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 January 31, 2005
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
SHILOH INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 51-0347683 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
Suite 202, 103 Foulk Road, Wilmington, Delaware 19803
(Address of principal executive officeszip code)
(302) 656-1950
(Registrants 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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date.
Number of shares of Common Stock outstanding as of February 23, 2005 was 15,918,601 shares.
INDEX
2
Item 1. Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
(Unaudited)
January 31, 2005 |
October 31, 2004 |
|||||||
ASSETS | ||||||||
Cash and cash equivalents |
$ | 130 | $ | 3,470 | ||||
Accounts receivable, net |
98,101 | 82,807 | ||||||
Related party accounts receivable |
8,340 | 5,020 | ||||||
Income tax receivable |
| 351 | ||||||
Inventories, net |
41,272 | 37,180 | ||||||
Deferred income taxes |
8,924 | 8,907 | ||||||
Prepaid expenses |
1,758 | 2,201 | ||||||
Total current assets |
158,525 | 139,936 | ||||||
Property, plant and equipment, net |
252,857 | 252,643 | ||||||
Other assets |
5,792 | 6,602 | ||||||
Total assets |
$ | 417,174 | $ | 399,181 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current debt |
$ | 10,453 | $ | 16,391 | ||||
Accounts payable |
84,618 | 82,637 | ||||||
Accrued income taxes |
1,137 | | ||||||
Other accrued expenses |
41,302 | 39,460 | ||||||
Total current liabilities |
137,510 | 138,488 | ||||||
Long-term debt |
118,601 | 100,329 | ||||||
Deferred income taxes |
19,252 | 18,902 | ||||||
Long-term benefit liabilities |
10,846 | 11,228 | ||||||
Other liabilities |
589 | 673 | ||||||
Total liabilities |
286,798 | 269,620 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock |
| 1 | ||||||
Preferred stock paid-in capital |
| 4,044 | ||||||
Common stock, 15,918,601 and 15,652,071 shares issued and outstanding at January 31, 2005 and October 31, 2004, respectively |
159 | 157 | ||||||
Common stock paid-in capital |
57,718 | 57,428 | ||||||
Retained earnings |
89,615 | 85,153 | ||||||
Unearned compensation |
| (106 | ) | |||||
Accumulated other comprehensive loss |
(17,116 | ) | (17,116 | ) | ||||
Total stockholders equity |
130,376 | 129,561 | ||||||
Total liabilities and stockholders equity |
$ | 417,174 | $ | 399,181 | ||||
The accompanying notes are an integral part of these financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar and share amounts in thousands, except per share data)
(Unaudited)
Three months ended January 31, | |||||||
2005 |
2004 | ||||||
Revenues |
$ | 151,523 | $ | 140,894 | |||
Cost of sales |
132,267 | 127,668 | |||||
Gross profit |
19,256 | 13,226 | |||||
Selling, general and administrative expenses |
8,310 | 8,716 | |||||
Operating income |
10,946 | 4,510 | |||||
Interest expense |
3,248 | 2,740 | |||||
Interest income |
35 | 2 | |||||
Other (expense) income, net |
(36 | ) | 83 | ||||
Income before income taxes |
7,697 | 1,855 | |||||
Provision for income taxes |
3,002 | 742 | |||||
Net income |
$ | 4,695 | $ | 1,113 | |||
Basic income per share: |
|||||||
Net income |
$ | 0.31 | $ | 0.07 | |||
Basic weighted average number of common shares |
15,870 | 15,468 | |||||
Diluted income per share: |
|||||||
Net income |
$ | 0.30 | $ | 0.07 | |||
Diluted weighted average number of common shares |
16,396 | 16,059 | |||||
The accompanying notes are an integral part of these financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Three months ended January 31, |
||||||||
2005 |
2004 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 4,695 | $ | 1,113 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
8,712 | 7,972 | ||||||
Amortization of unearned compensation |
106 | 128 | ||||||
Amortization of deferred financing costs |
1,538 | 348 | ||||||
Deferred income taxes |
333 | 598 | ||||||
Tax benefit on employee stock options and stock compensation |
191 | 122 | ||||||
Loss on sale of assets |
| 93 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(18,614 | ) | 1,015 | |||||
Inventories |
(4,092 | ) | (220 | ) | ||||
Prepaids and other assets |
716 | 503 | ||||||
Payables and other liabilities |
(9,103 | ) | 1,221 | |||||
Net cash (used in) provided by operating activities |
(15,518 | ) | 12,893 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Capital expenditures |
(9,361 | ) | (5,436 | ) | ||||
Proceeds from sale of assets |
| 6 | ||||||
Net cash used in investing activities |
(9,361 | ) | (5,430 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Repayments of short-term borrowings |
(273 | ) | (270 | ) | ||||
Payment of capital lease |
(18 | ) | (18 | ) | ||||
Increase (decrease) in overdraft balances |
14,298 | (12,272 | ) | |||||
Proceeds from long-term borrowings |
139,600 | 178,000 | ||||||
Repayments of long-term borrowings |
(126,975 | ) | (170,700 | ) | ||||
Redemption of preferred stock |
(4,524 | ) | | |||||
Proceeds from exercise of stock options |
108 | 53 | ||||||
Payment of deferred financing costs |
(677 | ) | (2,605 | ) | ||||
Net cash provided by (used in) financing activities |
21,539 | (7,812 | ) | |||||
Net decrease in cash and cash equivalents |
(3,340 | ) | (349 | ) | ||||
Cash and cash equivalents at beginning of period |
3,470 | 558 | ||||||
Cash and cash equivalents at end of period |
$ | 130 | $ | 209 | ||||
Supplemental Cash Flow Information: |
||||||||
Cash paid for interest |
$ | 1,426 | $ | 1,815 | ||||
Cash paid for income taxes |
$ | 888 | $ | 47 |
The accompanying notes are an integral part of these financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars amounts in thousands, except per share data)
(Unaudited)
Note 1Basis 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 Companys Annual Report on Form 10-K for the fiscal year ended October 31, 2004.
Revenues and operating results for the three months ended January 31, 2005 are not necessarily indicative of the results to be expected for the full year.
Reclassifications
Certain prior year amounts have been reclassified to be consistent with current year presentation.
Stock Options and Executive Compensation
In accordance with the provision of Statement of Financial Accounting Standard (SFAS) No. 148, Accounting for Stock-Based Compensation Transition and Disclosure an amendment of SFAS No. 123, the Company has elected to continue applying the intrinsic value approach under Accounting Principles Board No. 25 in accounting for its stock-based compensation plans. Accordingly, the Company does not recognize compensation expense for stock options when the exercise price at the grant date is equal to or greater than the fair market value of the stock at that date.
The following table illustrates the effect on net income and net income per share as if the fair value based method had been applied to all outstanding and vested awards in each period:
(Shares in thousands)
Three months ended January 31, |
||||||||
2005 |
2004 |
|||||||
Net income, as reported |
$ | 4,695 | $ | 1,113 | ||||
Less: Cumulative preferred stock dividend, as if declared |
| (61 | ) | |||||
Add: Effect of preferred share redemption |
197 | | ||||||
Add back: Stock-based compensation expense, net of tax, as reported |
65 | 77 | ||||||
Less: Stock-based compensation expense, net of tax, pro forma |
(167 | ) | (166 | ) | ||||
Pro forma net income |
$ | 4,790 | $ | 963 | ||||
Basic net income per share as reported |
$ | .31 | $ | .07 | ||||
Basic net income per share pro forma |
$ | .30 | $ | .06 | ||||
Diluted net income per share as reported |
$ | .30 | $ | .07 | ||||
Diluted net income per share pro forma |
$ | .29 | $ | .06 | ||||
The Companys 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 of the Companys common stock (Common Stock) at an exercise price equal to 100% of market value on the date of grant.
6
Note 2New Accounting Standards
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This standard requires that such items be recognized as current-period charges. The standard also establishes the concept of normal capacity and requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities. Any unallocated overhead must be recognized as an expense in the period incurred. This standard is effective for inventory costs incurred starting November 1, 2005. The Company does not believe the adoption of this standard will have a material impact on its financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets. This standard amended APB Opinion No. 29, Accounting for Nonmonetary Transactions, to eliminate the exception from fair value measurement for nonmonetary exchanges of similar productive assets. This standard replaces this exception with a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has no commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for all nonmonetary asset exchanges completed by the company starting November 1, 2005. The company does not believe the adoption of this standard will have a material impact on its financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123R). SFAS No. 123R addresses all forms of share-based payment (SBP) awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123R will require the Company to expense SBP awards with compensation cost for SBP transactions measured at fair value. The FASB originally stated a preference for a lattice model because it believed that a lattice model more fully captures the unique characteristics of employee stock options in the estimate of fair value, as compared to the Black-Scholes model which the Company currently uses for its footnote disclosure. The FASB decided to remove its explicit preference for a lattice model and not require a single valuation methodology. SFAS No. 123R requires the Company to adopt the new accounting provisions beginning in the fourth quarter of fiscal 2005. The Company has evaluated the provisions of this standard, and it is not expected to have a significant negative effect on consolidated net income.
Note 3Inventories
Inventories consist of the following:
January 31, 2005 |
October 31, 2004 | |||||
Raw materials |
$ | 18,653 | $ | 14,149 | ||
Work-in-process |
8,170 | 7,108 | ||||
Finished goods |
10,432 | 10,056 | ||||
Total material |
37,255 | 31,313 | ||||
Tooling |
4,017 | 5,867 | ||||
Total inventory |
$ | 41,272 | $ | 37,180 | ||
Note 4Property, Plant and Equipment
Property, plant and equipment consist of the following:
January 31, 2005 |
October 31, 2004 | |||||
Land |
$ | 8,306 | $ | 8,118 | ||
Buildings and improvements |
101,841 | 98,820 | ||||
Machinery and equipment |
311,033 | 309,077 | ||||
Furniture and fixtures |
23,510 | 23,410 | ||||
Construction in progress |
5,099 | 3,112 | ||||
Total, at cost |
449,789 | 442,537 | ||||
Less: Accumulated depreciation |
196,932 | 189,894 | ||||
Property, plant and equipment, net |
$ | 252,857 | $ | 252,643 | ||
7
Note 5 Financing Arrangements
Debt consists of the following:
January 31, 2005 |
October 31, 2004 | |||||
Amended and Restated Credit Agreementinterest at 4.42% at January 31, 2005 |
$ | 126,500 | $ | | ||
Credit Agreementinterest at 5.26% at October 31, 2004 |
| 113,875 | ||||
Insurance broker financing agreement |
184 | 457 | ||||
State of Ohio promissory note |
2,000 | 2,000 | ||||
Capital lease debt |
370 | 388 | ||||
Total debt |
129,054 | 116,720 | ||||
Less: Current debt |
10,453 | 16,391 | ||||
Total long-term debt |
$ | 118,601 | $ | 100,329 | ||
The weighted average interest rate of all debt excluding the capital lease debt was 5.32% and 4.58% for the three months ended January 31, 2005 and 2004, respectively.
On January 15, 2004, the Company entered into a new credit and security agreement with a syndicate of lenders, replacing its former credit agreement that was due to expire in April 2004. On January 18, 2005, the Company entered into an Amended and Restated Credit Agreement (the Amended Credit Agreement) with a syndicate of lenders consisting of primarily the same banks included in the new credit and security agreement. The syndicate of lenders is led by LaSalle Bank National Association, as lead arranger, sole book runner and administrative agent, National City Bank, as co-syndication agent, KeyBank National Association, as co-syndication agent, Citizens Bank of Pennsylvania, as co-documentation agent, and U.S. Bank National Association, as co-documentation agent. The Amended Credit Agreement provides the Company with borrowing capacity of $175,000 in the form of a five-year $125,000 revolving credit facility and a five-year term loan of $50,000, each maturing January 2010.
Under the Amended Credit Agreement, the Company has the option to select the applicable interest rate based upon two indicesa Base Rate, as defined in the Amended Credit Agreement, or the Eurodollar rate, as adjusted by the Eurocurrency Reserve Percentage, if any (LIBOR). The selected index is combined with a designated margin from an agreed upon pricing matrix. The Base Rate is the greater of the LaSalle Bank publicly announced prime rate or the Federal Funds effective rate plus 0.5% per annum. LIBOR is the published Bloomberg Financial Markets Information Service rate. At January 31, 2005, the interest rate for the revolving credit facility and the term loan was LIBOR plus 1.75%. The margins for the revolving credit facility and the term loan improve if the Company achieves improved ratios of funded debt to EBITDA, as defined in the Amended Credit Agreement.
Borrowings under the Amended Credit Agreement are collateralized by a first priority security interest in substantially all of the tangible and intangible property of the Company and its domestic subsidiaries and 65% of the stock of foreign subsidiaries.
The Amended Credit Agreement requires the Company to observe several financial covenants. At January 31, 2005, the covenants required a minimum fixed coverage ratio of 1.25 to 1.00, a maximum leverage ratio of 2.75 to 1.00 and a minimum net worth equal to the sum of $100,000 plus 50% of consolidated net income for the quarter ended January 31, 2005. The Amended Credit Agreement also establishes limits for additional borrowings, dividends, investments, acquisitions or mergers and sales of assets. At January 31, 2005, the Company was in compliance with the covenants under the Amended Credit Agreement.
Borrowings under the revolving credit facility must be repaid in full in January 2010. Repayments of borrowings under the term loan begin in March 2005 in equal quarterly installments of $2,500 with the final payment due on December 31, 2009. The Company may prepay the borrowings under the revolving credit facility and the term loan without penalty.
8
The Amended Credit Agreement specifies that upon the occurrence of an event or condition deemed to have a material adverse effect on the business or operations of the Company, as determined by the administrative agent of the lending syndicate or the required lenders, as defined, of 51% of the aggregate commitment under the Amended Credit Agreement, the outstanding borrowings become due and payable. However, the Company does not anticipate at this time any change in business conditions or operations that could be deemed as a material adverse change by the lenders.
Proceeds of the Amended Credit Agreement were used to repay a portion of the borrowings outstanding under the Companys credit agreement dated January 15, 2004. In addition, the proceeds were used to fund fees and related expenses of approximately $677 during the first quarter of fiscal 2005, and are being amortized over the term of the Amended Credit Agreement.
In June 2003, the Company entered into a finance agreement with an insurance broker for various insurance policies. The financing transaction bore interest at 4.89% and required monthly payments of $92 through April 2004. In June 2004, the Company entered into a new finance agreement with an insurance broker for various insurance policies that bears interest at a fixed rate of 4.89% and requires monthly payments of $93 through April 2005. As of January 31, 2005 and October 31, 2004, $184 and $457, respectively, remained outstanding under these agreements and were classified as current debt in the Companys consolidated financial statements.
In June 2004, the Company issued a $2,000 promissory note to the State of Ohio related to specific machinery and equipment at one of the Companys Ohio facilities. The promissory note bears interest at 1% for the first year of the term and 3% per annum for the balance of the term, with interest only payments for the first year of the term. Principal payments began in August 2005 in the amount of $25, and monthly principal payments continue thereafter increasing annually until July 2011, when the loan matures. The Company may prepay this promissory note without penalty.
After considering letters of credit of $2,180 that the Company has issued, available funds under the Amended Credit Agreement were $46,320 at January 31, 2005. Overdraft balances were $14,298 at January 31, 2005, and are included in accounts payable in the Companys consolidated balance sheets. There were no overdraft balances at October 31, 2004.
Note 6 - Fair Value of Derivative Financial Instruments
The Company is subject to risk resulting from interest rate fluctuations because interest on the Companys Amended Credit Agreement is based on variable rates. The Companys objective in managing the exposure to interest rate changes is to limit the volatility and impact of interest rate changes on earnings and cash flows. An interest rate collar has been entered into to achieve this objective, effectively converting a portion of its variable-rate exposures to fixed interest rates. The Company does not enter into financial instruments for trading purposes.
In January 2005, the Company entered into a $25,000 interest rate collar transaction that results in fixing the interest rate on a portion of the term loans within the Amended Credit Agreement between a floor of 3.08% and a cap of 5.00%. This collar agreement will terminate on January 12, 2007. To the extent that the three month Libor rate is below the collar floor, payment is due from the Company for the difference. To the extent the three month Libor rate is above the collar cap, the Company is entitled to receive the difference. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, the Company has reviewed and designated its interest rate collar agreement as a cash flow hedge and recognizes the fair value of its interest rate swap agreement on the balance sheet. Changes in the fair value of this agreement are recorded in other comprehensive income and reclassified into earnings as the underlying hedged item affects earnings to the extent that the interest rate collar is effective. The hedge ineffectiveness, if any, is recorded in earnings. There was no hedge ineffectiveness for the three months ended January 31, 2005.
Note 7Pension Matters
The components of net periodic benefit cost for the three months ended January 31, 2005 and 2004 are as follows:
Pension Benefits |
Other Post-Retirement Benefits |
|||||||||||||||
2005 |
2004 |
2005 |
2004 |
|||||||||||||
Service cost |
$ | 880 | 861 | $ | 10 | $ | 9 | |||||||||
Interest cost |
873 | 784 | 40 | 40 | ||||||||||||
Expected return on plan assets |
(789 | ) | (657 | ) | | | ||||||||||
Recognized net actuarial loss |
433 | 385 | 31 | 27 | ||||||||||||
Amortization of prior service cost |
83 | 83 | (17 | ) | (15 | ) | ||||||||||
Amortization of transition obligation |
21 | 21 | | 1 | ||||||||||||
Net periodic benefit cost |
$ | 1,501 | $ | 1,477 | $ | 64 | $ | 62 | ||||||||
9
The total amount of Company contributions paid for the three months ended January 31, 2005 was $1,371. The Company expects estimated contributions to be $9,214 for the remainder of fiscal 2005.
Note 8Equity Matters
Income Per Share
Basic income per share is computed by dividing net income available to common stockholders by the weighted average number of shares of the Common Stock outstanding during the period. The basic weighted average number of shares also includes the pro rata earned shares to be issued to the Companys President and Chief Executive Officer in accordance with his employment agreement. In addition, the diluted income per share reflects the potential dilutive effect of the Companys stock option plan and the unearned shares issuable to the Companys President and Chief Executive Officer in accordance with his employment agreement.
The shares of Common Stock issuable pursuant to stock options outstanding under the Companys Amended and Restated 1993 Key Employee Stock Incentive Plan and the shares of Common Stock issuable to the President and Chief Executive Officer are included in the diluted income per share calculation to the extent they are dilutive. The following is a reconciliation of the numerator and denominator of the basic and diluted income per share computation for net income:
Three months ended January 31, |
|||||||
2005 |
2004 |
||||||
Net income |
$ | 4,695 | $ | 1,113 | |||
Less: Cumulative preferred stock dividend, as if declared |
| (61 | ) | ||||
Add: Effect of preferred share redemption |
197 | | |||||
Net income available to common stockholders |
$ | 4,892 | $ | 1,052 | |||
Basic weighted average shares |
15,870 | 15,468 | |||||
Effect of dilutive securities: |
|||||||
Stock options |
526 | 477 | |||||
Chief Executive Officer compensation shares |
| 114 | |||||
Diluted weighted average shares |
16,396 | 16,059 | |||||
Basic income per share |
$ | 0.31 | $ | 0.07 | |||
Diluted income per share |
$ | 0.30 | $ | 0.07 | |||
Executive Compensation
Under the terms of the five-year employment agreement with the Companys President and Chief Executive Officer, the executive received an annual base salary, in arrears, in unrestricted shares of Common Stock for the first three years of the agreement. The number of shares issued was 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. The Company initially recorded the issuance of the total stock award of 900,000 shares of Common Stock as unearned compensation reducing stockholders equity by $1,530 for the value of the award at $1.70 per share, the market price of the Common Stock at the date of the agreement. On January 31, 2003, in accordance with the agreement, the Company issued 350,000 shares of Common Stock for services rendered from the period February 1, 2002 through January 31, 2003, the first year of the agreement. On January 31,
10
2004, the Company issued 300,000 shares of Common Stock for services rendered from the period February 1, 2003 through January 31, 2004, the second year of the agreement. On January 31, 2005, in accordance with the agreement, the Company issued 250,000 shares of Common Stock for services rendered from the period February 1, 2004 through January 31, 2005, the third year of the agreement. For the quarters ended January 31, 2005 and 2004, respectively, the Company recorded, as compensation expense, $106 and $128.
Comprehensive Income
Comprehensive income amounted to $4,695 and $1,128, net of tax, for the three months ended January 31, 2005 and 2004, respectively. The difference between net income and comprehensive income for the three months ended January 31, 2004 is equal to the unrealized holding gain on securities available for sale. Comprehensive income equals net income for the three months ended January 31, 2005 because the unrealized holding gain on available for sale securities of $27 was offset by the fair value of the Companys interest rate collar, which created a liability of $27.
Note 9Related Party Information
In January 2002, the Company issued 42,780 shares of Series A Preferred Stock to MTD Products Inc (MTD Products) to satisfy a note payable issued in connection with the purchase of the automotive division of MTD Products. In November 2004, pursuant to the terms of the Series A Preferred Stock, the Company elected to redeem the Series A Preferred at the stated redemption value of $100.00 per share and paid to MTD Holdings, Inc. (MTD Holdings, formerly known as MTD Products) $4,524, which included dividends of $246 for the period November 1, 2003 to October 31, 2004. Dividends prior to November 1, 2003 had been waived by agreement with MTD Holdings.
In December 2004, the Company acquired from MTD Consumer Group Inc, a wholly owned subsidiary of MTD Holdings, certain manufacturing equipment for $2,225. The manufacturing equipment acquired by the Company was originally sold by the Company to MTD Products in May 2002 for approximately $4,540. The manufacturing equipment is utilized by the Company to provide products to MTD Products under its three-year supply agreement. Upon acquisition of the manufacturing equipment in December 2004, the approximate $75 per month rental payment from the Company to MTD Products ceased. The equipment is recorded in machinery and equipment at the net book value of the equipment as if the original sale had not occurred and depreciation had continued while the equipment was leased. A $7 charge, net of tax, was recorded in stockholders equity to record the difference in the purchase price and the computed net book value.
Note 10 Valley City Steel Information
In December 2004, the Company entered into an agreement with Comerica Bank (Comerica) regarding certain debt of Valley City Steel (VCS LLC) owed to Comerica that was secured by a first mortgage on land and a building owned by the Company that was leased to VCS LLC. VCS LLC was a joint venture in which the Company owned a minority interest (49%) and Viking Steel, LLC (Viking) owned a majority interest (51%). In November 2002, Viking, as the majority member of VCS LLC, voted to unilaterally file a voluntary petition for protection under Chapter 11 of the United States Bankruptcy Code on behalf of VCS LLC. During the third quarter of fiscal 2003, substantially all of the assets of VCS LLC were sold to a third party, but the proceeds were insufficient to satisfy the debt owed to Comerica. The agreement between the Company and Comerica effectively results in the discharge of the Company under the debt and protects the Companys ownership interest in the land and building from foreclosure. The transaction, in the amount of $3,072, was recorded in land and building and the building is being depreciated over 20 years.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
General
Shiloh is a supplier of numerous parts to both automobile OEMs and, as a Tier II supplier, to Tier I automotive part manufacturers who in turn supply OEMs. The parts that the Company produces supply many models of vehicles manufactured by nearly all vehicle manufacturers that produce vehicles in North America. As a result, the Companys revenues are very dependent upon the North American production of automobiles and light trucks. According to industry statistics, North American car and light truck production for the first quarter of fiscal 2005 declined slightly compared with production for the first quarter of fiscal 2004.
Another significant factor affecting the Companys revenues is the Companys ability to successfully bid on the production and supply of parts for models that will be newly introduced to the market by the Companys customers. These new model
11
introductions typically go through a start of production phase with build levels that are higher than normal because the consumer supply network is filled to ensure adequate supply to the market, resulting in an increase in the Companys revenues at the beginning of the cycle.
Plant utilization levels are very important to profitability because of the capital-intensive nature of these operations. At January 31, 2005, the Companys facilities were operating at approximately 46% capacity. The Company defines capacity as 20 working hours per day and five days per week. Utilization of capacity is dependent upon the releases against customer purchase orders that are used to establish production schedules and manpower and equipment requirements for each month and quarterly period of the fiscal year.
The majority of the Companys stamping and engineered welded blank operations purchase steel through the customers steel program. Under these programs, the Company pays the steel suppliers and passes on to the customers the steel price the customers negotiated with the steel suppliers. Although the Company takes ownership of the steel, the customers are responsible for all steel price fluctuations. The Company also purchases steel directly from domestic primary steel producers and steel service centers. Domestic steel pricing has generally been increasing recently for several reasons, including capacity restraints, higher raw material costs and the weakening of the U.S. dollar in relation to foreign currencies. Finally, the Company blanks and processes steel for some of its customers on a toll processing basis. Under these arrangements, the Company charges a tolling fee for the operations that it performs without acquiring ownership of the steel and being burdened with the attendant costs of ownership and risk of loss. Toll processing operations results in lower revenues but higher gross margins than operations where the Company takes ownership of the steel. Revenues from operations involving directly owned steel include a component of raw material cost whereas toll processing revenues do not.
Changes in the price of scrap steel can have a significant effect on the Companys results of operations because substantially all of its operations generate engineered scrap steel. Engineered scrap steel is a planned by-product of the Companys processing operations, and proceeds from the disposition of scrap steel contribute to gross margin by offsetting the increases in the cost of steel and the attendant costs of quality and availability. Changes in the price of steel impact the Companys 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.
Critical Accounting Policies
Preparation of the Companys 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 consolidated financials statements and accompanying notes. The Company believes its estimates and assumptions are reasonable; however, actual results and the timing of the recognition of such amounts could differ from those estimates. The Company has identified the items that follow as critical accounting policies and estimates utilized by management in the preparation of the Companys financial statements. These estimates were selected because of inherent imprecision that may result from applying judgment to the estimation process. The expenses and accrued liabilities or allowances related to these policies are initially based on the Companys best estimates at the time they are recorded. Adjustments are recorded when actual experience differs from the expected experience underlying the estimates. The Company makes frequent comparisons of actual experience and expected experience in order to mitigate the likelihood that material adjustments will be required.
Allowance for Doubtful Accounts. The Company evaluates the collectibility of accounts receivable based on several factors. In circumstances where the Company is aware of a specific customers inability to meet its financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. Additionally, the allowance for doubtful accounts is estimated based on historical experience of write-offs and the current financial condition of customers. The financial condition of the Companys customers is dependent on, among other things, the general economic environment, which may substantially change, thereby affecting the recoverability of amounts due to the Company from its customers.
Inventory Reserves. Inventories are valued at the lower of cost or market. Cost is determined on the first-in, first-out basis. Where appropriate, standard cost systems are used to determine cost and the standards are adjusted as necessary to ensure they approximate actual costs. Estimates of lower of cost or market value of inventory are based upon current economic conditions, historical sales quantities and patterns, and in some cases, the specific risk of loss on specifically identified inventories.
The Company values inventories on a regular basis to identify inventories on hand that may be obsolete or in excess of current future projected market demand. For inventory deemed to be obsolete, the Company provides a reserve for the full value
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net of estimated scrap value of the inventory. Inventory that is in excess of current and projected use is reduced by an allowance to a level that approximates future demand. Additional inventory reserves may be required if actual market conditions differ from managements expectations.
Deferred Tax Assets. Deferred taxes are recognized at currently enacted tax rates for temporary differences between the financial reporting and income tax bases of assets and liabilities and operating loss and tax credit carryforwards. In assessing the realizability of deferred tax assets, the Company established a valuation allowance to record its deferred tax assets at an amount that is more likely than not to be realized. While future projections for taxable income and ongoing prudent and feasible tax planning strategies have been considered in assessing the need for the valuation allowance, in the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of their recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. At October 31, 2004, a valuation allowance of $6,398 was recorded and the Company believes that amount remains appropriate at January 31, 2005.
Impairment of Long-lived Assets. The Companys long-lived assets include primarily property, plant and equipment. If an indicator of impairment exists for certain groups of property, plant and equipment, the Company will compare the forecasted undiscounted cash flows attributable to the assets to their carrying value. If the carrying values exceed the undiscounted cash flows, the Company then determines the fair values of the assets. If the carrying value exceeds the fair value of the assets, then an impairment charge is recognized for the difference.
The Company cannot predict the occurrence of future impairment-triggering events. Such events may include, but are not limited to, significant industry or economic trends and strategic decisions made in response to changes in the economic and competitive conditions impacting the Companys business. Based on current facts, the Company believes there is currently no impairment to the Companys long-lived assets.
Group Insurance and Workers Compensation Accruals. The Company is self-insured for group insurance and workers compensation and reviews these accruals on a monthly basis and adjusts the balance as determined necessary. The Company reviews claims data and lag analysis as the primary indicators of the accruals. Additionally, the Company reviews specific large insurance claims to determine whether there is a need for additional accrual on a case-by-case basis. Changes in the claim lag periods and the specific occurrences could materially impact the required accrual balance period-to-period.
Pension and Other Post-retirement Costs and Liabilities. The Company has recorded significant pension and other post-retirement benefit liabilities that are developed from actuarial valuations. The determination of the Companys pension liabilities requires key assumptions regarding discount rates used to determine the present value of future benefit payments and the expected return on plan assets. The discount rate is also significant to the development of other post-retirement liabilities. The Company determines these assumptions in consultation with, and after input from, its actuaries.
The discount rate reflects the estimated rate at which the pension and other post-retirement liabilities could be settled at the end of the year. When determining the discount rate, the Company considers the most recent available interest rates on Moodys Aa Corporate bonds with maturities of at least ten years as of year-end. Based upon this analysis, the Company reduced the discount rate used to measure its pension and post-retirement liabilities to 6.00% at October 31, 2004 from 6.25% at October 31, 2003. A change of 25 basis points in the discount rate would increase or decrease expense on an annual basis by approximately $215,000.
The assumed long-term rate of return on pension assets is applied to the market value of plan assets to derive a reduction to pension expense that approximates the expected average rate of asset investment return over ten or more years. A decrease in the expected long-term rate of return will increase pension expense whereas an increase in the expected long-term rate will reduce pension expense. Decreases in the level of plan assets will serve to increase the amount of pension expense whereas increases in the level of actual plan assets will serve to decrease the amount of pension expense. Any shortfall in the actual return on plan assets from the expected return will increase pension expense in future years due to the amortization of the shortfall whereas any excess in the actual return on plan assets from the expected return will reduce pension expense in future periods due to the amortization of the excess. A change of 25 basis points in the assumed rate of return on pension assets would increase or decrease pension assets by approximately $86,000.
The Companys investment policy for assets of the plans is to maintain an allocation generally of 40 to 60 percent in equity securities and 40 to 60 percent in debt securities. Additionally real estate investments are permitted to range between zero to ten percent. Equity security investments are structured to achieve an equal balance between growth and value stocks. The Company determines the annual rate of return on pension assets by first analyzing the composition of its asset portfolio. Historical rates of return are applied to the portfolio. The Companys investment advisors and actuaries review this computed rate of return. Industry comparables and other outside guidance is also considered in the annual selection of the expected rates of return on pension assets.
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For the twelve months ended October 31, 2004, the actual return on pension plans assets for three of the Companys plans approximated 8.5% to 10.2% and for the twelve months ended March 31, 2004, the actual return on the Companys fourth pension plans assets was approximately 24.0%, which, in each case, was a higher rate of return than the 7.25% to 8.00% expected rates of return on plan assets used to derive pension expense. The higher actual return on plans assets reflects the recovery of the equity markets experienced in 2003 and 2004 from the depressed levels, which have existed since the end of 2001. Based on recent and projected market and economic conditions, the Company maintained its estimate for the expected long-term return on its plan assets at 7.25% to 8.00%, the same assumption used to derive fiscal 2004 expense.
If the fair value of the pension plans assets are below the plans accumulated benefit obligation (ABO), the Company is required to record a minimum liability. If the amount of the ABO in excess of the fair value of plan assets is large enough, the Company may be required, by law, to make additional contributions to the pension plans. Actual results that differ from these estimates may result in more or less future Company funding into the pension plans than is planned by management.
Results of Operations
(Dollars in thousands, except per share data)
Three Months Ended January 31, 2005 Compared to Three Months Ended January 31, 2004
REVENUES. Sales for the first quarter of fiscal 2005 were $151,523, an increase of $10,629, or 7.5%, over last years first quarter sales of $140,894. The increase in sales was led by the continued strong demand of the heavy truck market. Automotive and light truck sales were approximately even between the first quarters of fiscal 2005 and 2004. While sales of parts were adversely affected by customer assembly plant production down time, sales were favorably affected by parts supplied for new models that began production during the first quarter of fiscal 2005
GROSS PROFIT. Gross profit for the first quarter of fiscal 2005 was $19,256 compared to gross profit of $13,226 in the first quarter of fiscal 2004, an increase of $6,030, or 45.6%, between years. The gross profit percentage of sales was 12.7% in the first quarter of fiscal 2005 compared to 9.4% a year ago. Gross profit in fiscal 2005 improved as a result of increased volume of business realized in fiscal 2005 compared to fiscal 2004. Gross margin was also favorably impacted by net material cost recoveries in fiscal 2005. Lastly, gross margin was favorably affected by lower manufacturing expenses compared to the first quarter of fiscal 2004. Manufacturing expenses declined from the prior year quarter as a result of reduced personnel and related personnel costs, which was partially offset by increased depreciation expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses of $8,310 in the first quarter of fiscal 2005 declined by $406 from the prior year first quarter level of $8,716. As a percentage of sales, these expenses were 5.4% in the first quarter of fiscal 2005 compared to 6.2% of sales in the first quarter of fiscal 2004. Selling, general and administrative expenses declined because of a reduction in personnel related expenses.
OTHER. Interest expense for the first quarter of fiscal 2005 was $3,248, an increase of $508 from the first quarter of fiscal 2004. In January 2005, the Company entered into an Amended and Restated Credit Agreement, resulting in the accelerated amortization of deferred financing costs of $1,322 included in interest expense in the first quarter of fiscal 2005. In the first quarter of fiscal 2004, interest expense included approximately $350 of accelerated amortization of deferred financing costs associated with the Companys former credit agreement. Excluding the accelerated amortization of deferred financing costs in each of the first quarter periods, net interest expense in 2005 was $1,926 compared to $2,390 in 2004, for a decrease of $464. Interest expense declined from the prior year first quarter as the result of a lower level of borrowed funds offset by an increase in the interest rate. Borrowed funds averaged $122,887 during the first quarter of fiscal 2005 and the weighted average interest rate was 5.32%. In the first quarter of fiscal 2004, borrowed funds averaged $153,492 while the weighted average interest rate was 4.58%.
The provision for income taxes in the first quarter of fiscal 2005 was $3,002 on income before taxes of $7,697 for an effective tax rate of 39.0%. In the first quarter of fiscal 2004, the provision for income taxes was $742 on income before taxes of $1,855 for an effective tax rate of 40.0%.
NET INCOME. Net income for the first quarter of fiscal 2005 was $4,695, or $0.31 per share, basic, and $0.30 per share, diluted. A year ago, the first quarter income was $1,113, or $0.07 per share, basic and diluted.
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Liquidity and Capital Resources
On January 15, 2004, the Company entered a new credit and security agreement with a syndicate of lenders, replacing its former credit agreement that was due to expire in April 2004. On January 18, 2005, the Company entered an Amended and Restated Credit Agreement (the Amended Credit Agreement) with a syndicate of lenders consisting of primarily the same banks included in the new credit and security agreement. The syndicate of lenders is led by LaSalle Bank National Association, as lead arranger, sole book runner and administrative agent, National City Bank, as co-syndication agent, KeyBank National Association, as co-syndication agent, Citizens Bank of Pennsylvania, as co-documentation agent, and U.S. Bank National Association, as co-documentation agent. The Amended Credit Agreement provides the Company with borrowing capacity of $175,000 in the form of a five-year $125,000 revolving credit facility and a five-year term loan of $50,000, each maturing January 2010.
Under the Amended Credit Agreement, the Company has the option to select the applicable interest rate based upon two indicesa Base Rate, as defined in the Amended Credit Agreement, or the Eurodollar rate, as adjusted by the Eurocurrency Reserve Percentage, if any (LIBOR). The selected index is combined with a designated margin from an agreed upon pricing matrix. The Base Rate is the greater of the LaSalle Bank publicly announced prime rate or the Federal Funds effective rate plus 0.5% per annum. LIBOR is the published Bloomberg Financial Markets Information Service rate. At January 31, 2005, the interest rate for the revolving credit facility and the term loan was LIBOR plus 1.75%. The margins for the revolving credit facility and the term loan improve if the Company achieves improved ratios of funded debt to EBITDA, as defined in the Amended Credit Agreement.
Borrowings under the Amended Credit Agreement are collateralized by a first priority security interest in substantially all of the tangible and intangible property of the Company and its domestic subsidiaries and 65% of the stock of foreign subsidiaries.
The Amended Credit Agreement requires the Company to observe several financial covenants. At January 31, 2005, the covenants required a minimum fixed coverage ratio of 1.25 to 1.00, a maximum leverage ratio of 2.75 to 1.00 and a minimum net worth equal to the sum of $100,000 plus 50% of consolidated net income for the quarter ended January 31, 2005. The Amended Credit Agreement also establishes limits for additional borrowings, dividends, investments, acquisitions or mergers and sales of assets. At January 31, 2005, the Company was in compliance with the covenants under the Amended Credit Agreement.
Borrowings under the revolving credit facility must be repaid in full in January 2010. Repayments of borrowings under the term loan begin in March 2005 in equal quarterly installments of $2,500 with the final payment due on December 31, 2009. The Company may prepay the borrowings under the revolving credit facility and the term loan without penalty.
The Amended Credit Agreement specifies that upon the occurrence of an event or condition deemed to have a material adverse effect on the business or operations of the Company, as determined by the administrative agent of the lending syndicate or the required lenders, as defined, of 51% of the aggregate commitment under the Amended Credit Agreement, the outstanding borrowings become due and payable. However, the Company does not anticipate at this time any change in business conditions or operations that could be deemed as a material adverse change by the lenders.
In June 2003, the Company entered into a finance agreement with an insurance broker for various insurance policies. The financing transaction bore interest at 4.89% and required monthly payments of $92 through April 2004. In June 2004, the Company entered into a new finance agreement with an insurance broker for various insurance policies that bears interest at a fixed rate of 4.89% and requires monthly payments of $93 through April 2005. As of January 31, 2005 and October 31, 2004, $184 and $457, respectively, remained outstanding under these agreements and were classified as current debt in the Companys consolidated financial statements.
In June 2004, the Company issued a $2,000 promissory note to the State of Ohio related to specific machinery and equipment at one of the Companys Ohio facilities. The promissory note bears interest at 1% for the first year of the term and 3% per annum for the balance of the term, with interest only payments for the first year of the term. Principal payments begin in August 2005 in the amount of $25, and monthly principal payments continue thereafter increasing annually until July 2011, when the loan matures. The Company may prepay this promissory note without penalty.
Scheduled repayments under the terms of the Amended Credit Agreement plus repayments of other debt for the next five years are listed below:
Year ended January 31, |
Amended Credit Agreement |
Other Debt |
Total | ||||||
2006 |
$ | 10,000 | $ | 453 | $ | 10,453 | |||
2007 |
10,000 | 417 | 10,417 | ||||||
2008 |
10,000 | 429 | 10,429 | ||||||
2009 |
10,000 | 350 | 10,350 | ||||||
2010 |
86,500 | 342 | 86,842 | ||||||
2011 and thereafter |
| 563 | 563 | ||||||
Total |
$ | 126,500 | $ | 2,554 | $ | 129,054 | |||
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At January 31, 2005, total debt was $129,054 and total equity was $130,376, resulting in a capitalization rate of 49.7% debt, 50.3% equity. Current assets were $158,525 and current liabilities were $137,510 resulting in a working capital of $21,015.
Cash was generated by income and non-cash items amounting to $15,575 in the first quarter of fiscal 2005 compared to $10,374 in the first quarter of fiscal 2004. The increase of $5,201 reflects the improvement in net income, a higher level of depreciation and increased amortization of deferred financing fees, including the accelerated amortization of deferred financing fees as a result of the Amended Credit Agreement.
Working capital changes since October 31, 2004 required funds of $31,093 and included an increase in accounts receivable of $18,614. As anticipated, accounts receivable have increased as the accelerated collection programs that had previously existed with the automotive customers came to an end. These programs permitted collection of accounts due approximately 30 days sooner than normal collection terms of approximately 45 days average. The transition to the new collection cycle is expected to be completed in the next six months and accounts receivable are expected to continue to increase during that period. Inventory increased, reflecting the higher cost of steel and quantities purchased to meet first quarter demand. In addition, payables, including overdraft balances included in financing activities, increased in connection with the additional sales volume experienced in the quarter.
Capital expenditures in the first quarter of fiscal 2005 were $9,361 and included several non-recurring transactions. The Company had previously sold several presses to MTD Products Inc (MTD Products) and leased the presses from MTD Products for use in production of parts for MTD Products. By agreement, the Company retained the right to repurchase the equipment at the original selling price to MTD Products less lease payments paid to MTD Products during the term of the lease. In December 2004, the Company repurchased the presses from an affiliate of MTD Products for $2,225. During the same month, the Company entered into an agreement with Comerica Bank (Comerica) regarding certain debt of Valley City Steel (VCS LLC) owed to Comerica that was secured by a first mortgage on land and a building owned by the Company that was leased to VCS LLC. VCS LLC was a joint venture in which the Company owned a minority interest (49%) and Viking Steel, LLC (Viking) owned a majority interest (51%). In November 2002, Viking, as the majority member of VCS LLC, voted to unilaterally file a voluntary petition for protection under Chapter 11 of the United States Bankruptcy Code on behalf of VCS LLC. During the third quarter of fiscal 2003, substantially all of the assets of VCS LLC were sold to a third party, but the proceeds were insufficient to satisfy the debt owed to Comerica. The agreement between the Company and Comerica effectively results in the discharge of the Company under the debt and protects the Companys ownership interest in the land and building from foreclosure. The transaction, in the amount of $3,072, was recorded in land and building and the building is being depreciated over 20 years.
In January 2002, the Company issued 42,780 shares of Series A Preferred Stock to MTD Products to satisfy a note payable issued in connection with the purchase of the automotive division of MTD Products. In November 2004, pursuant to the terms of the Series A Preferred Stock, the Company elected to redeem the Series A Preferred at the stated redemption value of $100.00 per share and paid to MTD Holdings, Inc. (formerly known as MTD Products) $4,524, which included dividends of $246 for the period November 1, 2003 to October 31, 2004. Dividends prior to November 1, 2003 had been waived by agreement with MTD Holdings.
Financing activity in the first quarter of fiscal 2005 reflects the Amended Credit Agreement. Once the Amended Credit Agreement was completed, the Company repaid a term loan of the original credit agreement and borrowed funds under the revolving credit facility, increasing borrowed funds to sufficiently provide for the working capital requirements, the fixed asset additions, the financing costs related to the Amended Credit Agreement and for the repurchase of preferred stock.
After considering letters of credit of $2,180 that the Company has issued, available funds under the Amended Credit Agreement were $46,320 at January 31, 2005. The Company believes that funds available under the Amended Credit Agreement and cash flow from operations will provide sufficient liquidity to meet its cash requirements through January 31, 2006 and until the expiration of the revolving credit facility in January 2010, including capital expenditures, pension obligations and scheduled repayments of $50,000 in the aggregate under the Amended Credit Agreement in accordance with the repayment terms. Furthermore, the Company does not anticipate at this time any change in business conditions or operations of the Company that could be deemed as a material adverse change by the agent bank or required lenders, as defined, and thereby result in declaring borrowed amounts as immediately due and payable.
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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 Companys financial results.
FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements. The forward-looking statements are made on the basis of managements assumptions and expectations. As a result, there can be no guarantee or assurance that these assumptions and expectations will in fact occur. The forward-looking statements are subject to risks and uncertainties that may cause actual results to materially differ from those contained in the statements. Some, but not all of the risks, include the ability of the Company to accomplish its strategic objectives with respect to implementing its sustainable business model; the ability to obtain future sales; changes in worldwide economic and political conditions, including adverse effects from terrorism or related hostilities; costs related to legal and administrative matters; the Companys ability to realize cost savings expected to offset price concessions; inefficiencies related to production and product launches that are greater than anticipated; changes in technology and technological risks; increased fuel costs; work stoppages and strikes at the Companys facilities and that of the Companys customers; the Companys dependence on the automotive and heavy truck industries, which are highly cyclical; the dependence of the automotive industry on consumer spending, which is subject to the impact of domestic and international economic conditions and regulations and policies regarding international trade; financial and business downturns of the Companys customers or vendors; increases in the price of, or limitations on the availability, of steel, the Companys primary raw material, or decreases in the price of scrap steel; the successful launch and consumer acceptance of new vehicles for which the Company supplies parts; the occurrence of any event or condition that may be deemed a material adverse effect under Amended Credit Agreement; pension plan funding requirements; and other factors, uncertainties, challenges and risks detailed in Shilohs other public filings with the Securities and Exchange Commission. 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 managements 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Companys 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 Companys financial position, liquidity or results of operations.
Interest Rate Risk
The Company is exposed to market risk through variable rate debt instruments. As of January 31, 2005, the Company had $126.5 million outstanding under the Amended Credit Agreement. Based on January 31, 2005 debt levels, a 0.5% annual change in interest rates would have impacted interest expense by approximately $0.15 million for the quarter ended January 31, 2005.
In the normal course of business, the Company employs established policies and procedures to manage exposure to changes in interest rates. The Companys objective in managing the exposure to interest rate changes is to limit the volatility and impact of interest rate changes on earnings and cash flows. The Company entered an interest rate collar agreement in January 2005, which requires the Company to pay a fixed interest rate, within a specific range, while receiving a floating interest rate based on LIBOR. The Company has a $25.0 million interest rate collar with a floor rate of 3.08% and a cap rate of 5.00%. The Company does not engage in hedging activity for speculative or trading purposes.
In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, the Company had designated the interest rate collar as a cash flow hedge. Changes in the fair value of the interest rate collar are recorded in other comprehensive income and reclassified into earnings as the underlying hedged item affects earnings to the extent that the interest rate collar is effective. The hedge ineffectiveness, if any, is recorded in earnings.
Foreign Currency Exchange Rate Risk
In order to reduce the impact of changes in foreign exchange rates on the consolidated results of operations, the Company enters into foreign currency contracts periodically. There were no foreign currency forward exchange contracts outstanding as of January 31, 2005. The intent of any contracts entered into by the Company is to reduce exposure to currency movements
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affecting foreign currency purchase commitments. Changes in the fair value of forward exchange contracts are recorded in the consolidated statements of operations. The Companys risks related to commodity price and foreign currency exchange risks have historically not been material. The Company does not expect the effects of these risks to be material in the future based on current operating and economic conditions in the countries and markets in which it operates.
Item 4. Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. As of the end of the period covered by the Quarterly Report, an evaluation of the effectiveness of the Companys disclosure controls and procedures was carried out under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures are effective.
There have been no changes in the Companys internal control over financial reporting during the first quarter of fiscal 2005 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Exhibits:
10.1 | Amended and Restated Credit and Security Agreement, dated January 18, 2005, among Shiloh Industries, Inc., the other loan parties thereto, LaSalle Bank National Association as lead arranger and administrative agent, National City Bank and KeyBank National Association as co-syndication agents and Citizens Bank of Pennsylvania and U.S. Bank National Association as co-documentation agents, is incorporated herein by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on January 24, 2005 (Commission File No. 0-21964). | |
31.1 | Principal Executive Officers Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Principal Financial Officers Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: February 25, 2005
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EXHIBIT INDEX
10.1 | Amended and Restated Credit and Security Agreement, dated January 18, 2005, among Shiloh Industries, Inc., the other loan parties thereto, LaSalle Bank National Association as lead arranger and administrative agent, National City Bank and KeyBank National Association as co-syndication agents and Citizens Bank of Pennsylvania and U.S. Bank National Association as co-documentation agents, is incorporated herein by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on January 24, 2005 (Commission File No. 0-21964). | |
31.1 | Principal Executive Officers Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Principal Financial Officers Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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