|
|
|
4.17
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
213,099
|
|
|
$7.07
|
|
|
|
21,134
|
|
|
$7.06
|
|
Options exercised or restricted stock vested
|
|
—
|
|
|
—
|
|
|
|
|
(20,650
|
)
|
|
$15.28
|
|
|
|
—
|
|
|
—
|
|
|
Forfeited or expired
|
|
(7,500
|
)
|
|
$10.46
|
|
|
|
(1,700
|
)
|
|
$13.22
|
|
|
|
—
|
|
|
—
|
|
|
January 31, 2017
|
|
82,166
|
|
|
$9.60
|
|
2.80
|
|
567,089
|
|
|
$11.19
|
|
2.08
|
|
42,673
|
|
|
$5.48
|
(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
three months ended January 31,
2017
and
2016
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31,
|
|
|
2017
|
|
2016
|
Restricted stock
|
|
375
|
|
|
189
|
|
Restricted stock units
|
|
22
|
|
|
—
|
|
Total
|
|
$
|
397
|
|
|
$
|
189
|
|
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 the
three months ended January 31,
2017
and
2016
.
Stock options were not exercised during the
three months ended January 31,
2017
. Options that have an exercise price greater than the market price are excluded from the intrinsic value computation. At both
January 31, 2017
and
October 31, 2016
, the exercise price of some of the Company's stock option grants were higher than the market value of the Company's stock. At
January 31, 2017
and
October 31, 2016
, the options outstanding and exercisable had an intrinsic value of
$294
and
$72
, respectively.
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
January 31, 2017
, there was approximately
$2,684
of total unrecognized compensation expense related to non-vested restricted stock that is expected 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
January 31, 2017
, there was approximately
$175
of total unrecognized compensation expense related to these restricted stock units that is expected to be recognized over the next three fiscal years.
Earnings per Share
Basic earnings per share is computed by dividing net income (loss) 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
three months ended January 31,
2017
and
2016
, approximately
27
and
467
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 loss per share:
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
Three Months Ended January 31,
|
|
2017
|
|
2016
|
Net loss available to common stockholders
|
$
|
(2,018
|
)
|
|
$
|
(5,127
|
)
|
Basic weighted average shares
|
17,720
|
|
|
17,342
|
|
Effect of dilutive securities:
|
|
|
|
Restricted shares (a)
|
—
|
|
|
—
|
|
Diluted weighted average shares
|
17,720
|
|
|
17,342
|
|
Basic loss per share
|
$
|
(0.11
|
)
|
|
$
|
(0.30
|
)
|
Diluted loss per share
|
$
|
(0.11
|
)
|
|
$
|
(0.30
|
)
|
(a) Due to a loss for the period, zero restricted shares are included because the effect would be anti-dilutive.
Note 13—Other Fair Value of 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
January 31, 2017
and
October 31, 2016
are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset (Liability)
|
|
Level 2
|
|
Valuation Technique
|
October 31, 2016:
|
|
|
|
|
|
|
Interest Rate Swap Contracts
|
|
$
|
(5,036
|
)
|
|
$
|
(5,036
|
)
|
|
Income Approach
|
Marketable Securities
|
|
174
|
|
|
174
|
|
|
Income Approach
|
January 31, 2017:
|
|
|
|
|
|
|
Interest Rate Swap Contracts
|
|
(3,172
|
)
|
|
(3,172
|
)
|
|
Income Approach
|
Marketable Securities
|
|
$
|
350
|
|
|
$
|
350
|
|
|
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.
The Company calculates the fair value of its marketable securities by using the closing stock price on the last business day of the quarter.
Note 14—Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss in stockholders' equity by component for the
three
months ended
January 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Post Retirement Plan Liability (1)
|
|
Marketable Securities Adjustment
|
|
Interest Rate Swap Adjustment
|
|
Foreign Currency Translation Adjustment
|
|
Accumulated Other Comprehensive Loss
|
Balance at October 31, 2016
|
|
$
|
(32,659
|
)
|
|
$
|
(466
|
)
|
|
$
|
(3,112
|
)
|
|
$
|
(20,225
|
)
|
|
$
|
(56,462
|
)
|
|
Other comprehensive income (loss)
|
|
—
|
|
|
114
|
|
|
701
|
|
|
(558
|
)
|
|
257
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
237
|
|
|
—
|
|
|
418
|
|
|
—
|
|
|
655
|
|
|
Net current-period other comprehensive income (loss)
|
|
237
|
|
|
114
|
|
|
1,119
|
|
|
(558
|
)
|
|
912
|
|
Balance at January 31, 2017
|
|
$
|
(32,422
|
)
|
|
$
|
(352
|
)
|
|
$
|
(1,993
|
)
|
|
$
|
(20,783
|
)
|
|
$
|
(55,550
|
)
|
(1) Amounts reclassified from accumulated other comprehensive loss, net of tax are classified with cost of sales included in the statements of operations.
Note 15—Business Segment Information
For the
three months ended January 31,
2017
, the Company conducted its business and reported its information as one operating segment - Automotive and Commercial Vehicles. The Chief Operating Decision Maker has been identified
as the Senior Leadership Team, 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 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
18.0%
and
17.1%
for the
three months ended January 31,
2017
and
2016
, respectively.
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
Three Months Ended January 31,
|
Geographic Region:
|
2017
|
|
2016
|
United States
|
$
|
203,200
|
|
|
$
|
208,186
|
|
Europe
|
35,669
|
|
|
32,999
|
|
Rest of World
|
9,069
|
|
|
9,870
|
|
Total Company
|
$
|
247,938
|
|
|
$
|
251,055
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Gain (Loss)
|
|
Three Months Ended January 31,
|
Geographic Region:
|
2017
|
|
2016
|
Europe
|
$
|
141
|
|
|
$
|
836
|
|
Rest of World
|
$
|
(273
|
)
|
|
$
|
(114
|
)
|
The foreign currency loss is included as a component of other expense in the condensed consolidated statements of operations.
Long-lived assets consist primarily of net property, plant and equipment, goodwill and intangibles.
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets
|
Geographic Region:
|
January 31, 2017
|
|
October 31, 2016
|
United States
|
$
|
250,047
|
|
|
$
|
253,160
|
|
Europe
|
52,651
|
|
|
48,716
|
|
Rest of World
|
19,191
|
|
|
20,631
|
|
Total Company
|
$
|
321,889
|
|
|
$
|
322,507
|
|
Note 16—Income Taxes
The Company is required to adjust its effective tax rate each quarter based upon its estimated annual effective tax rate. The Company must also record the tax impact of certain discrete, unusual or infrequently occurring items, including changes in judgment about valuation allowance and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefits can be recognized are excluded from the estimated annual effective tax rate.
The provision for income taxes in the three months ended January 31, 2017 was a benefit of
$76
on a pretax loss of
$2,094
for an effective tax rate of
3.6%
. The provision for income taxes in the three months ended January 31, 2016 was a benefit of
$1,911
on a pretax loss of
$7,038
for an effective tax rate of
27.2%
.
The effective tax rate for the three months ended January 31, 2017 and 2016 varies from statutory rate primarily due to income taxes on foreign earnings which are taxed at rates different from the U.S. statutory rate, certain foreign losses without tax benefits, and other permanent items.
Note 17—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.
FORWARD-LOOKING STATEMENTS
Certain statements made by Shiloh in this Quarterly Report on Form 10-Q 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 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 "Part I, Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 2016
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 Quarterly report on Form 10-Q.
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 Quarterly Report on Form 10-Q. 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.