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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 0-21964
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SHILOH INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0347683
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 202, 103 Foulk Road, Wilmington, Delaware 19803
(Address of principal executive offices--zip code)
(302) 998-0592
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock as of the latest
practicable date.
Number of shares of Common Stock outstanding as of September 12, 2002 was
14,798,094 shares.
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SHILOH INDUSTRIES, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
2
PART I--FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SHILOH INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
July 31, October 31,
2002 2001
ASSETS
Cash and cash equivalents $ 519 $ 4,715
Accounts receivable, net 73,633 95,172
Income tax receivable 725 2,714
Inventories, net 64,348 58,350
Net assets held for sale 4,512 7,500
Deferred income taxes 11,535 11,535
Prepaid expenses 3,479 3,239
-------- --------
Total current assets 158,751 183,225
-------- --------
Property, plant and equipment, net 293,085 315,285
Goodwill, net 3,051 3,144
Investment in and advances to affiliate 11,706 12,274
Other assets 17,831 15,532
-------- --------
Total assets $484,424 $529,460
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $ 626 $ -
Accounts payable 69,799 78,754
Advanced billings 227 382
Other accrued expenses 23,318 17,060
-------- --------
Total current liabilities 93,970 96,196
-------- --------
Long-term debt 216,460 268,545
Deferred income taxes 11,127 126
Long-term benefit liabilities 31,148 31,096
Other liabilities 2,394 1,810
-------- --------
Total liabilities 355,099 397,773
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock 1 --
Paid-in capital preferred stock 4,044 --
Common stock 148 148
Paid-in capital common stock 56,631 53,924
Retained earnings 81,944 89,783
Unearned compensation (1,275) --
Other comprehensive loss (12,168) (12,168)
-------- --------
Total stockholders' equity 129,325 131,687
-------- --------
Total liabilities and stockholders' equity $484,424 $529,460
======== ========
The accompanying notes are an integral part of these financial statements.
3
SHILOH INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited) (Unaudited)
Three months ended Nine months ended
July 31, July 31,
------- -------
2002 2001 2002 2001
---- ---- ---- ----
(Note 1) (Note 1)
Revenues $147,568 $165,166 $452,233 $504,244
Cost of sales 136,040 151,527 418,737 459,420
-------- -------- -------- --------
Gross profit 11,528 13,639 33,496 44,824
Selling, general and administrative expenses 8,684 14,999 31,128 42,819
Asset impairment (recovery) charges (1,285) 2,066 (1,285) (8,690)
Restructuring charges 79 430 1,106 430
-------- -------- -------- --------
Operating income (loss) 4,050 (3,856) 2,547 10,265
Interest expense 3,952 4,689 13,485 15,779
Interest income 3 19 71 80
Other income (expense), net 77 (1,012) 234 (702)
-------- -------- -------- --------
Income (loss) before equity in net losses of affiliated
company and income taxes 178 (9,538) (10,633) (6,136)
Equity in net losses of affiliated company (218) - (678) -
-------- -------- -------- --------
Loss before income taxes (40) (9,538) (11,311) (6,136)
Provision (benefit) for income taxes 258 (3,148) (3,472) (2,025)
-------- -------- -------- --------
Net loss $ (298) $ (6,390) $ (7,839) $ (4,111)
======== ======== ======== ========
Loss per share:
Basic loss per share $ (.02) $ (.43) $ (.53) $ (.28)
======== ======== ======== ========
Basic weighted average number of common shares 14,798 14,798 14,798 14,798
======== ======== ======== ========
Diluted loss per share $ (.02) $ (.43) $ (.53) $ (.28)
======== ======== ======== ========
Diluted weighted average number of common shares 14,798 14,798 14,798 14,798
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
4
SHILOH INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine months ended July 31,
--------------------------
2002 2001
---- ----
(Note 1)
Cash Flows From Operating Activities:
Net loss $(7,839) $ (4,111)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 22,373 20,933
Asset impairment (recovery) charges (1,285) (8,690)
Equity in net losses of affiliated company 678 --
Non cash restructuring charges 282 430
Loss on sale of assets 161 1,302
Deferred income taxes 11,001 3,151
Changes in operating assets and liabilities, net of working capital changes
resulting from acquisitions:
Accounts receivable 20,069 52,060
Inventories (5,818) (2,403)
Prepaids and other assets (1,319) (9,162)
Payables and other liabilities 5,936 (31,204)
Accrued income taxes 1,256 (2,891)
------- --------
Net cash provided by operating activities 45,495 19,415
------- --------
Cash Flows From Investing Activities:
Capital expenditures (10,375) (29,338)
Proceeds from sale of assets 15,858 16,138
Acquisitions, net of cash 1,326 --
------- --------
Net cash provided by (used in) investing activities 6,809 (13,200)
------- --------
Cash Flows From Financing Activities:
Book overdrafts (7,673) 12,425
Proceeds from short-term borrowings 703 --
Repayments of short-term borrowings (77) --
Proceeds from long-term borrowings 209,660 246,500
Repayments of long-term borrowings (257,700) (266,000)
Payment of debt financing costs (1,413) --
------- --------
Net cash used in financing activities (56,500) (7,075)
------- --------
Net decrease in cash and cash equivalents (4,196) (860)
Cash and cash equivalents at beginning of period 4,715 1,173
------- --------
Cash and cash equivalents at end of period $ 519 $ 313
======= ========
The accompanying notes are an integral part of these financial statements.
5
SHILOH INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
Note 1--Basis of Presentation and Business:
The condensed consolidated financial statements have been prepared by
Shiloh Industries, Inc. and its subsidiaries (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
The information furnished in the condensed consolidated financial statements
includes normal recurring adjustments and reflects all adjustments which are, in
the opinion of management, necessary for a fair presentation of such financial
statements. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations. Although the Company believes that the
disclosures are adequate to make the information presented not misleading, it is
suggested that these condensed consolidated financial statements be read in
conjunction with the audited financial statements and the notes thereto included
in the Company's 2001 Annual Report on Form 10-K for the fiscal year ended
October 31, 2001.
The Company recognizes revenue, except for tooling contracts, once it is
realized and earned. This generally occurs once product has been shipped in
accordance with an arrangement that exists with the customer, the selling price
is determinable based on this arrangement and the Company is reasonably certain
that it will receive payment from the customer. The Company recognizes revenue
on tooling contracts when the contract is complete. Losses are provided for when
estimates of total contract revenues and contract costs indicate a loss.
During the fourth quarter of fiscal 2001, the Company changed its method
of inventory costing from last-in-first-out ("LIFO") to first-in-first-out
("FIFO") for certain inventories. Prior periods have been restated to reflect
this change. The method was changed because the Company's steel inventory had
experienced declines in costs due to supply and demand in the market place. In
addition, many of the Company's peer group currently use the FIFO method of
inventory costing. Furthermore, the majority of the Company's inventory is
currently recorded using the FIFO method; therefore, the change will provide for
greater consistency in the accounting policies of the Company and will also
provide a better matching of revenue and expenses. The change increased net loss
for the third quarter of fiscal 2001 by $36 ($.00 per basic and diluted share)
and increased net loss for the nine months ended July 31, 2001 by $371 ($.03 per
basic and diluted share).
Revenues and operating results for the nine months ended July 31, 2002 are
not necessarily indicative of the results to be expected for the full year.
Note 2 - Recently Issued Accounting Standards
In June 2002, Statement of Financial Accounting Standards ("SFAS") No. 146
"Accounting for Costs Associated with Exit or Disposal Activities" was issued
effective for all fiscal years beginning after December 31, 2002 with early
application encouraged. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." The Company does not expect the
adoption of this Statement to have a material effect on the Company's financial
statements.
In April 2002, SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued
effective for all fiscal years beginning after May 15, 2002, which, among other
changes and technical corrections, rescinded SFAS No. 4 "Reporting Gains and
Losses from Extinguishment of Debt."
In August 2001, SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued effective for all fiscal years beginning after
December 15, 2001 with early application encouraged. This Statement, which
supersedes certain aspects of SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," addresses
implementation issues associated with SFAS No. 121 and improves financial
reporting by establishing one accounting model for long-lived assets to be
disposed of by sale. The adoption of SFAS No. 144 is not expected to have a
material effect on the Company's financial statements.
In July 2001, SFAS No. 142 "Goodwill and Other Intangible Assets" was
issued effective for all fiscal quarters of fiscal years beginning after
December 15, 2001 with earlier application permitted. This Statement establishes
criteria for the recognition of intangible assets and their useful lives. It
also results in companies ceasing the amortization of goodwill and requires
companies to test goodwill for impairment on an annual basis. The Company is
currently evaluating the impact that SFAS No. 142 will have on its financial
condition and results of operations. The Company expects that it will no longer
record approximately $123 of amortization associated with its $3,051 of existing
goodwill on an annual basis. The Company does not have any intangible assets
impacted by SFAS No. 142.
6
Note 3--Inventories:
Inventories consist of the following:
July 31, October 31,
2002 2001
---- ----
Raw materials $ 21,463 $ 23,279
Work-in-process 27,846 17,703
Finished goods 15,039 17,368
--------- ---------
Total $ 64,348 $ 58,350
========= =========
Note 4--Property, Plant and Equipment:
Property, plant and equipment consist of the following:
July 31, October 31,
2002 2001
---- ----
Land $ 8,690 $ 9,060
Buildings and improvements 110,188 112,632
Machinery and equipment 272,867 275,735
Furniture and fixtures 25,219 24,895
Construction in progress 11,367 11,444
--------- ---------
Total, at cost 428,331 433,766
Less: accumulated depreciation (135,246) (118,481)
--------- ---------
Net property, plant and equipment $ 293,085 $ 315,285
========= =========
Note 5--Financing Arrangements:
Debt consists of the following:
July 31, October 31,
2002 2001
---- ----
Insurance broker financing agreement $ 626 $ -
--------- ---------
Total short-term debt $ 626 $ -
========= =========
JP Morgan Chase Bank revolving credit loan--interest at 5.8125% at
July 31, 2002 and 5.875% at October 31, 2001 $ 216,000 $ 264,500
Promissory notes to related parties 460 --
MTD Products Inc promissory note -- 4,045
--------- ---------
Total long-term debt $ 216,460 $ 268,545
========= =========
The weighted average interest rate for the three and nine months ended
July 31, 2002 was 5.88% and 5.78%, respectively.
In June 2002, the Company entered into a finance agreement with an
insurance broker for various insurance policies. The financing transaction bears
interest at a fixed rate of 5.39% and requires monthly payments of $80 through
April 2003. As of July 31, 2002, $626 remained outstanding under this agreement
and is classified as short-term borrowings in the Company's financial
statements.
On August 11, 2000, the Company entered into a credit agreement with JP
Morgan Chase Bank, formerly 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 credit agreement had an original commitment of
$300,000 and was to expire in August of 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 $1,499 associated with the JP Morgan
Chase Bank credit agreement in the fourth quarter of fiscal 2000, which are
being amortized over the term of the debt.
Under the credit agreement, the Company has the option to select the
applicable interest rate at the alternative base rate ("ABR"), as defined in the
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, in either case, 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. The terms of the credit agreement also require an
annual commitment fee based on the amount of unused commitments under the 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 credit agreement
7
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
$15,000.
The 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 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, liens and encumbrances and
certain transactions resulting in a change of control.
On May 10, 2001, the Company amended the credit agreement primarily to
change the covenant thresholds. This amendment also provided that, among other
things, upon the sale of Valley City Steel Division, the amount of availability
under the credit agreement would decrease by $10,000. In addition, this
amendment increased the pricing matrix such that the ABR factor ranges from
1.25% to 2.5%, the LIBOR factor ranges from 2.25% to 3.5% and the annual
commitment fee ranges from .375% to .50%. The Company's LIBOR factor as
determined by the pricing matrix was 3.5% as of October 31, 2001. As a result of
this amendment, the Company capitalized deferred financing costs of $829, which
are being amortized over the remaining term of the debt.
As of October 31, 2001, the Company was not in compliance with its debt
covenants under the amended credit agreement. As a result, on January 25, 2002,
the Company's lenders consented to further amend the credit agreement. The
amended and restated credit agreement was executed as of February 12, 2002.
Significant provisions of the amendment and restatement include an increase in
the pricing matrix such that the ABR factor ranges from 1.5% to 3.0% and the
LIBOR factor ranges from 2.5% to 4.0%. The Company's LIBOR factor as determined
by the pricing matrix was 4.0% as of July 31, 2002. In addition, the amended and
restated credit agreement expires on April 30, 2004. The Company was required to
obtain, within 90 days of the effective date of the amendment and restatement,
$8,000 of additional liquidity. This liquidity was generated through certain
transactions entered into with related parties and included (1) the sale of
certain machinery and equipment for $6,541 on May 10, 2002, (2) receipt of
$1,000 associated with a three year supply arrangement on May 10, 2002 and (3)
on May 9, 2002, the issuance of two 9.0% promissory notes due May 1, 2004 in the
aggregate principal amount of $460. In addition, the Company satisfied its
requirement to generate approximately $12,000 of additional liquidity, as
defined in the amended and restated credit agreement, during the first quarter
of fiscal 2002. Net proceeds from the sale, transfer, lease or other disposition
of certain assets by the Company are required to be used to prepay outstanding
debt, which will reduce the total commitment under the amended and restated
credit agreement by the amount equal to such prepayment. As a result of the sale
of assets of the Romulus Blanking Division, the total commitment was reduced by
$8,200. Certain additional changes to covenant thresholds and additional
reporting requirements were instituted in accordance with the amended and
restated credit agreement. The changes include a limitation on capital
expenditures for the Company of $29,100 for the fiscal year ending October 31,
2002 and require the Company to achieve earnings before interest, taxes,
depreciation and amortization ("EBITDA") of $24,261 for the year ending October
31, 2002. In connection with such amendment and restatement, the Company is
required to pay an amendment fee to each lender equal to .25% of the aggregate
amount of such lender's commitment. Under the terms of the amended and restated
credit agreement, the Company would have been in compliance with its covenants
as of October 31, 2001. As of July 31, 2002, the Company is in compliance with
its covenants under the amended and restated credit agreement. As a result of
this amendment and restatement, the Company capitalized deferred financing costs
of $1,413, which are being amortized over the remaining term of the debt. In
addition, during the second quarter of fiscal 2002, the Company recorded
additional interest expense of $952 for unamortized bank fees incurred prior to
this amendment and restatement.
During fiscal 2001, MTD Products Inc forgave all interest, aggregating
$349, relating to the note that was issued by a wholly owned subsidiary of the
Company to MTD Products Inc in January 2001 in the aggregate principal amount
of $4,045. The Company was guarantor of the note. The principal was payable in
full on November 1, 2001. The Company satisfied all of its remaining obligations
under the note by issuing to MTD Products Inc 42,780 shares of Series A
Preferred Stock in accordance with an amendment to the MTD Automotive Purchase
Agreement, which was entered into as of December 31, 2001. The shares of Series
A Preferred Stock were issued in January 2002. The note was classified as
long-term debt as of October 31, 2001.
Book overdrafts were $13,245 at July 31, 2002 and $20,918 at October 31,
2001 and are included in accounts payable.
Total availability at July 31, 2002 under the Company's credit agreement
was $279,500, of which $56,875 was unused.
8
Note 6--Preferred Stock:
In December 2001, the Company authorized 100,000 shares of Series A
Preferred Stock. These shares, with a par value of $.01 per share, rank senior
to the Company's Common Stock. The shares of Series A Preferred Stock are
entitled to cumulative dividends, at a rate of $5.75 per share per annum, if and
when declared by the Company. The shares of Series A Preferred Stock are
non-voting and are not convertible into any other securities of the Company. The
Company may elect to redeem any or all outstanding shares of the Series A
Preferred Stock annually for $100 per share plus all accrued but unpaid
dividends.
Note 7--Other Information:
During the nine months ended July 31, 2002 and 2001, cash payments for
interest amounted to $12,629 and $16,800, respectively. Tax refunds, net of tax
payments, of $15,756 were received during the nine months ended July 31, 2002
and tax payments, net of tax refunds, of $849 were paid during the first nine
months of fiscal 2001. The tax benefit was $3,472 for the first nine months of
fiscal 2002 compared with a tax benefit of $2,025 for the comparable period in
fiscal 2001, representing effective tax rates of 30.7% and 33.0%, respectively.
During the third quarter of fiscal 2002, the Company recorded $900 of net
bad debt recoveries compared to $1,900 of bad debt expense for the comparable
quarter in fiscal 2001.
On March 9, 2002, the "Job Creation and Worker Assistance Act" (H.R. 3090)
was signed into law. A significant provision of this law is a temporary
extension of the general net operating loss carryback period from two years to
five years for net operating losses arising in taxable years ending in 2001 and
2002. The Company received $15,730 of tax refunds from the Internal Revenue
Service during the second quarter of fiscal 2002 and used these funds to pay
down outstanding debt. This refund included $12,104 of additional tax refunds
resulting from the change in tax law. As of October 31, 2001, the benefit
associated with this additional tax refund was classified on the balance sheet
as a component of long-term deferred income taxes.
As set forth in the MTD Automotive Purchase Agreement, the purchase price
may be adjusted at the end of fiscal 2002 upon resolution of a final contingency
related to certain price concessions. This final contingency payment, if any,
would be paid in cash. The anticipated amount of the contingency is not
determinable as of July 31, 2002.
On July 31, 2001, the Company completed the sale of certain assets and
liabilities of its Valley City Steel Division to Valley City Steel, LLC ("VCS
LLC") for $12,400. As a result of this sale, an asset impairment recovery of
$10,756 was recorded in the third quarter of fiscal 2001. VCS LLC is a joint
venture formed by the Company and Viking Industries, LLC ("Viking") in which the
Company owns a minority interest (49%) and Viking owns a majority interest
(51%). The Company also contributed certain other assets and liabilities of
Valley City Steel to VCS LLC. The Company retained ownership of the land and
building where VCS LLC conducts its operations and leases these facilities to
VCS LLC. As of September 1, 2002 and on the first day of every month thereafter,
the Company has the right to require VCS LLC to repurchase its interest at a put
price as defined in the operating agreement. In addition, as of September 1,
2002 and on the first day of every month thereafter, both the Company and Viking
have the right to purchase the other party's interest at a call purchase price
as defined in the operating agreement. The land and building leased by VCS LLC
is collateral for a portion of the debt incurred by VCS LLC. In May 2002, the
Company received notification that an event of default has occurred under the
terms of VCS LLC's loan agreement. The default prevents VCS LLC from currently
making its monthly lease payments. As of July 31, 2002, the net book value of
the land and building was $10,111. Although an event of default has occurred,
VCS LLC continues to receive funding from its lender. The Company believes the
covenant violation will be resolved favorably; however, there is no assurance
that a favorable resolution will be achieved. If a favorable resolution is not
achieved, the results of operations of the Company would be significantly
adversely affected. Once the debt matures in August 2003 and is discharged and
released, the Company's ownership interest in VCS LLC will be reduced to 40% and
Viking's interest will be increased to 60%. VCS LLC supplies steel processing
services to the Company.
On July 31, 2001, the Company completed the sale of the building, land and
certain other assets of the Wellington Die Division. The Company recognized a
$1,025 loss on the sale of the building and land. In addition, during the third
quarter of fiscal 2001, the Company recorded a pre-tax asset impairment charge
of $2,066 associated with the remaining assets of this division and a
restructuring charge of $430. The remaining operations at Wellington Die were
transferred to Wellington Stamping in the first quarter of fiscal 2002.
In September 2001, the decision was made to cease operations at the
Romulus Blanking Division during fiscal 2002, and its operations did cease in
December 2001. As of October 31, 2001, the Company had classified as assets held
for sale $7,500 of real property and certain machinery and equipment at this
facility. These assets were sold in July 2002 for approximately $9,500 resulting
in an asset impairment recovery of $1,285. Remaining assets were transferred to
other divisions of the Company.
9
In October 2001, the decision was made to cease operations at Canton Die
Division, and, as of January 31, 2002, the operations ceased. As of July 31,
2002, the Company has classified as assets held for sale $4,512 of real property
and certain machinery and equipment at this facility. As of October 31, 2001,
these assets were classified as held for use.
In connection with the amended and restated credit agreement, the Company
was required to generate additional liquidity. Accordingly, the Company agreed
to sell certain machinery and equipment to MTD Products Inc In May 2002, the
Company completed this sale of assets in the amount of $4,630 and a resulting
gain of $1,911 was recorded as a component of stockholders' equity.
Additionally, in May 2002, the Company entered into a three-year supply
agreement with MTD Products Inc to provide various services related to the
manufacturing of products for MTD Products Inc at Company locations. The Company
received $1,000 in cash for these services, which are being amortized over the
life of the agreement. The obligation is recorded in "other accrued expenses"
and "other liabilities" in the financial statements. Pursuant to the supply
agreement, the Company will manufacture parts for MTD Products Inc on an ongoing
basis at market-based prices.
The Company's non-qualified stock option plan, adopted in May 1993,
provides for granting officers and employees of the Company options to acquire
an aggregate of 1,700,000 shares at an exercise price equal to 100% of market
price on the date of grant. During the first nine months of fiscal 2002, 710,000
stock options were effectively granted and no options were exercised.
The Company finalized the terms of a five-year employment agreement with
its Chief Executive Officer during the second quarter of fiscal 2002. The
employment agreement was executed in June 2002. During the first three years of
the agreement, the executive will receive an annual base salary, in arrears, in
unrestricted shares of the Company's common stock. The number of shares to be
issued are 350,000 at the end of year one, 300,000 at the end of year two and
250,000 at the end of year three. The executive will draw a base salary paid in
cash during years four and five. In addition, the Company effectively granted
the executive 500,000 options and the Company established a supplemental
executive retirement plan whereby the executive will be entitled to a benefit of
$1,868 at the end of the five year employment agreement. The Company recorded
the issuance of the stock awards as unearned compensation, reducing
stockholders' equity for the value of the award and for the first nine months of
fiscal 2002, recorded $255 of compensation expense.
During the third quarter of fiscal 2002, the Company established a "Rabbi
Trust" for the Theodore K. Zampetis Supplemental Executive Retirement Plan. The
Rabbi Trust sets aside assets to pay for benefits to Theodore K. Zampetis, the
Company's President and Chief Executive Officer, under the supplemental
executive retirement plan, but those assets remain subject to claims by the
Company's general creditors in preference to the claims of the plan's
participant and beneficiaries. The trust is currently active and is funded with
$252 cash as of July 31, 2002.
A summary of the restructuring charges and related reserves of the Company
are as follows:
Restructuring Restructuring
reserves at Restructuring Cash reserves at
October 31, 2001 Charges Payments July 31, 2002
---------------- ------- -------- -------------
Severance and other employee costs $ 797 $ 990 $(1,544) $ 243
Plant closure and business exit costs 743 16 (413) 346
Professional fees 506 100 (228) 378
Other 190 -- (32) 158
------- ------- ------- -------
Total restructuring $ 2,236 $1,106 $(2,217) $ 1,125
======= ======= ======= =======
During the second and third quarters of fiscal 2002, the Company recorded
restructuring charges of $1,106 predominately associated with a reduction in its
salaried workforce.
Loss Per Share
Basic loss per share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Diluted
loss per share reflects the potential dilutive effect of the Company's stock
option plan.
The outstanding stock options under the Company's Amended and Restated
1993 Key Employee Stock Incentive Plan are included in the diluted loss per
share calculation to the extent they are dilutive. For the three and nine months
ended July 31, 2002, the loss per share calculation excludes 900,000 of
contingently issuable shares.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
Preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the condensed consolidated financials statements and accompanying
notes. The Company believes its estimates and assumptions are
10
reasonable; however, actual results and the timing of the recognition of such
amounts could differ from those estimates. The Company has identified the items
that follow as critical accounting policies and estimates utilized by management
in the preparation of the Company's financial statements.
The Company recognizes revenue, except for tooling contracts, once it is
realized and earned. This generally occurs once product has been shipped in
accordance with an arrangement that exists with the customer, the selling price
is determinable based on this arrangement and the Company is reasonably certain
that it will receive payment from the customer. The Company recognizes revenue
on tooling contracts when the contract is complete. Losses are provided for when
estimates of total contract revenues and contract costs indicate a loss.
The Company reviews the valuation of accounts receivable on a monthly
basis. The allowance for doubtful accounts is estimated based on historical
experience of write-offs and the current financial condition of customers. If
the financial condition of customers were to deteriorate, additional allowances
may be required.
The Company records inventory reserves for estimated obsolescence or lower
of cost or market concerns based upon future demand and current selling prices
of individual products. Additional inventory reserves may be required if actual
market conditions differ from management's expectations.
The Company evaluates the recoverability of long-lived assets and the
related estimated remaining lives whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Events or changes in
circumstances which could trigger an impairment review include significant
underperformance relative to the expected historical or projected future
operating results, significant changes in the manner of the use of the acquired
assets or the strategy for the overall business or significant negative industry
or economic trends. The Company records an impairment or change in useful life
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable or the useful life has changed in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of".
Pension and other post-retirement costs and liabilities are actuarially
calculated. These calculations are based on assumptions related to the discount
rate, projected salary increases and expected return on assets. The discount
rate assumption is tied to long-term high quality bond rates. The projected
salary increase assumption is based on recent trends in wages and salary
increases. The assumption surrounding the expected return on assets for the
pension plans is based on the long-term expected returns for the investment mix
of assets currently in the portfolio. The return on assets assumption is subject
to change depending upon the future asset mix of the portfolio.
The Company is required to estimate income taxes in each of the
jurisdictions in which it operates. The process involves estimating actual
current tax expense along with assessing temporary differences resulting from
different treatment of items for book and tax purposes. These timing differences
result in deferred tax assets and liabilities, which are included in the
Company's consolidated financial statements. The Company records a valuation
allowance to reduce its deferred tax assets to the amount that is more likely
than not to be realized. Future taxable income and ongoing tax planning
strategies are considered when assessing the need for the valuation allowance.
Increases in the valuation allowance result in additional expense to be
reflected within the tax provision in the consolidated financial statements.
General
The Company is a full service manufacturer of blanks, welded blanks and
engineered stamped and assembled components for the automotive and light truck,
heavy truck and other industrial markets. The Company also designs, engineers
and manufactures precision tools and dies for the automotive and other
industries and provides a variety of intermediate steel processing services,
such as oiling, cutting-to-length, slitting and edge trimming of hot and
cold-rolled steel coils for automotive and steel industry customers. In
addition, through its minority-owned investment, Valley City Steel LLC ("VCS
LLC"), the Company provides the intermediary steel processing service of
pickling. In fiscal 2001, approximately 92.0% of the Company's revenues were
generated by sales to the automotive and light 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 operating subsidiaries. In July 1993, the
Company completed an initial public offering of common stock.
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 1,428,571 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
11
returnable shares of common stock were not required to be returned to the
Company, 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 to MTD Products Inc. The Company was
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 relating to fiscal 2000.
These adjustments were reflected in the Company's financial statements for the
year ended October 31, 2000 as adjustments to the purchase price payable under
the terms of the Purchase Agreement. During fiscal 2001, MTD Products Inc
forgave all interest relating to the note in the aggregate amount of $.3
million. The Company satisfied all of its remaining obligations under the note
by issuing to MTD Products Inc 42,780 shares of Series A Preferred Stock in
accordance with an amendment to the Purchase Agreement, which was entered into
as of December 31, 2001. The shares of Series A Preferred Stock were issued in
January 2002. In October 2001, the Company resolved a contingency in the
Purchase Agreement related to price concessions and received a payment of
approximately $1.3 million. This additional reduction to the purchase price was
recorded by reducing the value originally assigned to fixed assets and
establishing an accounts receivable as of October 31, 2001. Also, in accordance
with the Purchase Agreement, the purchase price may be adjusted at the end of
fiscal 2002 upon resolution of a final contingency related to certain price
concessions. This final contingency payment, if any, would be paid in cash. The
anticipated amount of the contingency is not determinable as of July 31, 2002.
On July 31, 2001, the Company completed the sale of certain assets and
liabilities of its Valley City Steel Division to Valley City Steel, LLC ("VCS
LLC") for $12.4 million. As a result of this sale, an asset impairment recovery
of $10.8 million was recorded in the third quarter of fiscal 2001. VCS LLC is a
joint venture formed by the Company and Viking Industries, LLC ("Viking") in
which the Company owns a minority interest (49%) and Viking owns a majority
interest (51%). The Company also contributed certain other assets and
liabilities of Valley City Steel to VCS LLC. The Company retained ownership of
the land and building where VCS LLC conducts its operations and leases these
facilities to VCS LLC. As of September 1, 2002 and on the first day of every
month thereafter, the Company has the right to require VCS LLC to repurchase its
interest at a put price as defined in the operating agreement. In addition, as
of September 1, 2002 and on the first day of every month thereafter, both the
Company and Viking have the right to purchase the other party's interest at a
call purchase price as defined in the operating agreement. The land and building
leased by VCS LLC is collateral for a portion of the debt incurred by VCS LLC.
In May 2002, the Company received notification that an event of default has
occurred under the terms of VCS LLC's loan agreement. The default prevents VCS
LLC from currently making its monthly lease payment. As of July 31, 2002, the
net book value of the land and building was $10.1 million. Although an event of
default has occurred, VCS LLC continues to receive funding from its lender. The
Company believes the covenant violation will be resolved favorably; however,
there is no assurance that a favorable resolution will be achieved. If a
favorable resolution is not achieved, the results of operations of the Company
would be significantly adversely affected. Once the debt matures in August 2003
and is discharged and released, the Company's ownership interest in VCS LLC will
be reduced to 40% and Viking's interest will be increased to 60%. VCS LLC
supplies steel processing services to the Company.
On July 31, 2001, the Company completed the sale of building, land and
certain other assets of the Wellington Die Division. The Company recognized a
$1.0 million loss on the sale of the building and land. In addition, during the
third quarter of fiscal 2001, the Company recorded a $2.1 million asset
impairment charge on the remaining assets and a $.4 million restructuring
charge. The remaining operations at Wellington Die were transferred to
Wellington Stamping in the first quarter of fiscal 2002.
In September 2001, the decision was made to cease operations at the
Romulus Blanking Division during fiscal 2002, and its operations did cease in
December 2001. As of October 31, 2001, the Company had classified as assets held
for sale $7.5 million of real property and certain machinery and equipment at
this facility. These assets were sold in July 2002 for $9.5 million resulting in
an asset impairment recovery of $1.3 million. Remaining assets were transferred
to other divisions of the Company.
In October 2001, the decision was made to cease operations at Canton Die
Division, and, as of January 31, 2002, the operations ceased. As of July 31,
2002, the Company has classified as assets held for sale $4.5 million of real
property and certain machinery and equipment at this facility. As of October 31,
2001, these assets were classified as held for use.
In connection with the amended and restated credit agreement, the Company
was required to generate additional liquidity. Accordingly, the Company agreed
to sell certain machinery and equipment to MTD Products Inc. In May 2002, the
Company completed this sale of assets in the amount of $4.6 million and a
resulting gain of $1.9 million was recorded as a component of stockholders'
equity. Additionally, in May 2002, the Company entered into a three-year supply
agreement with MTD Products Inc to provide various services related to the
manufacturing of products for MTD Products Inc at Company locations. The
Company received $1.0 million in cash for these services, which is being
amortized over the life of the agreement. The obligation is recorded in "other
accrued expenses" and "other liabilities" in the financial statements. Pursuant
to the supply agreement, the Company will manufacture parts for MTD Products Inc
on an ongoing basis at market-based prices.
During the fourth quarter of fiscal 2001, the Company changed its method
of inventory costing from last-in-first-out ("LIFO") to first-in-first-out
("FIFO") for certain inventories. Prior periods have been restated to reflect
this change. The method was changed because the Company's steel inventory had
experienced declines in costs due to supply and demand in the market
12
place. In addition, many of the Company's peer group currently use the FIFO
method of inventory costing. Furthermore, the majority of the Company's
inventory is currently recorded using the FIFO method; therefore, the change
will provide for greater consistency in the accounting policies of the Company
and will also provide a better matching of revenue and expenses. The change
increased net loss for the third quarter of fiscal 2001 and increased net loss
for the first nine months of fiscal 2001 by $.04 million ($.00 per basic and
diluted share) and $.4 million ($.03 per basic and diluted share), respectively.
In analyzing the financial aspects of the Company's operations, you should
consider the following factors.
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 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 processes 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 67.1% in 2001, 75.9% in 2000 and 85.6% in 1999 were
used or processed on a toll processing basis. Excluding tons from which the
Company receives a storage fee, these percentages change to approximately 61.0%
in 2001, 72.5% in 2000 and 82.9% in 1999. Revenues from toll processing (the
majority of which is attributed to the Company's blanking operations) as a
percent of total revenues were approximately 13.2% in 2001, 16.5% in 2000 and
27.6% in 1999. 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 generally 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 pass along such costs.
Over the last several years, 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 of Mexico and Ohio Welded Blank
Division, an expansion of the Medina Blanking, Inc. facility. 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 implement their programs in a
timely manner, the Company's 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. In addition, during the last two
fiscal years, the Company's results of operations have been adversely impacted
as a result of the shutdown and sale of certain operations. During a shutdown,
the Company typically continues to incur certain fixed costs, such as overhead
related expenses, while also experiencing a diversion of certain resources, such
as management-related resources.
Results of Operations
Three Months Ended July 31, 2002 Compared to Three Months Ended July 31, 2001
REVENUES. Revenues decreased by $17.6 million, or 10.7%, to $147.6 million
for the third quarter of fiscal 2002 from $165.2 million for the comparable
period in fiscal 2001. The decrease in revenue is primarily due to the loss of
revenue in the three months ended July 31, 2002 as a result of the Valley City
Steel Division transaction in July of 2001 and the closure of Romulus Blanking
Division, Wellington Die Division and Canton Die Division during the first
quarter of 2002. The percentage of revenue from directly owned steel processing
increased to 87.9% for the third quarter of fiscal 2002 from 87.7% for the
comparable period in fiscal 2001. The percentage of revenues from toll
processing decreased to 12.1% for the third quarter of fiscal 2002 from 12.3%
for the comparable period in fiscal 2001. This shift in the mix of revenue from
directly owned steel processing to toll processing is the result of the decrease
in the percentage of revenue derived from automotive customers, which primarily
use directly owned steel.
13
GROSS PROFIT. Gross profit decreased by $2.1 million, or 15.4%, to $11.5
million for the third quarter of fiscal 2002 from $13.6 million for the
comparable period in fiscal 2001. Gross margin decreased to 7.8% for the third
quarter of fiscal 2002 from 8.3% for the comparable period in fiscal 2001. The
decrease in gross profit and gross margin is primarily related to increases in
the purchase costs of steel as a result of the tightening steel supply caused by
idling or closure of domestic steel-production facilities and the steel tariffs.
The Company was not able to pass along all of the increased costs to its
customers, which resulted in decreased gross margins.
SELLING, GENERAL AND ADMINSTRATIVE EXPENSE. Selling, general and
administrative expenses decreased by $6.3 million, or 42.0%, to $8.7 million for
the third quarter of fiscal 2002 from $15.0 million for the comparable period in
fiscal 2001. As a percentage of revenues, selling, general and administrative
expenses decreased to 5.9% for the third quarter of fiscal 2002 from 9.1% for
the comparable period in fiscal 2001. The decrease is primarily due to
reductions in personnel and related benefit costs as well as reductions
resulting from the Valley City Steel Division transaction in July of 2001 and
the closure of Romulus Blanking Division, Wellington Die Division and Canton Die
Division during the first quarter of 2002. Additionally, the Company recorded
$.9 million of bad debt recoveries in the third quarter of fiscal 2002 compared
to $1.9 million of bad debt expense for the comparable quarter in fiscal 2001.
OTHER. During the third quarter of fiscal 2002, the Company recognized an
asset impairment recovery associated with the sale of land, building and certain
other assets of Romulus Blanking Division for $1.3 million. During the third
quarter of fiscal 2001, the Company recorded a $2.1 million impairment charge
related to certain assets of the Wellington Die Division retained by the
Company. The Company recorded a restructuring charge of $.08 million and $.4
million for the third quarter of fiscal 2002 and 2001, respectively, primarily
due to a reduction in its salaried workforce. Interest expense decreased to $4.0
million in the third quarter of fiscal 2002 compared to $4.7 million of interest
expense in the comparable period of fiscal 2001. This decrease is due primarily
to decreased average borrowings as compared with the same period last fiscal
year. Other income was approximately $.1 million in the third quarter of fiscal
2002 compared to other expense of $1.0 million in the third quarter of fiscal
2001. During the third quarter of fiscal 2001, the Company recorded a loss for
$1.0 million on the sale of the land and building of Wellington Die. Equity in
the net loss of affiliated company, Valley City Steel, LLC, was $.2 million for
the third quarter of fiscal 2002. There was no corresponding gain or loss during
the third quarter of fiscal 2001 since Valley City Steel Division was still a
division of the Company. The income tax provision was $.3 million in the third
quarter of fiscal 2002 compared with a benefit for income taxes of $3.1 million
for the comparable period in fiscal 2001. The Company revised its estimated
effective tax rate in the third quarter of fiscal 2002 to 30.7% and accordingly
recorded a provision for income tax in the same quarter. The effective tax rate
was 33.0% for the third quarter of fiscal 2001.
NET LOSS. Net loss for the third quarter of fiscal 2002 decreased by $6.1
million to a net loss of $.3 million as compared to a net loss of $6.4 million
for the comparable period in fiscal 2001. This decrease was the result of the
factors described above.
Nine Months Ended July 31, 2002 Compared to Nine Months Ended July 31, 2001
REVENUES. Revenues decreased by $52.0 million, or 10.3%, to $452.2 million
for the first nine months of fiscal 2002 from $504.2 million for the comparable
period in fiscal 2001. The decrease in revenue is primarily due to the loss of
revenue in the nine months ended July 31, 2002 as a result of the Valley City
Steel Division transaction in July of 2001 and the closure of Romulus Blanking
Division, Wellington Die Division and Canton Die Division during the first
quarter of 2002 as well as lower volumes on certain programs from General
Motors, Ford and heavy truck customers. The percentage of revenue from directly
owned steel processed increased to 89.9% for the first nine months of fiscal
2002 from 87.3% for the comparable period in fiscal 2001. The percentage of
revenues from toll processed steel decreased to 10.1% for the first nine months
of fiscal 2002 from 12.7% for the comparable period in fiscal 2001. This shift
in the mix of revenue from directly owned steel processing to toll processing is
the result of the decrease in the percentage of revenue derived from automotive
customers, which primarily use directly owned steel.
GROSS PROFIT. Gross profit decreased by $11.3 million, or 25.2%, to $33.5
million for the first nine months of fiscal 2002 from $44.8 million for the
comparable period in fiscal 2001. Gross margin decreased to 7.4% for the first
nine months of fiscal 2002 from 8.9% for the comparable period in fiscal 2001.
The decrease in gross profit and gross margin is primarily related to reduced
revenues not absorbing related fixed costs and a shift in the mix of revenue
from directly owned steel processing to toll processing. The Company also
experienced an increase in the costs of steel as a result of tightening steel
supply caused by idling or closure of domestic steel-production facilities and
the steel tariffs. The Company was not able to pass along all of the increased
costs to its customers, which resulted in decreased gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $11.7 million, or 27.3%, to $31.1 million
for the first nine months of fiscal 2002 from $42.8 million for the comparable
period in fiscal 2001. As a percentage of revenues, selling, general and
administrative expenses decreased to 6.9% for the first nine months of fiscal
2002 compared to 8.5% for the same period in fiscal 2001. The decrease is
primarily due to reductions in personnel and
14
related benefit costs as well as reductions resulting from the Valley City Steel
Division transaction in July of 2001 and the closure of Romulus Blanking
Division, Wellington Die Division and Canton Die Division during the first
quarter of 2002.
OTHER. During the first nine months of fiscal 2002, the Company recognized
an asset impairment recovery associated with the sale of the land, building and
certain other assets of Romulus Blanking Division for $1.3 million. During the
first nine months of fiscal 2001, the Company reduced its estimated loss
associated with the assets held for sale of Valley City Steel Division, which
resulted in a $10.8 million increase to income. This was partially offset by an
impairment charge of $2.1 million related to certain assets of the Wellington
Die Division retained by the Company. The Company recorded a restructuring
charge of $1.1 million and $.4 million for the first nine months of fiscal 2002
and 2001, respectively. Interest expense decreased to $13.5 million for the
first nine months of fiscal 2002 from $15.8 million for the comparable period in
fiscal 2001. This decrease is due primarily to lower average borrowings, which
was partially offset by the write-off of certain unamortized bank fees of $1.0
million in fiscal 2002. Other income was $.2 million for the first nine months
of fiscal 2002 compared to other expense of $.7 million in the comparable period
of fiscal 2001. During the third quarter of fiscal 2001, the Company recorded a
loss for $1.0 million on the land and building sale of Wellington Die. Equity in
the net loss of affiliated company, Valley City Steel, LLC, was $.7 million for
the first nine months of fiscal 2002. There was no corresponding gain or loss
during the first nine months of 2001 since Valley City Steel Division was still
a division of the Company. The income tax benefit was $3.5 million and $2.0
million for the first nine months of fiscal 2002 and 2001, respectively
representing effective tax rates of 30.7% and 33.0%, respectively.
NET LOSS. Net loss for the first nine months of fiscal 2002 increased by
$3.7 million to a net loss of $7.8 million from net loss of $4.1 million for the
comparable period in fiscal 2001. This decrease was primarily the result of the
factors described above.
Liquidity and Capital Resources
At July 31, 2002, the Company had $64.8 million of working capital,
representing a current ratio of 1.7 to 1 and a debt-to-total-capitalization
ratio of 62.7%.
Net cash provided by operating activities is primarily generated from
changes in operating assets and liabilities. Net cash provided by operating
activities during the first nine months of fiscal 2002 was $45.5 million
compared to $19.4 million for the comparable period of fiscal 2001. This
increase is attributed primarily to the tax refunds received as a result of the
change in the tax law in fiscal 2002, the decrease in accounts receivable due to
renegotiated payment terms with certain major customers during fiscal 2002, and
the levels of accounts payable period-to-period. Net cash provided by operating
activities is used by the Company to fund its capital expenditures or pay down
debt.
Net cash provided by investing activities for the first nine months of
fiscal 2002 was $6.8 million compared to net cash used in investing activities
of $13.2 million for the comparable period in fiscal 2001. Net cash used in
financing activities was $56.5 million in fiscal 2002 compared to $7.1 million
in the first nine months of fiscal 2001.
Capital expenditures were $10.4 million during the first nine months of
fiscal 2002 and $29.3 million for the comparable period in fiscal 2001.
Approximately $7.7 million of the capital expenditures during the first nine
months of fiscal 2002 were used for new equipment at Canton Manufacturing, Ohio
Welded Blank and Cleveland Manufacturing. The Company estimates capital
expenditures for the remainder of fiscal 2002 to be approximately $9.0 million.
On August 11, 2000, the Company entered into a credit agreement with JP
Morgan Chase Bank, formerly 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 credit agreement had an original commitment of
$300.0 million and was to expire 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 JP
Morgan Chase Bank credit agreement in the fourth quarter of fiscal 2000, which
are being amortized over the term of the debt.
Under the credit agreement, the Company has the option to select the
applicable interest rate at the alternative base rate ("ABR"), as defined in the
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, in either case, 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.
The terms of the credit agreement also require an annual commitment fee
based on the amount of unused commitments under the 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 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.
15
The 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, liens and encumbrances and
certain transactions resulting in a change of control.
On May 10, 2001, the Company amended the credit agreement primarily to
change the covenant thresholds. This amendment also provided that, among other
things, upon the sale of Valley City Steel Division, the amount of availability
under the credit agreement would decrease by $10.0 million. In addition, this
amendment increased the pricing matrix such that the ABR factor ranges from
1.25% to 2.5%, the LIBOR factor ranges from 2.25% to 3.5% and the annual
commitment fee ranges from .375% to .50%. The Company's LIBOR as determined by
the pricing matrix was 3.5% as of October 31, 2001. As a result of this
amendment, the Company capitalized deferred financing costs of $.8 million,
which are being amortized over the remaining term of the debt.
As of October 31, 2001, the Company was not in compliance with its debt
covenants under the credit agreement. As a result, on January 25, 2002, the
Company's lenders consented to further amend the credit agreement. The amended
and restated credit agreement was executed as of February 12, 2002. Significant
provisions of the amendment and restatement include an increase in the pricing
matrix such that the ABR factor ranges from 1.5% to 3.0% and the LIBOR factor
ranges from 2.5% to 4.0%. The Company's LIBOR factor as determined by the
pricing matrix was 4.0% as of July 31, 2002. In addition, the amended and
restated credit agreement expires on April 30, 2004. The Company was required to
obtain, within 90 days of execution of the amendment and restatement, $8.0
million in additional liquidity. This liquidity was generated through certain
transactions entered into with related parties and included (1) the sale of
certain machinery and equipment for $6.5 million on May 10, 2002, (2) payment of
$1.0 million associated with a three year supply arrangement on May 10, 2002 and
(3) on May 9, 2002, the issuance of two 9.0% promissory notes due May 1, 2004 in
the aggregate principal amount of $.5 million. In addition, the Company
satisfied its requirement to generate approximately $12.0 million of additional
liquidity, as defined in the amended and restated credit agreement, during the
first quarter of fiscal 2002. Net proceeds from the sale, transfer, lease or
other disposition of certain assets by the Company are required to be used to
prepay outstanding debt, which will reduce the total commitment under the
amended and restated credit agreement by the amount equal to such prepayment. As
a result of the sale of assets of the Romulus Blanking Division, the total
commitment was reduced by $8.2 million. Certain additional changes to covenant
thresholds and additional reporting requirements were instituted in accordance
with the amended and restated credit agreement. The changes include limitations
on capital expenditures for the Company of $29.1 million for the fiscal year
ending October 31, 2002 and require the Company to achieve earnings before
interest, taxes, depreciation and amortization ("EBITDA") of $24.3 million for
the year ending October 31, 2002. In connection with such amendment and
restatement, the Company is required to pay an amendment fee to each lender
equal to .25% of the aggregate amount of such lender's commitment. Under the
terms of the amended and restated credit agreement, the Company would have been
in compliance with its covenants as of October 31, 2001. As of July 31, 2002,
the Company is in compliance with its covenants under the amended and restated
credit agreement. As a result of this amendment and restatement, the Company
capitalized deferred financing costs of $1.4 million, which are being amortized
over the remaining term of the debt. In addition, during the second quarter of
fiscal 2002, the Company recorded additional interest expense of $1.0 million
for unamortized bank fees incurred prior to this amendment and restatement.
Total availability at July 31, 2002 under the credit agreement was $279.5
million of which $56.9 million was unused.
In June 2002, the Company entered into a finance agreement with an
insurance broker for various insurance policies. The financing transaction bears
interest at 5.39% and requires monthly payments of approximately $.1 million
through April 2003. As of July 31, 2002, $.6 million remained outstanding under
this agreement and is classified as short-term borrowings on the Company's
financial statements.
On January 22, 2001, the Company's wholly-owned subsidiary, MTD
Automotive, executed a note in the aggregate principal amount of $4.0 million in
favor of MTD Products Inc as partial payment of additional consideration owed to
MTD Products Inc based on the performance of MTD Automotive for the first twelve
months subsequent to consummation of such acquisition. The Company was guarantor
of the note. The note was payable in full on November 1, 2001. During fiscal
2001, MTD Products Inc forgave all interest, aggregating $.3 million, relating
to the note. The Company satisfied all of its remaining obligations under the
note by issuing to MTD Products Inc 42,780 shares of Series A Preferred Stock in
accordance with an amendment to the Purchase Agreement, which was entered into
as of December 31, 2001. The shares of Series A Preferred Stock were issued in
January 2002. These non-cash transactions were executed to provide additional
liquidity to the Company.
16
On March 9, 2002, the "Job Creation and Worker Assistance Act" (H.R. 3090)
was signed into law. A significant provision of this law is a temporary
extension of the general net operating loss carryback period from two years to
five years for net operating losses arising in taxable years ending in 2001 and
2002. The Company received $15.7 million of tax refunds from the Internal
Revenue Service during the second quarter of fiscal 2002 and used these funds to
pay down outstanding debt. This refund included $12.1 million of additional tax
refunds resulting from the change in the tax law. As of October 31, 2001, the
benefit associated with this additional tax refund was classified on the balance
sheet as a component of long-term deferred income taxes.
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.
The Company is involved in various lawsuits 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, results of
operations or cash flows.
The Company believes that it has sufficient resources available to meet the
Company's cash requirements through at least the next twelve months. The Company
believes that it can adequately fund its cash needs for the foreseeable future
through cash on hand, borrowings under the amended and restated credit agreement
and cash generated from operations. In addition, the Company anticipates
improving its cash position by reducing inventory levels and through the sale of
certain property, plant and equipment. The Company's capital requirements will
depend on, and could increase as a result of, many factors, including, but not
limited to, the ability of the Company to accomplish its strategic objectives,
further downturns in the automotive and light truck and heavy truck industries,
and in the economy in general.
17
FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly Report of Form 10-Q 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 2002 as well as over the long term such as,
without limitations, (i) the Company's dependence on the automotive and light
truck and heavy truck industries, which are highly cyclical, (ii) 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, (iii) the ability of the Company to
accomplish its strategic objectives with respect to external expansion through
selective acquisitions and internal expansion, (iv) 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, (v) the ability of the Company to pass
along increased costs to its customers, (vi) risks associated with integrating
operations of acquired companies, (vii) the ability of the Company to implement
its cost savings initiatives, (viii) potential disruptions or inefficiencies in
operations due to or during facility expansions, start-up facilities or new
program launches, (ix) risks related to labor relations, labor expenses or work
stoppages involving the Company, its customers or suppliers, (x) changes in the
estimated fair value of assets held for sale, or (xi) the ability of the Company
to sell unwanted operations in a timely manner on terms acceptable to the
Company, if at all. 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 Quarterly Report on Form 10-Q. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date 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.
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.
Euro Conversion
On January 1, 1999, twelve of the fifteen countries (the "Participating
Countries") that are members of the European Union established a new uniform
currency known as the "Euro". The currency existing prior to such date in the
Participating Countries was phased out, effective January 1, 2002. Because the
Company has no European operations and no material European sales, the Company
does not anticipate that the introduction and use of the Euro will materially
affect the Company's business, prospects, results of operations or financial
condition.
Item 3. 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
speculative purposes. Based on the average outstanding variable rate debt during
the quarter and nine months ended July 31, 2002, each .5% change in the
Company's interest rate would have impacted the results of operations for the
quarter and nine months ended July 31, 2002 by $.3 million and $1.0 million,
respectively.
Part II. OTHER INFORMATION
18
Item 6. Exhibit and Reports on Form 8-K
a. Exhibits:
10.1 Purchase Agreement, dated May 10, 2002, between MTD Products Inc
and Shiloh Corporation
10.2 Purchase Agreement, dated May 10, 2002, between MTD Products Inc
and Shiloh Automotive, Inc.
10.3 Real Property Purchase Agreement, dated July 2, 2002, between
Shiloh of Michigan, L.L.C. and Plastech Holding Corporation
10.4 Cognovit Promissory Note, dated May 9, 2002, on behalf of Shiloh
Industries, Inc. payable to Dieter Kaesgen
10.5 Cognovit Promissory Note, dated May 9, 2002, on behalf of Shiloh
Industries, Inc. payable to Curtis E. Moll
10.6 Manufacturing Supply Arrangement, dated May 10, 2002, between MTD
Products Inc and Shiloh Corporation
10.7 Manufacturing Supply Arrangement, dated May 10, 2002, between MTD
Products Inc and Shiloh Automotive, Inc.
b. Reports on Form 8-K: None.
19
SIGNATURES
Pursuant to the requirements 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.
Shiloh Industries, Inc.
By: /s/ Theodore K. Zampetis
-------------------------------------
Theodore K. Zampetis
President and Chief Executive Officer
By: /s/ Stephen E. Graham
-------------------------------------
Stephen E. Graham
Chief Financial Officer
Date: September 16, 2002
20
CERTIFICATIONS
I, Theodore K. Zampetis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Shiloh
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
/s/ Theodore K. Zampetis
--------------------------------------
Theodore K. Zampetis
President and Chief Executive Officer
Date: September 16, 2002
21
CERTIFICATIONS
I, Stephen E. Graham, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Shiloh
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
/s/ Stephen E. Graham
--------------------------
Stephen E. Graham
Chief Financial Officer
Date: September 16, 2002
22
EXHIBIT INDEX
Exhibit
No. Exhibit Description
10.1 Purchase Agreement, dated May 10, 2002, between MTD Products Inc
and Shiloh Corporation
10.2 Purchase Agreement, dated May 10, 2002, between MTD Products Inc
and Shiloh Automotive, Inc.
10.3 Real Property Purchase Agreement, dated July 2, 2002, between
Shiloh of Michigan, L.L.C. and Plastech Holding Corporation
10.4 Cognovit Promissory Note, dated May 9, 2002, on behalf of Shiloh
Industries, Inc. payable to Dieter Kaesgen
10.5 Cognovit Promissory Note, dated May 9, 2002, on behalf of Shiloh
Industries, Inc. payable to Curtis E. Moll
10.6 Manufacturing Supply Arrangement, dated May 10, 2002, between MTD
Products Inc and Shiloh Corporation
10.7 Manufacturing Supply Arrangement, dated May 10, 2002, between MTD
Products Inc and Shiloh Automotive, Inc.
23