UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________________________________________________________________________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2017
Commission file no. 0-21964
Shiloh Industries, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
51-0347683
(I.R.S. Employer
Identification No.)
880 Steel Drive, Valley City, Ohio 44280
(Address of principal executive offices-zip code)
(330) 558-2600
(Registrant's telephone number, including area code)
——————————————
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, Par Value $0.01 Per Share The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
————————————
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and
"emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in the Exchange Act Rule 12b-2). Yes
No
Aggregate market value of Common Stock held by non-affiliates of the registrant as of April 30, 2017, the last business day of the registrant's
most recently completed second fiscal quarter, at a closing price of $12.30 per share as reported by the Nasdaq Global Market, was approximately
$106,810,605. Shares of Common Stock beneficially held by each executive officer and director and their respective spouses and affiliates have
been excluded since such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination
for other purposes.
Number of shares of Common Stock outstanding as of January 3, 2018 was 23,344,959.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference into Part III of this Annual Report on Form 10-K: the Proxy Statement for the
registrant's 2018 Annual Meeting of Stockholders (the "Proxy Statement").
INDEX TO ANNUAL REPORT
ON FORM 10-K
Table of Contents
PART I:
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II:
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
PART III:
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV:
Item 15.
Exhibits and Financial Statement Schedules
Page
3
7
17
17
17
18
18
20
21
32
34
71
71
73
73
74
74
74
74
75
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PART I
SHILOH INDUSTRIES, INC.
Item 1.
Business.
General
Shiloh Industries, Inc. and its subsidiaries (collectively referred to as the "Company," "Shiloh," "us," "our" or "we") is a
Delaware corporation incorporated in 1993. We are a global innovative solutions provider to the automotive, commercial vehicle
and other industrial markets with a strategic focus on designing, engineering and manufacturing lightweight technologies that
improve performance and benefit the environment. Shiloh, headquartered in Valley City, Ohio, has a global network of
manufacturing operations and technical centers in Asia, Europe and North America.
We offer one of the broadest portfolios of lightweighting solutions in the industry through our BlankLight®, CastLight®
and StampLight® brands and are uniquely qualified to supply product solutions utilizing multiple lightweighting solutions.
Shiloh delivers these solutions in body, chassis and powertrain systems to original equipment manufacturers ("OEMs") and several
"Tier 1" suppliers to the OEMs in the automotive, commercial vehicle and industrial markets .
Shiloh operates as one end-customer focused reporting segment.
Products and Manufacturing Processes
We produce components primarily for body, chassis and powertrain systems.
•
Solution materials include aluminum, magnesium, steel, high strength steel alloys and ShilohCore™ acoustic
laminates.
• Body systems components include: shock towers; instrument panel / cross car beams; torque boxes; tunnel
supports; seat supports; seat back frames; hinge pillars; liftgates; door inners; roof supports / roof panels;
dashpanels; body sides; and B and C pillars.
• Chassis systems components include: cross members; frame rails; axle carriers; bearing caps; axle covers; axle
housings; clutch housings; PTU covers; axle tubes; rack and pinion housings; steering column housings;
knuckles; links; wheel hubs; calipers; master cylinders; steering pumps; brake components; wheel blanks and
flanges.
•
Powertrain systems components include: planetary carriers; clutch housings; transmission gear housings; engine
valve covers; valve bodies; rocker arm spacers; heat shields; exhaust manifolds; cones; baffles; muffler shells;
engine oil pans; transmission fluid pans; front covers; and transmission covers.
• We also perform steel processing services, which include: oiling; leveling; cutting-to-length; multi-blanking;
slitting; edge trimming of hot and cold-rolled steel coils; and inventory control services.
Customers
Our customers are primarily in the automotive, commercial vehicle and industrial markets. We work closely with the
world’s leading OEM and Tier 1 suppliers and have over 200 customers globally. Our automotive OEM customers include
Bayerische Motoren Werke AG ("BMW"), Daimler-Benz AG, Fiat Chrysler Automobiles ("FCA"), Ford Motor Company ("Ford"),
General Motors Company ("General Motors"), Honda Motor Co., Ltd ("Honda"), Jaguar Land Rover plc, Nissan Motor Company,
Ltd., Porsche AG, Subaru of America, Inc., Tesla Motor Inc., Toyota Motor Corporation and Volvo Car Corporation. Tier 1
customers include Adient, American Axle Manufacturing, Brose Fahrzeugteile GmbH & Co. KG, Eberspaecher Inc., Faurecia,
Gestamp, John Bean Technologies AB, International Automotive Components Group Limited, KTH Parts Industries, Inc., Lear
Corporation, Linamar Corporation, Magna International, Nexteer Automotive Group Limited and ZF Friedrichshafen AG. The
Company’s commercial vehicle and industrial customers include Cummins Inc., Hendrickson International, PACCAR Inc., Scania
AB and Volvo AB.
3
The following customers accounted for more than 10% of our revenues in fiscal 2017, 2016, and 2015:
Customer
General Motors
FCA
2017
17.9%
15.0%
2016
18.2%
17.1%
2015
15.5%
17.4%
Business is awarded as a result of our ability to successfully bid on and win the production and supply of parts for models
that will be newly introduced to the market by the OEMs.
Raw Materials
The primary raw materials required for our operations are hot-rolled and cold-rolled coated steel, rolled-aluminum and
aluminum and magnesium ingots. We obtain steel from a number of primary steel producers and steel service centers. The majority
of the steel is purchased through customers' steel buying programs. Under these programs, we purchase steel at the price that our
customers negotiated with their steel suppliers. Our most significant steel suppliers are AK Steel, ArcelorMittal, Kenwal Steel
Corporation, Nucor Corporation, SSAB Swedish Steel Corporation, Steel Technologies, Tata Steels and U.S. Steel. We take
ownership of the steel in many instances; however, the customers are generally responsible for commodity price fluctuations.
Most of the steel owned by us is purchased domestically. A portion of our steel products and processing services are provided to
customers on a toll processing basis. Under these arrangements, we charge a specified fee for operations performed without
acquiring ownership of the steel and being burdened with the attendant costs of ownership and risk of loss. Through centralized
purchasing, we attempt to purchase raw materials at the lowest competitive prices for the quantity purchased. The amount of steel
available for processing is a function of the production levels of primary steel producers.
For our aluminum and magnesium, used in the CastLight® product brand, the cost of raw materials is adjusted frequently
to align with secured purchase commitments based on customer releases or based on referenced metal index plus additional material
cost spreads agreed to by us and our customers. Primary aluminum alloys are used in our proprietary "Thin Tech" castings
processes, which allow heat treat and enhanced mechanical properties. The primary supplier for the Shiloh is Rio Tinto Alcan.
Secondary smelting is the process of recycling aluminum, which has a positive impact environmentally and economically. These
types of alloys are used in our conventional die casting process. The secondary aluminum suppliers for the Company include
Imperial Aluminum, Real Alloy Holding Incorporated, Spectro Alloy Corporation and Superior Aluminum Alloys. The primary
supplier for magnesium alloy for US operations is US Magnesium LLC. For our European operations, magnesium alloy originates
from China and is delivered from either Chinese magnesium producers or metal trading companies that conduct business in Europe.
Competition
We compete in the laser welding, stamping, die casting and close-tolerance machining industries. Competitors within
our main product brands vary. BlankLight® competitors include numerous metal blanking companies ranging in all sizes, including
raw material manufacturers and customers. Welded blank competition in North America is primarily comprised of TWB Company
LLC and ArcelorMittal USA. Most laser welded blank competitors are affiliated with raw material or distribution providers.
Competition for sales of automotive stamping and assemblies is also intense. Primary StampLight® competitors are Gestamp,
L&W, Inc., Flex-n-Gate Corporation, Midway Products Group Inc., Narmco Group and Kirchhoff Automotive Group. CastLight®
competitors include Bocar Group, Cosma International (a Magna Company), Georg Fischer, Gnotec AB, KSM Casting Group,
Madison Kipp Corporation (MKC), Meridian (subsidiary of Wangfeng Auto Holdings Group), Nemak, Pace Industries, RCM
Industries and Ryobi Aluminum Casting (USA), Inc., which are all competing for a growing number of automotive projects. In
almost all instances, we compete through our main strategies of "Lightweighting without compromise®" and "Lightweighting
with Benefits®", which provides us with the ability to provide solutions that do not compromise part integrity such as performance,
safety, sound and efficiency. Development and design optimization to lightweight products allow customers to achieve vehicle
weight, fuel economy and/or ride and handling targets while favorably impacting the environment.
Employees
As of October 31, 2017, we had approximately 3,600 employees. Organized labor unions represent approximately 17%
of our U.S. hourly employees and approximately 92% of our non-U.S. employees.
Each of our 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.
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Backlog
A significant portion of our business pertains to automobile platforms for various model years. Orders against these
platforms are subject to releases by the customer and are not considered firm orders until close to time of shipment. Backlog,
therefore, is not a meaningful indicator of future performance.
Seasonality
Our business is moderately seasonal because many North American OEM customers close assembly plants for periods
in June and July for model year changeovers and for additional periods during the December and January holiday season. For
Europe, July and August and additional periods during December and January are lower volume months due to customer shutdown
and the holiday season. Shut-down periods in the rest of world vary by country. Historically, our sales and operating profits have
been strongest in the second and fourth quarters. For additional information, refer to our quarterly financial results contained in
Note 22 to the Consolidated Financial Statements, included in Item 8 of this report.
Environmental Matters
We are subject to environmental laws and regulations concerning emissions to the air, discharges to waterways and
generation, handling, storage, transportation, treatment and disposal of waste and hazardous materials.
We are also subject to laws and regulations that can require the remediation of contamination that exists at current or
former facilities. In addition, we are subject to other federal and state laws and regulations regarding health and safety matters.
The majority of our production facilities have permits and licenses allowing and regulating air emissions and water discharges.
While the Company believes that at the present time its production facilities are in substantial compliance with environmental
laws and regulations, these laws and regulations are constantly evolving, and it is impossible to predict whether compliance with
these laws and regulations may have a material adverse effect on us in the future.
ISO 14001 is a voluntary international standard issued in September 1996 and updated in 2015 by the International
Organization for Standardization. ISO 14001 identifies the elements of an Environmental Management System ("EMS") necessary
for an organization to effectively manage its effect on the environment. The ultimate objective of the standard is to integrate the
EMS with overall business management processes and systems so that environmental considerations are a routine part of business
decisions. All of our manufacturing facilities are certified to the ISO 14001 standard. We have completed the certification process
at each of our manufacturing facilities to the ISO/TS 16949 standard, which has been the global benchmark for an international
quality management system in the automotive industry. We are in the process of transitioning to the upgraded International
Automotive Task Force ("IATF")16949 standard, with our first two audited manufacturing facilities being recommended for
certification. The IATF 16949 certification will be a market requirement for doing business in the automotive industry.
Research and Development
We perform research, development, design and other engineering activities for the following primary reasons:
•
•
•
•
to provide solutions for customers;
to integrate our leading technologies into advanced products and processes;
to provide engineering support for all of our manufacturing sites; and
to provide technological expertise in engineering and design development.
Along with our global manufacturing locations,we maintain technical centers in Asia (Shanghai, China), Europe
(Gothenburg, Sweden) and in North America (Valley City, Ohio and Plymouth, Michigan). Furthermore, we have Sales and
Engineering Offices in the United Kingdom (Evesham, England) and Germany (Munich). Each of our business units is engaged
in engineering, research and development efforts working closely with customers to develop custom solutions to meet their needs.
Intellectual Property
We hold 102 issued patents on a worldwide basis, including 39 granted US patents and in excess of 39 patent applications
in process worldwide. Of the approximately 102 issued patents, approximately 28% are in production use and/or are licensed to
third parties, and the remaining 72% are being considered for future production use or provide a strategic technological benefit
to the us. We do not materially rely on any single patent, nor will the expiration of any single patent materially affect our business.
Our current patents expire over various periods into the year 2032. We are actively introducing and patenting new technology to
replace formerly patented technology before the expiration of the existing patents. In the aggregate, our worldwide patent portfolio
5
is materially important to our business because it enables us to achieve technological differentiation from our competitors. We
also maintain more than 35 active trademark registrations and applications worldwide. In excess of 90% of these trademark
registrations and applications are in commercial use by us or are licensed to third parties.
Segment and Geographic Information
We conduct our business and report our information as one operating segment - Automotive and Commercial Vehicles.
Our chief operating decision maker has been identified as the executive leadership team, which includes certain Vice Presidents,
all Senior 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, we 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.
Financial information regarding Company geographic mix is contained in Note 21 - Business Segment Information of
the Notes to Consolidated Financial Statements under Item 8 of this report.
Company Web Site and Access to Filed Reports
Our website is located at http://www.shiloh.com. Under the Investors tab on our website, you can obtain a copy of annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934 as soon as reasonably practicable after we file such
material electronically with, or furnishes it to, the Securities and Exchange Commission ("SEC").
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and
copy any document we file with the Securities and Exchange Commission ("SEC") at its Public Reference Room at 100 F Street,
N.E., Washington D.C. 20549. You may obtain information about the operation of the SEC's Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements, and other
information regarding registrants that file electronically with the SEC (http://www.sec.gov). We do not incorporate information
on the SEC's website into this Annual Report on Form 10-K, and information on the website is not and should not be considered
part of this document, unless expressly stated otherwise.
6
Item 1A.
Risk Factors
(amounts in thousands)
You should carefully consider the risks described below together with the other information set forth in this report, which
could materially affect our business, financial condition and future results. The risks described below are not the only risks facing
our company. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition and operating results.
Risks Related to Our Business
A downturn in the global economy could harm demand for automotive and commercial vehicles that are manufactured with
our products and, therefore, could adversely affect our business, financial condition, results of operations, and cash flows.
The level of demand for our products depends primarily upon the level of consumer demand for new vehicles that are
manufactured with our products. The global economic recession that began in 2008 had a significant adverse effect on our business,
customers and suppliers, and contributed to delayed and reduced purchases of passenger cars and commercial vehicles, including
those manufactured with our products. Demand for and pricing of our products is also subject to economic conditions and other
factors (e.g., energy costs, fuel costs, climate change concerns, vehicle age, consumer spending and preferences, materials used
in production, commodity prices and changing technology) present in the various domestic and international markets in which
our products are sold. If the global economy were to experience another significant downturn, depending upon its length, duration
and severity, or any other event that results in a reduction of demand for automobiles, our financial condition, results of operations,
and cash flows could be materially adversely affected.
Deterioration in the United States and world economies could harm our customers’ and suppliers’ ability to access the capital
markets, which may affect our business, financial condition, results of operations, and cash flows.
Disruptions in the capital and credit markets could adversely affect our customers and suppliers by making it increasingly
difficult for them to obtain financing for their businesses and for their customers to obtain financing for automobile purchases.
Our OEM customers typically require significant financing for their respective businesses. This financing often comes from
securitization markets, which experience severe disruptions during global economic crises. Our suppliers, as well as our customers’
suppliers, may face similar difficulties in obtaining financing for their businesses. If capital is not available to our customers or
suppliers, or if the cost of capital is prohibitively high, their businesses would be adversely affected, which could result in their
restructuring or even reorganization or liquidation under applicable bankruptcy laws. Any such adverse effect on our customers
or suppliers could materially adversely affect us, either through loss of revenues from any of our customers so affected, or due to
our inability to meet our commitments without excess expense, as a result of disruptions in supply caused by the suppliers so
affected. Financial difficulties experienced by any of our major customers could have a material adverse effect on us if such
customer were unable to pay for the products we provide or if we experienced a loss of, or material reduction in, business from
such customer. As a result of such difficulties, we could experience lost revenues, significant write-offs of accounts receivable,
significant impairment charges, or additional restructurings. In addition, severe financial or other difficulties at any of our major
suppliers could have a material adverse effect on us if we are unable to obtain on a timely basis and on similar economic terms
the quantity and quality of components we require to produce products. Moreover, severe financial or operating difficulties at any
automotive vehicle manufacturer or other significant supplier could have a significant disruptive effect on the entire industry,
leading to supply chain disruptions and labor unrest, among other things. These disruptions could force OEMs and, in turn, other
suppliers, including us, to shut down or reduce production at plants.
Our inability to obtain and maintain sufficient capital financing may harm our liquidity and financial condition.
Our working capital requirements can vary significantly, depending, in part, on the level, variability and timing of our
customers’ production and the payment terms we have with our customers and suppliers. Our liquidity could be adversely affected
if our suppliers were to suspend normal trade credit terms and require payment in advance or payment on delivery. If our available
cash flows from operations is not sufficient to fund our ongoing cash needs, we would likely look to our cash balances and
borrowing availability under our Credit Agreement (as defined hereinafter) to satisfy those needs. In 2013, we and our subsidiaries
entered into 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, CIBC Bank, USA, Compass Bank and The Huntington National Bank, N.A., as Co-Documentation Agents, and
the other lender parties thereto. We entered into our eighth amendment to the Credit Agreement on October 31, 2017 (the
"Amendment"), which, among other things, provides for an aggregate availability of $350 million, $275 million of which is
available to the Company through the Tranche A Facility and $75 million of which is available to the Dutch borrower through the
7
Tranche B Facility, and eliminates the scheduled reductions in such availability; increases the aggregate amount of incremental
commitment increases allowed under the Credit Agreement to up to $150 million subject to our pro forma compliance with financial
covenants, the Administrative Agent’s approval and the Company obtaining commitments for any such increase as well as other
provisions. There can be no assurance that we will be able to continue to satisfy the financial covenants currently under the Credit
Agreement, that we will be able to enter into favorable amendments in the future, that alternative sources of additional capital will
be available on satisfactory terms or at all or that we will otherwise continue to have the ability to maintain sufficient capital
financing. Insufficient liquidity may increase the risk of not being able to produce products or having to pay higher prices for
inputs that may not be recovered in selling prices.
We may pursue acquisitions or strategic alliances that we may not successfully integrate or that may divert management’s
attention and resources.
We may pursue acquisitions, joint ventures or strategic alliances in the future. However, we may not be able to identify
and secure suitable opportunities. Our ability to consummate and integrate effectively any future acquisitions or enter into strategic
alliances on terms that are favorable to us may be limited by a number of factors, such as competition for attractive targets and,
to the extent necessary, our ability to obtain financing on satisfactory terms, if at all.
In addition, if a potential acquisition target, joint venture, or strategic alliance candidate is identified, we may fail to enter
into a definitive agreement with the candidate on commercially reasonable terms or at all. The negotiation and completion of
potential acquisitions, joint ventures or strategic alliances, whether or not ultimately consummated, could also require significant
diversion of management’s time and resources and could potentially disrupt our existing business. The expected synergies and
cost savings from acquisitions, joint ventures or strategic alliances may not be realized and we may not achieve the expected
results, including the synergies and cost savings we expect to realize. We may also have to incur significant charges in connection
with future acquisitions. Future acquisitions or strategic alliances could also potentially result in the incurrence of additional
indebtedness, dilutive issuance of equity securities, costs and contingent liabilities. We may also have to obtain approvals and
licenses from the relevant government authorities for such transactions to comply with any applicable laws and regulations, which
could result in increased costs and delay. Future strategic alliances or acquisitions may expose us to additional potential risks,
including risks associated with:
•
•
•
•
uncertainties in assessing the value, strengths and potential profitability of, and identifying the extent of all
weaknesses, risks and contingent and other liabilities of, acquisition targets or other transaction candidates;
our inability to generate sufficient revenue to recover costs and expenses of the strategic alliances or acquisitions;
potential loss of, or harm to, relationships with employees, customers and suppliers; and
unanticipated changes in business, industry or general economic conditions that affect the assumptions underlying the
acquisition rationale.
Any of the above risks could significantly impair our ability to manage our business and materially harm our business, results of
operations and financial condition.
We may be unable to realize revenues represented by awarded business, which could materially harm our business, financial
condition, results of operations, and cash flows.
The realization of future revenues from awarded business is subject to risks and uncertainties, including the number of
vehicles that our customers will actually produce, the timing of that production and the mix of options that our customers may
choose.
In addition to not having a commitment from our customers regarding the minimum number of products they must
purchase from us if we obtain awarded business, the terms and conditions of the agreements with our customers typically provide
that they have the contractual right to unilaterally terminate our contracts with only limited notice. If such contracts are terminated
by our customers, our ability to obtain compensation from our customers for such termination is generally limited to the direct
out-of-pocket costs that we incurred for inventory and not fully reimbursed tooling, and in certain rare instances, not fully depreciated
capital expenditures.
We base a substantial part of planning on the anticipated lifetime revenues of particular products. We calculate the
anticipated lifetime revenues of a product by multiplying our expected price for a product by the forecasted production volume
for that product during the length of time we expect the related vehicle to be in production. We use third-party forecasting services
to provide long-term forecasts, which allow us to determine how long a vehicle is expected to be in production. If we over-estimate
8
the production units or if a customer reduces its level of anticipated purchases of a particular platform as a result of reduced
demand, our actual revenues for that platform may be substantially less than the lifetime revenues we had anticipated for that
platform.
Typically, it takes two to three years from the time a manufacturer awards a program until production begins. In many
cases, we must commit substantial resources in preparation for production under awarded customer business well in advance of
the customer’s production start date. Our results of operations may be affected due to delay in recovering these types of pre-
production costs if our customers cancel awarded business, including cancellation in the event technology supporting the awarded
business becomes obsolete.
We are dependent upon large customers for current and future revenues. The loss of all or a substantial portion of our sales
to any of these customers or the loss of market share by these customers could materially harm us.
We depend on major vehicle manufacturers for a substantial portion of our net sales. For example, during 2017, General
Motors and FCA accounted for 17.9% and 15.0% of our revenues, respectively. The loss of all or a substantial portion of our sales
to any of our large-volume customers could have a material adverse effect on our financial condition and results of operations by
reducing cash flows and our ability to spread costs over a larger revenue base. We may also make fewer sales to major customers
for a variety of reasons other than losses of business relationships, including but not limited to: (1) reduced or delayed customer
requirements; (2) strikes or other work stoppages affecting production by the customers; (3) reduced demand for our customers’
products; or (4) loss of business to competitors.
In addition, our OEM customers compete intensively against each other and other OEMs. The loss of market share by
any of our significant OEMs could have a material adverse effect on our business unless we are able to achieve increased sales to
other OEMs.
The failure to be awarded new business for additional content on new or existing vehicle programs or to retain existing business
could materially harm our business.
We compete for new business at the beginning of the development of new vehicle programs and upon the redesign of
existing programs by major OEM customers. New program development generally begins three-to-five years prior to the marketing
of the underlying vehicles to the public. Redesign of existing programs begins during the life cycle of a platform, usually at least
two-to-three years before the end of the platform’s life cycle. The failure to obtain new business on new programs or to retain or
increase business on redesigned existing programs, could adversely affect our business, financial condition, results of operations,
and cash flows. In addition, as a result of the relatively long lead times required for many of our structural components, it may be
difficult in the short term for us to obtain new revenues to replace any unexpected decline in the sale of existing products.
In addition, a component of our growth strategy is to bid on and be awarded new business for additional content on our
customers’ new or existing vehicle programs, while at the same time maintaining existing business that we have a desire to maintain
and renew. If we are unable to introduce, differentiate and enhance our product offerings, anticipate industry trends or keep pace
with technological developments or if our competitors introduce lower cost and/or differentiated products that are perceived by
our customers to compete with ours, we may be unable to grow and maintain our business with our customers, and our business,
financial condition and results of operations and cash flows could be materially affected.
Our inability to effectively manage the timing, quality and costs of new program launches could harm our financial performance.
In connection with the award of new business, we obligate ourselves to deliver new products and services that are subject
to our customers’ timing, performance and quality standards. Additionally, as a Tier 1 supplier, we must effectively coordinate the
activities of numerous suppliers in order for the program launches of our products to be successful. Given the complexity of new
program launches, we may experience difficulties managing product quality, timeliness and associated costs. In addition, new
program launches require a significant ramp up of costs; however, our sales related to these new programs generally are dependent
upon the timing and success of our customers’ introduction of new vehicles. Our inability to effectively manage the timing, quality
and costs of these new program launches could harm our financial condition, operating results and cash flows. Finally, even if we
successfully manage the timing, quality and cost of a new program launch with respect to our operations, our customers’ production
delays may be caused by another of our customers’ suppliers, which could harm our financial condition, operating results and cash
flows.
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Automotive production and sales are highly cyclical, which could harm our business, financial condition, results of operations,
and cash flows.
The highly cyclical nature of the automotive industry presents a risk that is outside our control and that often cannot be
accurately predicted. The cyclical nature depends on general economic conditions and other factors, including interest rates,
consumer confidence, consumer preferences, patterns of consumer spending, fuel costs and the automobile replacement cycle. In
addition, customer production changeovers or new program launches may result in altered or delayed production cycles, which
may reduce or delay purchases of our products by our customers. As a result, automotive production and sales may fluctuate
significantly from year-to-year and such fluctuations may give rise to changes in demand for our products. Our business is directly
related to the volume of automotive production and, because it has significant fixed production costs, declines in our customers’
production levels can have a significant adverse effect on our results of operations. Decreases in demand for automobiles generally,
or decreases in demand for our products in particular, could materially and harmfully affect our business, financial condition,
results of operations, and cash flows.
The automotive industry is seasonal, which could harm our business, financial condition, results of operations, and cash flows.
The automotive industry is seasonal. Some of our largest OEM customers typically shut down vehicle production during
certain months or weeks of the year. For example, our OEM customers in Europe typically shut down operations during portions
of July and August and additional periods during the December and January holiday season, while our OEM customers in North
America typically close assembly plants for periods in June and July for model year changeovers and for additional periods during
the December and January holiday season. During these downturns, our customers will generally reduce the number of production
days because of lower demand and reduce excess vehicle inventory. Such seasonality, or unanticipated changes in plant shutdown
schedules, could have a material adverse effect on our business, financial condition and results of operations.
Changes in technology and developments within the automotive industry could affect our business, financial condition, results
of operations and cash flows.
The automotive industry is undergoing significant change, and we believe that the pace of that change will accelerate in
the next several years. Technological changes, including the development of autonomous vehicles, new products and services,
new business models or new methods of travel may disrupt the historic business model of the industry, reduce the demand for the
purchase of automobiles, and adversely impact the sales of our customers as well as our sales, financial condition, results of
operations and cash flows.
A material disruption at one of our manufacturing facilities could prevent it from meeting customer demand, reduce our
revenues or negatively affect our results of operations and financial condition.
Any of our manufacturing facilities, or any of our machines or equipment within an otherwise operational facility, could
cease operations unexpectedly due to a number of events, including:
unscheduled maintenance outages;
prolonged power failures;
an equipment failure;
labor difficulties;
disruptions in transportation infrastructure, including roads, bridges, railroad tracks and tunnels;
fires, floods, windstorms, earthquakes, hurricanes or other natural catastrophes;
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• war, terrorism or threats of terrorism or political unrest;
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governmental regulations or intervention; and
other unexpected problems.
Any such disruption could prevent us from meeting customer orders, reduce our revenues or profits and negatively affect
our results of operations and financial condition.
The decreasing number of automotive parts suppliers and pricing pressures from our automotive customers could make it
more difficult for us to compete in the highly competitive automotive industry.
The automotive parts industry is highly competitive. Bankruptcies and consolidation among automotive parts suppliers
are reducing the number of competitors, resulting in larger competitors who benefit from purchasing and distribution economies
of scale. Our inability to compete with these larger suppliers in the future could result in a reduction of, or inability to increase,
revenues, which would harm our business, financial condition, results of operations, and cash flows.
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We face significant competition within each of our major product areas. The principal competitive factors include price,
quality, global presence, service, product performance, design and engineering capabilities, new product innovation, and timely
delivery. We also face significant competitive pricing pressures from our automotive customers. Because of their purchasing size,
our automotive customers can influence market participants to compete on price terms. If we are not able to offset pricing reductions
resulting from these pressures by improving operating efficiencies and reducing expenditures, those pricing reductions may have
an adverse effect on our business.
We cannot provide assurance that we will be able to continue to compete in the highly competitive automotive industry
or that increased competition will not have a material adverse effect on our business.
Fluctuations between foreign currencies and the U.S. dollar could harm our financial results.
We derived 19.5% of our revenue in fiscal year 2017 from our non-U.S. operations. The financial position and results of
operations of certain of our international operations are measured using the foreign currency in the jurisdiction of those operations
as the functional currency. As a result, we are exposed to currency fluctuations both in receiving cash from its international
operations and in translating its financial results back to U.S. dollars. Assets and liabilities of our international operations are
translated at the exchange rate in effect at each balance sheet date. Our income statement accounts are translated at the average
rate of exchange prevailing during each fiscal quarter. A strengthening U.S. dollar against relevant foreign currency reduces the
amount of income we recognize from our international operations. We cannot predict the effects of exchange rate fluctuations on
its future operating results. As exchange rates vary, our results of operations and profitability may be harmed. We may use a
combination of natural hedging techniques and financial derivatives to protect against certain foreign currency exchange rate risks.
Such hedging activities may be ineffective or may not offset more than a portion of the adverse financial effect resulting from
foreign currency variations. The gains or losses associated with hedging activities may harm our results of operations. In addition,
the portion of our revenue derived from international operations may increase in the future, due to the impact of its acquisitions
and overall growth in foreign markets, among other reasons. The risks we face in foreign currency transactions and translation
may continue to increase as we further develop and expand our international operations.
We are subject to risks related to our international operations.
We sell our products worldwide from our manufacturing and distribution facilities in various regions and countries,
including the United States, Mexico, Europe and Asia. International operations are subject to various risks which could have a
material adverse effect on those operations or our business as a whole, including:
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exposure to changes of trade policies and agreements, including changes in NAFTA (North American Free Trade
Agreement) and other international trade agreements;
exposure to impact of tariffs or other forms of political incentive systems affecting international trade;
exposure to local economic conditions and labor issues;
exposure to local political conditions, including the risk of seizure of assets by a foreign government;
exposure to local social unrest, including any resultant acts of war, terrorism or similar events;
exposure to local public health issues and the resultant impact on economic and political conditions;
currency exchange rate fluctuations;
controls on the repatriation of cash, including imposition or increase of withholding and other taxes on remittances and
other payments by foreign subsidiaries;
export and import restrictions; and
difficulties in penetrating new markets due to established and entrenched competitors.
The U.S. Congress and Trump administration may make substantial changes to fiscal, political, regulation and other federal
policies that may adversely affect our business, financial condition, operating results and cash flows.
Changes in general economic or political conditions in the United States or other regions could adversely affect our
business. For example, the new administration under President Donald Trump has indicated that it may propose significant changes
with respect to a variety of issues, including international trade agreements, import and export regulations, tariffs and customs
duties, foreign relations, immigration laws, tax laws, corporate governance laws and corporate fuel economy standards, that could
have a positive or negative impact on our business. The risks we face in our international operations may intensify if we further
develop and expand our international operations.
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Significant increases and fluctuations in raw materials pricing could materially harm us without proportionate recovery from
our customers.
Significant increases in the cost of certain raw materials used in our products, such as aluminum, steel and magnesium
ingot, or the cost of utility services required to produce our products, to the extent they are not timely reflected in the price we
charge our customers or are otherwise mitigated, could materially and adversely impact our results. Prices for raw material inputs
can be impacted by many factors, including developments in global commodities markets, international trade policies and
developments in technology. The amount of steel available for processing is a function of the production levels of primary steel
producers. The majority of our magnesium is sourced from China and could be subject to availability, trade policies, and price.
While we have been successful in the past recovering a significant portion of raw material costs, there is no assurance
that we will continue to do so, or that increases in raw material costs will not adversely impact our business, financial condition,
results of operations, and cash flows. In addition, significant increases in raw material prices may cause customers to redesign
certain components or use alternative materials, which could result in reduced revenues, which could in turn harm our business,
financial condition, results of operations and cash flows.
The volatility of steel prices could materially harm our results of operations.
A by-product of our production process is the generation of offal. We typically sell offal in secondary markets, which are
similar to the steel markets. We generally share recoveries from sales of offal with our customers either through scrap sharing
agreements, in cases in which we are participating in resale programs, or through product pricing, in cases in which we purchase
steel directly from steel suppliers. In either situation, we may be affected by the fluctuation in scrap steel prices, either positively
or negatively, in relation to our various customer agreements. As offal prices generally increase and decrease as steel prices increase
and decrease, sales of offal may mitigate the impact of the volatility of steel price increases, as well as limit the benefits reaped
from steel price declines. Any volatility in offal and steel prices could materially adversely affect our business, financial condition,
results of operations, and cash flows.
Disruptions in the automotive supply chain could materially harm our business, financial condition, results of operations, and
cash flows.
The automotive supply chain is subject to disruptions because we, along with our customers and suppliers, attempt to
maintain low inventory levels. Disruptions could result from a variety of situations, such as the closure of one of our or our
suppliers’ plants or critical manufacturing lines due to strikes, mechanical breakdowns, electrical outages, fires, explosions or
political upheaval. Disruptions could also result from logistical complications due to weather, earthquakes, or other natural or
nuclear disasters, mechanical failures, technology disruptions or delayed customs processing.
If we are the cause for a customer being forced to halt production, the customer may seek to recoup all of its losses and
expenses from us. Any disruptions affecting us or caused by us could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Longer product lives of automotive parts may harm demand for some of our products.
The average useful life of automotive parts may increase due to innovations in products and technologies. As automotive
product life cycles lengthen, opportunities to supply components for new programs may occur less frequently, which may reduce
demand for some of our products.
Discontinuation of the vehicle models, engines or transmissions for which we manufacture products may harm our business,
financial condition and results of operations.
Our typical sales contract provides for supplying a customer with our product requirements for particular programs, rather
than manufacturing a specific quantity of components and systems. The initial terms of our sales contracts typically range from
one to six years, with automatic renewal provisions that generally result in our contracts running for the life of the program. Our
contracts do not require our customers to purchase a minimum number of components or systems. The loss of awarded business
or significant reduction in demand for vehicles for which it produces components and systems could have a material adverse effect
on our business, financial condition, results of operations and cash flows.
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The hourly workforce in our industry is highly unionized and our business could be harmed by labor disruptions.
As of October 31, 2017, approximately 17% of our U.S. hourly employees and 92% of our non-U.S. employees were
unionized. Although we consider our current relations with our employees to be satisfactory, if major work disruptions were to
occur, our business could be harmed by, for instance, a loss of revenues, increased costs or reduced profitability. We have not
experienced a material labor disruption in our recent history, but there can be no assurance that we will not experience a material
labor disruption at one of our facilities in the future in the course of renegotiation of our labor arrangements or otherwise.
In addition, many of the hourly employees of Fiat Chrysler Automotive and General Motors in North America and many
of their other suppliers are unionized. Vehicle manufacturers, their suppliers and their respective employees in other countries are
also subject to labor agreements. A work stoppage or strike at one of our production facilities, at those of a customer, or impacting
a supplier of ours or any of our customers, such as the 2008 strike at a Tier 1 supplier that resulted in 30 General Motors facilities
in North America being idled for several months, could have a material adverse impact on us by disrupting demand for our products
and/or our ability to manufacture our products.
We may incur costs related to product warranties, legal proceedings and other claims, which could materially harm our financial
condition and results of operations.
From time to time, we receive product warranty claims from our customers, pursuant to which we may be required to
bear costs of repair or replacement of certain of our products. Vehicle manufacturers require their outside suppliers to guarantee
or warrant their products and to be responsible for the operation of these component products in new vehicles sold to consumers.
Warranty claims may range from individual customer claims to full recalls of all products in the field.
We vigorously defend ourselves in connection with all of the matters described above. We cannot, however, assure you
that the costs, charges and liabilities associated with these matters will not be material, or that those costs, charges and liabilities
will not exceed any amounts reserved for them in our consolidated financial statements. In future periods, we could be subject to
cash costs or charges to earnings if any of these matters are resolved unfavorably to us in amounts exceeding any reserves for such
matters.
Product recalls by vehicle manufacturers could negatively impact our production levels, which could materially harm our
business, financial condition and results of operations.
Historically, there have been significant product recalls by some of the world’s largest vehicle manufacturers. Our risk
to recalls of the products we manufacture is generally related to our workmanship on the product as opposed to the material and
design of the products, as the design generally belongs to our customers and our parts are produced according to customer's
specifications. Recalls, whether or not related to claims against us, may result in decreased vehicle production as a result of a
manufacturer focusing its efforts on the problems underlying the recall rather than generating new sales volume. In addition,
consumers may elect not to purchase vehicles manufactured by the vehicle manufacturer initiating the recall, or by vehicle
manufacturers in general, while the recalls persist. We do not maintain insurance in North America for product recall matters, as
such insurance is not generally available on acceptable terms. Any reduction in vehicle production volumes, especially by our
OEM customers, could have a material adverse effect on our business, financial condition and results of operations.
We rely on information technology and a failure of our information technology infrastructure or a breach of our information
security could adversely impact our business and operations.
Our operations rely on a number of information technologies to manage, store and support business activities. We have
a number of systems, processes and practices in place that are designed to protect against the failure of our systems. We recognize
the increasing volume of cyber-attacks and employ commercially practical efforts to provide reasonable assurance such attacks
are appropriately mitigated. Despite our efforts to protect sensitive information and confidential and personal data, however, our
facilities and systems and those of our third-party service providers may be vulnerable to security breaches, disclosure, modification
or destruction of proprietary and other key information, production downtimes and operational disruptions, which in turn could
adversely affect our results of operations. Our systems and those of our service providers are vulnerable to circumstances beyond
our reasonable control including acts of terror, acts of government, natural disasters, civil unrest and denial of service attacks
which may lead to the theft of our intellectual property or trade secrets, disclosure, modification or destruction of proprietary and
other key information and production downtimes and operational disruptions, which in turn could adversely affect our results of
operations. To the extent that any disruption or security breach results in a loss or damage to our data, or an inappropriate disclosure
of confidential or protected personal information, it could cause significant damage to our reputation, affect our relationships with
our customers, suppliers and employees, lead to claims against us and ultimately harm our business. Additionally, we may be
required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
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Changes in privacy laws, regulations, and standards may cause our business to suffer.
Personal privacy and data security have become significant issues in the United States, Europe, and in many other
jurisdictions where we offer our products. The regulatory framework for privacy and security issues worldwide is rapidly evolving
and is likely to remain uncertain for the foreseeable future. Federal, state, or foreign government bodies or agencies have in the
past adopted, and may in the future adopt, laws and regulations affecting data privacy. In many jurisdictions, enforcement actions
and consequences for noncompliance are rising. We may be required to incur significant costs to comply with privacy and data
securities laws, rules and regulations. Any inability to adequately address privacy and security concerns, even if unfounded, or
comply with applicable privacy and data security laws, rules and regulations could result in additional cost and liability to us,
damage our reputation, inhibit our sales, and adversely affect our business.
If we are unable to protect our intellectual property or if a third party makes assertions against us or our customers relating
to intellectual property rights, our business could be harmed.
We own important intellectual property, including patents, trademarks, copyrights and trade secrets, and could be involved
in licensing arrangements. Our intellectual property plays an important role in maintaining our competitive position.
Notwithstanding our intellectual property portfolio, our competitors may develop technologies that are similar or superior to our
proprietary technologies or design around the patents we own or license. Various patent, copyright, trade secret and trademark
laws provide limited protection and may not prevent our competitors from duplicating our products or gaining access to our
proprietary information. Further, as we expand our operations in jurisdictions where the protection of intellectual property rights
is less robust, the risk of others duplicating our proprietary technologies increases, despite efforts we undertake to protect them.
On occasion, we may assert claims against third parties who are taking actions that we believe are infringing our intellectual
property rights. Similarly, third parties may assert claims against us and our customers and distributors alleging our products
infringe upon third party intellectual property rights. These claims, regardless of their merit or resolution, are frequently costly to
prosecute, defend or settle and divert the efforts and attention of our management and employees. Claims of this sort also could
harm our relationships with our customers and might deter future customers from doing business with us. If any such claim were
to result in an adverse outcome, we could be required to take actions which may include: expending significant resources to develop
or license non-infringing products; paying substantial damages to third parties, including to customers to compensate them for
their discontinued use or replacing infringing technology with non-infringing technology; or cessation of the manufacture, use or
sale of the infringing products. Any of the foregoing results could have a material adverse effect on our business, financial condition,
results of operations, or our competitive position.
We are subject to risks associated with changing manufacturing technologies, which could place us at a competitive
disadvantage.
The successful implementation of our business strategy requires us to continuously evolve our existing products and
introduce new products to meet customers’ needs. Our products are characterized by stringent performance and specification
requirements that mandate a high degree of manufacturing and engineering expertise. If we fail to meet these requirements, our
business could be at risk. We believe that our customers rigorously evaluate their suppliers on the basis of a number of factors,
including:
product quality;
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technical expertise and development capability;
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new product innovation;
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reliability and timeliness of delivery;
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price competitiveness;
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product design capability;
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operational flexibility;
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global production capabilities;
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customer service; and
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overall management.
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Our success will depend on our ability to continue to meet our customers’ changing specifications with respect to these
criteria. We cannot assure you that we will be able to address technological advances or introduce new products that may be
necessary to remain competitive within our businesses. Furthermore, we cannot assure you that we can adequately protect any of
our own technological developments to produce a sustainable competitive advantage.
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The loss of our executive officers or key employees may materially harm operations and the ability to manage the day-to-day
aspects of our business.
Our future performance substantially depends on our ability to retain and motivate executive officers and key employees.
Our ability to manage the day-to-day aspects of our business may be materially harmed with the loss of any of our executive
officers or key employees, which have many years of experience with us and within the automotive industry and other manufacturing
industries, or if we are unable to recruit qualified personnel. The loss of the services of one or more executive officers or key
employees, who also have strong personal ties with customers and suppliers, could have a material adverse effect on our business,
financial condition and results of operations.
We are involved from time to time in legal proceedings, claims or investigations, which could have an adverse impact on our
business, financial condition, results of operations, and cash flows.
We are involved from time to time in legal proceedings, claims or investigations that could be significant. These are
typically claims that arise in the normal course of our business including, without limitation, commercial or contractual disputes,
including disputes with suppliers, intellectual property matters, personal injury claims, environmental issues, tax matters and
employment matters. No assurances can be given that such proceedings and claims will not have a material adverse impact on our
business, financial condition, results of operations, and cash flows.
We are subject to a variety of environmental, health and safety laws and regulations and the cost of complying, or our failure
to comply with such requirements may materially harm our business, financial condition, results of operations, and cash flows.
We are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to the release
or discharge of materials into the environment, the management, use, processing, handling, storage, transport or disposal of
hazardous waste materials, or otherwise relating to the protection of public and employee health, safety and the environment.
These laws and regulations expose us to liability for the environmental condition of our current facilities, and also may expose us
to liability for the conduct of others or for our actions that were not in compliance with all applicable laws at the time these actions
were taken or that resulted in contamination. These laws and regulations also may expose us to liability for claims of personal
injury or property damage related to alleged exposure to hazardous or toxic materials. Despite our intentions to be in compliance
with all such laws and regulations, we cannot guarantee that we will at all times be in compliance with all such requirements. The
cost of complying with these requirements may also increase substantially in future years. If we violate or fail to comply with
these requirements, we could be fined or otherwise sanctioned by regulators. These requirements are complex, change frequently
and may become more stringent over time, which could have a material adverse effect on our business.
Our failure to maintain and comply with environmental permits that we are required to maintain could result in fines or
penalties or other sanctions and have a material adverse effect on our operations or results. Future events, such as new environmental
regulations or changes in or modified interpretations of existing laws and regulations or enforcement policies, newly discovered
information or further investigation or evaluation of the potential health hazards of products or business activities, may give rise
to additional compliance and other costs that could have a material adverse effect on our business, financial conditions, results of
operations and cash flows.
We cannot assure you that the costs, charges and liabilities associated with these matters will not be material, or that those
costs, charges and liabilities will not exceed any amounts reserved for them in our consolidated financial statements.
We are subject to risks associated with our use of highly specialized machinery that cannot be easily replaced.
Our machinery and tooling are complex, cannot be easily replicated and have a long lead-time to manufacture. If there
is a breakdown in such machinery and tooling, and we or our service providers are unable to repair in a timely fashion, obtaining
replacement machinery or rebuilding tooling could involve significant delays and costs, and may not be available to us on reasonable
terms. Any disruption to our machinery could have a material adverse effect on our business, financial condition and results of
operations.
Impairment charges relating to our goodwill or long lived assets could adversely affect our financial performance.
Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. Generally accepted
accounting principles require that goodwill be periodically evaluated for impairment. As of October 31, 2017, we had $27,859 of
goodwill, or 4.5% of our total assets, that could be subject to impairment. Declines in our profitability or the value of comparable
companies may impact the fair value which could result in a write-down of goodwill and a reduction of net income. In addition,
we have been required to recognize impairment charges for long lived assets. In accordance with generally accepted accounting
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principles, we periodically assess these assets to determine if they are impaired. Significant negative industry or economic trends,
disruptions to our business, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes
in use of these assets, changes in the structure of our business, divestitures, market capitalization declines, or increases in associated
discount rates may impair our long lived assets. Any charges relating to impairments of goodwill or long lived assets may adversely
affect our results of operations in the periods recognized.
MTD Holdings Inc. may exercise significant influence over us.
MTD Holdings Inc. and its affiliates owned approximately 33.9% of our common stock as of October 31, 2017. As a
result, MTD Holdings Inc. and its affiliates have significant influence over the vote in any election of directors and thereby its
policies and operations, including the appointment of management, future issuances of our common stock or other securities, the
payment of dividends, if any, on our common stock, the incurrence of debt by us, amendments to our amended and restated
certificate of incorporation or bylaws and the entering into of extraordinary transactions, and its interests may not in all cases be
aligned with your interests. In addition, MTD Holdings Inc. may have an interest in pursuing acquisitions, divestitures and other
transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to us or be
opposed by other stockholders.
We may incur additional tax expense or become subject to additional tax exposure.
On December 22, 2017, President Trump signed U.S. tax reform legislation. Given this date of enactment, our financial
statements for the year ended October 31, 2017 do not reflect the impact of this legislation. We are currently undergoing an analysis
of the tax reform law and its impact to the financial statements and tax footnote disclosures. We are also evaluating if the tax
reform law will impact the realizability of deferred tax assets and carryforwards. A more detailed analysis will be completed in
our quarterly report for the period in which the law was enacted.
Certain of our pension plans are underfunded and we have unfunded post-retirement benefit obligations. Additional cash
contributions we may be required to make to our pension plans or amounts we may be required to pay in respect of post-
retirement benefit obligations will reduce the cash available for our business.
Certain of our employees in the United States are participants in defined benefit pension plans which we sponsor. As of
October 31, 2017, the unfunded amount of our U.S. pension plans was approximately $19,848. While future benefit accruals under
our U.S. defined benefit plans were frozen, we may have ongoing obligations to make contributions to our U.S. pension plans as
required in accordance with the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the Internal
Revenue Code of 1986, as amended. In addition, we sponsor unfunded post-retirement benefits for a limited number of employees.
As of October 31, 2017, the unfunded amount for these post-retirement benefits was approximately $313. Cash contributions to
these plans and payment of these post-retirement benefit obligations will reduce the cash available for our business. Under ERISA,
the Pension Benefit Guaranty Corporation (“PBGC”) has the authority to petition a court to terminate an underfunded defined
benefit pension plan under limited circumstances. In the event our pension plans are terminated by the PBGC, we could be liable
to the PBGC for the entire amount of the underfunding, as calculated by the PBGC based on its own assumptions (which likely
would result in a larger obligation than that based on the assumptions it has used to fund such plans).
We may incur material costs related to plant closings, which could materially harm our business, financial condition, results
of operations, and cash flows.
If we must close manufacturing facilities because of lost business or consolidation of manufacturing facilities, the
employee termination costs, asset retirements, and other exit costs associated with the closure of these facilities may be significant.
In certain circumstances, we may close a manufacturing facility that is operated under a lease agreement and we may continue to
incur material costs in accordance with the lease agreement. We attempt to align production capacity with demand; however, we
cannot provide assurance that plants will not have to be closed.
Regulations related to “conflict minerals” may cause us to incur substantial expenses and otherwise adversely impact our
business.
Regulations related to “conflict minerals” may cause us to incur additional expenses and may make our supply chain
more complex. In August 2012, the SEC adopted annual disclosure and reporting requirements for those companies who use
certain minerals known as “conflict minerals”, which may or may not be mined from the Democratic Republic of Congo and
adjoining countries, in their products. These requirements required due diligence efforts beginning in 2013, with initial disclosure
requirements which began in 2014. There are significant costs associated with complying with these disclosure requirements,
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including for diligence to determine the sources of conflict minerals used in our products and other potential changes to products,
processes or sources of supply as a consequence of such verification activities.
Failure to maintain an effective system of internal control over financial reporting or remediate weaknesses could materially
harm our revenues and trading price of the common stock. If we cannot accurately report financial results, stockholder
confidence in our ability to pursue business and maintain the trading price of our common stock may be eroded.
An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of
human error and circumvention or overriding of controls and therefore can provide only reasonable assurance with respect to
reliable financial reporting and preparation and fair presentation of financial statements. Because of its inherent internal control
limitations, our internal control over financial reporting may not prevent or detect misstatements because of inherent limitations,
including the possibility of human error, the circumvention or overriding of controls, or fraud.
In the prior fiscal years, our management-directed testing of the control environment identified material weaknesses.
Limited to specific manufacturing facilities, our management initiated and oversaw corrective actions remediating and improving
the overall company-wide environment. As a consequence of the identified material weaknesses, we incurred unanticipated
expenses and costs, including legal, consulting, and other professional fees, in connection with the respective remediation efforts.
As with inherent limitations, while we have established an effective control environment, future directed testing could
potentially identify weaknesses. If remedial measures are insufficient to address potential material weaknesses or significant
deficiencies in our internal control environment, our consolidated financial statements may contain material misstatements.
Potential corrective actions could include revision or restatement of our financial statements and would likely cause us to incur
significant additional accounting, legal, consulting, and other professional fees and expenses. Further, those potential revisions
and costs could expose us to potential claims or risks adversely affecting our results of operations, cash flows, and financial
condition. Lastly, matters impacting our internal controls may cause us to be unable to report our financial data on a timely basis,
or to adjust previously issued financial data. These potential risks may subject us to adverse regulatory consequences, including
sanctions or investigations by the SEC, or violations of applicable stock exchange listing rules. Overall, these factors could
precipitate a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial
statements.
Item 1B. Unresolved Staff Comments
Not Applicable.
Item 2.
Properties.
We own our principal executive offices, which are located at 880 Steel Drive, Valley City, Ohio 44280.
We maintain 22 manufacturing facilities and eight technical and administrative facilities located in Asia, Europe and
North America encompassing approximately 4.0 million square feet. Of the 30 facilities, 15 are leased.
We believe that substantially all of our facilities are well maintained and in good operating condition. Our facilities are
considered adequate for present needs and are expected to remain adequate for the near future.
Item 3.
Legal Proceedings.
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 our officers (the President and Chief Executive Officer and Vice President
of Finance and Treasurer). As amended, the lawsuit claims in part that we issued inaccurate information to investors about, among
other things, our earnings and income and our 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 our 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. The District Court rendered an opinion and
order granting our motion to dismiss the lawsuit on March 23, 2017. On April 6, 2017, the plaintiffs filed a motion for reconsideration
of the dismissal order. We, in opposition to the plaintiff's motion, filed a motion for consideration of the dismissal on April 20,
2017 and the plaintiffs filed a reply motion in opposition for reconsideration on April 27, 2017. On July 7, 2017, the District Court
17
denied the Plaintiffs’ request to vacate the District Court’s March 23, 2017 order of dismissal and granted the Plaintiff’s request
to further amend their complaint. The Plaintiffs filed their Second Amended Complaint on August 4, 2017. We filed our Motion
to Dismiss the Second Amended Compliant on August 18, 2017. The Plaintiffs’ filed their opposition brief on November 2, 2017
and we filed our reply in support of defendants’ motion to dismiss the second amended complaint on November 22, 2017.
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 our 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 our 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, we are involved in legal proceedings, claims or investigations that are incidental to the
conduct of its business. We vigorously defends ourselves against such claims. In future periods, we 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, we do not expect that our legal proceedings or claims will have a material impact on our future consolidated financial
condition, results of operations or cash flows.
Item 4.
Mine Safety Disclosures.
Not Applicable.
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Our Common Stock is traded on the Nasdaq Global Market under the symbol "SHLO." On January 3, 2018, the closing
price for our Common Stock was $8.52 per share.
The table below sets forth the high and low bid prices for our Common Stock for our four quarters in each of 2017 and
2016.
Quarter
1st
2nd
3rd
4th
2017
2016
High
$ 12.25
$ 16.69
$ 14.97
$ 10.98
Low
$
6.50
$ 11.33
$
$
7.16
7.25
High
Low
$
$
$
$
8.55
6.51
9.78
9.69
$
$
$
$
3.70
3.06
4.95
6.50
As of the close of business on January 3, 2018, there were 149 stockholders of record for our Common Stock. We believe
that the number of beneficial holders of our Common Stock exceed 4,000. We did not repurchase any of our equity securities
during fiscal 2017.
We did not pay any dividends in 2017 or 2016. Our current Credit Agreement contains covenants that could restrict,
under certain circumstances, the ability to pay dividends on our common stock. Any decision to declare and pay dividends in the
future will be made at the discretion of the Board of Directors and will depend on, among other things, results of operations, cash
requirements, financial condition, contractual restrictions and other factors that the Board of Directors may deem relevant.
18
The following graph compares our cumulative total stockholder return compared with Standard & Poor's 500 Stock Index
and the Standard & Poor's Supercomposite Auto Parts and Equipment Index. The comparison assumes $100 was invested at the
closing price on October 31, 2011 and reflects the total cumulative return on that investment, including the reinvestment of dividends
where applicable, through October 31, 2017.
10/31/2012
10/31/2013
10/31/2014
10/31/2015
10/31/2016
10/31/2017
Shiloh Industries, Inc. $
100.00 $
220.28 $
228.60 $
101.15 $
93.77 $
S&P 500 $
100.00 $
124.39 $
142.91 $
147.25 $
150.72 $
124.50
182.36
S&P Supercomposite Auto Parts
and Equipment Index $
100.00 $
173.13 $
187.73 $
185.96 $
167.03 $
235.18
19
Item 6. Selected Financial Data
The following table presents information from our Consolidated Financial Statements as of or for the five years ended
October 31, 2017. This information should be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Financial Statements and Supplementary Data."
Operating Results
Revenues (a)
Selling, general, and administrative expenses (a)
Net income (loss)
Basic earnings (loss) per common share (b)
Diluted earnings (loss) per common share (b)
Financial Position
Total assets (a)
Long-term debt (a)
Total liabilities
Total stockholders' equity (b)
Dividends declared per common share
Year Ended October 31,
2017
2016
2015
2014
2013
(dollars in thousands, except per share amount)
$1,041,986
$1,065,834
$1,073,052
$832,067
$660,217
83,142
(697)
$(0.04)
$(0.04)
73,417
63,028
3,669
$0.21
$0.21
5,905
$0.34
$0.34
50,236
19,915
$1.16
$1.16
31,181
20,186
$1.19
$1.19
$618,583
$626,429
$660,854
$625,678
$390,294
181,065
430,262
188,321
$0.00
256,922
493,639
132,790
$0.00
298,873
526,392
134,462
$0.00
268,102
485,253
140,425
$0.00
119,384
260,710
129,584
$0.25
(a) Sales from strategic acquisitions completed in fiscal years 2014 and 2013 increased revenues by approximately $122,320 and
$77,000 in 2014 and 2013, respectively. As a result of the acquisitions, selling, general, and administrative expenses increased in
2014 and 2013 by approximately $4,310 and $2,860, respectively. The acquisition related costs consisted of personnel, personnel
related expenses, and other administrative expenses. Total assets acquired in the acquisitions totaled $190,842 and $116,457 in 2014
and 2013, respectively. Total cash paid for the acquisitions was $124,544 in 2014 and $104,470 in 2013, which directly resulted in
an increase in borrowing from the line of credit and increased long-term debt accordingly.
(b) On July 19, 2017, we issued 5,250 shares of common stock in connection with an equity offering. Refer to Note 15 - Common
Stock for additional information.
20
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollars in thousands, except per share data)
General
Shiloh Industries, Inc. is a global innovative solutions provider to the automotive, commercial vehicle and other industrial
markets with a strategic focus on designing, engineering and manufacturing lightweight technologies that improve performance
and benefit the environment. Shiloh Industries offers one of the broadest portfolio of lightweighting solutions in the industry
through our BlankLight®, CastLight® and StampLight® brands and is uniquely qualified to supply product solutions utilizing
multiple lightweighting solutions. This includes combining castings and stampings or innovative, multi-material products in
aluminum, magnesium, steel and steel alloys. We design and manufacture components in body, chassis and powertrain systems
with expertise in precision blanks, ShilohCore™ acoustic laminates, aluminum and steel laser welded blanks, complex stampings,
modular assemblies, aluminum and magnesium die casting, as well as precision machined components. Additionally, we provide
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. We have over 3,600
dedicated employees with operations, sales and technical centers throughout Asia, Europe and North America.
Recent Trends and General Economic Conditions Affecting the Automotive Industry
Our 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.
Our 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 2017), Europe and North America
production volumes for the fiscal years ended October 31, 2017, 2016, and 2015 were as follows:
Production Volumes
Europe
North America
Total
Europe:
Increase from prior year
% Increase from prior year
North America
Increase (decrease) from prior year
% Increase (decrease) from prior year
Total
Increase from prior year
% Increase from prior year
Europe:
Year Ended October 31,
2017
22,087
17,323
39,410
2016
21,331
17,755
39,086
2015
20,802
17,423
38,225
756
3.5 %
(432)
(2.4)%
324
0.8 %
529
2.5%
332
1.9%
861
2.3%
Production in Europe continues to improve, although production increases or decreases vary from country to country and
from OEM to OEM. Production volumes were up for fiscal 2017. The United Kingdom's decision to withdraw from the European
Union along with political developments in other European countries has cast an element of uncertainty around continued economic
improvement in the region.
21
North America:
Production in North America, and specifically in the United States, was down for fiscal 2017. We remain confident of
improvements in the overall economy, including labor force expansion, housing starts, rising interest rates and automotive sales.
The impact the Trump administration will have on the economy going forward is still uncertain.
We operate 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 us to assess, redefine and improve operations, products, and manufacturing capabilities
to maintain and improve profitability. Our management continues to develop and execute initiatives designed to meet challenges
of the industry and to achieve our strategy for sustainable global profitable growth.
Capacity utilization levels are very important to profitability because of the capital-intensive nature of our operations.
We continue to adapt our capacity to meet customer demand, both expanding capabilities in growth areas as well as reallocating
capacity between manufacturing facilities as needs arise. We employ new technologies to differentiate our products from our
competitors and to achieve higher quality and productivity. We believe that we have sufficient capacity to meet current and expected
manufacturing needs.
Most of the steel purchased for our 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. We pay for the steel
based on these negotiated prices and pass on those costs to the customer. Although we take ownership of the steel, our customers
are responsible for all steel price fluctuations under these programs. We also purchase steel directly from domestic primary steel
producers and steel service centers. Current demand for construction and oil industry related steel products and stable automotive
production have helped the market rebound from historic lows with steel pricing stabilizing. We have seen recent gradual downward
pricing pressure since the rise, but this is likely related to historic seasonal pricing weakness as domestic summer shutdown periods
are approaching. We refer to the “net steel impact” as the combination of the change in steel prices that are reflected in the price
of its 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 risen, so have the scrap
metal markets as they are highly correlated. We blank and process steel for some of our customers on a toll processing basis.
Under these arrangements,we charge a tolling fee for the operations that we perform 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 our 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
us and our customers.
Results of Operations
Year Ended October 31, 2017 Compared to Year Ended October 31, 2016
REVENUES. Revenues for fiscal 2017 were $1,041,986, a decrease of $23,848 from fiscal 2016 sales of $1,065,834, or
2.2%. Adjusting for the change in the contractual relationship of certain customer sales from owned steel to consigned steel of
$10,533, $9,756 due to the elimination of production by FCA of its Chrysler 200 and Dodge Dart small vehicle product lines in
the fall of 2016 and an unfavorable currency impact of $1,266, automotive production sales decreased $13,697, weighted heavily
by the 2.4% reduction in North American automotive production. Commercial vehicle and industrial market sales recovered
$10,694 from prior year market declines. Additionally, there was an improvement of $710 of other sales.
GROSS PROFIT. Gross profit for fiscal 2017 was $114,133 compared to gross profit of $96,176 in fiscal 2016, an increase
of $17,957, or 18.7% despite lower sales. Gross profit as a percentage of sales was 11.0% for fiscal 2017 and 9.0% for fiscal 2016,
an improvement of 200 basis points. The improvement in gross profit included changes in customer and product mix which
favorably impacted direct material costs by $33,772, an increase in scrap recovery of $6,451, a decrease in labor and benefits of
$6,747 and a decrease in repairs and maintenance and indirect manufacturing supplies of $3,348 offset by an increase in deprecation
and overhead expenses of $8,513 from recent investments in capital equipment and processes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses support
the growth in sales opportunities, new technologies, new product launches and acquisition activities. Selling, general and
22
administrative expenses of $83,142 for fiscal 2017 were $9,725 more than selling, general and administrative expenses of $73,417
for the prior year. As a percentage of sales, these expenses were 8.0% of sales for fiscal 2017 and 6.9% for fiscal 2016. The increase
reflects our continued investments in human capital of $8,408 and expenses related to investments in infrastructure costs of $1,130
and other expenses of $187.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets expense of $2,259 for fiscal 2017 was
similar to amortization of intangible assets expense of $2,258 for the prior year.
ASSET IMPAIRMENT, NET. Asset impairments of $241 were recorded during fiscal 2017 which related to idled
equipment. 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.
RESTRUCTURING. Restructuring charges of $4,777 were recorded during fiscal 2017 based upon our strategic decision
to provide a more efficient and focused footprint allowing us to operate with lower fixed costs.These costs primarily included the
impairment of the building and manufacturing equipment, employee-related costs, legal costs and other related costs.
INTEREST EXPENSE. Interest expense for fiscal 2017 was $15,088, compared to interest expense of $18,086 during
fiscal 2016. The decrease in interest expense was the result of lower borrowed funds and lower borrowing rates which were offset
by an increase in amortization of deferred financing fees associated with the Credit Agreement. Borrowed funds averaged $220,689
during fiscal 2017 and the weighted average interest rate was 4.51%. During fiscal 2016, borrowed funds averaged $273,296 and
the weighted average interest rate of debt was 4.90%.
OTHER EXPENSE. Other expense, net was $2,207 for fiscal 2017, compared to other expense of $1,890 for fiscal 2016,
an increase of $317. Other expense, net reflects an unfavorable impact from an other-than-temporary-impairment of marketable
securities and other non-operating expenses of $796 offset by a favorable impact from currency transaction gains of $479 realized
by our Asian, European and Mexican subsidiaries.
PROVISION / BENEFIT FOR INCOME TAXES. The provision for income taxes in fiscal 2017 was an expense of
$7,120 on income before taxes of $6,423 for an effective tax rate of 110.9%. In fiscal year 2016, the provision for income taxes
was a tax benefit of $5,152 on a loss before taxes of $1,483 for an effective tax rate of 347.4%. The effective tax rate for the fiscal
years ended October 31, 2017 and 2016 varies from statutory rate 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, change to valuation allowance against certain
foreign deferred tax assets and tax return to provision adjustments.
NET INCOME (LOSS). The net loss for fiscal 2017 was $697, or $0.04 per share, compared to net income in fiscal year
2016 of $3,669, or $0.21 per share, diluted.
Results of Operations
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 over 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.
23
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. Asset impairment charges 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 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 4.90%. During fiscal 2015, borrowed funds averaged $278,289 and the weighted average interest rate of debt was 2.82%.
OTHER 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 our 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.
Liquidity and Capital Resources
General:
Our ability to obtain adequate cash to fund our needs depends generally on the results of our operations, and the availability
of financing. We believe that cash on hand, cash flow from operations and available borrowings under our Credit Agreement will
be sufficient to fund capital expenditures and meet our operating obligations for the next twelve months. As of October 31, 2017,
we had available borrowings of approximately $164,547, which we believe is adequate to fund working capital requirements for
at least the next twelve months. In the longer term, we believe that 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, 2017, total debt was $183,092 and total equity was $188,321, resulting in a capitalization rate of 49.3%
debt, 50.7% equity. Current assets were $294,521 and current liabilities were $215,885, resulting in positive working capital of
$78,636.
The following table summarizes the Company's cash flows from operating, investing, and financing activities:
Year Ended
Year Ended
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used for) provided by financing activities $ (37,523) $ (43,546) $
2017
76,315
Years Ended October 31,
2016
$
$
69,361
$ (39,620) $ (28,316) $ (27,701) $
$
26,120
3,373
2015
$
$
2017 vs. 2016
change
2016 vs. 2015
change
6,954
$
(11,304) $
$
6,023
65,988
(615)
(69,666)
24
Net Cash Provided by Operating Activities:
Operational cash flow before changes in operating assets and liabilities
$
56,884
$
44,163
$
46,726
Years Ended October 31,
2017
2016
2015
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaids and other assets
Payables and other liabilities
Accrued income taxes
Total change in operating assets and liabilities
Net cash provided by operating activities
(2,919)
(888)
5,375
16,715
1,148
19,431
76,315
$
$
10,975
(2,408)
14,476
(1,843)
3,998
25,198
(27,607)
358
(8,665)
(5,923)
(1,516)
$ (43,353)
69,361
$
3,373
$
$
Cash flow from operations before changes in operating assets and liabilities was $12,721 higher for the year ended
October 31, 2017 compared to the year ended October 31, 2016 as a result of an increase in deferred income taxes due to temporary
differences related to U.S. depreciation deductions, depreciation and loss on sale of assets offset by a decrease in earnings.
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 inflow and outflow from changes in operating assets and liabilities:
• Cash inflows from changes in operating assets and liabilities was $19,431 and $25,198 for the fiscal years ended
October 31, 2017 and 2016, respectively, and was positively impacted by working capital initiatives and new product
launches. Cash outflows from changes in operating assets and liabilities was $43,353 for the fiscal year ended October 31,
2015 and was positively impacted by increased sales, acquisition integration and new product launches.
• Cash outflows from changes in accounts receivable for the fiscal year ended October 31, 2017 was $2,919. The change
was primarily due to the timing of collecting receivables and invoicing of customer reimbursed tooling programs. Cash
inflows from changes in accounts receivable for the fiscal year ended October 31, 2016 was $10,975. The change 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 year ended October 31, 2015 was $27,607, primarily driven by sales increases, acquisitions.
• Cash outflows from changes in inventory for the fiscal year ended October 31, 2017 and 2016 were $888 and $2,408,
respectively. The use of cash was primarily driven by a change in customer mix and delivery. Cash inflows for the fiscal
year ended October 31, 2015 was $358, and was 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, 2017 and 2016 were $5,375
and $14,476, respectively, as a result of an improvement in the process of invoicing of customer reimbursed tooling.
Cash outflows from changes in prepaids and other assets for the fiscal year ended October 31, 2015 was $8,665. Significant
new program launches in 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 inflows from changes in payables and other for the fiscal year ended October 31, 2017 was $16,715 resulting from
improved matching of terms with our customers and vendors, offset partially by the timing of payments related to capital
expenditures and customer funded tooling. Cash outflows from changes in payables and other for the fiscal years ended
October 31, 2016 and 2015 were $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 accrued income taxes for the fiscal years ended October 31, 2017 and 2016 were $1,148
$3,998, respectively, and were primarily driven by federal income tax refunds and cash outflows of $1,516 for the fiscal
year ended October 31, 2015 was primarily due to tax payments.
Net Cash Used For Investing Activities:
25
Net cash used for investing activities in fiscal years 2017, 2016 and 2015 was $39,620, $28,316 and $27,701, respectively,
and consisted mainly of capital expenditures. Cash used for capital expenditures during fiscal years 2017, 2016, and 2015 was
$48,395, $28,324, and $39,376, respectively. The expenditures are attributed to projects for new awards and product launches.
For fiscal years 2017, 2016 and 2015, proceeds from the sales of assets generated $7,605, $1,508 and $11,480, respectively. The
total proceeds from the sale of assets during fiscal 2017 relates to the sale of unique equipment related to lower margin parts we
have sunset. 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 $4,239, $5,604 and $4,225 at October 31, 2017, 2016 and 2015, respectively, and such amounts were included
in accounts payable and excluded from capital expenditures in the accompanying consolidated statement of cash flows.
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 used in financing activities in fiscal years 2017 and 2016 was $37,523 and $43,546, respectively. For fiscal
2017, financing activities included $40,227 of net proceeds from the public offering in July 2017, offset by $77,750 for funding
working capital and debt payments and for fiscal 2016, financing activities of $43,546 were from working capital and debt
repayments. As of October 31, 2017, the Company's long-term indebtedness was $181,065.
Net cash provided by financing activities was $26,120 during 2015. 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.
We continue to closely monitor the business conditions affecting the automotive industry. In addition, we closely monitor
our working capital position to ensure adequate funds for operations. In addition, we anticipate that funds from operations will
be adequate to meet the obligations under the Credit Agreement, as well as scheduled payments for the equipment security note,
capital lease and repayment of the other debt totaling $4,892 over the next five years.
Revolving Credit Facility:
On October 31, 2017, we executed the Eighth Amendment to our Credit Agreement (the "Amendment") which among
other things: provides for an aggregate availability of $350,000, $275,000 of which is available to the Company through the
Tranche A Facility and $75,000 of which is available to the Dutch borrower through the Tranche B Facility, and eliminates the
scheduled reductions in such availability; increases the aggregate amount of incremental commitment increases allowed under
the Credit Agreement to up to $150,000 subject to our pro forma compliance with financial covenants, the Administrative Agent’s
approval and the Company obtaining commitments for any such increase. The Amendment extended the commitment period to
October 31, 2022.
On July 31, 2017, we executed the Seventh Amendment which modifies investments in subsidiaries and various cumulative
financial covenant thresholds, in each case, under the Credit Agreement. The Seventh Amendment also enhances our ability to
take advantage of customer supply chain finance programs.
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 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.
26
On April 29, 2015, the Company executed a 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 3.0% and on base rate loans of 0.50% to 2.0%, 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, 2017 and October 31, 2016.
After considering letters of credit of $7,253 that the Company has issued, unused commitments under the Credit Agreement
was $164,547 at October 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, 2017, the Company entered into a finance agreement with an insurance broker for various insurance policies
that bears interest at a fixed rate of 2.05% and requires monthly payments of $94 through May 2018. As of October 31, 2017,
$650 of principal remained outstanding under this agreement and was classified as current debt in our 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, 2017, $482 of principal remained outstanding
under this agreement and was classified as current debt in our consolidated balance sheets.
We maintain capital leases for equipment used in its manufacturing facilities with lease terms expiring between 2018 and
2021. As of October 31, 2017, the present value of minimum lease payments under its capital leases amounted to $3,760.
Derivatives:
On February 25, 2014, we 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 our 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 our
future interest payments at 2.74% plus the applicable rate, as described above, on an amount of our 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, we designated the interest rate swap as a hedge of the variability of cash flows to be paid relative to our
variable rate monies borrowed. Any ineffectiveness in the hedging relationship is recognized immediately into earnings. We
determined the mark-to-market adjustment for the interest rate swap to be a gain of $1,793 and $64, net of tax, for the fiscal years
ended October 31, 2017 and 2016, respectively, which is reflected in other comprehensive income (loss). The base notional amounts
of $25,000 each or $75,000 total that commenced during 2015 and 2016 resulted in realized losses of $1,401, $1,530, and $433
of interest expense related to the interest rate swap settlements for the fiscal years ended October 31, 2017, 2016 and 2015,
respectively. For fiscal 2018, we anticipates recognizing approximately $925 of additional interest expense related to the interest
swap.
27
Our contractual obligations as of October 31, 2017 are summarized below:
Maturities of Debt Obligations:
Less than 1 year
1-3 years
3-5 years
After 5 years
Total
Credit
Agreement
Equipment
Security Note
$
$
— $
—
—
178,200
178,200
$
482
—
—
—
482
Capital Lease
Obligations
895
$
624
2,241
—
3,760
$
$
$
Other Debt
Operating
Leases
650
—
—
—
650
$
$
11,328
19,524
10,500
3,885
45,237
$
$
Total
13,355
20,148
12,741
182,085
228,329
Critical Accounting Policies
Preparation of our financial statements are in conformity with accounting principles generally accepted in the United
States and requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and in the accompanying notes. We believe our estimates and assumptions are reasonable; however, actual results and
the timing of the recognition of such amounts could differ from those estimates. We have identified the following items as critical
accounting policies and estimates utilized by management in the preparation of the Company’s accompanying 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 our 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. We make frequent comparisons of actual experience and expected
experience in order to mitigate the likelihood that material adjustments will be required.
Revenue Recognition. We recognize 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. We
record 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. We enter into contracts with customers in the development of molds, dies and tools (collectively, "tooling")
to be sold to such customers. We primarily record 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 Shiloh and our
customers and are recorded on a gross or net basis in accordance with current applicable revenue recognition accounting literature.
Pre-production and development costs. We enter into contractual agreements with certain customers to develop tooling.
All such tooling contracts relate to parts that we will supply to customers under supply agreements. Tooling costs are capitalized
in prepaid expenses and other assets we 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. In accordance with ASC Topic 740, our income tax expense is calculated based on expected income and
statutory tax rates in the various jurisdictions in which we operate and require the use of management's estimates and judgments.
Business Combinations. We include the results of operations of the businesses that we acquire as of the respective dates
of acquisition. We allocate the fair value of the purchase price of our 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.
Intangible Assets. Intangible assets with definitive lives are amortized over their estimated useful lives. We amortize our
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.
We perform 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.
28
Goodwill. Goodwill, which represents the excess cost over the fair value of the net assets of businesses acquired, was
$27,859, net of foreign currency translation, as of October 31, 2017, or 4.5% of total assets, and $27,490, net of foreign translation,
as of October 31, 2016, or 4.4% of total assets.
Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed
in a business combination. Goodwill relates to and is assigned directly to specific reporting units. Goodwill is not amortized but
is subject to impairment assessment. In accordance with ASC 350, "Intangibles-Goodwill and Other," we assess goodwill for
impairment on an annual basis, or more frequently, if an event occurs or circumstances change that would more likely than not
reduce the fair value below the carrying amount. Our annual impairment testing is performed as of September 30. Such assessment
can be done on a qualitative or quantitative basis. When conducting a qualitative assessment, we consider relevant events and
circumstances that affect the fair value or carrying amount of the reporting unit. A quantitative test is required only if we conclude
that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or we elect not to perform a qualitative
assessment of a reporting unit. We consider the extent to which each of the events and circumstances identified affect the comparison
of the reporting unit's fair value or the carrying amount. Such events and circumstances could include macroeconomic conditions,
industry and market considerations, overall financial performance, entity and reporting unit specific events, product brand level
specific events and cost factors. We place more weight on the events and circumstances that may affect its determination of whether
it is more likely than not that the fair value of the reporting unit is less than its carrying amount. These factors are all considered
by management in reaching its conclusion about whether to perform a quantitative goodwill impairment test.
We perform a quantitative annual goodwill impairment test by comparing the fair value of a reporting unit to its carrying
amount, including goodwill. If the carrying amount exceeds the fair value, we recognize an impairment charge for the amount by
which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill in that reporting unit.
Share-based Payments. We record compensation expense for the fair value of nonvested stock option awards and restricted
stock awards over the remaining vesting period. We have elected to use the simplified method to calculate the expected term of
the stock options outstanding at five to six years and have utilized historical weighted average volatility. We determine 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, we do not estimate a forfeiture rate at the time of grant instead we elected to recognize share-based compensation
expense when actual forfeitures occur.
The restricted stock and restricted stock units are valued based upon a 20-day Exponential Moving Average as of the
Friday prior to the grant of an award. In addition, we do not estimate a forfeiture rate at the time of grant instead we elected to
recognize share-based compensation expense when actual forfeitures occur. We recognized an additional expense of $60 for the
early adoption of ASU 2016-09.
U.S. Pension and Other Post-retirement Costs and Liabilities. We have 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
in November of 2006 and therefore contributions by participants are not allowed. The determination of our 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. We determine
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 the year. For our U.S. operations, we use 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, 2017, the resulting discount rate from the use of the Principal Curve was 3.65%, a decrease of 0.05% from a year
earlier that contributed to an increase of the benefit obligation of approximately $59. A change of 25 basis points in the discount
rate at October 31, 2017 would increase expense on an annual basis by approximately $10 or decrease expense on an annual basis
by approximately $14.
29
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 $168.
Our investment policy for assets of the plans is to maintain an allocation generally of 30% to 70% in equity securities,
30% 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. We determine 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. Our 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, 2017, the actual return on pension plans’ assets for all of our plans approximated 16.33%,
which is higher 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.
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 we have conservatively contributed
to the defined benefit plans and therefore we only have one contribution for fiscal 2018 not required until the third quarter and
that pension expense will decrease in fiscal 2018.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements with unconsolidated entities or other persons.
Recent Accounting Pronouncements
This information can be found in Note 1 in our notes to the consolidated financial statements of Shiloh Industries, Inc.,
included in Item 8 of this Report.
Effect of Inflation, Deflation
Inflation generally affects us 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 our consolidated financial results for
the past three years.
In periods of decreasing prices, deflation occurs and may also affect our results of operations. With respect to steel
purchases, we purchase steel through customers' steel buying programs which protects recovery of the cost of steel through the
selling price of our products. For non-steel buying programs, we align the cost of steel purchases with the related selling price of
the product. For our aluminum and magnesium die casting business, the cost of the materials is adjusted frequently to align with
secured purchase commitments based on customer releases or based on referenced metal index plus additional material cost spreads
agreed to by us and our customers.
FORWARD-LOOKING STATEMENTS
Certain statements made by Shiloh in this Annual Report on Form 10-K regarding our operating performance, events or
developments that we believe will or expect 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 our expectations of future operating results are "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995.
30
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.
•
•
•
•
•
•
•
•
•
our ability to accomplish our strategic objectives;
our 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;
our ability to realize cost savings expected to offset price concessions;
our 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 our products;
inefficiencies related to production and product launches that are greater than anticipated;
changes in technology and technological risks;
• work stoppages and strikes at our facilities and that of our customers or suppliers;
•
•
•
•
•
•
•
•
•
•
our 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 our customers or vendors, including any production cutbacks or bankruptcies;
increases in the price of, or limitations on the availability of aluminum, magnesium or steel, our primary raw materials,
or decreases in the price of scrap steel;
the successful launch and consumer acceptance of new vehicles for which we supply parts;
the impact on financial statements of any known or unknown accounting errors or irregularities; and the magnitude of
any adjustments in restated financial statements of our operating results;
the occurrence of any event or condition that may be deemed a material adverse effect under our outstanding indebtedness
or a decrease in customer demand which could cause a covenant default under our outstanding indebtedness;
pension plan funding requirements; and
other factors besides those listed here could also materially affect our business.
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.
We undertake 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 we file from time to time with the SEC.
31
Item 7A.
Qualitative and Quantitative Market Risk Discussion (Dollar amounts in thousands)
Market risk is the potential loss arising from adverse changes in market rates and prices. We are exposed to market risk
throughout the normal course of our business operations due to purchases of metals, sales of scrap steel, our ongoing investing
and financing activities, and exposure to foreign currency exchange rates. As such, we have established policies and procedures
to govern our management of market risks.
Commodity Pricing Risk
Steel is the primary raw material used by the Company and a majority of the purchased steel is acquired through various
OEM steel buying programs. Buying through the customer steel buying programs mitigates the impact of price fluctuations
associated with the procurement of steel. The remainder of our steel purchasing requirements is met through contracts with various
steel suppliers. At times, we may be unable to either avoid increases in steel prices or pass through any price increases to our
customers. We refer to the "net steel impact" as the combination of the change in steel prices that are reflected in the price of
products, the change in the cost to procure steel from the steel sources, 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. Although we strive to achieve a neutral net
steel impact, we may not always be successful in achieving that goal, in part due to timing difference. The timing of a change in
the price of steel may occur in different periods and if a change occurs, that change may have a disproportionate effect, within
any fiscal period, on our product pricing. Depending upon when a steel price change or offal price change occurs, that change
may have a disproportionate effect, within any particular fiscal period, on its product pricing, our steel costs and the results of
our offal recovery. Net imbalances in any one particular fiscal period may be reversed in a subsequent fiscal period, although we
cannot provide assurances that, or when, these reversals will occur. In fiscal 2017, volume and scrap metal market pricing
contributed to an improvement in our offal recovery.
Interest Rate Risk
At October 31, 2017, we had total debt, excluding capital leases, of $179,332, consisting of a revolving line of credit of
floating rate debt of $178,200 (99.4%) and fixed rate debt of $1,132 (0.6%). Assuming no changes in the monthly average revolver
debt levels of $220,689 for the year ended October 31, 2017, we estimate that a hypothetical unfavorable change of 100 basis
points in the LIBOR and base rate would impact interest expense by approximately $1,782 in additional expense.
During 2014, we entered into an interest rate swap with an aggregate notional amount of $75,000 designated as a cash
flow hedge of a portion of our Credit Agreement to manage interest rate exposure on our floating rate LIBOR based debt. The
first base notional amount, $25,000, commenced on March 1, 2015, the second base notional amount, $25,000, commenced on
September 1, 2015 and the final notional amount, $25,000, commenced on March 1, 2016. We recognized $1,401 of interest
expense related to the interest rate swap for the year ended October 31, 2017.
The following table discloses the fair value and balance sheet location of the Company's derivative instrument:
Liability Derivatives
Balance Sheet
October 31,
October 31,
Location
2017
2016
Derivatives Designated as Cash Flow Hedging Instruments:
Interest rate swap contracts
Liabilities
$(2,088)
$(5,036)
The following table discloses the effect of the Company's derivative instrument on the consolidated statement of operations
and consolidated statement of comprehensive income (loss) for the fiscal year ended October 31, 2017:
Derivatives Designated as Hedging Instruments:
Interest rate swap contracts
$1,793
Interest expense
$1,401
Amount of Gain
Recognized in OCI
on Derivatives
(Effective Portion)
Location of Gain
(Loss) Reclassified
from AOCI into
Income (Effective
Portion)
Amount of Gain
Reclassified from
AOCI into Income
(Effective Portion)
32
The following table discloses the effect of the Company's derivative instrument on the consolidated statement of operations
and consolidated statement of comprehensive (income) loss for the year ended October 31, 2016:
Derivatives Designated as Hedging Instruments:
Interest rate swap contracts
$64
Interest expense
$1,530
Amount of Gain
(Loss) Recognized in
OCI on Derivatives
(Effective Portion)
Location of Gain
(Loss) Reclassified
from AOCI into
Income (Effective
Portion)
Amount of Gain
(Loss) Reclassified
from AOCI into
Income (Effective
Portion)
Currency Exchange Rate Risk
The translated values of revenue and expense from our international operations are subject to fluctuations due to changes
in currency exchange rates. Consequently, our results of operations may be affected by exposure to changes in foreign currency
exchange rates and economic conditions in the regions in which we sell or distribute products.
We derived 80.5% of our sales in the United States and 19.5% internationally. Of these international sales, no single
foreign currency represented more than 10% of sales. To minimize foreign currency risk, we generally maintain natural hedges
within our non-U.S. activities, including the efficient alignment of transaction settlements in the same currency and near term
accounting cycles.
In addition, to the transaction-related gains and losses that are reflected within the results of operations, we are subject
to foreign currency translation risk, as the financial statements for our subsidiaries are measured and recorded in the respective
subsidiary's functional currency and translated into U.S. dollars for consolidated financial reporting purposes. The resulting
translation adjustments are recorded net of tax impact in the consolidated statement of other comprehensive income (loss).
Inflation
Although we have not experienced a material inflationary impact, the potential for a rise in inflationary pressures could
impact certain commodities, such as steel, aluminum and magnesium. Additionally, because we purchase various types of
equipment, raw materials, and component parts from our suppliers, they may be adversely impacted by their inability to adequately
mitigate inflationary, industry, or economic pressures. The overall condition of its supply base may possibly lead to delivery
delays, production issues, or delivery of non-conforming products by its suppliers in the future. As such, we continue to monitor
our vendor base for the best sources of supply and we continue to work with those vendors and customers to mitigate the impact
of inflationary pressures.
33
Item 8.
Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at October 31, 2017 and 2016
Consolidated Statements of Operations for the years ended October 31, 2017, 2016, and 2015
Consolidated Statements of Comprehensive Income (Loss) for the years ended October 31, 2017, 2016, and 2015
Consolidated Statements of Cash Flows for the years ended October 31, 2017, 2016, and 2015
Consolidated Statements of Stockholders' Equity for the years ended October 31, 2017, 2016, and 2015
Notes to Consolidated Financial Statements
35
36
37
38
39
40
41
34
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, 2017 and 2016, and the related consolidated statements of
operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years
in the period ended October 31, 2017. 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, 2017 and 2016, and the results of its
operations and its cash flows for each of the three years in the period ended October 31, 2017 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, 2017, 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 5, 2018 expressed an unqualified opinion.
/s/GRANT THORNTON LLP
Southfield, Michigan
January 5, 2018
35
SHILOH INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
ASSETS:
Cash and cash equivalents
Investment in marketable securities
Accounts receivable, net
Related-party accounts receivable
Prepaid income taxes
Inventories, net
Prepaid expenses and other assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Deferred income taxes
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current debt
Accounts payable
Other accrued expenses
Accrued income taxes
Total current liabilities
Long-term debt
Long-term benefit liabilities
Deferred income taxes
Interest rate swap agreement
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 per share; 5,000,000 shares authorized; no shares issued and
outstanding at October 31, 2017 and October 31, 2016, respectively
Common stock, par value $.01 per share; 50,000,000 shares authorized; 23,121,957 and
17,614,057 shares issued and outstanding at October 31, 2017 and October 31, 2016,
respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive loss, net
Total stockholders’ equity
Total liabilities and stockholders’ equity
October 31,
2017
2016
$
8,736
$
194
8,696
174
188,664
183,862
759
338
61,812
34,018
294,521
266,891
27,859
15,025
6,338
7,949
618,583
2,027
166,059
46,171
1,628
215,885
181,065
21,106
9,166
2,088
952
$
$
1,235
1,653
60,547
36,986
293,153
265,837
27,490
17,279
9,974
12,696
626,429
2,023
158,514
40,824
1,686
203,047
256,922
23,312
4,734
5,036
588
430,262
493,639
—
—
231
112,351
117,976
(42,237)
188,321
618,583
$
176
70,403
118,673
(56,462)
132,790
626,429
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
36
SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Years Ended October 31,
Net revenues
Cost of sales
Gross profit
Selling, general & administrative expenses
Amortization of intangible assets
Asset impairment, net
Restructuring
Operating income
Interest expense
Interest income
Other expense
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Income (loss) per share:
Basic income (loss) per share
Basic weighted average number of common shares
Diluted income (loss) per share
Diluted weighted average number of common shares
2017
$1,041,986
927,853
114,133
83,142
2,259
241
4,777
23,714
15,088
(4)
2,207
6,423
7,120
(697) $
2016
$ 1,065,834
969,658
96,176
73,417
2,258
2,031
—
18,470
18,086
(23)
1,890
(1,483)
(5,152)
3,669
$
2015
$ 1,073,052
986,865
86,187
63,028
2,295
—
—
20,864
9,898
(36)
387
10,615
4,710
5,905
$
$
$
(0.04) $
0.21
$
0.34
19,233
17,513
17,287
(0.04) $
0.21
$
0.34
19,233
17,526
17,310
The accompanying notes are an integral part of these consolidated financial statements.
37
SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollar amounts in thousands)
Net income (loss):
Other comprehensive income (loss):
Defined benefit pension plans & other postretirement benefits
Amortization of net actuarial loss
Actuarial net gain (loss)
Asset net gain (loss)
Income tax benefit (provision)
Total defined benefit pension plans & other post retirement benefits, net of tax
Marketable securities
Unrealized gain (loss) on marketable securities
Income tax benefit (provision)
Reclassification of other-than-temporary impairment losses on marketable securities
included in net income (loss)
Total marketable securities, net of tax
Derivatives and hedging
Unrealized gain (loss) on interest rate swap agreements
Income tax benefit (provision)
Reclassification adjustments for settlement of derivatives included in net income
Change in fair value of derivative instruments, net of tax
Foreign currency translation adjustments:
Foreign currency translation gain (loss)
Reclassification adjustments for settlement of foreign currency included in net income
Unrealized gain (loss) on foreign currency translation
Comprehensive income (loss), net
Years Ended October 31,
2017
2016
2015
$
(697) $ 3,669
$ 5,905
1,480
604
5,729
(3,001)
4,812
45
(250)
669
464
1,251
(5,081)
(3,006)
2,986
(3,850)
(183)
58
—
(125)
1,214
743
(3,008)
(387)
(1,438)
(689)
248
—
(441)
1,543
(1,151)
1,401
1,793
(1,577)
111
1,530
64
(2,912)
861
433
(1,618)
7,156
—
7,156
$ 13,528
(3,032)
530
(2,502)
(9,671)
—
(9,671)
$ (2,744) $ (7,263)
The accompanying notes are an integral part of these consolidated financial statements.
38
SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of deferred financing costs
Asset impairment, net
Restructuring
Deferred income taxes
Stock-based compensation expense
(Gain) loss on sale of assets
Other than temporary impairment on marketable securities
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories, net
Prepaids and other assets
Payables and other liabilities
Prepaid and accrued income taxes
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Sale of (investment in) joint venture
Acquisitions, net of cash acquired
Proceeds from sale of assets
Net cash used for investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital leases
Proceeds from long-term borrowings
Repayments of long-term borrowings
Payment of deferred financing costs
Proceeds from exercise of stock options
Proceeds from the issuance of common stock
Net cash (used for) provided by financing activities
Effect of foreign currency exchange rate fluctuations on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental Cash Flow Information:
Cash paid for interest
Cash paid for (refund of) income taxes
Non-cash Activities:
Capital equipment included in accounts payable
Years Ended October 31,
2017
2016
2015
$
(697) $
3,669
$
5,905
41,648
3,115
241
4,420
4,174
1,698
1,590
695
(2,919)
(888)
5,375
16,715
1,148
76,315
(48,395)
1,170
—
7,605
(39,620)
(879)
221,600
(296,770)
(1,779)
78
40,227
(37,523)
868
40
8,696
8,736
12,432
1,780
$
$
$
37,645
2,505
2,031
—
(2,704)
1,072
(55)
—
10,975
(2,408)
14,476
(1,843)
3,998
69,361
(28,324)
(1,500)
—
1,508
(28,316)
(860)
145,400
(186,301)
(1,785)
—
—
(43,546)
(1,903)
(4,404)
13,100
8,696
$
34,267
992
—
—
4,263
1,025
274
—
(27,607)
358
(8,665)
(5,923)
(1,516)
3,373
(39,376)
—
195
11,480
(27,701)
(821)
153,900
(121,589)
(5,529)
159
—
26,120
(706)
1,086
12,014
13,100
$
15,801
(5,855) $
9,373
1,770
4,239
$
5,604
$
4,225
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
39
SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
Common
Stock ($.01
Par Value)
Paid-In
Capital
Retained
Earnings
October 31, 2014
Net income
Other comprehensive loss, net of tax
Restricted stock and exercise of stock options
Stock-based compensation cost
Income tax effect on stock compensation
October 31, 2015
Net income
Other comprehensive loss, net of tax
Restricted stock and exercise of stock options
Stock-based compensation cost
October 31, 2016
Net loss
Other comprehensive income, net of tax
Restricted stock and exercise of stock options
Issuance of common stock
Stock-based compensation cost
October 31, 2017
$
$
$
$
172
—
—
1
—
—
173
—
—
3
—
176
—
—
3
52
—
231
$
$
$
$
68,035
—
—
158
1,025
116
69,334
—
—
(3)
1,072
70,403
—
—
75
40,175
1,698
112,351
$
$
$
$
109,099
5,905
—
—
—
—
115,004
3,669
—
—
—
118,673
(697)
—
—
—
—
117,976
$
$
Accumulated
Other
Comprehensive
Loss
(36,881) $
—
(13,168)
—
—
— $
(50,049) $
—
(6,413)
—
—
(56,462) $
—
14,225
—
—
—
(42,237) $
Total
Stockholders'
Equity
140,425
5,905
(13,168)
159
1,025
116
134,462
3,669
(6,413)
—
1,072
132,790
(697)
14,225
78
40,227
1,698
188,321
$
$
The accompanying notes are an integral part of these consolidated financial statements.
40
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and number of shares in thousands except per share data)
Note 1—Summary of Significant Accounting Policies
General: We are 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 thirty-two wholly-owned subsidiaries at locations in
Asia, Europe and North America for the fiscal year ended October 31, 2017.
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 33.9% of the Company's outstanding shares of
Common Stock as of October 31, 2017, 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: We recognize 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. We
record 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. We enter into contracts with customers in the development of molds, dies and tools (collectively, "tooling")
to be sold to such customers. We primarily record 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 Shiloh and our
customers and are recorded on a gross or net basis in accordance with current applicable revenue recognition accounting literature.
Inventories: Inventories are valued at the lower of cost or market, using the first-in first-out ("FIFO") method.
Pre-production and development costs: We enter into contractual agreements with certain customers for tooling. All
such tooling contracts relate to parts that we will supply to customers under supply agreements. Tooling costs are capitalized in
prepaid expenses and other assets we 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.
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.
Income Taxes: We utilize 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. We assess 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 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
41
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
calculation of our tax liabilities also involves dealing with uncertainties in the application of complex tax laws and regulations.
We recognize liabilities for uncertain income tax positions based on the Company’s estimate of whether, and the extent to which,
additional taxes will be required. We report interest and penalties related to uncertain income tax positions as income taxes.
Business Combinations: We include the results of operations of the businesses that it acquires as of the respective dates
of acquisition. We allocate the fair value of the purchase price of our 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.
Intangible Assets: Intangible assets with definitive lives are amortized over their estimated useful lives. We amortize our
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.
We perform 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
exists.
Goodwill: Goodwill, which represents the excess cost over the fair value of the net assets of businesses acquired, was
$27,859, net of foreign currency translation, as of October 31, 2017, or 4.5% of total assets, and $27,490, net of foreign currency
translation, as of October 31, 2016, or 4.4% of total assets.
Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed
in a business combination. Goodwill relates to and is assigned directly to specific reporting units. Goodwill is not amortized but
is subject to impairment assessment. In accordance with ASC 350, "Intangibles-Goodwill and Other," we assess goodwill for
impairment on an annual basis, or more frequently, if an event occurs or circumstances change that would more likely than not
reduce the fair value below the carrying amount. Our annual impairment testing is performed as of September 30. Such assessment
can be done on a qualitative or quantitative basis. When conducting a qualitative assessment, we consider relevant events and
circumstances that affect the fair value or carrying amount of the reporting unit. A quantitative test is required only if we conclude
that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or we elect not to perform a qualitative
assessment of a reporting unit. We consider the extent to which each of the events and circumstances identified affect the comparison
of the reporting unit's fair value or the carrying amount. Such events and circumstances could include macroeconomic conditions,
industry and market considerations, overall financial performance, entity and reporting unit specific events, product brand level
specific events and cost factors. We place more weight on the events and circumstances that may affect its determination of whether
it is more likely than not that the fair value of the reporting unit is less than its carrying amount. These factors are all considered
by management in reaching its conclusion about whether to perform a quantitative goodwill impairment test.
We perform annual goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount,
including goodwill. If the carrying amount exceeds the fair value, we recognize an impairment charge for the amount by which
the carrying amount exceeds the fair value, not to exceed the total amount of goodwill in that reporting unit.
Share-based Payments: We record compensation expense for the fair value of nonvested stock option awards and restricted
stock awards over the remaining vesting period. We have elected to use the simplified method to calculate the expected term of
the stock options outstanding at five to six years and have utilized historical weighted average volatility. We determine 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, we do not estimate a forfeiture rate at the time of grant instead we elected to recognize share-based compensation
expense when actual forfeitures occur.
42
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The restricted stock and restricted stock units are valued based upon a 20-day Exponential Moving Average as of the Friday
prior to the grant of an award. In addition, we do not estimate a forfeiture rate at the time of grant instead we elected to recognize
share-based compensation expense when actual forfeitures occur. We recognized an additional expense of $60 for the early
adoption of ASU 2016-09.
Employee Benefit Plans: We accrue 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, 2017, approximately 96% of our US
employees of Shiloh participated in discretionary profit sharing plans administered by us. We also provide postretirement medical
benefits to 12 former employees.
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 we have conservatively contributed
to the defined benefit plans and therefore contributions for fiscal 2017 are not required until the third quarter of 2018.
Cash and Cash Equivalents: 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 Shiloh’s cash and cash equivalent bank balances
exceeded federally insured limits at October 31, 2017. Cash in foreign subsidiaries totaled $8,654 and $8,219 at October 31, 2017
and October 31, 2016, respectively.
Concentration of Risk: We sell products to customers primarily in the automotive, commercial vehicle and industrial
markets. Financial instruments, which potentially subject us to concentration of credit risk, are primarily accounts receivable. We
perform on-going credit evaluations of our 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.
We do not have financial instruments with off-balance sheet risk. Refer to Note 21-Business Segment Information for discussion
of concentration of revenues.
We believe that the concentration of credit risk in our trade receivables is substantially mitigated by our ongoing credit
evaluation process and relatively short collection terms. We do not generally require collateral from customers. We establish 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 our debt and derivative instruments
are considered to approximate the fair value of these instruments based on the borrowing rates currently available to us for loans
with similar terms and maturities.
Derivative Financial Instruments: We use interest rate swaps to manage volatility of underlying exposures. We recognize
all of our 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. We do not hold or issue derivative
financial instruments for trading or speculative purposes. Our objective for holding derivatives is to minimize risk using the most
effective and cost-efficient methods available.
Foreign Currency Translation: Our functional currency is the U.S. dollar as a substantial part of our operations are based
in the U.S. The financial statements of all subsidiaries with a functional currency other than the U.S. Dollar have been translated
into U.S. Dollars. 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
43
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
rate for the period. The resulting translation adjustments are recorded as a component of Other Comprehensive Income (Loss)
("OCI"). We engage 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 operations.
Guarantees: We have certain indemnification clauses within our Credit Agreement (as defined above) and certain lease
agreements that are considered to be guarantees within the scope of ASC 460, "Guarantees." We do not consider these guarantees
to be probable, and we cannot estimate their maximum exposure. Additionally, our exposure to warranty-related obligations is not
material.
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.
Recent Accounting Pronouncements
Standard
ASU 2017-09
Compensation - Stock
Compensation (Topic 718)
ASU 2017-07
Compensation - Retirement
Benefits (Topic 715):
Improving the Presentation
of Net Periodic Pension
Cost and Net Periodic
Postretirement Benefit Cost
ASU 2017-04
Intangibles-Goodwill and
Other (Topic 350):
Simplifying the Test for
Goodwill Impairment
Description
This amendment clarifies when a change
to the terms or conditions of a share-
based payment award must be accounted
for as a modification. The new guidance
requires modification accounting if the
fair value, vesting condition or the
classification of the award is not the same
immediately before and after a change to
the terms and conditions of the award.
The amendment should be adopted on a
prospective basis.
This amendment requires the presentation
of the service cost component of net
benefit cost to be in the same line item as
other compensation costs arising from
services rendered by the pertinent
employees during the period. All other
components of net benefit cost should be
presented separately from the service cost
component and outside of a subtotal of
earnings from operations, or separately
disclosed. The amendments should be
adopted on a retrospective basis.
This amendment 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
amendment should be applied on a
prospective basis.
Effective Date
October 1, 2018
with early adoption
permitted.
First quarter of
fiscal year ending
October 31, 2018.
Effect on our financial
statements and other
significant matters
We do not expect the adoption
of these provisions to have a
significant impact on the
Company's consolidated
financial statements as it is
not our practice to change
either the terms or conditions
of share-based payment
awards once they are granted.
We do not expect the adoption
of these provisions to have a
significant impact on the
Company's consolidated
statement of financial position
or financial statement
disclosures.
First quarter of
fiscal year ending
October 31, 2021
with early adoption
permitted.
We have early adopted these
provisions during our third
quarter of fiscal 2017 and any
impact will be reflected in the
Company's consolidated
financial statements.
44
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
ASU 2014-09
Revenue from Contracts
with Customers
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
ASU 2016-02
Leases
First quarter of
fiscal year ending
October 31, 2019
The amendments require companies to
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
amendments should be applied on either
a full or modified retrospective basis,
which clarifies existing accounting
literature relating to how and when a
company recognizes revenue. 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 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 fiscal 2016, the FASB issued
ASUs 2016-10, 2016-11 and 2016-12.
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.
This amendment's 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.
First quarter of
fiscal year ending
October 31, 2017.
We are planning a bottom up
approach to analyze the
standard's impact on our
revenues by looking at
historical policies and
practices and identifying the
differences from applying the
new standard to our revenue
stream. While we have not yet
identified any material
changes in the timing of
revenue recognition, our
evaluation is ongoing and not
complete. We have
established a cross-functional
coordinated team to
implement the guidance
related to the recognition of
revenue from contracts with
customers. We are in the
process of assessing our
customer contracts,
identifying contractual
provisions that may result in a
change in the timing or the
amount of revenue recognized
in comparison with current
guidance, as well as assessing
the enhanced disclosure
requirements of the new
guidance. In addition, we
have not selected a transition
date or method nor have we
determined the effect of the
standard to our consolidated
financial statements.
We have adopted these
provisions during our first
quarter of fiscal 2017 and any
impact will be reflected on the
Company's consolidated
financial statements.
First quarter of
fiscal year ending
October 31, 2020
with early adoption
permitted.
We are currently evaluating
the requirements of ASU
2016-02 and have not yet
determined its impact on the
Company's consolidated
financial statements.
This amendment requires lessees to
recognize a lease liability and a right-of-
use asset on the balance sheet and aligns
many of the underlying principles of the
new lessor model with those in
Accounting Standards Codification Topic
606, Revenue from Contracts with
Customers. The standard requires a
modified retrospective transition for
capital and operating leases existing at or
entered into after the beginning of the
earliest comparative period presented in
the financial statements, but it does not
require transition accounting for leases
that expire prior to the date of initial
adoption.
45
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
ASU 2016-01
Recognition and
Measurement of Financial
Assets and Financial
Liabilities
ASU 2015-11
Inventory
This amendment addresses 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"). The
amendments should be applied by means
of a cumulative-effect adjustment to the
balance sheet in year of adoption.
This amendment simplifies the
measurement of inventory by requiring
inventory to be measured at the lower of
cost and net realizable value. The
amendment should be applied on a
prospective basis.
First quarter of
fiscal year ending
October 31, 2019
with early adoption
permitted.
We do not expect the adoption
of these provisions to have a
significant impact on the
Company's consolidated
statement of financial position
or financial statement
disclosures.
First quarter of
fiscal year ending
October 31, 2018.
We do not expect the adoption
of these provisions to have a
significant impact on the
Company's consolidated
statement of financial position
or financial statement
disclosures.
Note 2—Asset Impairment
During fiscal 2017, we recorded an asset impairment charge of $200 on an asset held for sale within the Level 2 of the
fair value hierarchy and asset impairment charges of $41 related to idled equipment.
During fiscal 2016, we recorded an asset impairment charge of $273 to reduce the real property of our 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.
Note 3—Restructuring Charges
During the fourth quarter of fiscal 2017, management decided to idle a manufacturing facility located in Pendergrass,
Georgia. The strategic decision will provide a more efficient and focused footprint allowing us to operate with lower fixed costs.
We are anticipating that operations will be idled by the end of 2018. Total restructuring costs related to the idling of the Pendergrass
facility were $4,450. These costs primarily included the impairment of the building and manufacturing equipment, employee-
related costs, legal costs and other related costs. Also, during fiscal 2017, we incurred employee-related costs of $327 related to
restructuring initiatives at our Dickson, Tennessee facility. We expect to incur approximately $4,000 of additional restructuring
costs related to the Pendergrass facility initiated as of October 31, 2017. Any future restructuring actions will depend upon market
conditions, customer actions and other factors.
The following table presents information about restructuring costs recorded in fiscal 2017:
Impairment of fixed assets
Employee costs
Legal and professional costs
Other
October 31, 2017
I
$
m
$
4,085
392
270
30
4,777
46
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table presents a rollforward of the beginning and ending liability balances related to the restructuring costs
which are included in the consolidated balance sheets in other accrued expenses for the above-mentioned actions through
October 31, 2017:
Employee costs
Legal and professional costs
Note 4—Marketable Securities
Balance as of
October 31, 2016
Restructuring
Expense
Payments
Balance as of
October 31, 2017
—
—
— $
415
270
685
350
—
$
350
$
65
270
335
$
On March 11, 2014, we entered into a manufacturing agreement with Velocys, plc ("Velocys"). As part of the agreement,
we 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. The agreement was terminated on March 30, 2017. In May 2017, we considered the
decline in market value of our investment in Velocys to be other than temporary and recognized an other than temporary impairment
loss of $695, which was recorded within other expense in our consolidated statement of operations.
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 $1,271 and $790 at October 31, 2017 and 2016, respectively. We recognized bad debt expense of $493 and $210
during fiscal 2017 and 2015, respectively, and recognized a benefit of $10 from recoveries of receivables previously expensed
during fiscal 2016, in the consolidated statements of operations.
We continually monitor our exposure with our customers and additional consideration is given to individual accounts in
light of the market conditions in the automotive, commercial vehicle and industrial markets.
As a part of our working capital management, the Company entered into a factoring agreement with a third party financial
institution ("institution") for the sale of certain accounts receivables with recourse. The activity under this agreement is accounted
for as a sale of accounts receivables under ASC 860 "Transfers and Servicing". This agreement relates exclusively to the accounts
receivables of certain Swedish customers. The amount sold varies each month based on the amount of underlying receivables and
cash flow requirements of the Company. In addition, the agreement addresses events and conditions which may obligate us to
immediately repay the institution the purchase price of the receivables sold.
The total amount of accounts receivable factored was $7,567 as of October 31, 2017. As these sales of accounts receivable
are with recourse, $8,072 was recorded in accounts payable as of October 31, 2017. The cost incurred on the sale of these receivables
was immaterial for the fiscal years ended October 31, 2016. The cost of selling these receivables is dependent upon the number
of days between the sale date of the receivables and the date the client’s invoice is due and the interest rate. The expense associated
with the sale of these receivables is recorded as a component of selling, general and administrative expense in the accompanying
consolidated statements of operations.
Note 6—Inventories
Inventories consist of the following:
Raw materials
Work-in-process
Finished goods
Total inventories
47
October 31,
2017
2016
$
$
23,389
18,653
19,770
61,812
$
$
26,367
16,149
18,031
60,547
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 $5,535 and $2,946 at October 31, 2017 and 2016, respectively.
Note 7—Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
Tooling (1)
Prepaid expenses and other assets
Assets held for sale
Total
October 31,
2017
2016
$
$
13,629
14,089
6,300
34,018
$
$
19,792
10,694
6,500
36,986
(1) Development of molds, dies and tools (collectively, "tooling") related to new program awards that go into production over the next twelve months
and are reimbursable by the customer upon successful delivery and approval of an engineered part.
We invested in manufacturing equipment for one of our facilities. During the fourth quarter of fiscal 2016, we 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, we recorded an impairment charge of of $200 in fiscal 2017 to properly reflect the $6,300 fair
value of the equipment. In 2016, we recorded $1,282 of impairment related to this equipment - see Note 2 - Asset Impairment
for further details. We are actively working with the supplier to identify a buyer.
Note 8—Other Assets
Other assets consist of the following:
Deferred financing costs, net
Tooling
Investment in joint venture
Other
Total
October 31,
2017
2016
$
$
4,550
784
—
2,615
7,949
$
$
6,098
881
1,300
4,417
12,696
Deferred financing costs are amortized over the term of the debt. During fiscal 2017, 2016, and 2015, amortization of
these costs amounted to $3,115, $2,505, and $992, respectively. Accumulated amortization was $9,886 and $6,771 as of October 31,
2017 and 2016, respectively. During fiscal years 2017 and 2016, we capitalized $1,779 and $1,785, respectively, of costs related
to the Credit Agreement (as defined below).
48
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 9—Property, Plant and Equipment
Property, plant and equipment consist of the following:
Land and improvements
Buildings and improvements
Machinery and equipment
Furniture and fixtures
Construction in progress
Total, at cost
Less: Accumulated depreciation
Property, plant and equipment, net
October 31,
2017
2016
$
$
11,416
124,406
504,785
22,209
40,356
703,172
436,281
266,891
$
$
11,358
117,291
505,768
18,200
37,612
690,229
424,392
265,837
Depreciation expense was $39,389, $35,387, and $31,956 in fiscal 2017, 2016, and 2015, respectively.
During the years ended October 31, 2017 and 2016, interest capitalized as part of property, plant and equipment was $793
and $370, respectively. We had unpaid capital expenditures included in accounts payable of approximately $4,239, $5,604 and
$4,225 at October 31, 2017, 2016 and 2015, respectively, and consequently such amounts are excluded from capital expenditures
in the accompanying consolidated statements of cash flows for the fiscal years 2017 and 2016.
Capital Leases:
Leased Property:
Machinery and equipment
Less: Accumulated depreciation
Leased property, net
October 31,
2017
2016
$
$
$
7,099
2,420
4,679
$
$
$
$
$
$
7,295
1,781
5,514
895
624
401
1,840
3,760
373
4,133
Future minimum rental payments to be made under capital leases at October 31, 2017 are as follows:
Twelve Months Ending October 31,
2018
2019
2020
2021
Plus amount representing interest ranging from 3.05% to 3.77%
Total obligations under capital leases
49
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 10—Financing Arrangements
Debt consists of the following:
Credit Agreement —interest at 3.88% and 5.14% at October 31, 2017 and October 31, 2016,
respectively
$
178,200
$
252,900
October 31,
2017
2016
Equipment security note
Capital lease obligations
Insurance broker financing agreement
Total debt
Less: Current debt
Total long-term debt
482
3,760
650
183,092
2,027
996
4,388
661
258,945
2,023
$
181,065
$
256,922
At October 31, 2017, we had total debt, excluding capital leases, of $179,332, consisting of a revolving line of credit
under the Credit Agreement of floating rate debt of $178,200, which considers interest rate swap arrangements in Note 10 and
fixed rate debt of $1,132. The weighted average interest rate of all debt was 4.51% and 4.90% for fiscal years 2017 and 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 31, 2017, we executed the Amendment which among other things: provides for an aggregate availability of
$350,000, $275,000 of which is available to the Company through the Tranche A Facility and $75,000 of which is available to the
Dutch borrower through the Tranche B Facility, and eliminates the scheduled reductions in such availability; increases the aggregate
amount of incremental commitment increases allowed under the Credit Agreement to up to $150,000 subject to our pro forma
compliance with financial covenants, the Administrative Agent’s approval and the Company obtaining commitments for any such
increase. The Amendment extended the commitment period to October 31, 2022.
On July 31, 2017, we executed the Seventh Amendment which modifies investments in subsidiaries and various cumulative
financial covenant thresholds, in each case, under the Credit Agreement. The Seventh Amendment also enhances our ability to
take advantage of customer supply chain finance programs.
On October 28, 2016, we 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, we 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 our subsidiaries throughout the year ending October 31, 2016, subject to certain quarterly baskets.
On April 29, 2015, we 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 our pro forma compliance with financial covenants, the administrative agent's
approval, and the Company obtaining commitments for such increase.
50
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 our pro forma compliance with financial covenants.
Borrowings under the Credit Agreement bear interest, at our 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 3.0% and of 0.50% to 2.0% on base rate loans depending on our leverage ratio.
The Credit Agreement contains customary restrictive and financial covenants, including covenants regarding our
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. We were in compliance
with the financial covenants as of October 31, 2017 and October 31, 2016.
After considering letters of credit of $7,253 that we have issued, unused commitments under the Credit Agreement were
$164,547 at October 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 our domestic subsidiaries and 65% of the stock of foreign subsidiaries.
Other Debt:
On August 1, 2017, we entered into a finance agreement with an insurance broker for various insurance policies that
bears interest at a fixed rate of 2.05% and requires monthly payments of $94 through May 2018. As of October 31, 2017, $650
of principal remained outstanding under this agreement and was classified as current debt in our consolidated balance sheets.
On September 2, 2013, we 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, 2017, $482 of principal remained outstanding under this
agreement and was classified as current debt in our consolidated balance sheets.
We maintain capital leases for equipment used in our manufacturing facilities with lease terms expiring between 2018
and 2021. As of October 31, 2017, the present value of minimum lease payments under our capital leases amounted to $3,760.
Derivatives:
On February 25, 2014, we 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 our 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 our
future interest payments at 2.74% plus the applicable rate, as described above, on an amount of our 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, we 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. We
determined the mark-to-market adjustment for the interest rate swap to be a gain of $1,793 and $64, net of tax, for the fiscal years
ended October 31, 2017 and 2016, respectively, which is reflected in other comprehensive income (loss). The base notional amounts
of $25,000 each or $75,000 total that commenced during 2015 and 2016 resulted in additional interest expense of $1,401, $1,530,
and $433 related to the interest rate swap settlements for the fiscal years ended October 31, 2017, 2016, and 2015 respectively.
51
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Scheduled repayments of debt for the next five years are listed below:
Twelve Months Ending October 31,
Credit
Agreement
Equipment
Security Note
Capital Lease
Obligations
Other Debt
Total
2018
2019
2020
2021
2022
Total
$
— $
482
$
—
—
—
178,200
—
—
—
—
895
624
401
1,840
—
$
650
$
2,027
—
—
—
—
624
401
1,840
178,200
$
178,200
$
482
$
3,760
$
650
$
183,092
Note 11—Goodwill and Intangible Assets
Goodwill:
In accordance with FASB ASC Topic 350, "Intangibles – Goodwill and Other," goodwill must be reviewed for impairment
annually, or more frequently if events and circumstances arise that suggest the asset may be impaired. We conduct our review for
goodwill impairment on September 30 of each year. Goodwill impairment testing is performed at the reporting unit level. The fair
value is compared to the carrying value including goodwill. If the carrying value exceeds the fair value, then goodwill impairment
exists. We performed a quantitative assessment at the reporting unit level in 2017 and 2016 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, 2015
Foreign currency translation and other
Balance October 31, 2016
Foreign currency translation and other
Balance October 31, 2017
Intangibles:
$
27,992
(502)
27,490
369
$
27,859
The changes in the carrying amount of finite-lived intangible assets for the years ended October 31, 2017 and 2016 are
as follows:
Balance October 31, 2015
Amortization expense
Foreign currency translation
Balance October 31, 2016
Amortization expense
Foreign currency translation
Customer
Relationships
$
14,311 $
(1,330)
(6)
12,975
(1,332)
5
Developed
Technology
Non-Compete
Trade Name
Trademark
Total
3,540 $
(772)
—
2,768
(771)
—
63 $
(16)
—
47
(16)
—
1,500 $
(123)
—
1,377
(123)
—
129 $
(17)
—
112
(17)
—
19,543
(2,258)
(6)
17,279
(2,259)
5
Balance October 31, 2017
$
11,648 $
1,997 $
31 $
1,254 $
95 $
15,025
52
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:
Customer relationships
Developed technology
Non-compete
Trade name
Trademark
Total intangible assets
Customer relationships
Developed technology
Non-compete
Trade name
Trademark
Total intangible assets
October 31, 2017
Weighted
Average Useful
Life (years)
Gross
Carrying Value
Net of Foreign
Currency
Accumulated
Amortization
13.2
7.3
2.3
14.8
10.0
$
17,569
$
5,007
824
1,875
166
$
25,441
$
(5,921)
(3,010)
(793)
(621)
(71)
(10,416)
$
Net
11,648
1,997
31
1,254
95
$
15,025
October 31, 2016
Gross
Carrying Value
Net of Foreign
Currency
Accumulated
Amortization
$
17,564
$
5,007
824
1,875
166
$
25,436
$
(4,589)
(2,239)
(777)
(498)
(54)
(8,157)
$
Net
12,975
2,768
47
1,377
112
$
17,279
Total amortization expense for the years ended October 31, 2017, 2016 and 2015 was $2,259, $2,258, and $2,295,
respectively. Amortization expense related to intangible assets for the following fiscal years ending is estimated to be as follows:
2018
2019
2020
2021
2022
Thereafter
$
2,123
1,716
1,701
1,701
1,701
6,083
$
15,025
53
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 12—Operating Leases
We lease 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. Our operating leases are charged to expense over the lease term, on a straight-line basis.
The longest lease term of our current leases extends to May 2029. Rent expense under operating leases for fiscal years
2017, 2016, and 2015 was $11,147, $9,544 and $8,449, respectively.
Future minimum lease payments under operating leases are as follows at October 31, 2017:
2018
2019
2020
2021
2022
Thereafter
Total commitments under non-cancelable operating leases
Note 13—Employee Benefit Plans
$
$
11,328
10,448
9,076
7,379
3,121
3,885
45,237
We maintain pension plans, which are frozen, covering our eligible employees. We also provide an unfunded postretirement
health care benefit plan for 12 retirees and their dependents. The measurement date for our employee benefit plans coincides with
our fiscal year end, October 31.
Obligations and Funded Status U.S. Plans at October 31
Change in benefit obligation:
Benefit obligation at beginning of year
Interest cost
Actuarial gain (loss)
Benefits paid
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status, benefit obligations in excess of plan assets
Pension Benefits
Other Post Retirement
Benefits
2017
2016
2017
2016
$ (90,784)
(3,282)
576
4,427
(89,063)
64,458
9,184
—
(4,427)
69,215
$ (19,848)
$ (86,827)
(3,566)
(5,100)
4,709
(90,784)
66,655
1,562
950
(4,709)
64,458
$ (26,326)
$
$
(372)
(13)
28
44
(313)
—
—
44
(44)
—
(313)
$ (423)
(16)
20
47
(372)
—
—
47
(47)
—
$ (372)
54
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The above amounts are recorded in the liabilities section of the consolidated balance sheets as follows:
Pension Benefits
Other Post Retirement
Benefits
2017
2016
2017
2016
Other accrued expenses (1)
Long-term benefit liabilities
Total
$
— $ (4,120)
(22,206)
$ (26,326)
(19,848)
$ (19,848)
$
$
(38)
(275)
(313)
$
$
(42)
(330)
(372)
(1) As pension assets exceed expected benefit payments over the next year, liabilities for the pension plan are considered long-term.
Components of Net Periodic Benefit Cost
U.S. Plans
Pension Benefits
Other Post Retirement Benefits
2017
2016
2015
2017
2016
2015
Interest cost
$
3,282
$
Expected return on plan assets
Amortization of net actuarial loss
Net periodic benefit cost
(3,455)
1,508
1,335
$
$
3,566
(4,568)
1,239
$
237
$
3,466
(4,698)
1,186
(46)
$
$
13
—
10
23
$
$
16
—
12
28
$
$
24
—
28
52
We expect to recognize in the consolidated statements of operations the following amounts that will be amortized from
accumulated other comprehensive loss in fiscal 2018.
Amortization of net actuarial loss
Pension Benefits
$
(1,311)
$
Other
Post Retirement
Benefits
(7)
We have recognized the following cumulative pre-tax actuarial losses, prior service costs and transition obligations in
accumulated other comprehensive loss:
Net actuarial loss
Recognized in accumulated other comprehensive loss
Pension Benefits
Other Post Retirement
Benefits
2017
2016
2017
2016
$ 43,982
$ 51,795
$ 43,982
$ 51,795
$
$
84
84
$
$
122
122
55
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Additional Information on U.S. Plans
Increase (decrease) in minimum liability included in other comprehensive
income (loss)
$ (7,813)
$ 6,867
$
(38)
$
31
Pension Benefits
Other Post Retirement
Benefits
2017
2016
2017
2016
Assumptions for U.S. Plans:
Weighted-average assumptions used
to determine benefit obligations at October 31
Discount rate
Pension Benefits
Other Post Retirement Benefits
2017
3.65%
2016
3.70%
2015
4.20%
2017
3.65%
2016
3.70%
2015
4.20%
Pension Benefits
Other Post Retirement Benefits
Weighted-average assumptions used to determine net
periodic benefit costs for years ended October 31
Discount rate
Expected long-term return on plan assets
2017
3.70%
6.50%
2016
4.20%
7.50%
2015
4.00%
7.50%
2017
3.70%
—
2016
3.70%
—
2015
4.00%
—
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 2017, the assumptions used to determine net periodic benefit costs were
established at October 31, 2016, while the assumptions used to determine the benefit obligations were established at October 31,
2017
We use 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.
We determine 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. Our 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.
Assumed health care trend rates
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
October 31,
2017
7.0%
6.8%
2019
2016
7.0%
6.8%
2018
56
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plan. Our 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, 2017:
Effect on total of service and interest cost components
Effect on post retirement obligation
Plan Assets - U.S. Plan Assets
One-
Percentage
Point Increase
One-
Percentage
Point Decrease
$
$
3
23
$
$
(3)
(20)
We have established a targeted asset allocation percentage by asset category and rebalances the assets of each U.S. plan
when pension contributions are funded. Our pension plan weighted-average asset allocations at October 31, 2017 and 2016, by
asset category and comparison to the target allocation percentage are as follows:
Asset Category
Equity securities
Debt securities
Real estate
Total
Target
Allocation
Percentage
30-70%
30-70%
0-10%
Plan Assets at October 31,
2017
60%
34%
6%
100%
2016
59%
35%
6%
100%
Our investment policy for assets of the U.S. plans is to obtain a reasonable long-term return consistent with the level of
risk assumed. We also seek to control the cost of funding the plans within prudent levels of risk through the investment of plan
assets and we seek 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.
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.
57
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 we believe our 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.
Investments totaling $69,215 at October 31, 2017 and $64,458 at October 31, 2016 measured at fair value on a recurring
basis are summarized below:
U.S. Plans
Investments
Equity
Large U.S. Equity
Small/Mid U.S. Equity
International Equity
Fixed Income
Money Market
Government
Corporate
Real Estate (Primarily Commercial)
Total Investments
Fair Value Measurements
Fair Value Measurements
at October 31, 2017 Using
at October 31, 2016 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)
$
16,778
$
6,381
$
12,904
$
10,294
8,340
9,169
—
—
18,876
—
694
—
314
—
4,513
4,150
7,654
6,420
—
—
17,738
—
622
—
—
309
4,571
3,946
$
53,163
$
16,052
$
44,716
$
19,742
Valuation
Technique
Market
Market
Market
Market
Market
Market
Market
58
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Cash Flows
Contributions
We expect to contribute approximately $450 to our U.S. pension plans in fiscal 2018. We were not required to fund the
plan in fiscal 2017.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the
plans:
2018
2019
2020
2021
2022
2023-2026
Non-U.S. Plans
Pension Benefits
4,620
$
4,380
4,320
4,310
4,850
25,080
$
Other Benefits
$ 38
37
37
26
24
$ 101
For our Swedish operations, the majority of the pension obligations are covered by insurance policies with insurance
companies. Pension commitments in our Polish operations are $1,008 at the end of fiscal 2017 and $826 at the end of fiscal 2016.
The liability represents the present value of future obligations and is calculated on actuarial basis. The Polish operations recognized
expense of $148, $162 and $115 for the fiscal years ended October 31, 2017, 2016, and 2015, respectively.
The insurance contracts guarantee a minimum rate of return. We have 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, we maintain a number of defined contribution plans for our
United States locations. Under the terms of the plans, eligible employees may contribute a selected percentage of their base pay.
We match a percentage of the employees' contributions up to a stated percentage, subject to statutory limitations. We recorded an
expense related to the matching program for the fiscal years ended 2017, 2016 and 2015 of $4,310, $3,959 and $3,845, respectively.
Labor Agreements
As of October 31, 2017, we had approximately 3,600 employees. Organized labor unions represent approximately 17%
of the Company's U.S. hourly employees and approximately 92% of the Company's non-U.S. employees.
Each of our 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 that we use may produce a fair value calculation that may not be indicative of net realizable value or reflective
of future fair values. Furthermore, while we believe our 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.
59
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Assets and liabilities remeasured and disclosed at fair value on a recurring basis at October 31, 2017 and 2016 are set
forth in the table below:
October 31, 2016
Interest Rate Swap Contracts
Marketable Securities
October 31, 2017
Interest Rate Swap Contracts
Marketable Securities
Asset
(Liability)
Level 1
Level 2
Valuation
Technique
$
$
(5,036) $
174
(2,088)
194
$
— $
—
—
(5,036)
174
Income Approach
Income Approach
(2,088)
Income Approach
194
$
— Market Approach
We calculate the fair value of our 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 our counterparties.
We calculate the fair value of our marketable securities by using the closing stock price on the last business day of the
quarter.
Assets measured at fair value on a nonrecurring basis at October 31, 2017 and 2016 were related to machinery and
equipment of $200 and $1,758, respectively. Refer to Note 2, Asset Impairment, for further information regarding these charges
and the associated level of input.
Note 15—Common Stock
On July 19, 2017, we issued 5,250 shares of common stock in connection with an equity offering. We raised a total of
$40,227, net of underwriting discounts and offering costs of $3,086. The proceeds from the offering were used to repay outstanding
indebtedness under our Credit Agreement. The shares were registered under the Securities Act of 1933, as amended, pursuant to
a "shelf" registration statement on Form S-3, as amended, initially filed with the SEC on March 9, 2017 and declared effective as
of March 24, 2017, with a proposed maximum aggregate offering price of $175,000. The terms and conditions under which the
shares were issued and sold are described in a Prospectus dated March 24, 2017, as supplemented by a Prospectus dated July 13,
2017 (filed with the SEC on July 14, 2017).
60
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 16—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 years ended October 31, 2017, 2016, and 2015, approximately 68, 53, and 143 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
2017
Net income (loss) available to common stockholders
Basic weighted average shares
Effect of dilutive securities:
Restricted stock units and stock options (1)
Diluted weighted average shares
Basic earnings (loss) per share
Diluted earnings (loss) per share
$ (697)
$ 3,669
$ 5,905
19,233
17,513
17,287
—
13
23
19,233
17,526
17,310
$(0.04)
$(0.04)
$0.21
$0.21
$0.34
$0.34
(1) Due to loss for the fiscal year ended October 31, 2017, no restricted share awards and units are included because the effect would be anti-dilutive.
Note 17—Stock Incentive Compensation
Stock Incentive Compensation falls under the scope of ASC 718 "Compensation – Stock Compensation" and affects the
stock awards that have been granted and requires us to expense share-based payment ("SBP") awards with compensation cost for
SBP transactions measured at fair value. For stock options, we have 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. For restricted
stock and restricted stock units, we are computing fair value based on a 20-day EMA as of the close of business the Friday preceding
the award date. We do not estimate a forfeiture rate at the time of grant, instead we elected to recognize share-based compensation
expense when actual forfeitures occur.
2016 Equity and Incentive Compensation Plan
Long-Term/Annual Incentives
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 our 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 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 shares during any calendar year. Also, an
individual's award of restricted shares, restricted share units and performance based awards is limited to 350 shares during any
calendar year.
61
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, 2017, 2016,
and 2015:
Stock Options
Restricted Stock
Restricted Stock Units
Outstanding at:
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
Restricted
Shares
20 Day
EMA
Weighted
Average
Remaining
Contractual
Life
Restricted
Share Units
20 Day
EMA
Weighted
Average
Remaining
Contractual
Life
November 1, 2014
Granted
Options exercised or
restricted stock vested
Forfeited or expired
October 31, 2015
Granted
Options exercised or
restricted stock vested
Forfeited or expired
October 31, 2016
Granted
Options exercised or
restricted stock vested
Forfeited or expired
October 31, 2017
123
—
(19)
(13)
91
—
—
(1)
90
—
(8)
(24)
58
$9.69
—
8.19
11.80
$9.70
—
—
12.04
$9.67
—
9.79
13.38
$8.16
5.15
117
$16.81
2.58
84
11.22
(69)
(8)
124
312
(54)
(6)
376
247
(174)
(8)
441
14.99
20.64
$13.77
4.30
16.53
5.71
$6.11
7.94
6.11
9.57
$7.07
2.28
1.83
1.60
4.10
3.04
2.53
—
—
—
—
—
22
—
—
22
29
(14)
(1)
36
—
—
—
—
—
$4.17
—
—
$4.17
8.62
4.17
7.06
$7.69
1.46
1.82
We recorded stock compensation expense related to stock options, restricted stock and restricted stock units during the
fiscal years ended October 31, 2017, 2016 and 2015 as follows:
Stock options
Restricted stock (1)
Restricted stock units
Total
2017
2016
2015
$
$
— $
— $
1,583
115
1,035
37
1,698
$
1,072
$
15
1,010
—
1,025
(1) Includes $60 of additional expense from the impact of early adopting ASU 2016-09 for the fiscal year ended October 31, 2017.
Stock Options
The exercise price of each stock option equals the market price of our common stock on its grant date. Compensation
expense is recorded at the grant date fair value, adjusted for forfeitures as they occur, and is recognized on a straight-line basis
over the applicable vesting period. Our stock options generally vest over three years, with a maximum term of ten years. Incentive
stock options were not granted during fiscal years 2017, 2016, and 2015.
Cash received from the exercise of options for the fiscal years ended October 31, 2017 and 2015 was $78 and $159,
respectively. Stock options were not exercised during the fiscal year ended October 31, 2016. At October 31, 2017, the options
outstanding and exercisable had an intrinsic value of $137. Options that have an exercise price greater than the market price on
October 31, 2017 were excluded from the intrinsic value computation. The intrinsic value of options exercised during fiscal 2017
and 2015 was $40 and $18, respectively. Stock options were not exercised during the fiscal year ended October 31, 2016.
62
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table provides additional information regarding options outstanding as of October 31, 2017:
Exercise Prices
Options Outstanding
Exercise Price of Options
Outstanding and Options
Exercisable
Options Exercisable
Weighted Average Remaining
Contractual Life
$2.11
$5.30
$12.04
$8.10
Totals
8,000
18,166
26,000
6,000
58,166
Restricted Stock Awards
$2.11
$5.30
$12.04
$8.10
8,000
18,166
26,000
6,000
58,166
1.12
1.78
3.11
4.14
The grant date fair value of each restricted stock award equals the fair value of our common stock based on a 20-day
EMA as of the close of business on the Friday preceding the award date. Compensation expense is recorded at the grant date fair
value, adjusted for forfeitures as they occur, and is recognized over the applicable vesting periods. The vesting periods range
between one to four years. As of October 31, 2017, there was approximately $1,982 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 our common stock based on a 20-day EMA
as of the close of business on the Friday preceding the award date. Compensation expense is recorded at the grant date fair value,
adjusted for forfeitures as they occur, and is recognized over the applicable vesting periods. The vesting periods range between
one to three years. As of October 31, 2017, there was approximately $181 of total unrecognized compensation expense related to
these restricted stock units that is expected to be recognized over the next three fiscal years.
Cash Incentive Award Agreements
Under the provisions of the 2016 Plan, we granted certain awards pursuant to Cash Incentive Award Agreements to 12
executives on March 10, 2016. Additional awards were granted on December 14, 2016 to approximately 70 executives and director
level employees. These awards were designed to provide the individuals with an incentive to participate in the long-term success
and growth of the Company. The Cash Incentive Award Agreements provide for cash-based awards that vest upon payment. These
awards are performance-based and are re-evaluated each period and assessed for the probability that the targets will be met. The
awards granted on March 10, 2016 will be paid after October 31, 2019, if certain performance goals are achieved. The awards
granted on December 14, 2016 will be paid after October 31, 2020, if certain performance goals are achieved. These awards are
also subject to payment upon a change in control or termination of employment, if certain performance goals are achieved. One
half of the awards will be based on 3-year return on capital employed and 3-year EBITDA as adjusted goals, which could range
from 0% to 200% based on the achievement of performance goals. These awards represent unfunded, unsecured obligations of
the Company.
During fiscal year 2017, we recorded expense related to these awards of $536. At October 31, 2017, we had a liability
of $536 related to these awards and is presented as other accrued expenses in the consolidated balance sheets.
Incentive Bonus Plans
We maintain 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 2017, the Compensation Committee established
goals for participants based on the Company's earnings before interest, taxes, depreciation and amortization and return on capital
employed. For fiscal year 2016, the Compensation Committee established goals for participants based on the Company's earnings
before interest, taxes, depreciation and amortization and return on invested capital and for fiscal year 2015, the established goals
for participants were based on the Company's earnings before interest, taxes, depreciation and amortization. The incentive depends
upon meeting the operating targets and, for participants at an operating unit, 50% is based upon attaining the corporate goals for
63
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
the Company's performance. The MIP is accrued throughout the year based on forecast performance targets. For fiscal 2017,
participants in the MIP received an aggregate bonus of $9,660 under the MIP, which will be paid in the first quarter of fiscal 2018.
The aggregate bonus is included in the consolidated balance sheet in other accrued liabilities for the fiscal year ended October 31,
2017. 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.
Note 18—Income Taxes
Income (loss) before income taxes consists of the following:
Domestic
Foreign
Total
Years Ended October 31,
2017
2016
$
$
4,251
2,172
6,423
$
$
$
3,917
(5,400)
(1,483) $
2015
17,063
(6,448)
10,615
The components of the provision (benefit) for income taxes from continuing operations were as follows:
Current:
Federal
State and local
Foreign
Total current
Deferred:
Federal
State and local
Foreign
Total deferred
Provision (benefit)
Years Ended October 31,
2017
2016
2015
$
$
66
386
2,494
2,946
856
(329)
3,647
4,174
7,120
$
(3,900) $
329
1,123
(2,448)
3,289
156
(6,149)
(2,704)
(5,152) $
$
(545)
384
608
447
4,501
208
(446)
4,263
4,710
64
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Net deferred income tax assets (liabilities) included in the consolidated balance sheet consist of the tax effects of temporary
differences related to the following:
Deferred tax assets:
Accrued compensation and benefits
Inventory
State depreciation adjustments and loss carryforwards
Pension obligations and post retirement benefits
Foreign net operating loss
Other accruals, reserves and tax credits
Goodwill and intangible amortization
Foreign currency translation
Interest rate swap
Total deferred tax assets
Less: Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Fixed assets
Prepaid expenses and other
Net deferred tax (liability) asset
Change in net deferred tax asset:
Benefit (provision) for deferred taxes
Unrecognized tax benefit adjustments
Components of other comprehensive income:
Pension and post retirement benefits
Velocys investment
Interest rate swap
Other adjustments
Total change in net deferred tax asset
Years Ended October 31,
2017
2016
$
1,793
1,721
4,213
7,432
8,851
3,070
6,269
30
771
34,150
(9,401)
$ 24,749
$
2,091
646
2,664
10,229
7,466
3,668
7,234
75
1,922
35,995
(2,782)
$ 33,213
$ (26,742) $ (26,800)
(1,173)
5,240
(835)
$ (2,828) $
$ (4,174) $
453
2,704
(207)
(3,001)
(250)
(1,151)
55
$ (8,068) $
2,986
58
111
(27)
5,625
As required by FASB ASC Topic 740, we recognize 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.
Activities and balances of unrecognized tax benefits for 2017, 2016, and 2015 are summarized below:
Balance at beginning of year
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions based on tax positions related to the current year
Reductions for tax positions of prior years
Reductions as result of lapse of applicable statute of limitations
Balance at end of year
65
Years Ended October 31,
2017
2016
2015
$
$
561
88
9
—
—
(118)
540
$
$
731
48
—
—
(53)
(165)
561
$ 1,068
125
27
(39)
—
(450)
731
$
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The total amount of unrecognized tax benefits that, if recognized, would affect the effective rate was $355 at October 31,
2017 and $368 at October 31, 2016. We recognize interest accrued and penalties related to unrecognized tax benefits as part of
income tax expense. We recognized $102 of benefit in 2017, $218 of benefit in 2016 and $163 of benefit in 2015 for interest and
penalties. We had accrued $411 at October 31, 2017 and $513 at October 31, 2016 for the payment of interest and penalties.
We are 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, we are 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, 2010. We do 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.
During the third quarter of fiscal 2017, we established a full valuation allowance of $3,124 against deferred tax assets of
the Mexican operations in Saltillo. The valuation allowance as of October 31, 2017 was $3,831.
A valuation allowance of $9,401 remains as of October 31, 2017 for deferred tax assets whose realization remains
uncertain. The comparable amount of the valuation allowance at October 31, 2016 was $2,782. The net increase in the valuation
allowance of $6,619 relates to an increase of $1,636 related to state operating loss carry forwards, an increase of $3,831 related
to Mexican operating loss carry forwards and other deferred tax assets, an increase of $707 related to Netherlands operating loss
carry forwards, an increase of $369 related to China operating loss carry forwards, an increase of $33 related to Hong Kong
operating loss carry forwards, and an increase of $43 related to Swedish operating loss carry forwards.
We assess both negative and positive evidence when measuring the need for a valuation allowance. A valuation allowance
has been established 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. We believe 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.
We intend 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 we 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 we 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.
A reconciliation of income tax expense / (benefit) from operations and the U.S. Federal statutory income tax expense
were as follows:
Years Ended October 31,
Taxes at U.S. federal statutory rate
State and local income taxes, net of federal benefit
Valuation allowance change
Domestic tax credits
Domestic production activities deduction
Foreign operations
Adjustment of uncertain tax positions
Provision to return adjustment for tax law extensions subsequent to year-end
Other
Total income tax expense (benefit)
2017
$ 2,248
(1,639)
5,749
(803)
(455)
1,182
(83)
285
636
$ 7,120
2016
2015
$
(519) $ 3,715
499
1,337
(223)
(340)
1,401
(340)
(1,380)
41
$ (5,152) $ 4,710
65
(5,452)
(930)
(391)
2,240
(173)
202
(194)
At October 31, 2017, we had operating loss carry forwards of $103,689 in Sweden, Netherlands, China, Hong Kong,
Mexico and certain U.S. states. The Swedish foreign operating loss carry forward benefit is $5,898 which can be carried forward
indefinitely. There is a partial valuation allowance against it, in the amount of $43, for activities related to Shiloh Industries China
Holding. The foreign operating loss carry forward benefit for the Netherlands is $742 and has a full valuation allowance against
66
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
it. This benefit can be carried forward for nine years. The Chinese operating loss carry forward benefit is $742 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 $85 and has a full valuation allowance against it. This benefit can be carried forward indefinitely.
In addition, we had Mexican foreign operating loss carry forwards of approximately $1,384 as of October 31, 2017, which
will expire between 2019 and 2026. A full valuation allowance was established against the Mexican operating loss carry forward
benefit during the year.
Domestically, we had various state net operating loss carryforward benefits. As of October 31, 2017 and 2016, we had
state net operating loss carry forward benefits of $3,711 and $2,138 with a valuation allowance of $3,711 and $2,075, respectively
that will expire between 2018 and 2037. The table below summarizes the various country operating losses, credit carry forwards
and associated valuation allowances as of October 31, 2017 and 2016:
Jurisdiction
Netherlands
Sweden
China
Hong Kong
Mexico
U.S. (State)
Total before Foreign Tax Credit
U.S. Federal (Foreign Tax Credit)
Total
Gross NOL
Carryforward
3,711
$
26,811
2,968
338
4,614
65,247
103,689
$
—
103,689
$
$
$
$
October 31, 2017
NOL Tax
Effected
Valuation
Allowance
742
$
43
742
85
1,384
3,711
6,707
$
Gross NOL
Carryforward
174
$
27,271
1,494
206
3,358
39,331
71,834
$
742
5,898
742
85
1,384
3,711
12,562
October 31, 2016
NOL Tax
Effected
Valuation
Allowance
35
$
—
373
51
—
2,075
2,534
$
35
6,000
373
51
1,007
2,138
9,604
—
12,562
$
248
6,955
$
—
71,834
—
9,604
$
248
2,782
$
$
$
We paid income taxes, net of refunds, of $1,780 in 2017 and had a net income tax refund of $5,855 in 2016. U.S. income
taxes and foreign withholding taxes are not provided on undistributed earnings of foreign subsidiaries because such earnings are
permanently reinvested in the operations. As of October 31, 2017, there was approximately $19,282 of undistributed foreign
subsidiary earnings. The income tax liability that would result had such earnings been repatriated is estimated at $6,749.
On December 22, 2017, President Trump signed U.S. tax reform legislation. Given this date of enactment, our financial
statements for the year ended October 31, 2017 do not reflect the impact of this legislation. We are currently undergoing an analysis
of the tax reform law and its impact to the financial statements and tax footnote disclosures. We are also evaluating if the tax
reform law will impact the realizability of deferred tax assets and carryforwards. A more detailed analysis will be completed in
our quarterly report for the period in which the law was enacted.
67
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 19—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)
(341) $
(125)
(3,176) $
(1,466)
(17,723) $
(3,031)
Accumulated
Other
Comprehensive
Loss
(50,049)
(12,709)
Balance at October 31, 2015
Other comprehensive loss
Amounts reclassified from accumulated other
comprehensive loss, net of tax
Net current-period other comprehensive
income (loss)
Balance at October 31, 2016
Other comprehensive income
Amounts reclassified from accumulated other
comprehensive loss, net of tax
Net current-period other comprehensive
income
$
(28,809) $
(8,087)
4,237
(3,850)
$
(32,659) $
6,333
(1,521)
4,812
—
1,530
529
6,296
(125)
(466) $
29
435
464
64
(3,112) $
392
(2,502)
(20,225) $
7,156
(6,413)
(56,462)
13,910
1,401
—
315
1,793
(1,319) $
7,156
(13,069) $
14,225
(42,237)
Balance at October 31, 2017
$
(27,847) $
(2) $
(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 operations.
(2) Amounts reclassified from accumulated other comprehensive income loss, net of tax are classified with interest expense included on the statements
of operations.
(3) Amounts reclassified from accumulated other comprehensive income loss, net of tax are classified with other expense, net included on the statements
of operations.
Note 20—Related Party Transactions
We had sales to MTD Products Inc. and its affiliates of $5,129, $5,730, and $6,411 for fiscal years 2017, 2016, and 2015,
respectively. At October 31, 2017 and 2016, we had receivable balances of $759 and $1,235, respectively, due from MTD Products
Inc. and its affiliates.
Note 21—Business Segment Information
We conduct our business and report our information as one operating segment - Automotive and Commercial Vehicles.
Our chief operating decision maker has been identified as the executive leadership team, which includes certain Vice Presidents,
all Senior Vice Presidents plus the Chief Executive Officer of the Company. This team has the final authority over performance
assessment and resource allocation decisions. In determining that one operating segment is appropriate, we 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.
68
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Revenues of foreign geographic regions in the table below are attributed to external customers based upon the location
of the entity recording the sale. These foreign revenues represent 19.5%, 16.7%, and 15.9% of total revenues for fiscal years 2017,
2016 and 2015, respectively. Long-lived assets in the table below consist primarily of net property, plant and equipment, goodwill
and intangibles.
United States
Europe
Rest of World
Total Company
Revenues
Long-Lived Assets
2017
2016
2015
2017
2016
2015
$
839,013 $
888,164 $
901,182
$ 235,663 $ 243,225 $ 265,579
169,398
33,575
143,281
34,389
132,094
39,776
53,569
20,543
48,709
18,672
41,695
19,484
$ 1,041,986 $ 1,065,834 $ 1,073,052
$ 309,775 $ 310,606 $ 326,758
The foreign currency loss in the table below is included as a component of other expense in the consolidated statements
of operations.
Europe
Rest of World
Foreign Currency Loss
2017
2016
2015
$
$
(473) $
(622) $
(802) $
(772) $
(23)
(483)
The table below details customers that accounted for more than 10% of our revenues in fiscal 2017, 2016 and 2015:
Customer
General Motors
FCA
Note 22—Quarterly Results of Operations (Unaudited)
(amounts in thousands except per share data)
Revenues
2017
2016
2015
17.9%
15.0%
18.2%
17.1%
15.5%
17.4%
The following is a summary of our consolidated quarterly results for each of the fiscal years ended October 31, 2017 and
2016:
For the Year Ended October 31, 2017
Net revenues
Gross profit
Operating income (loss)
Provision (benefit) for income taxes
Net income (loss)
Net income (loss) per share basic
Net income (loss) per share diluted
Weighted average number of shares:
Basic
Diluted
First
Quarter
$247,938
23,800
3,006
(76)
$(2,018)
$(0.11)
$(0.11)
Second
Quarter
$273,031
33,216
10,957
2,323
$4,229
$0.24
$0.24
Third
Quarter
$256,847
28,855
7,039
4,439
$(1,982)
$(0.11)
$(0.11)
Fourth
Quarter
$264,170
27,912
2,712
434
$(926)
$(0.04)
$(0.04)
17,720
17,720
17,858
17,888
18,559
18,559
23,055
23,055
69
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the Year Ended October 31, 2016
Net revenues
Gross profit
Operating income (loss)
Provision for income taxes
Net income (loss)
Net income (loss) per share basic
Net income (loss) per share diluted
Weighted average number of shares:
Basic
Diluted
Note 23—Commitments and Contingencies
Litigation
First
Quarter
$251,055
15,889
(2,292)
(1,911)
$(5,127)
$(0.30)
$(0.30)
Second
Quarter
$284,264
26,281
8,724
364
$4,209
$0.24
$0.24
Third
Quarter
$248,832
23,910
5,798
1,344
$(678)
$(0.04)
$(0.04)
Fourth
Quarter
$281,683
30,096
6,240
(4,949)
$5,265
$0.31
$0.31
17,342
17,342
17,615
17,620
17,614
17,614
17,614
17,629
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 our officers (the President and Chief Executive Officer and Vice President
of Finance and Treasurer). As amended, the lawsuit claims in part that we issued inaccurate information to investors about, among
other things, our earnings and income and our 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 our 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. The District Court rendered an opinion and
order granting our motion to dismiss the lawsuit on March 23, 2017. On April 6, 2017, the plaintiffs filed a motion for reconsideration
of the dismissal order. We, in opposition to the plaintiff's motion, filed a motion for consideration of the dismissal on April 20,
2017 and the plaintiffs filed a reply motion in opposition for reconsideration on April 27, 2017. On July 7, 2017, the District Court
denied the Plaintiffs’ request to vacate the District Court’s March 23, 2017 order of dismissal and granted the Plaintiff’s request
to further amend their complaint. The Plaintiffs filed their Second Amended Complaint on August 4, 2017. We filed our Motion
to Dismiss the Second Amended Compliant on August 18, 2017. The Plaintiffs’ filed their opposition brief on November 2, 2017
and we filed our reply in support of defendants’ motion to dismiss the second amended complaint on November 22, 2017.
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 our 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 our 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, we are involved in legal proceedings, claims or investigations that are incidental to the
conduct of its business. We vigorously defend ourselves against such claims. In future periods, we 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, we do not expect that our legal proceedings or claims will have a material impact on our future consolidated financial
condition, results of operations or cash flows.
70
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by
us in reports that we file or submit under the Securities Exchange Act of 1934 (Exchange Act), as amended, is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and
communicated to our management, including the Principal Executive Officer ("PEO"), Principal Financial Officer ("PFO") and
Principal Accounting Officer ("PAO"), as appropriate to allow for timely decisions regarding required disclosure. An evaluation
was performed under the supervision and with the participation of our management, including the PEO, PFO and PAO, of the
effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(b)
or 15d-15(b), as amended, and it was determined that disclosure controls and procedures were effective as of October 31, 2017.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rule 13a-15(f), and based upon criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission in the 2013 Internal Control - Integrated Framework (COSO framework). Our internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of its financial reporting and the
preparation of the financial statements for external purposes in accordance with GAAP.
An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of
human error and circumvention or overriding of controls and therefore can provide only reasonable assurance with respect to
reliable financial reporting. Because of its inherent internal control limitations, our internal control over financial reporting may
not prevent or detect misstatements because of inherent limitations, including the possibility of human error, the circumvention
or overriding of controls, or fraud. Effective internal controls can provide only reasonable assurance with respect to the preparation
and fair presentation of financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or
detected on a timely basis.
Under the supervision and with the participation of our management, including our PEO, PFO and PAO, the Company
conducted an evaluation of the effectiveness of internal control over financial reporting as of October 31, 2017.
Our management concluded that we maintained effective internal control over financial reporting as of October 31, 2017,
based on criteria described in Internal Control - Integrated Framework (2013) issued by COSO.
Item 9A includes herein below the attestation report of Grant Thornton LLP on Shiloh Industries, Inc.’s internal control
over financial reporting as of October 31, 2017.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended October 31, 2017
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
71
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Shiloh Industries, Inc.
We have audited the internal control over financial reporting of Shiloh Industries, Inc. (a Delaware corporation) and
subsidiaries (the “Company”) as of October 31, 2017, based on criteria established in the 2013 Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit 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
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as
of October 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements of the Company as of and for the year ended October 31, 2017, and our
report dated January 5, 2018 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Southfield, Michigan
January 5, 2018
72
Item 9B.
Other Information.
None.
PART III
The information regarding the Audit Committee of our Board of Directors and the information regarding audit committee financial
experts are set forth under the caption “Board Meetings and Committees” in our Proxy Statement, which is incorporated herein
by reference.
Item 10. Directors, Executive Officers and Corporate Governance.
Information with respect to our Board of Directors, as well as information regarding Section 16(a) Beneficial Ownership
Compliance, is set forth in our definitive Proxy Statement involving the election of certain members of our Board of Directors,
which will be filed with the SEC pursuant to Regulation 14A not later than 120 days after October 31, 2017 ("Proxy Statement"),
which information is incorporated herein by reference. Information regarding our executive officers is included in Part I hereof
under "Executive Officers of the Registrant". The information regarding the Audit Committee of our Board of Directors and the
information regarding audit committee financial experts are set forth under the caption "Committees of the Board" in our Proxy
Statement, which is incorporated herein by reference.
We have adopted a code of ethics that applies to our PEO, PFO and PAO as well as the other officers, directors and
managers of the Company in accordance with the Marketplace Rules of the Nasdaq Stock Market. The code of ethics is available
at our website: www.shiloh.com.
Executive Officers of the Registrant
Set forth below is certain information concerning the executive officers of the Registrant. Executive officers are appointed
annually by the Board of Directors.
Name
Ramzi Y. Hermiz
W. Jay Potter
Gary DeThomas
Age
52
56
54
Years as Executive
Officer
5
2
3
Title
President and Chief Executive Officer
Senior Vice President and Chief Financial Officer
Vice President Corporate Controller and Principal Accounting Officer
Mr. Hermiz, President and Chief Executive Officer, was appointed by the Board of Directors in September 2012. Prior
to joining the Company, Mr. Hermiz served since 2009 as Senior Vice President, Vehicle Safety and Protection of Federal-Mogul
Corporation, a publicly held company that designs, engineers, manufactures and distributes technologies to improve fuel economy,
reduce emissions and enhance vehicle safety.
Mr. Potter, Senior Vice President and Chief Financial Officer joined the Company in December 2015. Prior to joining
the Company, Mr. Potter served as Vice President and Chief Financial Officer of Sedgwick Claims Management Services, a
provider of technology-enabled claims and productivity management solutions, since 2012. Immediately prior to his employment
with Sedgwick Claims Management Services, Mr. Potter held various financial leadership roles with Masco Corporation, a provider
of building supplies, construction materials and contractor services for new home and industrial construction, commencing in
2002 through 2010, where he then became the Chief Financial Officer and Vice President of Finance of Masco Cabinetry.
Mr. DeThomas, Vice President Corporate Controller and Principal Accounting Officer, joined the Company in March
2015 and was appointed to principal accounting officer in September 2015. Prior to joining the Company, Mr. DeThomas worked
at Techtronic Industries, a designer, manufacturer and marketer of power tools, outdoor power equipment and floor care appliances,
beginning in June 2013. While at Techtronic Industries, Mr. DeThomas was Vice President and Chief Financial Officer of the
Floor Care Division. Prior to that, Mr. DeThomas served as the Vice President and Chief Financial Officer for King Systems, a
manufacturer and distributor of medical devices, from 2011 until June 2013. Mr. DeThomas also served as Vice President,
Controller of North American Tire Division for Cooper Tire & Rubber Company, the parent company of a global family of
companies that specializes in the design, manufacture, marketing and sale of passenger car and light truck tires, from 2008 until
2011.
73
Item 11.
Executive Compensation.
Information with respect to executive compensation and the report of the compensation committee of our Board of
Directors is set forth in the Proxy Statement, which information and report are incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information with respect to security ownership of certain owners and management is set forth in the Proxy Statement,
which information is incorporated herein by reference.
Summary of Equity Compensation Plans
(Amounts in number of shares and per share data)
Shown below is information concerning all equity compensation plans and individual compensation arrangements in
effect as of October 31, 2017.
Equity Compensation Plan Information
Number of
Securities To
Be Issued
Upon Exercise
of Outstanding
Options,
Warrants and
Rights (1)
Weighted Average
Exercise Price of
Number of Securities
to be Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights (2)
Number of Securities
Remaining Available
For Future Issuance
Under Equity
Compensation Plans
93,981
—
93,981
$7.98
—
$7.98
932,352
—
932,352
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
31, 2017.
(1) In addition to stock options, restricted stock units have been awarded under Shiloh's equity compensation plans and were outstanding at October
(2) Calculated without taking into account the 35,815 shares of common stock subject to outstanding restricted stock that become issuable as those
units vest since they have no exercise price and no cash consideration or other payment is required for such shares.
For additional information regarding the Company's equity compensation plans, refer to the discussion in Note 17 to
consolidated financial statements.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Information with respect to certain relationships and related transactions and director independence is set forth in the
Proxy Statement, which information is incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services.
Information with respect to principal accountant fees and services is set forth in the Proxy Statement, which information
is incorporated herein by reference.
74
Item 15.
Exhibits and Financial Statement Schedules
PART IV
(a) The following documents are filed as a part of this Annual Report on Form 10-K under Item 8.
1.
Financial Statements.
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at October 31, 2017 and 2016.
Consolidated Statements of Operations for the years ended October 31, 2017, 2016, and 2015.
Consolidated Statements of Other Comprehensive Income (Loss) for the years ended October 31, 2017, 2016, and 2015.
Consolidated Statements of Cash Flows for the years ended October 31, 2017, 2016, and 2015.
Consolidated Statements of Stockholders' Equity for the years ended October 31, 2017, 2016, and 2015.
Notes to Consolidated Financial Statements.
2.
Financial Statement Schedule. The following consolidated financial statement schedule of the Company and its
subsidiaries and the report of the independent accountant thereon are filed as part of this Annual Report on Form 10-
K and should be read in conjunction with the consolidated financial statements of the Company and its subsidiaries
included in the Annual Report on Form 10-K.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
Description
Valuation allowance for accounts receivable
Year ended October 31, 2017
Year ended October 31, 2016
Year ended October 31, 2015
Valuation allowance for inventory reserves
Year ended October 31, 2017
Year ended October 31, 2016
Year ended October 31, 2015
Valuation allowance for deferred tax assets
Year ended October 31, 2017
Year ended October 31, 2016
Year ended October 31, 2015
Balance at
Beginning of
Year
Additions
(Reductions)
Charged to
Costs and
Expenses
Deductions
Foreign
Currency
Adjustment
Balance at
End of Year
$
$
$
$
$
$
$
$
$
790
821
601
2,946
2,547
2,051
2,782
4,986
3,638
$
$
$
$
$
$
$
$
$
493
$
(10) $
$
210
24
57
1
2,933
1,210
1,626
$
$
$
384
802
1,120
$
$
$
$
$
$
6,619
$
(2,204) $
$
1,348
— $
— $
— $
12
36
11
$
$
$
40
$
(9) $
(10) $
— $
— $
— $
1,271
790
821
5,535
2,946
2,547
9,401
2,782
4,986
Schedules not listed above have been omitted because they are not applicable or are not required or the information required
to be set forth therein is included in the consolidated financial statements or notes thereto.
3. Exhibits. The exhibits listed in the accompanying Exhibit Index and required by Item 601 of Regulation S-K (numbered
in accordance with Item 601 of Regulation S-K) are filed as part of this Annual Report on Form 10-K.
75
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
SIGNATURES
behalf by the undersigned, thereunto duly authorized.
Date: January 5, 2018
SHILOH INDUSTRIES, INC.
By:
By:
/s/ Ramzi Hermiz
Ramzi Hermiz
President and Chief Executive Officer
/s/ W. Jay Potter
W. Jay Potter
Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and the capabilities and on the dates indicated.
Signature
/s/ RAMZI HERMIZ
Ramzi Hermiz
/s/ W. JAY POTTER
W. Jay Potter
/s/ GARY DETHOMAS
Gary DeThomas
*
Curtis E. Moll
*
Cloyd Abruzzo
*
Jean Brunol
*
George G. Goodrich
*
Michael S. Hanley
*
David J. Hessler
*
Dieter Kaesgen
*
Robert J. King, Jr.
Title
Date
President and Chief Executive Officer and
Director (Principal Executive Officer)
Senior Vice President and Chief Financial
Officer (Principal Financial Officer)
January 5, 2018
January 5, 2018
Vice President Corporate Controller (Principal
Accounting Officer)
January 5, 2018
Chairman and Director
January 5, 2018
Director
Director
Director
Director
Director
Director
Director
January 5, 2018
January 5, 2018
January 5, 2018
January 5, 2018
January 5, 2018
January 5, 2018
January 5, 2018
*The undersigned, by signing his name hereto, does sign and execute this Annual Report on Form 10-K pursuant to the Powers of Attorney executed by the above-
named officers and Directors of the Company and filed with the Securities and Exchange Commission on behalf of such officers and Directors.
By:
/s/ Ramzi Y. Hermiz
Ramzi Y. Hermiz, Attorney-In-Fact
January 5, 2018
76
EXHIBIT INDEX
Incorporated By Reference
Exhibit
#
Exhibit Description
3.1 Restated Certificate of Incorporation of the Company.
Form
10-K
File Number Date of First Filing
Exhibit #
000-21964
October 31, 1995
3.1
Filed
Herewith
3.2 Certificate of Designation, dated December 31, 2001,
authorizing the issuance of 100,000 shares of Series A
Preferred Stock, par value $.01.
3.3 Amended and Restated By-Laws of the Company, dated
December 13, 2007.
10-K
000-21964
February 13, 2002
3.1(ii)
10-K
000-21964 December 20, 2007
3.1(iii)
3.4 Amended and Restated Certificate of Incorporation of the
Company, as amended, dated March 10, 2016.
Schedule
14A
000-21964
January 29, 2016
Appendix
B
4.1 Specimen certificate for the Common Stock, par value $.01
per share, of the Company.
4.2 Registration Rights Agreement, dated June 22, 1993, by and
among the Company, MTD Products Inc and the
stockholders named therein.
10-K
000-21964
October 31, 1995
4.1
10-K
000-21964
October 31, 1995
10.1* Form of Incentive Stock Option Agreement.
10-K
000-21964 December 22, 2004
10.2* Form of Nonqualified Stock Option Agreement.
10-K
000-21964 December 22, 2004
4.3
10.2
10.3
B
A
B
A
Schedule
14A
Schedule
14A
Schedule
14A
Schedule
14A
000-21964
February 8, 2005
000-21964
February 2, 2010
000-21964
February 2, 2010
000-21964
February 10, 2014
10-Q
000-21964
May 24, 2007
10.21
8-K
000-21964
August 26, 2011
10.1
8-K
000-21964
August 29, 2012
10.1
8-K
000-21964
August 29, 2012
10.20
10-K
000-21964 December 21, 2012
10.21
10-K
000-21964 December 23, 2013
10.30
8-K
000-21964 December 30, 2013
10.1
10.3* Shiloh Industries, Inc. Senior Management Bonus Plan.
10.4* Amended and Restated 1993 Key Employee Stock
Incentive Plan (as Amended and Restated as of
December 10, 2009).
10.5* Senior Management Bonus Plan.
10.6* First Amendment to the Shiloh Industries, Inc. Senior
Management Incentive Plan.
10.7 Form of Indemnification Agreement between Directors and
Officers and Shiloh Industries, Inc., dated February 5,
2007.
10.8 Change in Control Severance Agreement between Thomas
M. Dugan and Shiloh Industries, Inc.
10.9 Offer Letter to Ramzi Hermiz by Shiloh Industries, Inc.,
dated as of August 23, 2012.
10.10 Change in Control Severance Agreement between Ramzi Y.
Hermiz and Shiloh Industries, Inc.
10.11 First Amendment to Change in Control Agreement between
Thomas M. Dugan and Shiloh Industries, Inc.
10.12 Credit Agreement dated as of October 25, 2013 with Bank
of America, N.A., as Administrative Agent, Swing Line
Lender and L/C Issuer, 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
RBS Citizens, N.A., as Co-Documentation Agents, and
the other lender parties thereto.
10.13 First Amendment Agreement dated as of December 30,
2013 with Bank of America, N.A., as Administrative
Agent, Swing Line Lender and L/C Issuer, 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 RBS Citizens, N.A., as Co-
Documentation Agents, and the other lender parties
thereto.
77
Exhibit
#
10.14 Share Sale and Purchase Agreement, dated May 21, 2014,
Exhibit Description
among the subsidiary and Finnveden AB, a company
limited by shares incorporated in Sweden, Shiloh
Holdings Sweden AB, company limited by shares
incorporated in Sweden, and FinnvedenBulten AB, a
company limited by shares incorporated in Sweden.
10.15 Second Amendment Agreement, dated as of June 26, 2014
with Bank of America, N.A., as Administrative Agent,
Swing Line Lender and L/C Issuer, 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 RBS Citizens, N.A., as Co-
Documentation Agents, and the other lender parties
thereto.
10.16 Third Amendment Agreement, dated September 29, 2014,
among Shiloh Industries, Inc. and Shiloh Holdings
Netherlands B.V., a besloten vennootschap met beperkte
aansprakelijkheid organized under the laws of the
Netherlands with Bank of America, N.A., as
Administrative Agent, Swing Line Lender, Dutch Swing
Line Lender and an 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
Citizens Bank, N.A., as Co-Documentation Agents, and
the other lender parties thereto.
10.17 Asset Purchase Agreement, dated September 30, 2014,
among the Company, Radar Industries, Inc., and Radar
Mexican Investments, LLC.
10.18 Fourth Amendment Agreement, dated April 29, 2015,
among Shiloh Industries, Inc. and Shiloh Holdings
Netherlands B.V., a besloten vennootschap met beperkte
aansprakelijkheid organized under the laws of the
Netherlands, with Bank of America, N.A., as
Administrative Agent, Swing Line Lender, Dutch Swing
Line Lender and an 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
Citizens Bank, N.A., as Co-Documentation Agents, and
the other lender parties thereto.
10.19 Fifth Amendment Agreement dated October 30, 2015,
among Shiloh Industries, Inc. and Shiloh Holdings
Netherlands B.V., a besloten vennootschap met beperkte
aansprakelijkheid organized under the laws of the
Netherlands, with Bank of America, N.A., as
Administrative Agent, Swing Line Lender, Dutch Swing
Line Lender and an 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
Citizens Bank, N.A., as Co-Documentation Agents, and
the other lender parties thereto.
Incorporated By Reference
Form
File Number Date of First Filing
Exhibit #
Filed
Herewith
10-Q
000-21964 September 5, 2014
10.1
8-K
000-21964
July 2, 2014
10.1
10-K
000-21964
January 13, 2015
10.1
10-K
000-21964
January 13, 2015
10.32
10-Q
000-21964
June 5, 2015
10.1
8-K/A
000-21964 November 6, 2015
1.1
10.20* Employment Agreement by and between the Company and
W. Jay Potter dated as of December 16, 2015.
10-Q
000-21964
March 3, 2016
10.1
10.21* Shiloh Industries, Inc. 2016 Equity and Incentive
Compensation Plan.
Schedule
14A
000-21964
January 29, 2016
A
78
Exhibit
#
10.22 Sixth Amendment Agreement dated October 28, 2016,
Exhibit Description
among Shiloh Industries, Inc. and Shiloh Holdings
Netherlands B.V., a besloten vennootschap met beperkte
aansprakelijkheid organized under the laws of the
Netherlands, with Bank of America, N.A., as
Administrative Agent, Swing Line Lender, Dutch Swing
Line Lender and an 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.
Incorporated By Reference
Form
File Number Date of First Filing
Exhibit #
Filed
Herewith
10-K
000-21964
January 17, 2017
10.22
10.23* Letter Agreement dated as of November 1, 2016 between
Shiloh Industries, Inc. and Jean Brunol.
10-K
000-21964
January 17, 2017
10.23
10.24 Form of Indenture.
S-3
333-216571
March 9, 2017
4.1
10.25 Agreement on Terms and Conditions of Stock Award -
Director Restricted Stock Award.
10.26 Agreement on Terms and Conditions of RSU Award -
Director Restricted Stock Unit Award.
10.27 Agreement on Terms and Conditions of Stock Award -
Employee Restricted Stock Award.
10.28 Agreement on Terms and Conditions of Cash Incentive
Award - Employee Cash Incentive Award.
10.29 Underwriting Agreement, dated July 13, 2017, by and
among Shiloh Industries, Inc., MTD Products Inc. Master
Employee Benefit Trust, and J.P. Morgan Securities LLC,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
BMO Capital Markets Corp., as representatives of the
several underwriters named therein.
10.30 Seventh Amendment to the Credit Agreement, dated July
31, 2017, among Shiloh Industries, Inc., Bank of
America, N.A., as Administrative Agent, 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.
10.31 Eighth Amendment to the Credit Agreement, dated October
31, 2017, among Shiloh Industries, Inc. and Shiloh
Holdings Netherlands B.V., a besloten vennootschap met
beperkte aansprakelijkheid organized under the laws of
the Netherlands as the borrowers and the Domestic
Subsidiaries of Shiloh Industries, Inc. as Guarantors,
Bank of America, N.A., as Administrative Agent, Swing
Line Lender, Dutch Swing Line Lender and L/C Issuer,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
JPMorgan Chase Bank, N.A. as Joint Lead Arrangers and
Joint Bookrunners, CIBC Bank USA, Compass Bank and
the Huntington National Bank as Co-Documentation
Agents, and the other lender parties thereto.
21.1 Subsidiaries of the Company.
23.1 Consent of Grant Thornton LLP.
24.1 Power of Attorney.
31.1 Principal Executive Officer's Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
79
10-Q
000-21694
June 1, 2017
10.1
10-Q
000-21694
June 1, 2017
10.2
10-Q
000-21694
June 1, 2017
10.3
10-Q
000-21694
June 1, 2017
10.4
8-K
000-21694
July 19, 2017
1.1
8-K
000-21964
August 1, 2017
10.1
8-K
000-21964 November 2, 2017
10.1
x
x
x
x
31.2 Principal Financial Officer's Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
100.1 The following materials from Shiloh Industries, Inc's
Annual Report on 10-K for the year ended October 31,
2017, formatted in XBRL (Extensible Business Reporting
Language): (i) the Consolidated Balance Sheets, (ii) the
Consolidated Statements of Operations, (iii) the
Consolidated Statement of Comprehensive Income (Loss),
(iv) the Consolidated Statement of Cash Flows, (v) the
Consolidated Statement of Stockholders' Equity and (vi)
Notes to the Consolidated Financial Statements.
x
x
x
* Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 15(b) of this Report.
80
LIST OF SUBSIDIARIES OF SHILOH INDUSTRIES, INC.
The following is a list of the subsidiaries of Shiloh Industries, Inc., a Delaware corporation (the "Corporation"). The common
stock of all the corporations listed below is wholly owned, directly or indirectly, by the Corporation.
EXHIBIT 21.1
Name of Corporation
Shiloh Corporation
The Sectional Die Company (Inactive)
Sectional Stamping, Inc.
Medina Blanking, Inc.
Liverpool Coil Processing, Incorporated
VCS Properties, LLC (Inactive)
Greenfield Die & Manufacturing Corp.
Shiloh Holdings International, Inc.
C & H Design Company (Inactive)
Jefferson Blanking Inc.
Shiloh Automotive, Inc. (Inactive)
Shiloh de Mexico S.A. de C.V.
Shiloh International S.A. de C.V.
Shiloh Industries, Inc. Dickson Manufacturing Division
Shiloh Die Cast LLC
Albany Chicago Company, LLC
Shiloh Die Cast Midwest, LLC
FMS Magnum Holdings LLC
Magnum CV
Shiloh Holdings Netherlands B.V.
Shiloh Holdings Sweden AB
Shiloh Industries AB
Shiloh Industries China Holding AB
Shiloh Industries, SP. Z.O.O.
Shiloh Automotive Components (Shanghai) Ltd. Co.
Shiloh Manufacturing Holdings LLC
Shiloh Manufacturing LLC
Radar Stamping Technologies S. de R.L. de C.V.
Radar Servicios Celaya S. de R.L. de C.V.
Shiloh Holdings Hong Kong Ltd.
Shiloh Industries UK Ltd.
Shiloh Automotive Components (Nantong) Co., Ltd.
State of
Incorporation
Ohio
Ohio
Ohio
Ohio
Ohio
Ohio
Michigan
Michigan
Michigan
Georgia
Ohio
Mexico
Mexico
Tennessee
Ohio
Wisconsin
Ohio
Ohio
Netherlands
Netherlands
Sweden
Sweden
Sweden
Poland
China
Ohio
Michigan
Mexico
Mexico
Hong Kong
United Kingdom
China
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated January 5, 2018 with respect to the consolidated financial statements, schedule, and
internal control over financial reporting included in the Annual Report of Shiloh Industries, Inc. and subsidiaries on
Form 10 K for the year ended October 31, 2017. We consent to the incorporation by reference of said reports in the
Registration Statements of Shiloh Industries, Inc. and subsidiaries on Forms S 8 (File No. 333-21161, File No.
333-103152, File No. 333-178354 and File No. 333-210030) and Form S-3 (File No. 333-216571).
/s/GRANT THORNTON LLP
Southfield, Michigan
January 5, 2018
POWER OF ATTORNEY
EXHIBIT 24.1
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and directors of Shiloh Industries, Inc.,
a Delaware corporation, hereby constitutes and appoints Ramzi Hermiz and Kenton Bednarz, and each of them, as his true and
lawful attorney or attorneys-in-fact, with full power of substitution and revocation, for each of the undersigned and in the name,
place and stead of each of the undersigned, to sign on behalf of each of the undersigned an Annual Report on Form 10-K for the
fiscal year ended October 31, 2017 pursuant to Section 13 of the Securities Exchange Act of 1934 and to sign any and all amendments
to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith including,
without limitation, a Form 12b-25 with the Securities and Exchange Commission, granting to said attorney or attorneys-in-fact,
and each of them, full power and authority to do so and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes may lawfully do or cause to
be done by virtue thereof.
This power of attorney may be executed in multiple counterparts, each of which shall be deemed an original with respect
to the person executing it.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the 12th day of January 2016.
Signature
/s/ Ramzi Hermiz
Ramzi Hermiz
/s/ W. Jay Potter
W. Jay Potter
/s/ Gary DeThomas
Gary DeThomas
/s/ Curtis E. Moll
Curtis E. Moll
/s/ Cloyd J. Abruzzo
Cloyd J. Abruzzo
/s/ Jean Brunol
Jean Brunol
/s/ George G. Goodrich
George G. Goodrich
/s/ Michael S. Hanley
Michael S. Hanley
/s/ David J. Hessler
David J. Hessler
/s/ Dieter Kaesgen
Dieter Kaesgen
/s/ Robert J. King, Jr.
Robert J. King, Jr.
Title
President and Chief Executive Officer (Principal
Executive Office)
Senior Vice President and Chief Financial Officer
(Principal Financial Officer )
Vice President Corporate Controller (Principal
Accounting Officer)
Chairman of the Board and Director
Director
Director
Director
Director
Director
Director
Director
PRINCIPAL EXECUTIVE OFFICER'S CERTIFICATION PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ramzi Hermiz, certify that:
EXHIBIT 31.1
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Shiloh Industries, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statement for external purposes in accordance with generally accepted
accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: January 5, 2018
/s/ Ramzi Hermiz
Ramzi Hermiz
President and Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER'S CERTIFICATION PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, W. Jay Potter, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Shiloh Industries, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statement for external purposes in accordance with generally accepted
accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: January 5, 2018
/s/ W. Jay Potter
W. Jay Potter
Senior Vice President and Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Shiloh Industries, Inc. (the "Company") on Form 10-K for the fiscal year ended
October 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned
officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to such officer's knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company as of the dates and for the periods expressed in the Report.
Dated: January 5, 2018
/s/ Ramzi Hermiz
Ramzi Hermiz
President and Chief Executive Officer
/s/ W. Jay Potter
W. Jay Potter
Senior Vice President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the
Report or as a separate disclosure document.