ITEM 1. BUSINESS
GENERAL
Shiloh is a full service manufacturer of blanks and stamped components for the automotive and light truck, heavy truck and other industrial markets. The Company's blanks, which are engineered two dimensional shapes cut from fat-rolled steel, are principally sold to automotive and truck original equipment manufacturers ("OEMs") and are used for exterior steel components, such as fenders, hoods and doors, for which quality of fit and finish is critical. These blanks include first operation unexposed blanks and more advanced engineered-welded blanks, which are manufactured from two or more blanks of different steel or gauges that are welded together utilizing both mash seam resistance and laser welding. Engineered-welded blanks allow OEMs to achieve a reduction in vehicle weight, which improves the vehicle's performance while maintaining body strength for safety. The Company's stampings are principally used as components in mufflers, seat frames, structural rails, window lifts, heat shields, vehicle brakes and other structural body components.
The Company also builds modular assemblies, which include components used in the structural and powertrain systems of a vehicle. Our structural systems include bumper beams, door impact beams, steering column supports, chassis components and structural underbody modules. Our powertrain systems consist of deep draw components, such as oil pans, transmission pans and valve covers. In addition, the Company also designs, engineers and manufactures precision tools and dies and welding and assembly equipment for use in its blanking and stamping operations, as well as for sale to OEMs, other Tier I automotive suppliers and other industrial customers. Furthermore, the Company provides a variety of intermediate steel processing services, such as pickling and oiling, cutting-to-length, slitting and edge trimming of hot-and cold-rolled steel coils for automotive and steel industry customers. The Company currently has thirteen subsidiaries at locations in Ohio, Michigan, Georgia, Mexico and Tennessee.
HISTORY
In November 1996, the Company acquired substantially all of the assets of Greenfield Die & Manufacturing Corp. ("Greenfield"), which is headquartered in Canton, Michigan, a suburb of Detroit, and serves the automotive industry by providing a variety of value added processes, including tool and die design and build, stamping, assembly, welding, prototyping operations and mold design and build. Greenfield conducts operations as "Canton Manufacturing" and "Canton Tool and Die." In July 2000, the Company announced that it would seek strategic alternatives for two of its tool and die operations, Canton Tool and Die and Utica Tool and Die, and one of its steel processing facilities, Valley City Steel. As a result, the assets of Canton Tool and Die and Valley City Steel are currently being held for sale and certain assets of Utica Tool and Die are being held for sale. In August 1997, the Company acquired C&H Design Company, d.b.a. C&H Die Technology, d.b.a. Utica Tool and Die, ("C&H") which was headquartered in Utica, Michigan. In October 2000, the Company closed the operations of C&H and the equipment was either transferred to other Shiloh locations or is being held for sale. In July 1998, the Company also commenced operation of Jefferson Blanking, Inc. ("Jefferson Blanking"), a blanking and stamping facility in Pendergrass, Georgia.
In November 1999, the Company acquired the automotive division ("MTD Automotive") of MTD Products Inc for $20.0 million in cash and 1,428,571 shares of common stock, par value $0.01 per share, of the Company (the "Common Stock"), of which 535,714 were contingently returnable at November 1, 1999. Pursuant to the terms of the earnout provisions of the Asset Purchase Agreement, dated as of June 21, 1999, as amended (the "Purchase Agreement"), entered into by and among the Company, Shiloh Automotive, Inc. and MTD Products Inc, the aggregate consideration was increased due to the performance of MTD Automotive during the first twelve months subsequent to consummation of such acquisition. As a result of the subsequent performance of MTD Automotive, the 535,714 contingently returnable shares of Common Stock were not required to be returned to the Company and in January 2001, the Company issued MTD Products Inc an additional 288,960 shares of Common Stock and the Company's wholly owned subsidiary issued a note in the aggregate principal amount of
$4.0 million, due in full on November 1, 2001. The Company is guarantor of the note. In addition, in accordance with the Purchase Agreement, approximately $1.8 million was returned to the Company for settlement of price concessions and capital expenditure reimbursements. These adjustments were reflected in the Company's financial statements for the year ended October 31, 2000 as adjustments to the purchase price. Also in accordance with the Purchase Agreement, the purchase price may be adjusted at the end of fiscal 2001 and fiscal 2002 upon resolution of certain contingencies set forth in such Purchase Agreement.
In July 2000, the Company commenced operation of Shiloh de Mexico, a laser welded blanking facility in Saltillo, Mexico. In August 2000, the Company purchased substantially all the assets of A.G. Simpson (Tennessee) Inc., d.b.a. Dickson Manufacturing ("Dickson") for approximately $49.2 million, including approximately $1.2 million in acquisition costs. Dickson is headquartered in Dickson, Tennessee and serves the automotive industry by providing stampings and assemblies primarily used for seating and interior structural applications.
In January 2001, certain purchase price adjustments were made pursuant to the terms of the Purchase Agreement, dated July 18, 2000, by and between the Company and A.G. Simpson (Tennessee) Inc., in which approximately $4.5 million was released from escrow and returned to the Company. For accounting purposes, these adjustments were reflected in the Company's financial statements for the year ended October 31, 2000.
The Company's principal executive offices are located at Suite 202, 103 Foulk Road, Wilmington, Delaware 19803 and its telephone number is (302) 998-0592. Unless otherwise indicated, all references to the "Company" or "Shiloh" refer to Shiloh Industries, Inc. and its direct and indirect subsidiaries.
INDUSTRY
ENGINEERED PRODUCTS
In the engineered products business, OEMs and Tier I automotive suppliers purchase steel components from suppliers such as the Company. The Company manufactures these components and also engineers and builds the tools and dies used in its blanking and stamping operations. In addition, the Company produces tools and dies and welding and assembly equipment for its customers. OEMs typically find it more cost effective and time efficient to focus their core operations on vehicle assembly, marketing and distribution. As a result, OEMs increasingly outsource the blanked and stamped steel components and modular assemblies used in their vehicles. OEMs increasingly look to suppliers such as the Company to assume blanking and stamping, as well as tool and die operations that were previously done internally at OEMs.
INTERMEDIATE STEEL PROCESSING
Primary steel producers typically find it more cost effective to focus on the sale of standard size and tolerance steel to large volume purchasers and view the intermediate steel processor as part of their customer base. End-product manufacturers seek to purchase steel free from oxidation and scale, with closer tolerances, on shorter lead times and with more reliable and more frequent delivery than the primary steel producers can provide efficiently. By outsourcing these processing services, many end-product manufacturers are able to significantly enhance their productivity. These factors, together with the lower cost structure typically found in the outside supplier, have caused many end-product manufacturers to find it more beneficial, from a cost, quality and manufacturing flexibility standpoint, to outsource much of the intermediate steel processing, which is required for the production of their end-products.
PRODUCTS AND MANUFACTURING PROCESSES
ENGINEERED PRODUCTS
The Company produces precision stamped steel components through its blanking and stamping operations. Blanking is a process in which flat rolled steel is cut into precise two dimensional shapes by passing steel through a press, employing a blanking die. These blanks are used principally by manufacturers in the automobile, heavy truck, heating, ventilation and air conditioning ("HVAC") and lawn and garden industries. These blanks are used by the Company's automotive and heavy truck customers for automobile exterior parts, including fenders, hoods,
doors and side panels, and heavy truck wheel rims and brake components. The Company's HVAC and lawn and garden customers use blanks primarily for compressor housings and lawn mower decks.
The Company produces engineered-welded blanks utilizing both the mash seam resistance and laser weld processes. The engineered-welded blanks that are produced generally consist of two or more sheets of steel or aluminum of the same or different material grade, thickness or coating welded together into a single flat panel. The primary distinctions between mash seam resistance and laser welding are weld bead appearance and cost. Engineered-welded blanks allow OEMs to reduce vehicle weight, while maintaining body strength for safety and improving performance of the vehicle. Furthermore, by reducing the number of parts and supplemental operations required, engineered-welded blanks offer significant cost savings to OEMs.
Stamping is a process in which steel is passed through dies in a stamping press in order to form the steel into three dimensional parts. The Company also produces stamped parts using precision single stage, progressive and transfer dies, which in most cases, the Company designs and manufactures. Some stamping and blanking operations also provide value-added processes, such as welding, assembly and painting capabilities. The Company also manufactures deep draw stampings, such as mufflers, oil pans, transmission pans and valve covers. The Company's stampings and assemblies are principally used as components for bumper beams, door impact beams, steering column support, chassis components, seat frames, structural rails, window lifts, vehicle brakes and other structural body components for automobiles and light trucks.
The Company also designs, engineers and produces precision tools and dies and weld and assembly equipment. To support the manufacturing process, the Company supplies substantially all of the tools and dies used in the blanking and stamping operations and a portion of the welding and secondary assembly equipment used to manufacture modular systems. The Company also produces tools and dies for sale to OEMs, Tier I suppliers and other industrial customers. Advanced technology is maintained to conduct activities and improve tool and die production capabilities. The Company has computerized most of the design and engineering portions of the tool and die production process to reduce production time and cost.
INTERMEDIATE STEEL PROCESSING
The Company processes flat rolled steel principally for primary steel producers and manufacturers that require processed steel for end-product manufacturing purposes. The Company also processes flat rolled steel for internal blanking and stamping operations. The Company either purchases hot-rolled and cold-rolled steel from primary steel producers located throughout the Midwest or receives the steel on a toll-processing basis and does not acquire ownership of it. This steel typically requires additional processing to meet the requirements of the end-product manufacturers. The Company's intermediate processing operations include slitting, cutting-to-length, pickling and oiling, edge trimming, roller leveling and quality inspecting of flat rolled steel.
The first processing operation for hot-rolled steel typically involves pickling, a chemical process in which an acidic solution is applied to the steel to remove the surface oxidation and scale which develops on the steel shortly after it is hot-rolled. During the pickling process, the steel is either coated with oil to prevent oxidation or with a borax-based solution to prevent oxidation and facilitate the stamping process. In 1996, the Company added an additional pickling line, allowing the Company to nearly double capacity for cleaning, finishing and coating steel. After pickling, the steel is ready for either additional processing or delivery to the customer.
Pickled steel and cold-rolled steel often go through additional processing operations to meet the requirements of end-product manufacturers. Slitting is the cutting of coiled steel to precise widths. Cutting to length produces steel cut to specified lengths ranging from 12 inches to 168 inches. Edge trimming removes a specified portion of the outside edges of the coiled steel to produce a uniform width. Roller leveling flattens the steel by applying pressure across the width of the steel to make the steel suitable for blanking and stamping. To achieve high quality and increased volume levels and to be responsive to customers' just-in-time supply requirements, most of the Company's steel processing operations are computerized and have combined several complementary processing lines, such as pickling, slitting and cutting to length at single facilities. In addition to cleaning, leveling and cutting steel, the Company inspects steel to detect production flaws and utilize computers to provide both visual displays and documented records of the thickness maintained throughout the entire coil of steel. The Company also performs inventory control services for some customers.
CUSTOMERS
The Company produces blanked and stamped parts and processed flat-rolled steel for a variety of industrial customers. The Company supplies steel blanks, stampings and modular assemblies primarily to North American automotive manufacturers and stampings to other Tier I automotive suppliers. The Company also supplies blanks and stampings to manufacturers in the lawn and garden, HVAC, home appliance and construction industries. Finally, the Company processes flat-rolled steel for a number of primary steel producers.
One of the Company's largest customers is the Parma, Ohio stamping facility of the metal fabricating division of General Motors. The Company has been working with General Motors for more than 20 years. The Company is linked to this facility through an electronic data interchange and the Company supplies blanks on a just-in-time basis.
The acquisition of MTD Automotive in November 1999 established Ford Motor Company as another significant customer. The Company supplies Ford with stampings and assemblies.
In fiscal 2000, General Motors and Ford accounted for approximately 19.1% and 18.2% of the Company's revenues, respectively.
SALES AND MARKETING
The current sales force consists of approximately 38 individuals. These individuals directly market the Company's automotive and steel processing products and services. The sales force is organized to enable the Company to target sales and marketing efforts at three distinct types of customers.
- OEM customers;
- Tier I suppliers; and
- Steel consumers and producers.
To supplement the sales and marketing efforts, the Company established a sales and technical center in Auburn Hills, Michigan which is in close proximity to its automotive customers. The Company's engineering staff at this center provides total program management as well as technical assistance and support to customers during the product development stage. The location of the engineering and technical center allows for greater, more frequent access to some of the Company's key customers.
OPERATIONS AND ENGINEERING
The Company operates its steel processing facilities on an integrated basis. A significant portion of the flat-rolled steel used by the Company in its blanking and stamping operations is supplied through its other steel processing operations. With three tool and die facilities, the Company typically designs, engineers and manufacturers substantially all of the tools and dies used in its blanking and stamping operations.
Eleven of the Company's facilities were constructed by the Company and were located and designed to facilitate the integrated flow of the Company's processing operations. In addition, the Company has developed a just-in-time delivery system that enables the Company to meet its customers' requirements for deliveries on shorter lead times thereby minimizing their need to carry significant inventory levels.
RAW MATERIALS
The basic materials required for the Company's operations are hot- and cold-rolled steel. The Company obtains steel from a number of primary steel producers. A significant portion of the steel processing products and services are provided to customers on a toll processing basis. Under these arrangements, the Company charges 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, the Company attempts 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.
COMPETITION
Competition for sales of steel blanks and stampings is intense, coming from numerous companies, including independent domestic and international suppliers, and from internal divisions of General Motors, Ford and DaimlerChrysler, as well as independent domestic and international Tier I and Tier II suppliers, which have blanking facilities and greater financial and other resources than the Company. The market for the Company's steel processing operations is also highly competitive. The Company competes with a number of steel processors in its region, such as Worthington Industries and Samuel Steel Pickling Company, and primary steel producers, many of which also have comparable facilities and greater financial and other resources than the Company. The primary characteristics of competition encountered in each of these markets are product quality, service and price and technological innovation. In addition, competition for sales of automotive stamped modules is intense. Primary competitors in North America for the stamping business are Aetna/Sofedit, Cosma, a division of Magna International, Oxford Automotive and Tower Automotive. The significant areas of competition with these companies are price, product quality, delivery and engineering capabilities.
EMPLOYEES
As of December 31, 2000, the Company had approximately 3,600 employees. The employees at five of the subsidiaries, an aggregate of approximately 1,465 employees, are covered by six collective bargaining agreements that are due to expire in June 2001, August 2001, May 2002, June 2002, May 2004 and January 2005.
BACKLOG
Because the Company conducts its steel processing operations generally on the basis of short-term orders, backlog is not a meaningful indicator of future performance.
SEASONALITY
The Company typically experiences decreased revenue and operating income during its first fiscal quarter of each year, usually resulting from generally slower overall automobile production during the winter months. The Company's revenues and operating income in its third fiscal quarter can also be affected by the typically lower automobile production activities in July due to manufacturers' changeover in production lines.
ENVIRONMENTAL MATTERS
The Company is 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.
The Company is also subject to laws and regulations that can require the remediation of contamination that exists at current or former facilities. In addition, the Company is subject to other federal and state laws and regulations regarding health and safety matters. Each of the production facilities has permits and licenses allowing and regulating air emissions and water discharges. While the Company believes that at the present time they 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 all liability under these laws and regulations may have a material adverse effect on the Company in the future.
MTD Automotive, at its facilities in Parma and Valley City, Ohio, has engaged in industrial manufacturing operations since 1946 and 1968, during which time various hazardous substances have been handled at each facility. As a consequence of these historic operations, the potential for liability relating to contamination of soil and groundwater may exist at the Parma facility, which the Company leases from MTD Products Inc, and the Valley City facility, which the Company owns. Although the Company could be liable for cleanup costs at these facilities, MTD Products Inc is contractually obligated to indemnify the Company against any such costs arising as a result of operations prior to the Company's acquisition of the MTD Automotive business.
ITEM 2.
ITEM 2. PROPERTIES
The Company is a Delaware holding company that conducts its operations through thirteen subsidiaries, seven located in north central Ohio, three located in Michigan, one located in Georgia, one located in Tennessee and one located in Mexico. The Company believes substantially all of its property and equipment is in good condition and that it has sufficient capacity to meet its current operational needs. The Company considers full capacity of its steel processing facilities to be three eight hour shifts for 5.5 days per week. At October 31, 2000, the Company's steel processing operations were operating at near full capacity. The Company's facilities at 14 locations, all of which are owned (except for its Utica and some of its Canton, Michigan and Cleveland, Ohio facilities), are as follows:
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(1) This facility is owned by Shiloh of Michigan, the Company's joint venture with Rouge Steel. The Company is an 80% equity owner of Shiloh of Michigan.
(2) This facility is leased by C&H. Since October 31, 2000, operations ceased to be conducted at this facility.
(3) The Company acquired these facilities on November 1, 1999 in connection with the acquisition of MTD Automotive. The Valley City facility is owned and the Cleveland facility is leased.
(4) This facility is currently held for sale.
(5) The tool and die facilities are currently held for sale.
The facilities in Valley City, Ohio are in close proximity to each other facilitating greater integration of operations and management. In addition, the Company's operating facilities at Canton, Michigan consist of five separate facilities (three of which are leased) located within a five mile radius of each other.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various law suits arising in the ordinary course of business. In management's opinion, the outcome of these matters will not have a material adverse effect on the Company's financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of fiscal 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The information under this Item 4A is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
CURTIS E. MOLL, CHAIRMAN OF THE BOARD. Mr. Moll became Chairman of the Board of the Company in April 1999, and he has served as a Director of the Company since its formation in April 1993. Since 1980, Mr. Moll has served as the Chairman of the Board and Chief Executive Officer of MTD Products Inc, a privately-held manufacturer of outdoor equipment. Mr. Moll also serves as a director of Sherwin Williams Company and AGCO Corporation. Mr. C. Moll is 61 years old.
JOHN F. FALCON, PRESIDENT AND CHIEF EXECUTIVE OFFICER. Mr. Falcon has been the President and Chief Executive Officer of the Company since April 1999. From 1995 to April 1999, Mr. Falcon held several positions at Lear Corporation, a supplier of automotive interior systems, including Director of Interiors for its General Motors division. Prior to that time, he had over twenty years of experience at General Motors, a manufacturer of vehicles, where he held several positions, including, among others, Worldwide Operations Manager for ignition and filtration products. Mr. J. Falcon is 52 years old.
CRAIG A. STACY, CHIEF FINANCIAL OFFICER AND TREASURER. Mr. Stacy has served as Chief Financial Officer and Treasurer since October 1996. Mr. Stacy had been the Corporate Controller of the Company since 1994. Prior to joining the Company, Mr. Stacy was employed by Price Waterhouse LLP (currently PricewaterhouseCoopers LLP) and Ernst & Young LLP. Mr. Stacy is a Certified Public Accountant. Mr. Stacy is 34 years old.
DAVID K. FRINK, VICE PRESIDENT OF STEEL PROCESSING. Mr. Frink was named Vice President of Steel Processing in July 1997. He also served as Director of Corporate Purchasing from May 1996 to November 1999. Mr. Frink was President of Steel Processing from August 1996 to July 1997. Prior to August 1996, Mr. Frink had been the plant general manager at Liverpool Coil Processing since June 1991. Mr. Frink is 53 years old.
LARRY D. PAQUIN, VICE PRESIDENT OF QUALITY AND CONTINUOUS IMPROVEMENT. Mr. Paquin has served as Vice President of Quality and Continuous Improvement since August 1999. Prior to his tenure with the Company, Mr. Paquin had been Vice President and General Manager of Thomas Madison Incorporated, a privately-held automotive stamping manufacturer, from April 1996 to July 1999. Prior to that time, Mr. Paquin served as President of the Crescive Die and Tool Company, a privately-held tool and die manufacturer. Mr. L. Paquin is 57 years old.
MARK D. THEISEN, VICE PRESIDENT OF SALES AND MARKETING. Mr. Theisen was named Vice President of Sales and Marketing in January 2001. Prior to that time, Mr. Theisen served as Vice President of Strategic Planning and Purchasing. Mr. Theisen was named Vice President of Strategic Planning of MTD Automotive in August 1998 and served as general manager of MTD Automotive from June 1997 to August 1998. Prior to that time Mr. Theisen had been Marketing Manager of MTD Automotive from April 1995 to June 1997 and Sales Account Manager of MTD Automotive prior to that time. Mr. M. Theisen is 38 years old.
PATRICK C. BOYER, VICE PRESIDENT OF TOOLING & DESIGN. Mr. Boyer was named Vice President of Tooling and Design in June 1999. Prior to June 1999, Mr. Boyer was Vice President of Marketing from November 1998 to May 1999. Prior to that time, Mr. Boyer served as Plant General Manager of Sectional Stamping Inc. for a six-year period. Mr. P. Boyer is 45 years old.
HAYDEN M. COTTERILL, VICE PRESIDENT ENGINEERED PRODUCTS. Mr. Cotterill was named Vice President of Engineered Products in January 2000. Mr. Cotterill was employed by the Oxford Group, a Tier II supplier, from April 1998 to January 2000, where he held the position of General Manager of the suspension business unit. Prior to that time, he had over twenty-five years of experience with Eaton Corporation, a global diversified industrial manufacturer in various positions, including plant general manager of the automotive group. Mr. Cotterill is 53 years old.
STEPHEN J. TOMASKO, VICE PRESIDENT OF HUMAN RESOURCES. Mr. Tomasko was named Vice President of Human Resources in April 2000. Prior thereto, Mr. Tomasko had been employed by the Reserve Group, a privately held company engaged in the acquisition and expansion of businesses involved in the production of steel and stampings. He served the Reserve Group in various capacities and since 1995, as the Vice President of Administration. Mr. Tomasko is 57 years old.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of the close of business on January 22, 2001, there were 154 stockholders of record for the Company's Common Stock. The Company believes that the actual number of stockholders of the Company's Common Stock exceeds 300. The Company has not declared or paid any cash dividends on shares of its equity securities, including Common Stock, since its incorporation in April 1993. The Company currently intends to retain earnings to supports its growth strategy and does not anticipate paying dividends in the foreseeable future. The Common Stock is traded on the Nasdaq National Market under the symbol "SHLO". On January 22, 2001, the closing price for the Company's Common Stock was $4.625 per share.
The Company's Common Stock commenced trading on June 29, 1993. The table below sets forth the high and low bid prices for the Company's Common Stock for its four quarters in each of 1999 and 2000.
On November 1, 1999, the Company issued 1,428,571 shares of its Common Stock to MTD Products Inc as a portion of the consideration for the acquisition by the Company of MTD Automotive. In addition, in January 2001, the Company issued 288,960 shares of its Common Stock to MTD Products Inc as a portion of the consideration owed by the Company to MTD Products Inc under the earnout provision of the Asset Purchase Agreement, dated as of June 21, 1999, as amended, by and among the Company, Shiloh Automotive, Inc. and MTD Products Inc (the "Purchase Agreement"). These issuances of shares of Common Stock were exempt from the registration requirements of the Securities Act of 1933 based on Section 4(2) of such Act.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the Company. The data for each of the five years in the period ended October 31, 2000, are derived from the consolidated financial statements of the Company, which have been audited by PricewaterhouseCoopers LLP, independent accountants. The data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and the notes thereto included elsewhere in this Annual Report.
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(1) On July 9, 1996, the Company completed the sale of substantially all of the issued and outstanding common stock of Shafer Valve for approximately $13.2 million in cash. This disposition resulted in a $9.589 million loss after tax and has been accounted for as a discounted operation.
(2) Purchase price adjustments made in connection with the acquisitions of MTD Automotive and Dickson are reflected in earnings per share and balance sheet data for fiscal 2000.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a full service manufacturer of blanks and stamped components for the automotive and light truck, heavy truck and other industrial markets. The Company's engineered products include blanks, stamped components and modular assemblies. The Company also designs, engineers and manufactures precision tools and dies for the automotive and other industries. In addition, the Company provides steel processing services, which include pickling hot-rolled steel, slitting, edge trimming, roller leveling and cutting-to-length of both hot- and cold-rolled steel. In fiscal 2000, approximately 88.8% of the Company's revenues were generated by sales to the automotive and light truck and heavy truck industries.
The Company's origins date back to 1950 when its predecessor, Shiloh Tool & Die Mfg. Company, began to design and manufacture precision tools and dies. As an outgrowth of its precision tool and die expertise, Shiloh Tool & Die Mfg. Company expanded into blanking and stamping operations in the early 1960's. In April 1993, Shiloh Industries, Inc. was organized as a Delaware corporation to serve as a holding company for its seven operating subsidiaries and in July 1993 completed an initial public offering of Common Stock.
In January 1996, the Company entered into a joint venture with Rouge Steel Company and formed a limited liability company, Shiloh of Michigan, L.L.C., to produce engineered steel blanks. The Company is an 80% equity owner in this joint venture. On November 1, 1996, the Company acquired substantially all of the assets of Greenfield Die & Manufacturing Corp., headquartered in Canton, Michigan. Greenfield Die & Manufacturing Corp. provides a variety of value-added processes, including tool and die design and build, stamping, assembly, welding, prototyping operations and mold design and manufacture.
In August 1997, the Company acquired C&H, headquartered in Utica, Michigan. In October 2000, the Company closed C&H and the equipment was either transferred to other Shiloh locations or is being held for sale. In October 1997, the Company incorporated Jefferson Blanking, Inc. and commenced operations in July 1998.
On November 1, 1999, the Company acquired MTD Automotive, the automotive division of MTD Products Inc, headquartered in Cleveland, Ohio. MTD Automotive is primarily a Tier I supplier and primarily serves the automotive industry by providing metal stampings and modular assemblies. The aggregate consideration for the acquisition of MTD Automotive consisted of $20.0 million in cash and the issuance of 1,428,531 shares of Common Stock to MTD Products Inc, of which 535,714 were contingently returnable at November 1, 1999. In January 2001, the aggregate consideration was increased based upon the performance of MTD Automotive during the first twelve months subsequent to closing. Specifically, the 535,714 contingently returnable shares of Common Stock were not required to be returned to the Company and the Company issued MTD Products Inc an additional 288,960 shares of Common Stock and the Company's wholly owned subsidiary issued a note payable in full on November 1, 2001, in the aggregate principal amount of $4.0 million. The Company is guarantor of the note. In addition, in accordance with the Purchase Agreement, approximately $1.8 million was returned to the Company for settlement of price concessions and capital expenditure reimbursements. These adjustments were reflected in the Company's financial statements for the year ended October 31, 2000 as adjustments to the purchase price. Also in accordance with the Purchase Agreement, the purchase price may be adjusted at the end of fiscal 2001 and fiscal 2002 upon resolution of certain contingencies set forth in the Purchase Agreement.
In July 2000, the Company announced that it would seek strategic alternatives for two of its tool and die facilities, C&H and Canton Tool & Die, and one of its steel processing facilities, Valley City Steel. In October 2000, the Company closed C&H and transferred certain of its assets to other subsidiaries of the
Company. The Company currently intends to sell the assets of Canton Tool & Die, the assets of the steel processing facility of Valley City Steel and certain assets of C&H. The Company anticipates these sales will be completed in fiscal 2001.
On August 29, 2000, the Company acquired substantially all the assets of Dickson for approximately $49.2 million, including approximately $1.2 million in acquisition costs. In January 2001, certain purchase price adjustments were made pursuant to the terms of the Purchase Agreement in which approximately $4.5 million was released from escrow and returned to the Company. For accounting purposes, these adjustments were reflected in the Company's financial statements for the year ended October 31, 2000. The acquisition reflects an expansion of the Company's capabilities and improves its position as a key supplier of engineered metal products for automotive seating and interior structural applications.
In analyzing the financial aspects of the Company's operations, the following factors should be considered.
Plant utilization levels are very important to profitability because of the capital intensive nature of these operations. Because the Company performs a number of different operations, it is not meaningful to analyze simply the total tons of steel processed. For example, blanking and stamping involve more operational processes, from the design and manufacture of tools and dies to the production and packaging of the final product, than the Company's other services and therefore generally have higher margins.
A significant portion of the Company's steel processing and blanking products and services is provided to customers on a toll processing basis. Under these arrangements, the Company charges a tolling fee for the operations that it performs without acquiring ownership of the steel and being burdened with the attendant costs of ownership and risk of loss. Although the proportion of tons of steel which the Company uses or process that is directly owned as compared to toll processed may fluctuate from quarter to quarter depending on customers' needs, the Company estimates that of total tons used or processed in its operations, approximately 75.9% in 2000, 85.6% in 1999, and 87.4% in 1998, were used or processed on a toll processing basis. Revenues from toll processing as a percent of total revenues were approximately 16.5% in 2000, 27.6% in 1999 and 29.7% in 1998. Revenues from operations involving directly owned steel include a component of raw material cost whereas toll processing revenues do not. Consequently, toll processing generally results in lower revenue, but higher gross margin, than directly owned steel processing. Therefore, an increase in the proportion of total revenues attributable to directly owned steel processing may result in higher revenues but lower gross margins. The Company's stamping operations use more directly owned steel than its other operations.
Changes in the price of scrap steel can have a significant effect on the Company's results of operations because substantially all of its operations generate engineered scrap steel. Engineered scrap steel is a planned by-product of our processing operations. Changes in the price of steel, however, also can impact the Company's results of operations because raw material costs are by far the largest component of cost of sales in processing directly owned steel. The Company actively manages its exposure to changes in the price of steel, and, in most instances, passes along the rising price of steel to its customers. At times, however, the Company has been unable to do so.
The Company's results of operations have been adversely affected by a large number of facility expansions and start-up operations in recent periods, such as Shiloh de Mexico S.A. de C.V. ("Shiloh of Mexico") and Ohio Welded Blank, an expansion facility of Medina Blanking, Inc. ("OWB"). Operations at expanded and new facilities are typically less efficient than established operations due to the implementation of new production processes. In addition, the Company depends on customers to implement their purchase programs in a timely manner, which affects the Company's ability to achieve satisfactory plant utilization rates. When the customers fail to do so, results are negatively impacted. In the Company's experience, operations at expanded or new facilities may be adversely impacted by the above factors for several periods.
RESULTS OF OPERATIONS
The following table sets forth income statement data of the Company expressed as a percentage of revenues for the periods indicated:
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* indicates that amounts are greater than 0.0 percent but less than 0.1 percent.
YEAR ENDED OCTOBER 31, 2000 COMPARED TO YEAR ENDED OCTOBER 31, 1999
REVENUES. Revenues increased by $276.5 million, or 78.1%, to $630.8 million for the year ended October 31, 2000 from $354.2 million for the comparable period in 1999. The increase in revenues is primarily due to the inclusion of MTD Automotive and OWB. MTD Automotive was acquired on November 1, 1999 and accounted for $207.1 million, or 74.9%, of the revenue increase in fiscal 2000 as compared to fiscal 1999. OWB, dedicated to engineered welded blanks for the automotive sector, became operational on November 1, 1999 and accounted for $60.0 million, or 21.7% of the revenue increase in fiscal 2000 as compared to fiscal 1999. In addition, in fiscal 2000, scrap revenue increased $6.9 million as a result of (1) an increase in the average scrap price per gross ton and (2) an increase in scrap volume, primarily as a result of the inclusion of MTD Automotive and OWB. Excluding MTD Automotive and OWB, scrap sales increased $4.1 million in fiscal 2000 as compared to fiscal 1999. The percentage of revenues from directly owned steel processed was 83.5% for fiscal 2000 compared to 72.4% for fiscal 1999. Revenues from the toll processed steel were 16.5% for fiscal 2000 compared to 27.6% for fiscal 1999. This shift in the mix of revenue from toll processing to directly owned steel primarily resulted from the addition of MTD Automotive and OWB, which derived substantial revenue from directly owned steel.
GROSS PROFIT. Gross profit increased by $19.7 million, or 31.4%, to $82.7 million for fiscal 2000 from $63.0 million for the comparable period in 1999. Gross margin decreased to 13.1% in fiscal 2000 from 17.8% for the comparable period in 1999. The increase in gross profit is primarily related to the acquisition of MTD Automotive, which has historically generated lower gross margins than the historical results of the Company's existing operations. The decline in gross margin is primarily a result of the addition of MTD Automotive and OWB, which derive substantial revenue from sales of directly owned steel which results in higher revenues but lower gross margins. In addition, lower gross margin and lower gross profit were experienced at Canton Tool and Die and C&H as a result of the softening in the tool and die business and at Valley City Steel as a result of the weakening steel industry. Excluding MTD Automotive, OWB, Canton Tool and Die, C&H and Valley City Steel, gross profit decreased by $3.6 million and gross margin increased to 20.0% for fiscal 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $24.3 million, or 77.2%, to $55.7 million in fiscal 2000 from $31.4 million in fiscal 1999. As a percentage of revenues, these expenses decreased slightly to 8.8% for fiscal 2000 from 8.9% for fiscal 1999. The largest component of the increase, in dollars, arose principally from the addition of MTD Automotive and OWB. Excluding MTD Automotive and OWB, selling, general and administrative expenses increased $14.2 million from fiscal 1999 and as a percentage of revenues increased to 12.6% from fiscal 1999. Additional increases are the result of: the addition of corporate personnel and related costs, a bad debt write-off relating to one customer, increased depreciation on the new business system software, write-off of costs relating to the high yield bond offering that was terminated during the fourth quarter of fiscal 2000, administrative expenses relating to Dickson, acquired in August 2000 and administrative expenses for the start-up of the Shiloh of Mexico facility.
OTHER. The Company recognized a one-time asset impairment charge of $33.0 million relating to assets held for sale at Canton Tool and Die and Valley City Steel as well as a one time charge of $1.2 million for restructuring related to the closing of C&H. Interest expense increased to $15.4 million in fiscal 2000 from $7.5 million for the comparable period in fiscal 1999 due primarily to increased average borrowings during fiscal 2000 that were primarily incurred in connection with acquisitions and capital expenditures made during fiscal 1999 and fiscal 2000. Interest expense of approximately $2.6 million relating to expansion of several facilities was capitalized in fiscal 2000. The income tax benefit was $8.5 million in fiscal 2000 compared with a provision for income tax of $9.4 million in fiscal 1999, representing effective tax rates of 40.3% and 37.9%, respectively.
NET INCOME (LOSS). Net income for fiscal 1999 decreased by $27.9 million to a net loss of $12.6 million for fiscal 2000. This decrease was substantially the result of the asset impairment charge and restructuring charge.
YEAR ENDED OCTOBER 31, 1999 COMPARED TO YEAR ENDED OCTOBER 31, 1998
REVENUES. Revenues increased by $54.9 million, or 18.3%, to $354.2 million for the year ended October 31, 1999 from $299.4 million for the comparable period in 1998. The increase in revenues is primarily due to increased volumes in our stamping operations, increased tailor-welded blanking revenue, increased tool and die sales and the inclusion of a full year of revenue at Jefferson Blanking. This increase was partially offset by a $4.0 million decrease in revenue from sales of scrap steel due to a decline in the price of scrap steel per gross ton from an average of $94.0 per gross ton during fiscal 1999 compared to an average of $137.0 per gross ton for fiscal 1998. Revenues from the blanking and stamping operations for fiscal 1999 increased approximately 24.3% from the comparable period in fiscal 1998, while revenue from the other steel processing operations for fiscal 1999 decreased approximately 1.3% from the comparable period in fiscal 1998. The percentage of revenues from directly owned steel processed was 72.4% for fiscal 1999 compared to 70.3% for fiscal 1998. Revenues from the toll processed steel were 27.6% for fiscal 1999 and 29.7% for the comparable period in fiscal 1998. The increase in the percentage of revenue from directly owned steel processed of approximately 2.1% was primarily due to the increase in directly owned steel processing revenue and tonnage at certain facilities during the fiscal year due to a shift in customer requirements.
GROSS PROFIT. Gross profit increased by $6.1 million, or 10.7%, to $63.0 million for fiscal 1999 from $56.9 million for the comparable period in 1998. Gross margin decreased to 17.8% in fiscal 1999 from 19.0% for the comparable period in 1998. Gross margin was negatively affected by the 31.4% decrease in the average price of scrap steel per ton during fiscal 1999. In addition, gross margin was negatively affected by difficulties that the Company experienced in the implementation of one very significant tool and die program which caused significant difficulties at one of our tool and die facilities which resulted in production disruptions. Finally, gross margin was negatively impacted by increased depreciation resulting from increased capital expenditures.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $4.6 million, or 17.2%, to $31.4 million in fiscal 1999 from $26.8 million for the comparable period in fiscal 1998. As a percentage of revenues, these expenses decreased slightly to 8.9% for fiscal 1999 from 9.0% for the comparable period in fiscal 1998. The largest component of the increase, in dollars, arose principally from the addition of corporate personnel and related benefit costs. In addition, we incurred increased professional fees associated with personnel recruitment fees and legal fees associated with the negotiation of union contracts.
OTHER. Interest expense increased to $7.5 million in fiscal 1999 from $5.3 million for the comparable period in fiscal 1998 due primarily to increased average borrowings during fiscal 1999 that were primarily incurred in connection with significant capital expenditures made during fiscal 1998 and fiscal 1999. Interest expense of approximately $2.5 million relating to expansion of several facilities was capitalized in fiscal 1999. The provision for income taxes was $9.4 million in fiscal 1999 compared with $9.7 million in fiscal 1998, representing effective tax rates of 37.9% and 38.4%, respectively.
NET INCOME. Net income for fiscal 1999 decreased by $0.2 million, or 1.5%, to $15.3 million from $15.5 million for the comparable period in fiscal 1998. This decrease was substantially the result of a decline in scrap prices per gross ton, lower margins on specific tool and die projects, increased depreciation resulting from increased capital expenditures and increased interest expense resulting from increased borrowing for significant capital expenditures made during fiscal 1998 and fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2000, the Company had $138.8 million of working capital, representing a current ratio of 2.2 to 1 and debt to total capitalization of 58.3%. As a result of this strong financial condition, the Company will be able to continue its planned investment in new equipment and facilities through the next fiscal year.
Net cash provided by operating activities is primarily generated from operations of the Company plus non-cash charges for depreciation and amortization, which because of the capital intensive nature of the Company's business, are substantial. Net cash provided by operating activities for 2000 was $62.1 million as compared to $13.4 million for the comparable period in fiscal 1999. Fluctuations in working capital were the primary factors causing the increase in net cash provided by operations from fiscal 1999 to fiscal 2000. Net cash provided by operating activities has historically been used by the Company to fund a portion of its capital expenditures.
Capital expenditures, excluding acquisitions, were $66.2 million during the year ended October 31, 2000 and $58.4 million during fiscal 1999. The capital expenditures made during 2000 were primarily for expansions of existing facilities of approximately $46.1 million, as well as sustaining capital expenditures of approximately $20.1 million.
The Company's total capital budget for fiscal 2001 amounts to approximately $34.0 million. The capital expenditures in fiscal 2001 are anticipated to be primarily for facility expansions and additions, which are being made to support expected increases in existing business, anticipated new business and to enhance productivity.
On August 11, 2000, the Company entered into a new credit agreement with The Chase Manhattan Bank as administrative agent for a group of lenders, which replaced the KeyBank Agreement with KeyBank NA as agent for a group of lenders. The Company now has a $300.0 million commitment under the credit agreement, which expires in August 2005. All amounts outstanding under the KeyBank Agreement were refinanced and all existing obligations under the KeyBank Agreement were terminated. As a result of the refinancing, the Company capitalized deferred financing costs of $1.5 million associated with the new Chase Manhattan credit agreement in the fourth quarter of fiscal 2000, which is being amortized over the term of the debt.
Under the new credit agreement, the Company has the option to select the applicable interest rate at the alternative base rate ("ABR"), as defined in the new credit agreement to be the greater of the prime rate in effect on such day and the federal funds effective rate in effect on such day plus half of 1%, or the LIBOR rate plus a factor determined by a pricing matrix (ranging from 0.5% to 1.5% for the ABR and ranging from 1.5% to 2.5% for the LIBOR rate) based on funded debt to earnings before interest, taxes, depreciation and amortization. As of October 31, 2000, the factor as determined by the pricing matrix was 2.0%. The terms of the new credit agreement also require an annual commitment fee based on the amount of unused commitments under the new credit agreement and a factor determined by a pricing matrix (ranging from 0.25% to 0.5%) based on funded debt to earnings before interest, taxes, depreciation and amortization. The new credit agreement also provides for the incurrence of debt under standby letters of credit and for the advancement of funds under a discretionary line of credit. The maximum amount of debt that may be incurred under each of these sources of funds is $15.0 million. As of October 31, 2000, $242.1 million was outstanding under the credit agreement.
The new credit agreement is collateralized by an interest in all of the Company's and its wholly owned domestic subsidiaries' cash and cash accounts, accounts receivable, inventory, mortgages on certain owned real property and equipment, excluding fixtures and general intangibles such as patents, trademarks and copyrights.
The credit agreement includes, without limitation, covenants involving minimum interest coverage, minimum tangible net worth coverage and a minimum leverage ratio. In addition, the new credit agreement limits the incurrence of additional indebtedness, capital expenditures, investments, dividends, transactions with affiliates, asset sales, leaseback transactions, acquisitions, prepayments of other debt, hedging agreements and liens and encumbrances and certain transactions resulting in a change of control.
On January 22, 2001, the Company's wholly-owned subsidiary, MTD Automotive, executed a note in the aggregate principal amount of approximately $4.0 million in favor of MTD Products Inc as partial payment of the additional consideration owed to MTD Products based on the performance of MTD Automotive for the first twelve months subsequent to consummation of such acquisition. Specifically, aggregate consideration increased in that the 535,714 contingently returnable shares of Common Stock were not required to be returned to the Company, the Company issued MTD Products an additional 288,960 shares of Common Stock and the note was issued to MTD Products Inc. The note is payable in full on November 1, 2001. Interest on such note is at a rate of 8.620% per annum. The Company is guarantor of such note. These adjustments were reflected in the Company's financial statements for the year ended October 31, 2000 as adjustments to the purchase price.
In addition, in January 2001, due to certain purchase price adjustments made pursuant to the Asset Purchase Agreement, dated July 18, 2000, by and between the Company and A.G. Simpson (Tennessee) Inc., approximately $4.5 million was released from escrow and returned to the Company. For accounting purposes, these adjustments were reflected in the Company's financial statements for the year ended October 31, 2000.
The Company executed a demand promissory note as of December 6, 1996 in favor of The Richland Bank in the aggregate principal amount of $4.0 million. Interest accrues on the outstanding principal balance under that facility at LIBOR plus 0.75%.
In March 1995, Medina County, Ohio issued on the Company's behalf an aggregate of $5.4 million in principal amount of variable rate industrial revenue bonds due 2010, all of which was outstanding as of October 31, 1999. These bonds are secured by a letter of credit. The funds from these bonds were used to finance a portion of the expansion at the steel pickling operations in Valley City, Ohio.
The Company intends to dispose of the assets of Canton Tool and Die and Valley City Steel and certain of the assets of C & H. The Company expects to complete the sale of these assets during fiscal 2001. As of the date hereof, no definitive agreement with respect to any such transaction has been entered into. In addition, the Company from time to time is involved in various stages of discussion or negotiation regarding other acquisitions, dispositions and other such transactions and strategic alternatives. There is no assurance that any such sale or strategic or other alternative will be consummated.
EFFECT OF INFLATION
Inflation generally affects the Company by increasing the interest expense of floating rate indebtedness and by increasing the cost of labor, equipment and raw materials. The general level of inflation has not had a material effect on the Company's financial results.
OUTLOOK
The statements contained in this Annual Report of Form 10-K that are not historical facts are forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties with respect to the Company's operations in fiscal 2000 as well as over the long term such as, without limitation, (i) the Company's dependence on the automotive and light truck and heavy truck industries, which are highly cyclical, the dependence of the automotive and light truck industry on consumer spending, which is subject to the impact of domestic and international economic conditions and regulations and policies regarding international trade, (ii) the ability of the Company to accomplish its strategic objectives with respect to external expansion through selective acquisitions and internal expansion, (iii) increases in the price of, or limitations on the availability of
steel, the Company's primary raw material or decreases in the price of scrap steel (iv) risks associated with integrating operations of acquired companies, including the acquisition of the MTD Automotive division and Dickson Manufacturing, (v) potential disruptions or inefficiencies in operations due to or during facility expansions or start-up facilities, (vi) risks related to conducting operations in a foreign country, (vii) risks related to labor relations, labor expenses or work stoppages involving the Company, its customers or suppliers or (viii) changes in the estimated sale prices of assets held for sale. 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 the filing of this Annual Report on Form 10-K. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. In addition to the disclosure contained herein, readers should carefully review risks and uncertainties contained in other documents the Company files from time to time with the Securities and Exchange Commission.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is primarily due to possible fluctuations in interest rates as they relate to its variable rate debt. The Company does not enter into derivative financial investments for trading or speculation purposes. As a result, the Company believes that its market risk exposure is not material to the Company's financial position, liquidity or results of operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statement Schedule for the three years ended October 31, 2000 is included in Item 14 of this Annual Report of Form 10-K.
II -- Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Shiloh Industries, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Shiloh Industries, Inc. and its subsidiaries at October 31, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Cleveland, Ohio December 15, 2000
SHILOH INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS
Shiloh Industries, Inc. (the "Company") is a full service manufacturer of blanks and stamped components for the automotive and light truck, heavy truck and other industrial markets.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and all wholly-owned and majority-owned subsidiaries. All significant intercompany transactions have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue upon product shipment. Revenues include both direct sales as well as toll processing revenue. Toll processing revenue is generated as a result of the Company performing steel processing operations without acquiring ownership of the material. Revenues include $103,937,259, $97,937,323 and $88,792,119 of toll processing revenue for 2000, 1999 and 1998, respectively.
EMPLOYEE BENEFIT PLANS
The Company accrues the cost of defined benefit pension plans which cover a majority of the Company's employees in accordance with Statement of Financial Accounting Standards ("SFAS") No. 87. The plans are funded based on the requirements and limitations of the Employee Retirement Income Security Act of 1974. The majority of employees of the Company participate in discretionary profit sharing plans administered by the Company. The Company also provides postretirement benefits to certain employees (Note 11).
GOODWILL
Goodwill represents the excess of cost over the fair value of net assets of acquired entities and is amortized on a straight-line basis over its expected benefit period of 30 years. During 2000, 1999 and 1998, goodwill amortization amounted to $396,803, $408,558 and $408,558, respectively. Accumulated amortization was $1,589,464 and $1,192,661 for October 31, 2000 and 1999, respectively.
The Company uses an undiscounted cash flow method to review the recoverability of the carrying value of goodwill and other long-lived assets.
STATEMENT OF CASH FLOWS INFORMATION
Cash and cash equivalents include checking accounts and all highly liquid investments with an original maturity of three months or less. Cash equivalents are stated at cost, which approximates market value.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental disclosures of cash flow information for the years ended October 31 are as follows:
INVENTORIES
Inventories are valued at the lower of cost or market, cost being determined primarily by the last-in, first-out ("LIFO") method and the balance determined by the first-in, first-out ("FIFO") method, which approximates average cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Expenditures for maintenance, repairs and renewals are charged to expense as incurred, whereas major improvements are capitalized. The cost of these improvements is depreciated over their estimated useful lives. Useful lives range from five to twelve years for furniture and fixtures and machinery and equipment, fifteen to twenty years for land improvements and thirty to forty years for buildings and their related improvements. Depreciation is computed using principally the straight-line method for financial reporting purposes and accelerated methods for income tax purposes.
INCOME TAXES
The Company utilizes the asset and liability method in accounting for income taxes which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amount and tax basis of assets and liabilities.
CONCENTRATION OF RISK
The Company sells products to customers primarily in the automotive, light truck and heavy truck industries. The Company performs on-going credit evaluations of its customers and generally does not require collateral when extending credit. The Company maintains a reserve for potential credit losses. Currently, the Company does not have financial instruments with off-balance sheet risk. During fiscal 2000, the Company's sales to General Motors and Ford Motor Company represented 19.1% and 18.2% of the Company's revenues, respectively.
As of December 31, 2000, the Company had approximately 3,600 employees. The employees at five of its subsidiaries, an aggregate of approximately 1,465 employees, are covered by six collective bargaining agreements that are due to expire in June 2001, August 2001, May 2002, June 2002, May 2004 and January 2005.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and investments, trade receivables and payables approximates fair value because of the short maturity of those instruments. The carrying value of the Company's long-term debt is considered to approximate the fair value of these instruments based on the borrowing rates currently available to the Company for loans with similar terms and maturities.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles 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. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 in accounting for stock-based employee compensation; however, the impact of the fair value based method described in SFAS No. 123, "Accounting for Stock-Based Compensation" is presented in the notes to the financial statements (Note 12).
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilutive effect of the Company's stock option plan by adjusting the denominator using the treasury stock method.
The outstanding stock options under the Company's Key Employee Stock Incentive Plan (Note 12) are included in the diluted earnings per share calculation to the extent they are dilutive. The only reconciling item between the average outstanding shares in each calculation is the stock options outstanding. The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation for net income.
The 535,714 contingently returnable shares of Common Stock of the Company and the 288,960 additional shares of Common Stock of the Company associated with the MTDA acquisition were not included in quarterly weighted average shares when the Company published its quarterly reports on Form 10-Q during fiscal 2000 since the earn-out contingency had not been resolved as of such time. Since the contingency was resolved by the end of fiscal 2000, such shares are included in basic and diluted weighted average shares from the beginning of the quarter in which they were earned for the twelve months ended October 31, 2000. Weighted average shares and earnings per share for each quarterly period presented in Note 15 were revised to reflect shares earned during
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the respective period based on the contingency resolution. The 288,960 additional shares were issued in January 2001 and are considered issued and outstanding for financial reporting purposes at October 31, 2000.
NEW ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") was issued effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137 "Accounting For Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." This delays the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. The Company is currently evaluating the impact, if any, of SFAS No. 133, but does not expect adoption to materially affect its financial position, results of operations or financial statement disclosures.
The Accounting Standards Executive Committee Statement of Position 98-5, "Accounting for the Costs of Start-up Activities" ("SOP 98-5"), issued in April 1998 and effective for fiscal years beginning after December 15, 1998 with earlier application permitted, provides guidance on financial reporting of start up costs and organization costs. The adoption of SOP 98-5 in fiscal 2000 did not have a material effect on the Company's financial statements.
In December 1999, the Commission issued Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements, which provides guidance related to revenue recognition based on interpretations and practices promulgated by the Commission. SAB 101, as amended, is effective for the fourth fiscal quarter of 2001. The Company is currently determining the effect, if any, it will have on its financial statements.
NOTE 3 -- ACQUISITIONS
On August 29, 2000 the Company acquired substantially all of the assets and assumed certain liabilities of A.G. Simpson (Tennessee) Inc. for approximately $49,222,546 consisting of $47,932,625 in cash and $1,289,921 in acquisition costs. In January 2001, certain purchase price adjustments were made pursuant to the terms of the Purchase Agreement in which $4,478,659 was released from escrow and returned to the Company. For accounting purposes, these adjustments were reflected in the Company's financial statements for the year ended October 31, 2000. Accounts receivable at October 31, 2000 include $4,478,659 related to these adjustments. The acquisition was accounted for using the purchase method of accounting. A.G. Simpson (Tennessee) Inc.'s assets and liabilities were recorded at their fair values as of the date of the acquisition. The final purchase price allocation is subject to refinement upon completion of a review of property, plant and equipment, intangibles, and certain accrued liabilities. The total cost of net assets acquired was $44,743,887 and consisted of assets of $57,176,137 less liabilities assumed of $12,432,250. Assets acquired (at fair value) consisted primarily of accounts receivable of $12,396,976, inventories of $2,096,765, costs in excess of billings on uncompleted contracts of $3,176,462, prepaid expenses of $17,574, and fixed assets of $39,488,360. Liabilities assumed (at fair value) consisted primarily of accounts payable of $9,992,882, accrued liabilities of $1,946,667 and billings in excess of costs on uncompleted contracts of $492,701. The Consolidated Statement of Operations includes the results of operations of A.G. Simpson (Tennessee) Inc. since the date of the acquisition.
On November 1, 1999, the Company acquired MTD Automotive ("MTDA"), the automotive division of MTD Products Inc, a significant stockholder of the Company. The acquisition was accounted for using the purchase method of accounting. MTDA is a manufacturer of stamped parts and components for the automotive industry, and sells primarily to original equipment manufacturers in the United States. MTDA net sales were $192,850,382 in its fiscal year ended July 31, 1999.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to the terms of the purchase agreement, the Company acquired substantially all of the assets of MTDA for aggregate consideration of $20,000,000 in cash and 1,428,571 shares of Common Stock of the Company at a price of $14.00 per share. Of the original 1,428,571 shares of Common Stock issued, 535,714 shares were considered contingent consideration for the first three quarters of fiscal 2000 and did not enter into the purchase price allocation until the fourth quarter of fiscal 2000, when the contingency was resolved. The aggregate consideration was subsequently increased in that the 535,714 contingently returnable shares of Common Stock were not required to be returned to the Company and the Company issued an additional 288,960 shares of Common Stock and a wholly owned subsidiary of the Company issued a note to MTD Products Inc in the aggregate principal amount of $4,045,392. In addition, the purchase price decreased by $1,820,113 for settlement of certain price concessions and capital expenditure reimbursements. These adjustments were reflected in the Company's financial statements for the year ended October 31, 2000 as adjustments to the purchase price. The Company is guarantor of the note. The note is payable in full on November 1, 2001. The 288,960 additional shares were issued in January 2001 and are considered issued and outstanding for financial reporting purposes at October 31, 2000.
The Company incurred an aggregate of $1,591,573 in acquisition costs associated with the acquisition. Cash in the amount of $20,000,000 was paid on the effective date of the acquisition and was financed by the Company's revolving credit facility and 1,428,571 shares of common stock were issued on the same date. The initial purchase price was calculated based on $20,000,000 cash paid at closing and 892,857 shares of Common Stock valued at $9,642,856, based on the market price at the date of the acquisition. The final purchase price was increased by $4,045,392 in cash and 824,674 shares of Common Stock valued at $4,898,563 based on the market price at October 31, 2000, the time the performance contingency was resolved, and decreased by $1,820,113 for settlement of certain price concessions and capital expenditure reimbursements, which is included in accounts receivable at October 31, 2000.
The purchase price was allocated to the underlying assets and liabilities based upon their estimated fair values at the date of the acquisition. The total cost of net assets acquired was $38,358,271 and consisted of assets of $52,601,553 less liabilities assumed of $14,243,282. Assets acquired, (at fair value) consisted of accounts receivable of $19,366,134, inventory of $24,196,338 pension assets of $4,465,799, fixed assets of $4,452,598 and other assets of $120,684. Liabilities assumed (at fair value) consisted of accounts payable of $11,307,031 and accrued liabilities of $2,936,251. The Company is in the process of finalizing the purchase price allocation. The final purchase price allocation is subject to refinement upon completion of a review of property, plant and equipment, intangibles, and certain accrued liabilities. In addition, under the terms of the Purchase Agreement, the purchase price may be adjusted at the end of fiscal 2001 and fiscal 2002 upon resolution of additional contingencies set forth in such Purchase Agreement. The Consolidated Statement of Operations includes the results of operations of MTDA since the date of the acquisition.
The following are unaudited pro forma results of operations for the years ended October 31, 2000 and 1999 assuming the acquisitions of A.G. Simpson (Tennessee) Inc. had occurred on November 1, 1998 and 1999 and MTD Automotive had occurred on November 1, 1998. The results are not necessarily indicative of future operations or what would have occurred had the acquisitions been consummated on the respective dates.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
In July 2000, the Company announced that it would seek strategic alternatives for two of its tool and die facilities, Utica Tool & Die and Canton Tool & Die, and one of the its steel processing facilities, Valley City Steel.
In October 2000 the Company closed Utica Tool & Die ("UTD"). During the fourth quarter ended October 31, 2000 the Company recorded a pre-tax asset impairment charge of $6,539,430 to write-down certain UTD long-lived assets to be disposed of to the Company's estimated fair value. Fair value was primarily based on appraisal values. Actual results could differ significantly from such estimates. Certain assets were transferred to other divisions of the Company (at net book value) to be used in ongoing operations and remaining impaired assets are in the process of being sold or disposed. In addition, during the fourth quarter ended October 31, 2000 the Company recorded a pre-tax restructuring charge of $1,229,932 associated with the closure of UTD. The restructuring charge consisted of lease termination costs $802,237, facility closing costs $136,000, personnel costs $48,002, and other costs $243,693. Approximately $969,897 remains as accrued exit costs at October 31, 2000.
In October 2000 the Company committed to plans to sell Canton Tool & Die and Valley City Steel. Accordingly, the Company has classified the net assets of Canton Tool & Die and Valley City Steel as Assets Held for Sale. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Company recorded an impairment charge associated with these facilities and will not reflect depreciation expense against future operations. The resulting pre-tax adjustment of $26,503,505 was recorded in the fourth quarter ended October 31, 2000. The carrying values of the net assets were written down to the Company's estimates of fair value. Fair value was based on current offers to purchase these businesses, less costs to dispose. Actual results could differ significantly from such estimates. At October 31, 2000 the net assets of Canton Tool & Die and Valley City Steel have a remaining carrying amount of approximately $32,705,765. The Company intends to operate these facilities while pursuing alternatives for their sale. The Company expects to complete the sale of these facilities by the end of fiscal 2001.
Together, these three facilities recorded net sales of $68.6 million, $81.8 million and $76.2 million and contributed net operating losses of $9.7 million, $5.2 million and $7.2 million for the years ended October 31, 2000, 1999 and 1998, respectively, net of asset impairment and restructuring charges and inter-company sales and expenses.
NOTE 5 -- ACCOUNTS RECEIVABLE
Accounts receivable in the consolidated balance sheet are expected to be collected within one year and are net of provisions for doubtful accounts, in the amount of $1,777,611 and $1,080,641 at October 31, 2000 and 1999, respectively.
NOTE 6 -- INVENTORIES
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Average cost inventory is net of reserves to reduce certain inventory from cost to net realizable value. Such reserves aggregated $2,133,831 and $144,888 at October 31, 2000 and 1999, respectively. Of the total inventory at average cost at October 31, 2000 and 1999, $24,550,163 and $28,923,588, respectively, were valued using the LIFO method.
NOTE 7 -- OTHER ASSETS
In November 2000, the life insurance policy was surrendered in the amount of its cash surrender value and is included in accounts receivable at October 31, 2000.
NOTE 8 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
Depreciation expense was $23,390,660, $17,838,676 and $14,861,850 for 2000, 1999 and 1998, respectively.
During the years ended October 31, 2000, 1999 and 1998, interest expense incurred was $17,970,153, $10,019,015 and $7,535,211, respectively, of which $2,563,154, $2,530,445 and $2,231,993 was capitalized as part of property, plant and equipment, respectively.
The Company had commitments for capital expenditures of approximately $5.9 million at October 31, 2000.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- FINANCING ARRANGEMENTS
Long-term debt consists of the following:
The weighted average interest rate was 8.26% for fiscal 2000, 8.19% for fiscal 1999 and 5.85% for fiscal 1998.
On August 11, 2000 the Company entered into a new credit agreement with The Chase Manhattan Bank as administrative agent for a group of lenders, which replaced the KeyBank Agreement with KeyBank NA as agent for a group of lenders. The Company now has a $300.0 million commitment under the credit agreement, which expires in August 2005. All amounts outstanding under the KeyBank Agreement were refinanced and all existing obligations under the KeyBank Agreement were terminated. As a result of the refinancing the Company capitalized deferred financing costs of $1.5 million associated with the new Chase Manhattan credit agreement in the fourth quarter, which are being amortized over the term of the debt.
Under the new credit agreement, the Company has the option to select the applicable interest rate at the alternative base rate ("ABR"), as defined in the new credit agreement to be the greater of the prime rate in effect on such day and the federal funds effective rate in effect on such day plus half of 1%, or the LIBOR rate plus a factor determined by a pricing matrix (ranging from 0.5% to 1.5% for the ABR and ranging from 1.5% to 2.5% for the LIBOR rate) based on funded debt to earnings before interest, taxes, depreciation and amortization. As of October 31, 2000 the factor as determined by the pricing matrix was 2.0%. The terms of the new credit agreement also require an annual commitment fee based on the amount of unused commitments under the new credit agreement and a factor determined by a pricing matrix (ranging from 0.25% to 0.5%) based on funded debt to earnings before interest, taxes, depreciation and amortization. The new credit agreement also provides for the incurrence of debt under standby letters of credit and for the advancement of funds under a discretionary line of credit. The maximum amount of debt that may be incurred under each of these sources of funds is $15.0 million.
The new credit agreement is collateralized by an interest in all of the Company's and its wholly owned domestic subsidiaries' cash and cash accounts, accounts receivable, inventory, mortgages on certain owned real property, equipment excluding fixtures and general intangibles such as patents, trademarks and copyrights.
The credit agreement includes, without limitation, covenants involving minimum interest coverage, minimum tangible net worth coverage and a minimum leverage ratio. In addition, the new credit agreement limits the incurrence of additional indebtedness, capital expenditures, investments, dividends, transactions with affiliates, asset sales, leaseback transactions, acquisitions, prepayments of other debt, hedging agreements and liens and encumbrances and certain transactions resulting in a change of control.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company executed a demand promissory note as of December 6, 1996 in favor of The Richland Bank in the aggregate principal amount of $4.0 million. Interest accrues on the outstanding principal balance under that facility at LIBOR plus 0.75%
In March, 1995, Medina County, Ohio issued on the Company's behalf an aggregate of $5.4 million in principal amount of variable rate industrial revenue bonds due 2010, all of which were drawn upon as of October 31, 1996. These bonds are secured by a letter of credit. The funds from these bonds were used to finance a portion of the expansion at the steel pickling operations in Valley City, Ohio.
Total availability at October 31, 2000 under the Company's Credit Agreement and Line of Credit was $304,000,000, of which $51,100,000 was unused.
At October 31, 2000 the scheduled maturities of all long-term debt during the next five years is as follows:
NOTE 10 -- LEASES
The Company leases certain equipment under operating leases. Rent expense under operating leases for 2000, 1999 and 1998 was $1,509,600, $1,869,524 and $1,154,806, respectively. Future minimum lease payments under non-cancellable operating leases for the next five years are as follows at October 31, 2000:
NOTE 11 -- EMPLOYEE BENEFIT PLANS
The Company maintains pension plans covering most employees. The assets of the plans consist primarily of insurance and annuity contracts. The Company provides postretirement health care benefits to certain employees
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(and their dependents) who retire early, but coverage generally continues only until age 65. Components of the plan obligations and assets, and the recorded liability at October 31, 2000 and 1999 are as follows:
The components of net periodic benefit cost for the years ended October 31 are as follows:
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plan with accumulated benefit obligations in excess of plan assets were $13,044,446, $12,711,612, and $9,921,040 respectively as of October 31, 2000 and $3,113,087, $3,113,087, and $2,617,138 respectively as of October 31, 1999.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Actuarial assumptions used in the calculation of the recorded liabilities are as follows:
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plan. A one-percentage point charge in assumed healthcare cost trend rates would have the following effects at October 31, 2000:
In addition to the defined benefit plans described above, the Company recorded expense of $1,420,529, $1,473,566 and $1,440,520 during fiscal 2000, 1999 and 1998, respectively, for its defined contribution plans.
During 1997, the Company initiated a Supplemental Executive Retirement Plan ("SERP") for key employees of the Company. The Company has agreed to pay each covered employee a certain sum annually for ten (10) years upon retirement or, in the event of death, to their designated beneficiary. A benefit is also paid if the employee terminates employment (other than by discharge for cause). Compensation expense relating to this plan was $283,933, $285,593 and $216,028 in fiscal 2000, 1999 and 1998, respectively. The benefits accrued under this plan were $1,053,705 at October 31, 2000.
NOTE 12 -- STOCK AND BONUS PLANS
1993 KEY EMPLOYEE STOCK INCENTIVE PLAN
The Company maintains a Key Employee Stock Incentive Program (the "Incentive Plan"), which authorizes grants to officers and other key employees of the Company and its subsidiaries of (i) stock options that are intended to qualify as "incentive stock options", (ii) nonqualified stock options and (iii) restricted stock awards. An aggregate of 1,200,000 shares of common stock, subject to adjustment upon occurrence of certain events to prevent dilution or expansion of the rights of participants that might otherwise result from the occurrence of such events, has been reserved for issuance upon the exercise of stock options.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Only non-qualified stock options have been granted to date and all options have been granted at market price at the date of grant. Options expire over a period not to exceed ten years from the date of grant. Options granted in 1998, 1999 and 2000 are exercisable over five years. A summary of option activity under the plan follows:
Exercise prices for options outstanding as of October 31, 2000 ranged from $9.50 to $18.625, with 81% of options outstanding having exercise prices in the range of $9.50 to $13.50 per share.
In accordance with the provisions of SFAS No. 123 "Accounting for Stock-Based Compensation," ("SFAS 123") the Company has elected to continue applying the intrinsic value approach under the Accounting Principles Board Opinion No. 25 in accounting for its stock-based compensation plans. Accordingly, the Company does not recognize compensation expense for stock options when the stock price at the grant date is equal to or greater than the fair market value of the stock at that date.
SFAS 123 requires pro forma information on net income and earnings per share as if the fair value method for valuing stocks options, as prescribed by SFAS 123, had been applied. The Company's pro forma information follows:
The fair value of these options was estimated at the date of grant using the Black-Sholes option-pricing model with the following weighted average assumptions for 2000 and 1999:
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EXECUTIVE INCENTIVE BONUS PLAN
In 1996, the Company replaced the Executive Bonus Plan with the Short-Term Incentive Plan (the "Bonus Plan") which provides annual incentive bonuses to its eligible employees. The Bonus Plan provides for an aggregate annual bonus pool (the "Aggregate Amount") equal to 5% of the Company's operating earnings. Incentives up to the Aggregate Amount may be paid to the individual participants, in the case of the Chief Executive Officer, by the Board of Directors upon recommendation by the Compensation Committee and the Board of Directors. In determining the individual incentives, in the case of the Chief Executive Officer, 75% of the incentive depends upon meeting the corporate goal for return on equity and 25% of the incentive depends upon meeting specific, project-oriented goals. These goals are established by the Board of Directors. In the case of corporate executives eligible for the Bonus Plan, 65% of the incentive depends upon meeting the goal for return on equity and 35% of the incentive depends upon specific goals established by the Chief Executive Officer. Finally, in the case of the remaining employees eligible for the Bonus Plan, 50% of the incentive depends upon meeting the goal for operating return on assets established by the Chief Executive Officer and 50% of the incentive depends upon specific goals as established by the Chief Executive Officer. During fiscal 2000, 1999 and 1998, amounts of $310,249, $383,000 and $1,089,000, respectively, were paid under the existing bonus plan for that fiscal year.
NOTE 13 -- INCOME TAXES
The components of the provision for income taxes (benefits) on income from continuing operations were as follows:
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences and carryforwards which give rise to deferred tax assets and liabilities were comprised of the following:
The valuation allowance relates to capital loss carryforwards which are not expected to be utilized.
A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
At October 31, 2000, the Company had available a capital loss carryforward of approximately, $12,791,797 expiring in 2001, if not utilized. The capital loss was incurred on the sale of Shafer Valve and a full valuation allowance has been provided.
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- RELATED PARTY TRANSACTIONS
The Company had sales to MTD Products Inc of $18,410,324, $10,943,440 and $6,564,094 for the years 2000, 1999 and 1998, respectively. At October 31, 2000 and 1999, the Company had accounts receivable balances of $4,851,202 and $1,982,032 respectively, due from this shareholder. At October 31, 2000, the Company had accounts payable balances of $3,282,747 due to this shareholder. A wholly owned subsidiary of the Company issued a note to MTD Products Inc in the principal amount of $4,045,392. This note is due in full on November 1, 2001. Interest on such note is at a rate of 8.620% per annum. The Company is guarantor of the note. For information regarding the related party acquisition of MTD Automotive see "Note 3 -- Acquisitions."
NOTE 15 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
In the fourth quarter, the Company recorded restructuring costs of $1,229,932, and asset impairment charges of $33,042,935. In addition, net income (loss) per share and weighted average number of shares have been revised from the information previously reported by the Company to reflect resolution of the contingencies described in Note 2. -- "Earnings Per Share."
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to several lawsuits and claims arising in the normal course of its business. In the opinion of management, the Company's liability or recovery, if any, under pending litigation and claims would not materially affect its financial condition, results of operations or cash flows.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information with respect to Directors of the Company is set forth in the Proxy Statement under the heading "Election of Directors," which information is incorporated herein by reference. Information required by Item 401 of Regulation S-K regarding the executive officers of the Company is included as Item 4A of Part I of this Annual Report on Form 10-K as permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item 405 of Regulation S-K is set forth in the Proxy Statement under the heading "Section 16(a) Beneficial Ownership Reporting Compliance," which information is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is set forth in the Proxy Statement under the heading "Compensation of Executive Officers" and under the heading "Election of Directors -- Compensation Committee Interlocks and Insider Participation and Certain Relationships and Related Transactions," which information is incorporated herein by reference (except for the Compensation Committee Report on Executive Compensation and the Comparative Stock Performance Graph).
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "Beneficial Ownership of Common Stock," which information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions is set forth in the Proxy Statement under the heading "Election of Directors -- Compensation Committee Interlocks and Insider Participation and Certain Relationships and Related Transactions," which information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Annual Report on Form 10-K on Item 8.
SCHEDULE II
SHILOH INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
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. - ---------------
(1) Approximately $1.1 million reflects the bad debt write-off relating to one customer.
3. EXHIBITS
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended October 31, 2000. - ---------------
* Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 14 (c) of this Report.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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.
* 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/ JOHN F. FALCON
------------------------------------ John F. Falcon, Attorney-In-Fact
EXHIBIT INDEX