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Shiloh Industries 10-K 2012
SHLO 10.31.2012 10-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________________________________________ 
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended October 31, 2012
Commission file no. 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.)
880 Steel Drive, Valley City, Ohio 44280
(Address of principal executive offices-zip code)
(330) 558-2600
(Registrant's telephone number, including area code)
—————— 
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.01 Per Share
Securities registered pursuant to Section 12(g) of the Act:
None
——————  
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ¨ No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes ¨ No x 
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Do not check if a small reporting company)
Large accelerated filer  ¨  Accelerated filer  ¨  Non-accelerated filer  ¨   Smaller Reporting Company  x
Indicate by check mark whether the registrant is a shell company (as defined in the Exchange Act Rule 12b-2).  Yes  ¨  No   x
Aggregate market value of Common Stock held by non-affiliates of the registrant as of April 30, 2012, the last business day of the registrant's most recently completed second fiscal quarter, at a closing price of $9.19 per share as reported by the Nasdaq Global Market, was approximately $51,756,196. Shares of Common Stock beneficially held by each executive officer and director and their respective spouses have been excluded since such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
Number of shares of Common Stock outstanding as of December 21, 2012 was 16,904,255
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference into Part III of this Annual Report on Form 10-K: the Proxy Statement for the registrant's 2013 Annual Meeting of Stockholders (the “Proxy Statement”).




 
INDEX TO ANNUAL REPORT
 
 
ON FORM 10-K
 
 
 
 
 
Table of Contents
 
 
 
Page
 
PART I:
 
 
 
Item 1.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II:
 
Item 5.
 
 
Item 7.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
PART III:
 
Item 10.
Item 11.
Item 12.
 
 
Item 13.
Item 14.
 
 
 
 
PART IV:
 
Item 15.
 
 
 
 
 
 
 
 
 
 
 
 



2






PART I— FINANCIAL INFORMATION

SHILOH INDUSTRIES, INC.
PART I
Item 1.
Business
General
Shiloh Industries, Inc. is a Delaware corporation organized in 1993. Unless otherwise indicated, all references to the “Company” or “Shiloh” refer to Shiloh Industries, Inc. and its consolidated subsidiaries. The Company's principal executive offices are located at 880 Steel Drive, Valley City, Ohio 44280 and its telephone number is (330) 558-2600. The Company's website is located at http://www.shiloh.com. On its website, you can obtain a copy of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company files such material electronically with, or furnishes it to, the Securities and Exchange Commission. A copy of these filings is available to all interested parties upon written request to Thomas M. Dugan, Vice President of Finance and Treasurer, at the Company's corporate offices. The Company does not incorporate its website into this Form 10-K, and information on the website is not and should not be considered part of this document.
The Company files annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any document the Company files with the Securities and Exchange Commission (“SEC”) at its Public Reference Room at 100 F Street, N.W., Washington D.C. 20549. You may obtain information about the operation of the SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC (http://www.sec.gov).
Shiloh is a leading supplier providing light weighting and noise, vibration and harshness (NVH) solutions to automotive, commercial vehicle and other industrial markets. Shiloh delivers these solutions through design engineering and manufacturing of first operation blanks, engineered welded blanks, complex stampings and modular assemblies. In addition, Shiloh is a designer and engineer of precision tools and dies and welding and assembly equipment for use in its blanking, welded blank and stamping operations and for sale to original equipment manufacturers (“OEMs”), Tier I automotive suppliers and other industrial customers. The Company's blanks, which are engineered two dimensional shapes cut from flat-rolled steel, are principally sold to automotive and truck OEMs and are used for exterior and structural components, such as fenders, hoods and doors. These blanks include first operation exposed and unexposed blanks and more advanced engineered welded blanks. Engineered welded blanks generally consist of two or more sheets of steel of the same or different material grade, thickness or coating that are welded together utilizing both mash seam resistance and laser welding.
The Company's complex stampings and modular assemblies include components used in the structural and powertrain systems of a vehicle. Structural systems include body-in-white applications and structural underbody modules. Powertrain systems consist of deep draw components, such as oil pans and transmission pans. Additionally, the Company provides a variety of intermediate steel processing services, such as oiling, leveling, cutting-to-length, slitting, edge trimming of hot and cold-rolled steel coils and inventory control services for automotive and steel industry customers. The Company has fourteen wholly owned subsidiaries at locations in Georgia, Kentucky, Michigan, Ohio, Tennessee and Mexico.
The Company conducts its business and reports its information as one operating segment.
History
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 1960s. In April 1993, Shiloh Industries, Inc. was organized as a Delaware corporation to serve as a holding company for its operating subsidiaries and, in July 1993, completed an initial public offering of its common stock, par value $0.01 per share (“Common Stock”).


3



In November 1999, the Company acquired the automotive division of MTD Products Inc (“MTD Automotive”). MTD Holdings Inc (the parent of MTD Products Inc) and the MTD Products Inc Master Employee Benefit Trust, a trust fund established and sponsored by MTD Products are owners of the Company's outstanding shares of Common Stock, making MTD a related party of the Company.

Products and Manufacturing Processes
Revenues derived from the Company's products were as follows:
 
 
 
 
 
 
 
 
Years Ended October 31,
 
 
2012
 
2011
 
 
(dollars in thousands)
Engineered welded blanks
 
$
287,604

 
$
246,255

Complex stampings and modular assemblies
 
157,531

 
123,949

Blanking
 
92,387

 
97,908

Steel processing, tools, dies, scrap and other
 
48,552

 
49,631

Total
 
$
586,074

 
$
517,743

 
 
 
 
 
The Company produces engineered welded blanks using both the mash seam resistance and laser weld processes. The engineered welded blanks that are produced generally consist of two or more sheets of steel of the same or different material grade, thickness or coating welded together into a single flat panel. The primary distinctions between mash seam resistance and laser welding are weld bead appearance and cost.
The Company's complex stamping operations produce engineered stampings and modular assemblies. Stamping is a process in which steel is passed through dies in a stamping press in order to form the steel into three-dimensional parts. The Company produces complex stamped parts using precision single stage, progressive, deep draw and transfer dies, which the Company either designs and manufactures or sources from third parties. Some stamping operations also provide value-added processes such as welding, assembly and painting capabilities. The Company's complex stampings and modular assemblies are principally used as components for body-in-white, powertrain, seat frames and other structural body components for automobiles.
The Company produces steel blanks in its blanking operations. Blanking is a process in which flat-rolled steel is cut into precise two-dimensional shapes by passing steel through a press, employing a blanking die. These blanks, which are used principally by manufacturers in the automobile, heavy truck, and lawn and garden industries, are used by the Company's automotive and heavy truck customers for automobile exterior and structural components, including fenders, hoods, doors and side panels, and heavy truck wheel rims and brake components and by the Company's lawn and garden customers for lawn mower decks.
To a lesser extent, the Company provides the service of steel processing and processes flat-rolled steel principally for primary steel producers and manufacturers that require processed steel for end-product manufacturing purposes. The Company also processes flat-rolled steel for internal blanking and stamping operations. The Company either purchases hot-rolled, cold-rolled or coated steel from primary steel producers located throughout the Midwest or receives the steel on a toll-processing basis and does not acquire ownership of it. Cold-rolled and hot-rolled steel often go through additional processing operations to meet the requirements of end-product manufacturers. The Company's additional processing operations include slitting, cutting-to-length, edge trimming, roller leveling and quality inspecting of flat-rolled steel.
 
Slitting is the cutting of coiled steel to precise widths. Cutting-to-length produces steel cut to specified lengths ranging from 12 inches to 168 inches. Edge trimming removes a specified portion of the outside edges of the coiled steel to produce a uniform width. Roller leveling flattens the steel by applying pressure across the width of the steel to make the steel suitable for blanking and stamping. To achieve high quality and productivity and to be responsive to customers' just-in-time supply requirements, most of the Company's steel processing operations are computerized and have combined several complementary processing lines, such as slitting and cutting-to-length at single facilities. In addition to cleaning, leveling and cutting steel, the Company inspects steel to detect mill production flaws and utilizes computers to provide both visual displays and documented records of the thickness maintained throughout the entire coil of steel. The Company also performs inventory control services for some customers.
The Company also designs, engineers and produces precision tools and dies, and weld and secondary assembly equipment. To support the manufacturing process, the Company supplies or sources from third parties the tools and dies used in the blanking

4



and stamping operations and the welding and secondary assembly equipment used to manufacture modular systems. Advanced technology is maintained to create products and processes that fulfill customers' advanced product requirements. The Company has computerized most of the design and engineering portions of the tool and die production process to reduce production time and cost.

International Operation
The Company's international operation, which is located in Mexico, is subject to various risks that are more likely to affect this operation than the Company's domestic operations. These include, among other things, exchange rate controls and currency restrictions, currency fluctuations, changes in local economic conditions, unsettled political conditions, security risk and foreign government-sponsored boycotts of the Company's products or services for noncommercial reasons. The identifiable assets associated with the Company's international operation are located where the Company believes the risks to be minimal.
Customers
The Company produces blanked and stamped parts and processed flat-rolled steel for a variety of industrial customers. The Company supplies steel blanks, stampings and modular assemblies primarily to North American automotive manufacturers and stampings to Tier I automotive suppliers. The Company also supplies blanks and stampings to manufacturers in the lawn and garden and heavy duty truck and trailer industries. Finally, the Company processes flat-rolled steel for a number of primary steel producers.
The Company's largest customer is General Motors Company (“General Motors”). The Company has been working with General Motors for more than 25 years and operates a vendor-managed program to supply blanks, which program includes on-site support staff, electronic data interchange, logistics support, a just-in-time delivery system and engineered welded blanks. As a result of the acquisition of MTD Automotive in November 1999, Ford Motor Company (“Ford”) became another significant customer. The Company supplies Ford with blanks, deep draw stampings and modular assemblies. The Company also does business with Chrysler Group LLC (“Chrysler”), and supplies Chrysler with engineered welded blanks, blanks, and deep draw stampings. In addition, the Company also supplies complex stampings and modular assemblies to Nissan USA ("Nissan").
In fiscal 2012, General Motors and Chrysler accounted for approximately 24.5% and 19.0%, respectively of the Company's revenues. No other individual customer accounted for more than 10% of the Company's revenues in fiscal 2012. At October 31, 2012 and 2011, General Motors accounted for 23.4% and 31.4% of the Company's accounts receivable, respectively and Chrysler accounted for 23.2% and 18.7% of the Company's accounts receivable, respectively.
Sales and Marketing
The Company operates a sales and technical center in Canton, Michigan, which center is in close proximity to certain of its automotive customers. The sales and marketing organization is structured to efficiently service all of the Company's key customers and directly market the Company's automotive and steel processing products and services. The sales force is organized to enable the Company to target sales and marketing efforts at four distinct types of customers, which include OEM customers, Tier I suppliers and steel consumers and producers.
The Company's engineering staff provides total program management, technical assistance and advanced product development support to customers during the product development stage of new vehicle design.
 
Operations and Engineering
The Company operates eight manufacturing facilities in the United States and one manufacturing facility in Mexico, along with technical centers in Canton, Michigan and Valley City, Ohio that coordinate advanced product and process development and applications with its customers and its manufacturing facilities. The Company's manufacturing facilities and technical centers are strategically located close to its customers' engineering organizations and fabricating-assembly plants. Each facility of the Company is focused on meeting the business strategy of the Company by optimizing its performance in quality, cost and delivery.
Raw Materials
The basic materials required for the Company's operations are hot-rolled, cold-rolled and coated steel. The Company obtains steel from a number of primary steel producers and steel service centers. The majority of the steel is purchased through customers' steel buying programs. Under these programs, the Company purchases steel at the steel price that its customers negotiated with the steel suppliers. These suppliers include AK Steel, AreclorMittal, Severstal and U.S. Steel. Although the Company takes ownership of the steel, the customers are responsible for all steel price fluctuations. Most of the steel owned by the Company is purchased domestically. A portion of the steel processing products and services is provided to customers on a toll processing basis.

5



Under these arrangements, the Company charges a specified fee for operations performed without acquiring ownership of the steel and being burdened with the attendant costs of ownership and risk of loss. Through centralized purchasing, the Company attempts to purchase raw materials at the lowest competitive prices for the quantity purchased. The amount of steel available for processing is a function of the production levels of primary steel producers.

Competition
Competition for sales of steel blanks and engineered welded blanks is intense, coming from numerous companies, including independent domestic and international suppliers, and from internal divisions of OEMs, as well as independent domestic and international Tier I and Tier II suppliers, some of which have blanking facilities. Competitors for engineered welded blanks include TWB Company, LLC, ArcelorMittal Tailored Blanks Americas, Delaco AMTB,and Worthington Specialty Processing. Competition for sales of automotive stamping and assemblies is also intense. Primary competitors in North America for the engineered stamping and assembly business are L&W Inc., Flex-n-Gate, Midway Products Group., Narmco Group and Van -Rob. The methods of competition with these companies in blanks, engineered welded blanks and automotive stampings and assemblies are product quality, price, delivery, location and engineering capabilities. Shiloh is the only supplier of engineered welded blanks that is not affiliated with a steel company.
Employees
As of November 30, 2012, the Company had approximately 1,430 employees. A total of approximately 40 employees at one of the Company's subsidiaries are covered by a collective bargaining agreement that is due to expire in November 2017.
Backlog
A significant portion of the Company's business pertains to automobile platforms for various model years. Orders against these platforms are subject to releases by the customer and are not considered technically firm. Backlog, therefore, is not a meaningful indicator of future performance.
Seasonality
The Company typically experiences decreased revenue and operating income during its first fiscal quarter of each year, usually resulting from generally lower overall automobile production during November and December. The Company's revenues and operating income in its third fiscal quarter can also be affected by the typically lower automobile production activities in June and July due to manufacturers' plant shutdowns and new model changeovers of production lines.
Environmental Matters
The Company is subject to environmental laws and regulations concerning emissions to the air, discharges to waterways and generation, handling, storage, transportation, treatment and disposal of waste and hazardous materials.
The Company is also subject to laws and regulations that can require the remediation of contamination that exists at current or former facilities. In addition, the Company is subject to other federal and state laws and regulations regarding health and safety matters. Each of the Company's production facilities has permits and licenses allowing and regulating air emissions and water discharges. While the Company believes that at the present time its production facilities are in substantial compliance with environmental laws and regulations, these laws and regulations are constantly evolving and it is impossible to predict whether compliance with these laws and regulations may have a material adverse effect on the Company in the future.
ISO 14001 is a voluntary international standard issued in September 1996 by the International Organization for Standardization. ISO 14001 identifies the elements of an Environmental Management System (“EMS”) necessary for an organization to effectively manage its effect on the environment. The ultimate objective of the standard is to integrate the EMS with overall business management processes and systems so that environmental considerations are a routine part of business decisions. All of the Company's facilities are ISO 14001 certified. The Company has completed the certification process at each of its nine manufacturing facilities for the latest and highest international quality standard for the automotive industry, ISO/TS 16949:2002. The Company believes this certification is a market requirement for doing business in the automotive industry.
Segment and Geographic Information
The Company conducts its business and reports its information as one operating segment-Automotive Products. The Chief Executive Officer of the Company has been identified as the chief operating decision maker because he has final authority over performance assessment and resource allocation decisions. In determining that one operating segment is appropriate, the Company considered the nature of the business activities, the existence of managers responsible for the operating activities and information presented to the Board of Directors for its consideration and advice. Furthermore, the Company is a full service manufacturer of first operation blanks, engineered welded blanks, complex stampings and modular assemblies predominately for the automotive

6



and heavy truck markets. Customers and suppliers are substantially the same among operations, and all processes entail the acquisition of steel and the processing of the steel for use in the automotive industry.

Revenues from the Company's foreign subsidiary in Mexico were $36,647 and $29,740 for fiscal years 2012 and 2011, respectively. These revenues represent 6.3% of total revenues for fiscal 2012 and 5.7% of total revenues for fiscal year 2011. Long-lived assets consist primarily of net property, plant and equipment. Long-lived assets of the Company's foreign subsidiary totaled $14,302 and $14,708 at October 31, 2012 and 2011, respectively. The consolidated long-lived assets of the Company totaled $121,263 and $123,971 at October 31, 2012 and 2011, respectively.

Item 1B.
Unresolved Staff Comments
None.



7



Item 2.    Properties
The Company believes substantially all of its property and equipment is in good condition and that it has sufficient capacity to meet its current operational needs. The Company's facilities, all of which are owned are as follows:
 
 
 
 
 
 
Subsidiary 
 
Facility
Name
 
Location
 
Square
Footage 
 
Year
Occupied 
 
Description of Use
 
Medina Blanking, Inc.
Medina Blanking
Valley City, Ohio
255,000
1986
Blanking/Engineered Welded Blanks/Engineering and Development
 
 
 
 
 
 
Medina Blanking, Inc.
Ohio Welded Blank
Valley City, Ohio
254,000
2000
Engineered Welded Blanks
 
 
 
 
 
 
Medina Blanking, Inc.
Bowling Green Manufacturing
Bowling Green, Kentucky
83,000

2011
Blanking/Tool and Die Production/ Complex Stamping and Modular Assembly
 
 
 
 
 
 
VCS Properties, LLC
 
Valley City, Ohio
260,000
1977
(Closed)
 
 
 
 
 
 
Liverpool Coil Processing, Incorporated
LCPI
Valley City, Ohio
244,000
1990
Steel Processing Services/Complex Stamping and Modular Assembly/Administration
 
 
 
 
 
 
Shiloh Automotive, Inc.
Liverpool Manufacturing
Valley City, Ohio
260,000
1999
(Closed)
 
 
 
 
 
 
Sectional Stamping, Inc.
Wellington Stamping
Wellington, Ohio
235,000
1987
Complex Stamping and Modular Assembly
 
 
 
 
 
 
Greenfield Die & Manufacturing Corp.
Canton Manufacturing
Canton, Michigan
170,000
1996
Engineered Welded Blanks/Complex Stamping and Modular Assembly/ Sales and Marketing/ Engineering and Development
 
 
 
 
 
 
Jefferson Blanking Inc.
Jefferson Blanking
Pendergrass, Georgia
185,500
1998
Blanking/Engineered Welded Blanks/ Complex Stamping and Modular Assembly
 
 
 
 
 
 
Shiloh Industries, Inc., Dickson Manufacturing Division
Dickson Manufacturing
Dickson, Tennessee
242,000
2000
Complex Stamping and Modular Assembly
 
 
 
 
 
 
Shiloh de Mexico S. A. de C.V.
Saltillo Welded Blank
Saltillo, Mexico
153,000
2000
Engineered Welded Blanks/Complex Stamping and Modular Assembly
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Legal Proceedings
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.  

Item 4. Mine Safety Disclosures
Not Applicable

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PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company's Common Stock is traded on the Nasdaq Global Market under the symbol “SHLO.” On December 20, 2012, the closing price for the Company's Common Stock was $10.75 per share.
The Company's Common Stock commenced trading on the Nasdaq National Market on June 29, 1993. The table below sets forth the high and low bid prices for the Company's Common Stock for its four quarters in each of 2012 and 2011.


 
 
2012
 
2011
Quarter
 
High
 
Low
 
High
 
Low
1st
 
$
8.85

 
$
7.11

 
$
13.75

 
$
10.09

2nd
 
$
10.77

 
$
7.84

 
$
13.67

 
$
10.56

3rd
 
$
11.50

 
$
8.93

 
$
11.57

 
$
9.73

4th
 
$
11.50

 
$
9.04

 
$
12.34

 
$
7.87

As of the close of business on December 20, 2012, there were 86 stockholders of record for the Company's Common Stock. The Company believes that the actual number of stockholders of the Company's Common Stock exceeds 400. The Company did not repurchase any of the Company's equity securities during fiscal 2012.
Please see Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for securities authorized for issuance under equity compensation plans.



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Item 7.         Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except per share data)

General

Shiloh is a supplier of numerous parts to both automobile original equipment manufactures (“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 Company’s revenues are heavily dependent upon the North American production of automobiles and light trucks, particularly production of traditional domestic manufacturers, such as General Motors, Chrysler and Ford. According to industry statistics, traditional domestic manufacturer production for fiscal 2012 increased by 11.0% and total North American car and light truck production for fiscal 2012 increased by 19.3%, in each case compared with production for fiscal 2011. The continued viability of the traditional domestic manufacturers is critical to the profitability of the Company.

Another significant factor affecting the Company’s revenues is the Company’s ability to successfully bid on the production and supply of parts for models that will be newly introduced to the market by the OEMs. These new model 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 Company’s revenues for related parts at the beginning of the cycle.

Plant utilization levels are very important to profitability because of the capital-intensive nature of the Company’s operations. At October 31, 2012, the Company’s facilities were operating at approximately 56.0%, compared to 46.8% capacity at October 31, 2011. The Company defines capacity as 20 working hours per day and five days per week (i.e. 3-shift operation). 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 significant majority of the steel purchased by the Company’s stamping and engineered welded blank operations is purchased through customers’ steel programs. Under these programs, the customer negotiates the price for steel with the steel suppliers. The Company pays for the steel based on these negotiated prices and passes on those costs to the customer. Although the Company takes ownership of the steel, these customers are responsible for all steel price fluctuations under these programs. The Company also purchases steel directly from domestic primary steel producers and steel service centers. Domestic steel pricing has generally been rising on increased demand. 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 result 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.

Engineered scrap steel is a planned by-product of the Company’s processing operations and part of our quoted cost to each customer. Net 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 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.



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Company’s Response to Current Economic Conditions Affecting the Automotive Industry

The production of cars and light trucks for fiscal year 2012 in North America according to industry forecasts (published by IHS Automotive), was approximately 15,270,000 units, which reflects an improvement of 19.3% over fiscal year 2011’s vehicle production of approximately 12,800,000 units. The increased production units for fiscal year 2012 has surpassed the pre-crisis industry average production for the years 2005 to 2008 of 14,928,000 units. The improved vehicle production reflects an improvement in economic conditions and consumer demand. However, the automotive industry's recovery over the past several quarters remain susceptible to the impacts that consumer income and confidence levels, housing sales, gasoline prices, automobile discount and incentive offers, and perceptions about global economic stability have on consumer spending and could adversely impact consumer demand for vehicles.

The Company continues its approach of monitoring closely the customer release volumes as the overall outlook for the global economy has begun to soften amid concerns of continued high levels of unemployment and geopolitical unrest.

The Company continues to follow its previously implemented action plans to respond to changes in customer production volumes. These include:
 
Challenging customer releases. The Company’s production scheduling is based on releases that are received weekly for thirteen week periods. The releases drive manning levels and inventory purchases. The Company’s operations personnel review the releases each week to ensure that the releases are not overly optimistic, a problem that seems to impact Tier I customers and not OEM manufacturing plants.

Inventory orders. The Company’s operations personnel monitor daily the ordering and receipt of production material to ensure that inventory will be readily consumed in the manufacturing process and that cash outlays for purchases coincide with receipts for sale of parts to the Company’s customers.

Manning levels. The Company’s operations personnel also monitor daily the level of personnel required to fulfill the production schedule by operating the equipment that produces the parts (direct personnel) and to support the direct personnel efforts (indirect, technical, and administrative staff). Manning is reviewed daily to react as necessary.

Discretionary spending in support of operations. The Company’s operating personnel also monitor the spending required for repair and maintenance, purchases of supplies consumed in operating production equipment and indirect support of operations, such as material handling equipment and utilities.

These daily activities are factored into forecasts for each plant, and are consolidated to provide forecasts of operating results on a weekly and monthly basis, to reflect the latest developments in terms of customer intelligence and new awards of business. This process is intended to address the cash needs of the Company considering capital asset and tooling needs related to new business as well as ongoing cash requirements for operations, payroll, pension contributions, debt repayment requirements, contingencies and other matters.

All of the above actions are intended to ensure that controllable variable spending is in line with the forecast of sales as indicated by the customer releases against open purchase orders. Actions are also initiated to monitor selling, general and administrative costs as well.

The Company also assesses the level of working capital risk with each customer by monitoring accounts receivable and payable levels to ensure that net balances are either equal or in favor of the Company. The Company also reviews compliance of the Company’s customers with terms and conditions of their purchase orders and gathers market intelligence on the customers to consider in assessing any risk in the collection process.

With the conclusion of fiscal 2012, the Company continues to exercise caution as the next fiscal year has begun. The same disciplined approach that was followed in fiscal years 2012 and earlier remains in place. According to industry forecasts, car and light truck production is predicted to increase to approximately 15,520,000 units, which represents a 1.7% improvement over fiscal year 2012's production levels. The Company's approach to monitoring customer release volumes and the adjustment of the Company's cost structure, as described above, remains appropriate to aid the Company in controlling costs and maintaining or improving profitability. The Company therefore intends to adjust manning levels and discretionary spending in support of operations as necessary in relation to customer releases as the releases are updated. In addition, these steps demonstrate the Company’s intent to stay focused on efficient cost management, to generate cash with a focus on working capital management and capital investment efficiency and to maintain liquidity and covenant compliance with its amended and restated Credit and

11



Security Agreement dated April 19, 2011.

During the third quarter of fiscal 2012, the Company entered into negotiations to sell its Mansfield Blanking facility, which ceased operations in December 2011. As a result, the Company recorded an asset impairment charge of $1,552 to reduce the Mansfield real property to an estimated fair value of $1,400 based on an independent assessment that considered recent sales of similar properties and a submitted offer to acquire the real property. In addition, during the third quarter of fiscal 2012, the Company recorded an impairment charge of $392 to reduce the value of long lived assets to their estimated fair value. The fair value of machinery and equipment, as determined using level 3 inputs, was zero as the items were worn equipment for which the Company had no further use and limited value in the used equipment market. During the fourth quarter of fiscal 2012, the Company sold the real property and building for $1,400 in cash.

Impairment recoveries of $2,778 were recorded during fiscal 2012 for cash received upon sales of assets from the Company's Mansfield Blanking facility of $1,551, which was impaired in fiscal 2010, and from the Company's Liverpool Stamping Facility of $1,159, which was impaired in fiscal 2009, with the remaining $68 of recoveries coming from other assets impaired in prior periods. Impairment recoveries of $230 were recorded during fiscal 2011 for cash received upon sales of assets from the Company's Liverpool Stamping facility.

During the third quarter of fiscal 2011, the Company recorded a restructuring charge of $352 based on a negotiated settlement with approximately 90 employees for severance and health insurance related to the previously announced planned closure of the Company's plant in Mansfield, Ohio. During the third quarter of 2012, the Company reduced the restructuring charges by $30 as a result of certain employees not meeting the requirements for obtaining severance payments.

Due to uncertain market conditions for industrial real estate, during the fourth quarter of fiscal 2011, the Company recorded an asset impairment charge of $324 to reduce the carrying value of real property of the Company's VCS Properties facility to a fair value of $1,900 based primarily on an independent assessment that considered recent sales of similar properties, as well as an income approach.

12



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 consolidated financial 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 following items as critical accounting policies and estimates utilized by management in the preparation of the Company’s preceding 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 Company’s best estimates at the time they are recorded. Adjustments are charged or credited to income and the related balance sheet account when actual experience differs from the expected experience underlying the estimates. The Company makes frequent comparisons of actual experience and expected experience in order to mitigate the likelihood that material adjustments will be required.

Revenue Recognition. The Company recognizes revenue both for sales from toll processing and sales of products made with Company owned steel when there is evidence of a sales agreement, the delivery of goods has occurred, the sales price is fixed or determinable and collectability of revenue is reasonably assured. The Company records revenues upon shipment of product to customers and transfer of title under standard commercial terms. Price adjustments, including those arising from resolution of quality issues, price and quantity discrepancies, surcharges for fuel and/or steel and other commercial issues are recognized in the period when management believes that such amounts become probable, based on management’s estimates.

Allowance for Doubtful Accounts. The Company evaluates the collectability of accounts receivable based on several factors. In circumstances where the Company is aware of a specific customer’s 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, a general 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 Company’s 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.

The Company carefully assesses its risk with each of its customers and considers compliance with terms and conditions, aging of the customer accounts, intelligence learned through contact with customer representatives and its net account receivable / account payable position with customers, if applicable, in establishing the allowance.

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 of the inventory, net of estimated realizable value. 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 management’s expectations.

The Company continues to monitor purchases of inventory to insure that receipts coincide with shipments, thereby reducing the economic risk of holding excessive levels of inventory that could result in long holding periods or in unsalable inventory leading to losses in conversion.

Income Taxes. The Company utilizes the asset and liability method in accounting for income taxes. Income tax expense includes U.S. and international income taxes minus tax credits and other incentives that will reduce tax expense in the year they are claimed. Deferred taxes are recognized at currently enacted tax rates for temporary differences between the financial accounting and income tax basis of assets and liabilities and operating losses and tax credit carryforwards. Valuation allowances are recorded to reduce net deferred tax assets to the amount that is more likely than not to be realized. The Company assesses both positive and negative evidence when measuring the need for a valuation allowance. Evidence typically assessed includes the operating results for the most recent three-year period and, to a lesser extent because of inherent uncertainty, the expectations of future profitability, available tax planning strategies, the time period over which the temporary differences will reverse and taxable income in prior carryback years if carryback is permitted under the tax law. The calculation of the Company’s tax liabilities also involves dealing with uncertainties in the application of complex tax laws and regulations. The Company recognizes liabilities for uncertain income tax positions based on the Company’s estimate of whether, and the extent to which, additional taxes will be required. The Company

13



reports interest and penalties related to uncertain income tax positions as income taxes.

Impairment of Long-lived Assets. The Company has historically performed an annual impairment analysis of long-lived assets, which only includes property, plant and equipment since the Company has no intangible assets. However, when significant events, which meet the definition of a “triggering event” in the context of assessing asset impairments, occur within the industry or within the Company’s primary customer base, an interim impairment analysis is performed. The analysis consists of reviewing the next five years outlook for sales, profitability, and cash flow for each of the Company’s manufacturing plants and for the overall Company. The five-year outlook considers known sales opportunities for which purchase orders exist, potential sale opportunities that are under development, third party forecasts of North American car builds (published by IHS Automotive), and the potential sales that could result from new manufacturing process additions and lastly, strategic geographic localities that are important to servicing the automotive industry. All of this data is collected as part of our annual planning process and is updated with more current Company specific and industry data when an interim period impairment analysis is deemed necessary. In concluding the impairment analysis, the Company incorporates a sensitivity analysis by probability weighting the achievement of the forecasted cash flows by plant and achievements of cash flows that are 20% greater and less than the forecasted amounts.

The property, plant and equipment included in the analysis for each plant represents factory facilities devoted to the Company’s manufacturing processes and the related equipment within each plant needed to perform and support those processes. The property, plant and equipment of each plant form each plant’s asset group and typically certain key assets in the group form the primary processes at that plant that generate revenue and cash flow for that facility. Certain key assets have a life of ten to twelve years and the remainder of the assets in the asset group are shorter-lived assets that support the key processes. When the analysis indicates that estimated future undiscounted cash flows of a plant are less than the net carrying value of the long-lived assets of such plant, to the extent that the assets cannot be redeployed to another plant to generate positive cash flow, the Company will record an impairment charge, reducing the net carrying value of the fixed assets (exclusive of land and buildings, the fair value of which would be assessed through appraisals) to zero. Alternative courses of action to recover the carrying amount of the long-lived asset group are typically not considered due to the limited-use nature of the equipment and the full utilization of their useful life. Therefore, the equipment is of limited value in a used-equipment market. The depreciable lives of the Company’s fixed assets are generally consistent between years unless the assets are devoted to the manufacture of a customized automotive part and the equipment has limited reapplication opportunities. If the production of that part concludes earlier than expected, the asset life is shortened to fully amortize its remaining value over the shortened production period.

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 Company’s business. Based on the current facts, the Company recorded an impairment charge related to long-lived assets of $1,944 in the third quarter of fiscal 2012 and $324 in the fourth quarter of fiscal 2011. See Note 2 to the consolidated financial statements for a discussion of the impairment charges recorded in fiscal 2012 and fiscal 2011. The Company continues to assess impairment to long-lived assets based on expected orders from the Company’s customers and current business conditions.

The key assumptions related to the Company’s forecasted operating results could be adversely impacted by, among other things, decreases in estimated North American car builds during the forecast period, the inability of the Company or its major customers to maintain their respective forecasted market share positions, the inability of the Company to achieve the forecasted levels of operating margins on parts produced, and a deterioration in property values associated with manufacturing facilities.

Group Insurance and Workers’ Compensation Accruals. The Company is self-insured for group insurance and workers’ compensation claims and reviews these accruals on a monthly basis to adjust the balances as determined necessary. The Company reviews historical 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. The Company carries excess insurance coverage for group insurance and workers’ compensation claims exceeding a range of $160-170 and $100-500 per plan year, respectively, dependent upon the location where the claim is incurred. At October 31, 2012 and 2011, the amount accrued for group insurance and workers’ compensation claims was $2,597 and $2,233, respectively. The self-insurance reserves established are a result of safety statistics, changes in employment levels, number of open and active workers’ compensation cases, and group insurance plan design features. The Company does not self-insure for any other types of losses.

Share-Based Payments. The Company records compensation expense for the fair value of nonvested stock option awards over the remaining vesting period. The Company has elected to use the simplified method to calculate the expected term of the stock options outstanding at five to six years and has utilized historical weighted average volatility. The Company determines the

14



volatility and risk-free rate assumptions used in computing the fair value using the Black-Scholes option-pricing model, in consultation with an outside third party.

The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the expected life of the stock-based award and stock price volatility. The assumptions used are management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, the recorded stock-based compensation expense could have been materially different from that depicted in the financial statements. In addition, the Company has estimated a 20% forfeiture rate. If actual forfeitures materially differ from the estimate, the share-based compensation expense could be materially different.

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 Company’s 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. The Company uses the Principal Pension Discount Yield Curve ("Principal Curve") as the basis for determining the discount rate for reporting pension and retiree medical liabilities. The Principal Curve has several advantages to other methods, including: transparency of construction, lower statistical errors, and continuous forward rates for all years. At October 31, 2012, the resulting discount rate from the use of the Principal Curve was 3.75%, a decrease of 1.25% from a year earlier that resulted in an increase of the benefit obligation of approximately $13,728. A change of 25 basis points in the discount rate at October 31, 2012 would increase or decrease expense on an annual basis by approximately $4.

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 $124.

The Company’s investment policy for assets of the plans is to maintain an allocation generally of 0% to 70% in equity securities, 0% to 70% in debt securities, and 0% to 10% in real estate. Equity security investments are structured to achieve an equal balance between growth and value stocks. 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 Company’s investment advisors and actuaries review this computed rate of return. Industry comparables and other outside guidance are also considered in the annual selection of the expected rates of return on pension assets.

For the twelve months ended October 31, 2012, the actual return on pension plans’ assets for all of the Company’s plans approximated 10.41% to 10.46%, which is above the expected rate of return on plan assets of 7.50% used to derive pension expense. The long term expected rate of return takes into account years with exceptional gains and years with exceptional losses.

Actual results that differ from these estimates may result in more or less future Company funding into the pension plans than is planned by management. Based on current market investment performance, the Company anticipates that contributions to the Company’s defined benefit plans will decrease in fiscal 2013, and that pension expense will decrease in fiscal 2013.


15



Results of Operations
Year Ended October 31, 2012 Compared to Year Ended October 31, 2011

REVENUES. Sales for fiscal 2012 were $586,074, an increase of $68,331 over fiscal 2011 of $517,743, or 13.2%. Sales increased during fiscal 2012 as a result of increased production volumes of the North American car and light truck manufacturers, especially the traditional domestic manufacturers, the Company’s major customers. According to industry statistics, North American car and light truck production for fiscal 2012 increased 19.3% from production levels of fiscal 2011 led by a recovery by the traditional Japanese manufacturers, as they rebounded from the March 2011 earthquake and tsunami. For traditional domestic manufacturer, the production increase for fiscal 2011 was 11.0% compared with production levels in fiscal 2011. Sales were slightly impacted by a reduction in demand for the heavy truck industry that the Company also serves.

GROSS PROFIT. Gross profit for fiscal 2012 was $50,735 compared to gross profit of $38,936 in fiscal 2011, an increase of $11,799, or 30.3%. Gross profit as a percentage of sales was 8.7% for fiscal 2012 and 7.5% fiscal 2011. Gross profit in fiscal 2012 was favorably impacted by approximately $16,900 from the increased sales volume. Gross profit margin was unfavorably affected by a change in sales mix to increased sales with steel ownership and increasing material costs, net of revenue realized from the sales of engineered scrap during fiscal 2012 compared to fiscal 2011, resulting in a net material increase of approximately $6,300. In addition, manufacturing expenses were reduced by approximately $1,200 during fiscal 2012 compared to fiscal 2011. Personnel and personnel related expenses, increased by approximately $2,900 as the Company’s workforce was increased in anticipation of improved production volumes, planning for future launches, and planning for further increases in North American vehicle production volumes. Expenses for repairs and maintenance and manufacturing supplies increased by approximately $500. These increases were offset by a reduction in depreciation and utilities of approximately $4,600.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses of $27,519 for fiscal 2012 were $3,861 more than selling, general and administrative expenses of $23,658 for the prior year. As a percentage of sales, these expenses were 4.7% of sales for fiscal 2012 and 4.6% for fiscal 2011. The increase in selling, general and administrative expenses reflects higher personnel and personnel related expenses of approximately $2,800 as a result of an increase in the Company's workforce and an increase of approximately $1,050 in other administrative expenses.

ASSET IMPAIRMENT AND RESTRUCTURING CHARGES. During the third quarter of fiscal 2012, the Company entered into negotiations to sell its Mansfield Blanking facility, which ceased operations in December 2011. As a result, the Company recorded an asset impairment charge of $1,552 to reduce the Mansfield real property to an estimated fair value of $1,400 based on an independent assessment that considered recent sales of similar properties and a submitted offer to acquire the real property. In addition, during the third quarter of fiscal 2012, the Company recorded an impairment charge of $392 to reduce the value of long lived assets to their estimated fair value. The fair value of machinery and equipment, as determined using level 3 inputs, was zero as the items were worn equipment for which the Company had no further use and limited value in the used equipment market. During the fourth quarter of fiscal 2012, the Company sold the real property and building for $1,400 in cash.

Impairment recoveries of $2,778 were recorded during fiscal 2012 for cash received upon sales of assets from the Company's Mansfield Blanking facility of $1,551, which was impaired in fiscal 2010, and from the Company's Liverpool Stamping Facility of $1,159, which was impaired in fiscal 2009, with the remaining $68 of recoveries coming from other assets impaired in prior periods. Impairment recoveries of $230 were recorded during fiscal 2011 for cash received upon sales of assets from the Company's Liverpool Stamping facility.

During the third quarter of fiscal 2011, the Company recorded a restructuring charge of $352 based on a negotiated settlement with approximately 90 employees for severance and health insurance related to the previously announced planned closure of the Company's plant in Mansfield, Ohio. During the third quarter of 2012, the Company reduced the restructuring charges by $30 as a result of certain employees not meeting the requirements for obtaining severance payments.

Due to uncertain market conditions for industrial real estate, during the fourth quarter of fiscal 2011, the Company recorded an asset impairment charge of $324 to reduce the carrying value of real property of the Company's VCS Properties facility to a fair value of $1,900 based primarily on an independent assessment that considered recent sales of similar properties, as well as an income approach.

OTHER. Interest expense for fiscal 2012 was $1,525, compared to interest expense of $1,714 for fiscal 2011. Interest expense decreased from the prior year as a result of a reduced level of average borrowed funds and the impact of the amended and restated Credit and Security Agreement, which lowered the weighted average interest rate during fiscal 2012 compared to the prior year. Borrowed funds averaged $27,622 during fiscal 2012 and the weighted average interest rate was 2.82%. In fiscal 2011, borrowed funds averaged $28,552 while the weighted average interest rate was 3.03%.

16




Other expense, net was $48 for fiscal 2012 compared to a net expense of $40 for fiscal 2011. Other expense in both fiscal 2012 and 2011 is the result of currency transaction losses realized by the Company's Mexican subsidiary. 

The provision for income taxes in fiscal 2012 was an expense of $8,981 on income before taxes of $22,507 for an effective tax rate of 39.9%. In fiscal year 2011 the provision for income taxes was $5,236 on income before taxes of $13,081 for an effective tax rate of 40.0%. The effective tax rate for fiscal 2012 and 2011 included the losses of the Company's Mexican subsidiary, for which no tax benefit could be recorded. The effective tax rate for fiscal 2012 has decreased 0.1 percentage points compared to fiscal 2011 primarily from a decrease in Shiloh's uncertain tax positions with an offsetting increase in the valuation allowance for foreign tax credits utilized in the United States.

NET INCOME. The net income for fiscal 2012 was $13,526, or $0.80 per share, diluted compared to net income in fiscal year 2011 of $7,845 or $0.47 per share, diluted.

 

17




Liquidity and Capital Resources

On April 19, 2011, the Company entered into an amended and restated Credit and Security Agreement (the “Agreement”) with a syndicate of lenders led by The Privatebank and Trust Company, as co-lead arranger, sole book runner and administrative agent and PNC Capital Markets, LLC as co-lead arranger and PNC Bank, National Association, as syndication agent. The Agreement amends and restates in its entirety the Company’s Credit Agreement, dated as of August 1, 2008.

The Agreement has a five-year term and provides for an $80 million secured revolving line of credit which may be increased up to $120 million subject to the Company’s pro forma compliance with financial covenants, the administrative agent’s approval and the Company obtaining commitments for such increase. The Company is permitted to prepay the borrowings under the revolving credit facility without penalty.

Borrowings under the Agreement bear interest, at the Company’s option, at the LIBOR or the base (or “prime”) rate established from time to time by the administrative agent, in each case plus an applicable margin set forth in a matrix based on the Company’s leverage ratio. In addition to interest charges, the Company will pay in arrears a quarterly commitment fee ranging from 0.375% - 0.750% based on the Company’s daily revolving exposure. At October 31, 2012, the interest rate for the credit facility was 2.71% for Eurodollar rate loans and 4.25% for base rate loans.

The Agreement contains customary restrictive and financial covenants, including covenants regarding the Company’s outstanding indebtedness and maximum leverage and fixed charge coverage ratios. The Agreement specifies that the leverage ratio shall not exceed 2.25 to 1.00 to the conclusion of the Agreement. Also, the Agreement specifies that the fixed charge ratio shall not be less than 2.50 to 1.00 to the conclusion of the Agreement. The Company was in compliance with the financial covenants as October 31, 2012 and 2011.

The 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, defined as 51% of the aggregate commitment under the Agreement, the outstanding borrowings become due and payable at the option of the required lenders. The Company does not anticipate at this time any change in business conditions or operations that could be deemed a material adverse effect by the lenders.

Borrowings under the 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.
On January 31, 2012, the Company entered into a First Amendment Agreement (the “First Amendment”) to the Agreement. The First Amendment continues the Company's revolving line of credit up to $80 million through April 2016 with a modification to the calculation of the fixed charge coverage ratio to allow for payment of a special dividend declared on February 1, 2012 and other modifications to allow the Company to participate in certain customer-sponsored financing arrangements allowing for early, discounted payment of Company invoices.

After considering letters of credit of $1,748 that the Company has issued, available funds under the Credit Agreement were $57,102 at October 31, 2012.

In July 2012, the Company entered into a finance agreement with an insurance broker for various insurance policies that bears interest at a fixed rate of 2.53% and requires monthly payments of $75 through April 2013. As of October 31, 2012, $447 remained outstanding under this agreement and were classified as current debt in the Company’s consolidated balance sheets.

Scheduled repayments under the terms of the Credit Agreement plus repayments of other debt for the next five years are listed below:
Year
 
Amended Credit Agreement
 
Other Debt

 
Total
2013
 
$

 
$
447

 
$
447

2014
 

 

 

2015
 

 

 

2016
 
21,150

 

 
21,150

Total
 
$
21,150

 
$
447

 
$
21,597



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At October 31, 2012, total debt was $21,597 and total equity was $107,403, resulting in a capitalization rate of 16.7% debt, 83.3% equity. Current assets were $127,839 and current liabilities were $85,475 resulting in positive working capital of $42,364.

For fiscal year ended October 31, 2012, operations generated $34,367 of cash flow compared to $33,519 in fiscal year 2011, before changes in working capital.

Working capital changes since October 31, 2011 were a use of funds of $13,686. During fiscal 2012, accounts receivable have increased by $1,026 in connection with the increased sales volume experienced in fiscal 2012. Inventory increased by $10,711 since the end of fiscal 2011. Considering the increase in overdraft balances of $4,843, accounts payable, net have increased $6,419.

The increase in production inventory of approximately $3,834 is the result of increased sales volume along with increased sales with steel ownership.

The increase in tooling inventories of approximately $6,877 is for customer reimbursed tooling related to new program awards that go into production throughout fiscal 2013.

Proceeds from the sale of assets during fiscal 2012 were $4,370 resulting from the sale of the Mansfield Blanking real property and building and the sale of previously impaired machinery and equipment assets primarily from the Company's Mansfield Blanking and Liverpool Stamping facilities.

In the second quarter of fiscal 2012, the Board of Directors of the Company declared a special dividend of $0.50 per share that was paid on February 21, 2012 resulting a use of cash of $8,422.

Cash capital expenditures in fiscal 2012 were $17,095. The Company had unpaid capital expenditures of approximately $802 at the end of fiscal 2012 and such amounts are included in accounts payable and excluded from capital expenditures in the accompanying consolidated statement of cash flows.

The Company continues to closely monitor business conditions that are currently affecting the automotive industry and therefore, to closely monitor the Company's working capital position to insure adequate funds for operations. The Company anticipates that funds from operations will be adequate to meet the obligations of the amended and restated Credit and Security Agreement through maturity of the agreement in April 2016, as well as pension contributions of $5,321 during fiscal 2013, capital expenditures for fiscal 2013 and repayment of the other debt of $447.

As of October 31, 2012, the Company has $1,860 of commitments for capital expenditures and $6,120 of commitments under non-cancelable operating leases. These capital expenditures in 2013 are for the support of current and new business, expected increases in existing business and enhancements of production processes.



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Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.
New Accounting Standards
The new accounting standard, "Comprehensive Income", becomes effective for fiscal years beginning after December 15, 2011 which for the Company would be the first quarter ending January 31, 2013. This standard requires that other comprehensive income be presented as either a separate statement, or as an addition to the statement of income and prohibits the presentation of other comprehensive income in the statement of shareholders' equity. As the Company has historically presented other comprehensive income as part of the statement of shareholders' equity, the Company will have to retroactively restate its financial statements for this change upon adoption of this accounting standard.
In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements with GAAP and International Financial Reporting Standards ("IFRS"). This guidance amends certain accounting and disclosure requirements related to fair value measurements to ensure that fair value has the same meaning in GAAP and IFRS and that their respective fair value measurement and disclosure requirements are the same. This amendment is effective for a reporting entity's interim and annual periods beginning after December 15, 2011. We adopted the guidance of the fair value accounting standard as required by this amendment, and it did not have a material impact on our disclosures, financial position or results of operations for the year ended October 31, 2012.

Effect of Inflation, Deflation
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 level of inflation has not had a material effect on the Company's financial results for the past three years.
In periods of decreasing prices, deflation occurs and may also affect the Company's results of operations. With respect to steel purchases, the Company's purchases of steel through customers' resale steel programs protects recovery of the cost of steel through the selling price of the Company's products. For non-resale steel purchases, the Company coordinates the cost of steel purchases with the related selling price of the product.


FORWARD-LOOKING STATEMENTS
Certain statements made by the Company in this Annual Report on Form 10-K regarding earnings or general belief in the Company’s expectations of future operating results are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, forward-looking statements are statements that relate to the Company’s operating performance, events or developments that the Company believes or expects to occur in the future, including those that discuss strategies, goals, outlook, or other non-historical matters, or that relate to future sales, earnings expectations, cost savings, awarded sales, volume growth, earnings or general belief in the Company’s expectations of future operating results. The forward-looking statements are made on the basis of management’s assumptions and expectations. As a result, there can be no guarantee or assurance that these assumptions and expectations will in fact occur. The forward-looking statements are subject to risks and uncertainties that may cause actual results to materially differ from those contained in the statements. 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 Company’s 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 and utility costs; work stoppages and strikes at the Company’s facilities and those of the Company’s customers; the Company’s dependence on the automotive and heavy truck industries, which are highly cyclical; the dependence of the automotive industry on consumer spending, which is subject to the impact of domestic and international economic conditions, including increased energy costs affecting car and light truck production, and regulations and policies regarding international trade; financial and business downturns of the Company’s customers or vendors, including any production cutbacks or bankruptcies; increases in the price of, or limitations on the availability of, steel, the Company’s 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 the amended and restated Credit Agreement; pension plan funding requirements; and other factors, uncertainties, challenges and risks detailed in the Company’s 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 management’s analysis only as of the date of the filing of this Annual Report on Form 10-K. The Company undertakes no

20



obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. In addition to the disclosures contained herein, readers should carefully review risks and uncertainties contained in other documents the Company files from time to time with the Securities and Exchange Commission.


21



Item 8.
Financial Statements and Supplementary Data



INDEX TO FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 
 
Page
 
 
 
 
 
        The following Financial Statement Schedule for the two years ended October 31, 2012 is included in
Item 15 of this Annual Report on Form 10-K:
 
 
 
 
 
 
 
 
 
 
     All other schedules are omitted because they are not applicable or the required information is shown in the
financial statements or notes thereto.
 
 
 
 
 


22



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Shareholders
Shiloh Industries, Inc.
We have audited the accompanying consolidated balance sheets of Shiloh Industries, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of October 31, 2012 and 2011, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years then ended. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15 (a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Shiloh Industries, Inc. and subsidiaries as of October 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ GRANT THORNTON LLP
Cleveland, Ohio
December 21, 2012



23



SHILOH INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)


 
 
October 31,
 
 
2012
 
2011
ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
174

 
$
20

Accounts receivable, net
 
77,556

 
76,632

Related-party accounts receivable
 
536

 
434

Income tax receivable
 
1,201

 
1,688

Inventories, net
 
44,687

 
33,976

Deferred income taxes
 
2,153

 
2,228

Prepaid expenses
 
1,532

 
1,725

Total current assets
 
127,839

 
116,703

Property, plant and equipment, net
 
117,101

 
121,467

Deferred income taxes
 
3,294

 
918

Other assets
 
868

 
1,586

Total assets
 
$
249,102

 
$
240,674

LIABILITIES AND STOCKHOLDERS’ EQUITY:
 
 
 
 
Current debt
 
$
447

 
$
428

Accounts payable
 
63,633

 
57,214

Other accrued expenses
 
21,395

 
23,733

Total current liabilities
 
85,475

 
81,375

Long-term debt
 
21,150

 
25,700

Long-term benefit liabilities
 
32,819

 
24,019

Other liabilities
 
2,255

 
1,928

Total liabilities
 
141,699

 
133,022

Commitments and contingencies
 

 

Stockholders’ equity:
 

 

Preferred stock, $.01 per share; 5,000,000 shares authorized; no shares issued and outstanding at October 31, 2012 and October 31, 2011, respectively
 

 

Common stock, par value $.01 per share; 25,000,000 shares authorized; 16,902,755 and 16,762,428 shares issued and outstanding at October 31, 2012 and October 31, 2011, respectively
 
169

 
168

Paid-in capital
 
65,120

 
63,950

Retained earnings
 
73,425

 
68,321

Accumulated other comprehensive loss: Pension related liability, net
 
(31,311
)
 
(24,787
)
Total stockholders’ equity
 
107,403

 
107,652

Total liabilities and stockholders’ equity
 
$
249,102

 
$
240,674








The accompanying notes are an integral part of these consolidated financial statements.

24



SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)

 
 
 
Years Ended
 
 
October 31,
 
 
2012
 
2011
Revenues
 
$
586,074

 
$
517,743

Cost of sales
 
535,339

 
478,807

Gross profit
 
50,735

 
38,936

Selling, general and administrative expenses
 
27,519

 
23,658

Asset impairment (recovery), net
 
(834
)
 
94

Restructuring charges (recovery)
 
(30
)
 
352

Operating income
 
24,080

 
14,832

Interest expense
 
1,525

 
1,714

Interest income
 

 
3

Other (expense), net
 
(48
)
 
(40
)
Income before income taxes
 
22,507

 
13,081

Provision for income taxes
 
8,981

 
5,236

Net income
 
$
13,526

 
$
7,845

Earnings per share:
 
 
 
 
Basic earnings per share
 
$
0.80

 
$
0.47

Basic weighted average number of common shares
 
16,813

 
16,716

Diluted earnings per share
 
$
0.80

 
$
0.47

Diluted weighted average number of common shares
 
16,904

 
16,859




























The accompanying notes are an integral part of these consolidated financial statements.

25



SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)

 
 
 
Years Ended
October 31,
 
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
13,526

 
$
7,845

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
18,793

 
22,367

Amortization of deferred financing costs
 
325

 
513

Asset impairment (recovery)
 
(834
)
 
94

              Recovery of restructuring charge
 
(30
)
 

Deferred income taxes
 
1,898

 
1,920

Stock-based compensation expense
 
754

 
799

Gain on sale of assets
 
(65
)
 
(19
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(1,026
)
 
(4,006
)
Inventories
 
(10,711
)
 
(13,057
)
Prepaids and other assets
 
676

 
399

Payables and other liabilities
 
(3,116
)
 
3,698

Accrued income taxes
 
491

 
(262
)
Net cash provided by operating activities
 
20,681

 
20,291

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Capital expenditures
 
(17,095
)
 
(18,452
)
Proceeds from sale of assets
 
4,370

 
248

Net cash used in investing activities
 
(12,725
)
 
(18,204
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Payment of dividends
 
(8,422
)
 
(2,004
)
Decrease in overdraft balances
 
4,843

 
1,436

Proceeds from long-term borrowings
 
24,700

 
28,750

Repayments of long-term borrowings
 
(29,250
)
 
(29,950
)
Payment of deferred financing costs
 
(90
)
 
(906
)
Proceeds from exercise of stock options
 
417

 
573

Net cash used in financing activities
 
(7,802
)
 
(2,101
)
Net increase (decrease) in cash and cash equivalents
 
154

 
(14
)
Cash and cash equivalents at beginning of period
 
20

 
34

Cash and cash equivalents at end of period
 
$
174

 
$
20

Supplemental Cash Flow Information:
 
 
 
 
Cash paid for interest
 
$
1,237

 
$
1,316

Cash paid for income taxes
 
$
6,306

 
$
3,202







The accompanying notes are an integral part of these consolidated financial statements.

26



SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)

 
Common Stock ($.01 Par Value)
 
Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Stockholders' Equity
November 1, 2010
$
166

 
$
62,317

 
$
62,480

 
$
(22,784
)
 
$
102,179

Net income

 

 
7,845

 

 
7,845

Pension liability, net of tax benefit of $1,003

 

 

 
(2,003
)
 
(2,003
)
     Comprehensive income

 

 

 

 
5,842

Payment of dividends

 

 
(2,004
)
 

 
(2,004
)
Exercise of stock options
2

 
571

 

 

 
573

Stock-based compensation cost

 
799

 

 

 
799

Tax benefit on stock options

 
263

 

 

 
263

October 31, 2011
$
168

 
$
63,950

 
$
68,321

 
$
(24,787
)
 
$
107,652

Net income

 

 
13,526

 

 
13,526

Pension liability, net of tax effect of $4,199

 

 

 
(6,524
)
 
(6,524
)
     Comprehensive income

 

 

 

 
7,002

Payment of dividends

 

 
(8,422
)
 

 
(8,422
)
Exercise of stock options
1

 
416

 

 

 
417

Stock-based compensation cost

 
754

 

 

 
754

Tax benefit on stock options

 

 

 

 

October 31, 2012
$
169

 
$
65,120

 
$
73,425

 
$
(31,311
)
 
$
107,403

 
 
 
 
 
 
 
 
 
 

























The accompanying notes are an integral part of these consolidated financial statements.

27

SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)




Note 1—Summary of Significant Accounting Policies
General
Shiloh Industries, Inc. and its subsidiaries (“the Company”) is a full service manufacturer of first operation blanks, engineered welded blanks, complex stampings and modular assemblies for the automotive, heavy truck and other industrial markets. In addition, the Company is a designer and engineer of precision tools and dies and welding and assembly equipment for use in its blanking and stamping operations and for sale to original equipment manufacturers (“OEMs”), Tier I automotive suppliers and other industrial customers. The Company's blanks, which are engineered two dimensional shapes cut from flat-rolled steel, are principally sold to automotive and truck OEMs and are used for structural and exterior steel components, such as support brackets, frame sides, fenders, hoods and doors. These blanks include first operation exposed and unexposed blanks and more advanced engineered welded blanks. Engineered welded blanks generally consist of two or more sheets of steel of the same or different material grade, thickness, or coating that are welded together utilizing both mash seam resistance and laser welding. The Company's stampings are principally used as components in mufflers, seat frames, structural rails, window lifts, heat shields, vehicle brakes and other structural body components.
The Company also builds modular assemblies, which include components used in the structural and powertrain systems of a vehicle. Structural systems include bumper beams, door impact beams, steering column supports, chassis components and structural underbody modules. Powertrain systems consist of deep draw components, such as oil pans, transmission pans and valve covers. Additionally, the Company provides a variety of intermediate steel processing services, such as oiling, leveling, cutting-to-length, multi-blanking, slitting, edge trimming of hot and cold-rolled steel coils and inventory control services for automotive and steel industry customers. The Company has fourteen wholly-owned subsidiaries at locations in Georgia, Kentucky, Michigan, Ohio, Tennessee and Mexico.
MTD Holdings Inc (the parent of MTD Products Inc) and the MTD Products Inc Master Employee Benefit Trust, a trust fund established and sponsored by MTD Products are owners of approximately 50% of the Company's outstanding shares of Common Stock, making MTD a related party of the Company.
Principles of Consolidation
The consolidated financial statements include the accounts of Shiloh Industries, Inc. and all wholly-owned subsidiaries. All significant intercompany transactions have been eliminated.
Revenue Recognition
The Company recognizes revenue both for sales from toll processing and sales of products made with Company owned steel when there is evidence of a sales agreement, the delivery of goods has occurred, the sales price is fixed or determinable and collectability of revenue is reasonably assured. The Company records revenues upon shipment of product to customers and transfer of title under standard commercial terms. Price adjustments including those arising from resolution of quality issues, price and quantity discrepancies, surcharges for fuel and/or steel and other commercial issues are recognized in the period when management believes that such amounts become probable, based on management's estimates.
Shipping and Handling Costs
The Company classifies all amounts billed to a customer in a sales transaction related to shipping and handling as revenue and the costs incurred by the Company for shipping and handling are classified as costs of sales.
 

Inventories
Inventories are valued at the lower of cost or market, using the first-in first-out (“FIFO”) method.






28


SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for maintenance, repairs and renewals are charged to expense as incurred, while major improvements are capitalized. The cost of these improvements is depreciated over their estimated useful lives. Useful lives range from three to twelve years for furniture and fixtures and machinery and equipment, or if the assets are dedicated to a customer program, over the estimated life of that program, ten to twenty years for land improvements and twenty to forty years for buildings and their related improvements. Depreciation is computed using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. When assets are retired or otherwise disposed, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is included in the earnings for the current period.
Employee Benefit Plans
The Company accrues the cost of defined benefit pension plans, in accordance with Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 715 “Compensation - Retirement Benefits.” The plans are funded based on the requirements and limitations of the Employee Retirement Income Security Act of 1974. The majority of employees of the Company also participate in discretionary profit sharing plans administered by the Company. The Company also provides postretirement benefits to approximately 24 former employees.
Stock-Based Compensation
The Company records compensation cost for share-based awards based upon fair value. The Company has elected to use the simplified method of calculating the expected term of the stock options and historical volatility to compute fair value under the Black-Scholes option-pricing model. The risk-free rate for periods within the contractual life of the option is based on the U.S. zero coupon Treasury yield in effect at the time of grant. Forfeitures have been estimated based upon the Company's historical experience.
 
Income Taxes
 
The Company utilizes the asset and liability method in accounting for income taxes. Income tax expense includes U.S. and international income taxes minus tax credits and other incentives that will reduce tax expense in the year they are claimed. Deferred taxes are recognized at currently enacted tax rates for temporary differences between the financial accounting and income tax basis of assets and liabilities and operating losses and tax credit carryforwards. Valuation allowances are recorded to reduce net deferred tax assets to the amount that is more likely than not to be realized. The Company assesses both positive and negative evidence when measuring the need for a valuation allowance. Evidence typically assessed includes the operating results for the most recent three-year period and, to a lesser extent because of inherent uncertainty, the expectations of future profitability, available tax planning strategies, the time period over which the temporary differences will reverse and taxable income in prior carryback years if carryback is permitted under the tax law. The calculation of the Company's tax liabilities also involves dealing with uncertainties in the application of complex tax laws and regulations. The Company recognizes liabilities for uncertain income tax positions based on the Company's estimate of whether, and the extent to which, additional taxes will be required. The Company reports interest and penalties related to uncertain income tax positions as income taxes.
Impairment
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 cause an impairment include significant underperformance relative to the historical or projected future operating results, significant changes in the manner of the use of the 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 of long-lived assets may not be recoverable or the useful life has changed.
Comprehensive Income
Comprehensive income is defined as net income (loss) and changes in stockholders' equity from non-owner sources which, for the Company in the periods presented, consists of pension related liability adjustments.



29


SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


Statement of Cash Flows Information
Cash and cash equivalents include checking accounts and all highly liquid investments with an original maturity of three months or less.
Concentration of Risk
The Company sells products to customers primarily in the automotive and heavy truck industries. Financial instruments, which potentially subject the Company to concentration of credit risk, are primarily accounts receivable. The Company performs on-going credit evaluations of its customers' financial condition. The allowance for non-collection of accounts receivable is based on the expected collectability of all accounts receivable. Losses have historically been within management's expectations. The Company does not have financial instruments with off-balance sheet risk. Refer to Note 14-Business Segment Information for discussion of concentration of revenues.
As of October 31, 2012, the Company had approximately 1,430 employees. A total of approximately 40 employees at one of the Company's subsidiaries are covered by a collective bargaining agreement that is due to expire in November 2017.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade receivables and payables approximate fair value because of the short maturity of those instruments. The carrying value of the Company's debt is considered to approximate the fair value of these instruments based on the borrowing rates currently available to the Company for loans with similar terms and maturities.
Derivative Financial Instruments
The Company does not engage in derivatives trading, market-making or other speculative activities. The intent of any contracts entered by the Company is to reduce exposure to currency movements affecting foreign currency purchase commitments. The Company's risks related to 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. These contracts are marked-to-market and the resulting gain or loss is recorded in the consolidated statements of income. As of October 31, 2012 and 2011, there were no foreign currency forward exchange contracts outstanding.

Guarantees
The Company has certain indemnification clauses within its credit facility and certain lease agreements that are considered to be guarantees within the scope of FASB ASC Topic 460, “Guarantees”. The Company does not consider these guarantees to be probable and the Company cannot estimate the maximum exposure. Additionally, the Company's exposure to warranty-related obligations is not material.
Accounting Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management reviews its estimates based upon current available information. Actual results could differ from those estimates.

Prior Year Reclassification
Certain prior year amounts have been reclassified to conform with current year presentation.
Other New Accounting Standards
The new accounting standard, "Comprehensive Income", becomes effective for fiscal years beginning after December 15, 2011 which for the Company would be the first quarter ending January 31, 2013. This standard requires that other comprehensive income be presented as either a separate statement, or as an addition to the statement of income and prohibits the presentation of other comprehensive income in the statement of shareholders' equity. As the Company has historically presented other comprehensive income as part of the statement of shareholders' equity, the Company will have to retroactively restate its financial

30


SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

statements for this change upon adoption of this accounting standard.

In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements with GAAP and International Financial Reporting Standards ("IFRS"). This guidance amends certain accounting and disclosure requirements related to fair value measurements to ensure that fair value has the same meaning in GAAP and IFRS and that their respective fair value measurement and disclosure requirements are the same. This amendment is effective for a reporting entity's interim and annual periods beginning after December 15, 2011. We adopted the guidance of the fair value accounting standard as required by this amendment, and it did not have a material impact on our disclosures, financial position or results of operations for the year ended October 31, 2012.

Note 2—Asset Impairment and Restructuring Charges

During the third quarter of fiscal 2012, the Company entered into negotiations to sell its Mansfield Blanking facility, which ceased operations in December 2011. As a result, the Company recorded an asset impairment charge of $1,552 to reduce the Mansfield real property to an estimated fair value of $1,400 based on an independent assessment that considered recent sales of similar properties and a submitted offer to acquire the real property. In addition, during the third quarter of fiscal 2012, the Company recorded an impairment charge of $392 to reduce the value of long lived assets to their estimated fair value. The fair value of machinery and equipment, as determined using level 3 inputs, was zero as the items were worn equipment for which the Company had no further use and limited value in the used equipment market. During the fourth quarter of fiscal 2012, the Company sold the real property and building for $1,400 in cash.

Impairment recoveries of $2,778 were recorded during fiscal 2012 for cash received upon sales of assets from the Company's Mansfield Blanking facility of $1,551, which was impaired in fiscal 2010, and from the Company's Liverpool Stamping Facility of $1,159, which was impaired in fiscal 2009, with the remaining $68 of recoveries coming from other assets impaired in prior periods. Impairment recoveries of $230 were recorded during fiscal 2011 for cash received upon sales of assets from the Company's Liverpool Stamping facility.

During the third quarter of fiscal 2011, the Company recorded a restructuring charge of $352 based on a negotiated settlement with approximately 90 employees for severance and health insurance related to the previously announced planned closure of the Company's plant in Mansfield, Ohio. During the third quarter of 2012, the Company reduced the restructuring charges by $30 as a result of certain employees not meeting the requirements for obtaining severance payments.

Due to uncertain market conditions for industrial real estate, during the fourth quarter of fiscal 2011, the Company recorded an asset impairment charge of $324 to reduce the carrying value of real property of the Company's VCS Properties facility to a fair value of $1,900 based primarily on an independent assessment that considered recent sales of similar properties, as well as an income approach.

A summary of the charges included in the accompanying consolidated statements of income for fiscal 2012 and 2011, is below.
 
 
 
 
 
 
2012
 
2011
Asset impairment, net
$
(834
)
 
$
94

 
 
 
 
 
 

 
 

Restructuring charges (recovery)
$(30)
 
$352
 
An analysis of restructuring charges and related reserves of the Company for fiscal 2012 is as follows:

 
 
Restructuring Reserves at October 31, 2011
 
Reversal of Restructuring Charges
 
Cash Payments
 
Restructuring Reserves at October 31, 2012
Restructuring - Severance and benefits
 
$
279

 
$
(30
)
 
$
(249
)
 
$


31


SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)





Note 3—Accounts Receivable

Accounts receivable are expected to be collected within one year and are net of an allowance for doubtful accounts in the amount of $482 and $568 at October 31, 2012 and 2011, respectively. The Company recognized net bad debt expense (credit) of $(164) and $425 during fiscal 2012 and 2011, respectively, in the consolidated statements of operations.
The Company continually monitors its exposure with its customers and additional consideration is given to individual accounts in light of the market conditions in the automotive industry.


Note 4—Inventories
Inventories consist of the following:
 
October 31,
 
2012
 
2011
Raw materials
$
17,705

 
$
14,433

Work-in-process
6,236

 
5,612

Finished goods
8,513

 
8,575

Total material
32,454

 
28,620

Tooling
12,233

 
5,356

Total inventories
$
44,687

 
$
33,976


Total cost of inventory is net of reserves to reduce certain inventory from cost to net realizable value. Such reserves aggregated $55 and $566 at October 31, 2012 and 2011, respectively.

The increase in production inventory of approximately $3,834 is the result of increased sales volume along with increased sales with steel ownership.

The increase in tooling inventories of approximately $6,877 is for customer reimbursed tooling related to new program awards that go into production throughout fiscal 2013.


Note 5-Other Assets
 
 
 
 
October 31, 
 
 
 
 
 
2012
 
2011
Other assets consist of the following:
 
 
 
 
 
Deferred financing costs, net
 
$
685

 
$
920

 
Other
 
183

 
666

 
 
 
 
 
 
 
 
 
Total
 
$
868

 
$
1,586

 
 
 
 
 
 
 

Deferred financing costs are amortized over the term of the debt. During fiscal 2012 and 2011, amortization of these costs amounted to $325 and $513, respectively. Accumulated amortization was $2,142 and $1,847 as of October 31, 2012 and 2011, respectively. In January 2012, the Company completed the amended and restated Credit and Security Agreement and capitalized $90 of new costs.








32


SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)





Note 6—Property, Plant and Equipment
Property, plant and equipment consist of the following:
 
October 31,
2012
 
October 31,
2011
Land and improvements
$
8,408

 
$
9,671

Buildings and improvements
99,855

 
109,293

Machinery and equipment
341,568

 
342,557

Furniture and fixtures
11,372

 
11,450

Construction in progress
13,636

 
8,744

Total, at cost
474,839

 
481,715

Less: Accumulated depreciation
357,738

 
360,248

Property, plant and equipment, net
117,101

 
121,467

Depreciation expense was $18,793 and $22,367 in fiscal 2012 and 2011, respectively.
During the years ended October 31, 2012 and 2011, interest capitalized as part of property, plant and equipment was $34 and $204, respectively. The Company had unpaid capital expenditures of approximately $802 and $614 at October 31, 2012 and 2011, respectively, and such amounts are included in accounts payable at those dates and excluded from capital expenditures in the accompanying consolidated statements of cash flows for the fiscal years 2012 and 2011. The Company has commitments for capital expenditures of $1,860 at October 31, 2012 that will be incurred in 2013.

Note 7—Financing Arrangements
Debt consists of the following:
 
October 31, 2012
 
October 31, 2011
Credit Agreement —interest at 2.87% and 2.79% at October 31, 2012 and October 31, 2011, respectively
$
21,150

 
$
25,700

Insurance broker financing agreement
447

 
428

Total debt
21,597

 
26,128

Less: Current debt
447

 
428

Total long-term debt
$
21,150

 
$
25,700


The weighted average interest rate of all debt was 2.82% and 3.03% for fiscal years 2012 and 2011, respectively.
On April 19, 2011, the Company entered into an amended and restated Credit and Security Agreement (the “Agreement”) with a syndicate of lenders led by The Privatebank and Trust Company, as co-lead arranger, sole book runner and administrative agent and PNC Capital Markets, LLC as co-lead arranger and PNC Bank, National Association, as syndication agent. The Agreement amends and restates in its entirety the Company’s Credit Agreement, dated as of August 1, 2008.
The Agreement has a five-year term and provides for an $80 million secured revolving line of credit (which may be increased up to $120 million subject to the Company’s pro forma compliance with financial covenants, the administrative agent’s approval and the Company obtaining commitments for such increase). The Company is permitted to prepay the borrowings under the revolving credit facility without penalty.Borrowings under the Agreement bear interest, at the Company’s option, at the London Interbank Offered Rate (“LIBOR”) or the base (or “prime”) rate established from time to time by the administrative agent, in each case plus an applicable margin set forth in a matrix based on the Company’s leverage ratio. In addition to interest charges, the Company will pay in arrears a quarterly commitment fee ranging from 0.375% - 0.750% based on the Company’s daily revolving exposure. At October 31, 2012 and 2011, the interest rate for the credit facility was 2.71% and 2.75%, respectively for Eurodollar rate loans and 4.25% for base rate loans.

33


SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

The Agreement contains customary restrictive and financial covenants, including covenants regarding the Company’s outstanding indebtedness and maximum leverage and fixed charge coverage ratios. The Agreement specifies that the leverage ratio shall not exceed 2.25 to 1.00 to the conclusion of the Agreement. Also, the Agreement specifies that the fixed charge ratio shall not be less than 2.50 to 1.00 to the conclusion of the Agreement. The Company was in compliance with the financial covenants as of October 31, 2012 and 2011.
The 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, defined as 51% of the aggregate commitment under the Agreement, the outstanding borrowings become due and payable at the option of the required lenders. The Company does not anticipate at this time any change in business conditions or operations that could be deemed a material adverse effect by the lenders.
On January 31, 2012, the Company entered into a First Amendment Agreement (the “First Amendment”) to the Agreement. The First Amendment continues the Company's revolving line of credit up to $80 million through April 2016 with a modification to the calculation of the fixed charge coverage ratio to allow for payment of a special dividend declared on February 1, 2012 and other modifications to allow the Company to participate in certain customer-sponsored financing arrangements allowing for early, discounted payment of Company invoices.
After considering letters of credit of $1,748 that the Company has issued, available funds under the Credit Agreement were $57,102 at October 31, 2012.
Borrowings under the 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.
In July 2012, the Company entered into a finance agreement with an insurance broker for various insurance policies that bears interest at a fixed rate of 2.53% and requires monthly payments of $75 through April 2013. As of October 31, 2012, $447 remained outstanding under this agreement and was classified as current debt in the Company’s condensed consolidated balance sheets.
Scheduled repayments under the terms of the Amended Credit Agreement plus repayments of other debt for the next five years are listed below:
     
 
 
Amended
 
 
 
 
Year
 
Credit Agreement
 
Other Debt
 
Total
2013
 
$

 
$
447

 
$
447

2014
 

 

 

2015
 

 

 

2016
 
21,150

 

 
21,150

Total
 
$
21,150

 
$
447

 
$
21,597

 
 
 
 
 
 
 

34


SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Note 8-Operating Leases
The Company leases material handling, manufacturing and office equipment under operating leases with terms that range from three to ten years at inception. The leases do not include step rent provisions, escalation clauses, capital improvement funding or other lease concessions that qualify the leases as a contingent rental. Also, the leases do not include a variable related to a published index. The Company's operating leases are charged to expense over the lease term, on a straight-line basis.
The longest lease term of the Company's current leases extends to June, 2017. Rent expense under operating leases for fiscal years 2012 and 2011 was $2,634 and $2,382, respectively. Future minimum lease payments under operating leases are as follows at October 31, 2012:
 
 
 
2013
$2,624
2014
561
2015
183
2016
91
2017
27


Note 9-Employee Benefit Plans
The Company maintains pension plans covering its employees. The Company also provides an unfunded postretirement health care benefit plan for approximately 24 retirees and their dependents. The measurement date for the Company's employee benefit plans coincides with its fiscal year end, October 31.

Obligations and Funded Status
At October 31
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Post Retirement Benefits
 
2012
 
2011
 
2012
 
2011
Change in benefit obligation:
 
 
 
 
 
 
 
Benefit obligation at beginning of year
$
(75,292
)
 
$
(70,912
)
 
$
(935
)
 
$
(590
)
Service cost

 
(140
)
 

 
(7
)
Interest cost
(3,683
)
 
(3,821
)
 
(45
)
 
(30
)
Amendments and settlements

 

 

 
98

Actuarial gain (loss)
(13,186
)
 
(3,913
)
 
18

 
(445
)
Benefits paid
3,496

 
3,494

 
22

 
39

 
 
 
 
 
 
 
 
Benefit obligation at end of year
(88,665
)
 
(75,292
)
 
(940
)
 
(935
)
Change in plan assets:
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
46,218

 
42,488

 

 

Actual return on plan assets
4,601

 
2,769

 

 

Employer contributions
5,907

 
4,455

 
22

 
39

Benefits paid
(3,496
)
 
(3,494
)
 
(22
)
 
(39
)
 
 
 
 
 
 
 
 
Fair value of plan assets at end of year
53,230

 
46,218

 

 

 
 
 
 
 
 
 
 
Funded status, benefit obligations in excess of plan assets
$
(35,435
)
 
$
(29,074
)
 
$
(940
)
 
$
(935
)
 
 
 
 
 
 
 
 





35


SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

The above amounts are recorded in the liabilities section of the consolidated balance sheets as follows:
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Post Retirement Benefits
 
2012
 
2011
 
2012
 
2011
Other accrued expenses
$
(3,480
)
 
$
(5,910
)
 
$
(92
)
 
$
(82
)
Long-term benefit liabilities
(31,955
)
 
(23,164
)
 
(848
)
 
(853
)
 
 
 
 
 
 
 
 
Total
$
(35,435
)
 
$
(29,074
)
 
$
(940
)
 
$
(935
)
 
 
 
 
 
 
 
 
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Post Retirement Benefits
 
 
2012
 
2011
 
2012
 
2011
Service cost
 
$

 
$
140

 
$

 
$
7

Interest cost
 
3,683

 
3,821

 
45

 
30

Expected return on plan assets
 
(3,251
)
 
(2,821
)
 

 

Amortization of net actuarial loss
 
1,040

 
1,245

 
54

 
61

Net periodic benefit cost
 
$
1,472

 
$
2,385

 
$
99

 
$
98

The Company expects to recognize in the consolidated statement of operations the following amounts that will be amortized from accumulated other comprehensive income in fiscal 2013.
 
 
 
 
 
Pension Benefits
 
Other
Post Retirement
Benefits 
 
Amortization of net actuarial loss
$1,392
 
$48
 
 
 
 
The Company has recognized the following cumulative pre-tax actuarial losses, prior service costs and transition obligations in accumulated other comprehensive income:
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Post Retirement Benefits
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net actuarial loss
$
49,415

 
$
38,619

 
$
772

 
$
844

 
 
 
 
 
 
 
 
Accumulated other comprehensive income
$
49,415

 
$
38,619

 
$
772

 
$
844

 
 
 
 
 
 
 
 
 
Additional Information
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Post Retirement Benefits
 
2012
 
2011
 
2012
 
2011
Increase (decrease) in minimum liability included in other comprehensive income
$
(10,796
)
 
$
(2,721
)
 
$
72

 
$
(286
)
 
 
 
 
 
 
 
 

36


SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Assumptions
 
 
 
 
 
 
 
 
 
 
Weighted-average assumptions used
to determine benefit obligations at October 31
 
Pension Benefits
 
Other Post Retirement Benefits
 
2012
 
2011
 
2012
 
2011
Discount rate
 
3.75
%
 
5.00
%
 
3.75
%
 
5.00
%
 
 
 
Pension Benefits
 
Other Post Retirement Benefits
Weighted-average assumptions used to determine net
periodic benefit costs for years ended October 31 
 
2012
 
2011
 
2012
 
2011
Discount rate
 
5.00
%
 
5.50
%
 
5.00
%
 
5.50
%
Expected long-term return on plan assets
 
7.50
%
 
7.50
%
 

 


These assumptions are used to develop the projected obligation at fiscal year end and to develop net periodic benefit cost for the subsequent fiscal year. Therefore, for fiscal 2012, the assumptions used to determine net periodic benefit costs were established at October 31, 2011, while the assumptions used to determine the benefit obligations were established at October 31, 2012.

The Company uses the Principal Pension Discount Yield Curve ("Principal Curve") as the basis for determining the discount rate for reporting pension and retiree medical liabilities. The Principal Curve has several advantages to other methods, including: transparency of construction, lower statistical errors, and continuous forward rates for all years. At October 31, 2012 the discount rate from the use of the Principal Curve was 3.75%, a decrease of 1.25% from a year ago that resulted in an increase of the benefit obligation of approximately $13,728.
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 Company's outside investment advisors and actuaries review the computed rate of return. Industry comparables and other outside guidance are also considered in the annual selection of the expected rates of return on pension assets. The long-term expected rate of return on plan assets takes into account years with exceptional gains and years with exceptional losses.
 
 
 
Assumed health care trend rates at October 31
2012
2011
Health care cost trend rate assumed for next year
8.0%
8.0%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
7.5%
7.5%
Year that the rate reaches the ultimate trend rate
2014
2013
 
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plan. The Company's trend rate was based on reduced health care claims experienced by a small and declining retiree population. A one-percentage point change in assumed healthcare cost trend rates would have the following effects at October 31, 2012:
 
 
One-Percentage
Point Increase 
 
One-Percentage
Point Decrease 
Effect on total of service and interest cost components
$
5

 
$
(4
)
Effect on post retirement obligation
$
47

 
$
(42
)




37


SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Plan Assets
The Company has established a targeted asset allocation percentage by asset category and rebalances the assets of each plan when pension contributions are funded. The Company's pension plan weighted-average asset allocations at October 31, 2012 and 2011, by asset category and comparison to the target allocation percentage are as follows:
 
 
Target
Allocation
Percentage
Plan Assets at October 31,
2012
 
2011
Asset Category
 
 
 
 
Equity securities
 0-70%
56%
 
68%
Debt securities
 0-70%
38%
 
27%
Real estate
0-10%
6%
 
5%
 
 
 
 
 
Total
 
100%
 
100%
 
 
 
 
 
The Company's investment policy for assets of the plans is to obtain a reasonable long-term return consistent with the level of risk assumed. The Company also seeks to control the cost of funding the plans within prudent levels of risk through the investment of plan assets and the Company seeks to provide diversification of assets in an effort to avoid the risk of large losses and to maximize the return to the plans consistent with market and economic risk.
Fair Value
The plans' investments are reported at fair value. Purchases and sales of securities are recorded on a trade‑date basis. Dividends are recorded on the ex‑dividend date.

Fair value is the price that would be received by the plans for an asset or paid by the plans to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date in the plans' principal or most advantageous market for the asset or liability. Fair value measurements are determined by maximizing the use of observable inputs and minimizing the use of unobservable inputs when measuring fair value. The hierarchy places the highest priority on unadjusted quoted market prices in active markets for identical assets or liabilities (level 1 measurements) and gives the lowest priority to unobservable inputs (level 3 measurements). The three levels of inputs within the fair value hierarchy are defined as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the plans have the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect the plans' own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In some cases, a valuation technique used to measure fair value may include inputs from multiple levels of the fair value hierarchy. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.

The following descriptions of the valuation methods and assumptions used by the plans to estimate the fair values of investments apply to investments held directly by the plans.

Mutual funds: The fair values of mutual fund investments are determined by obtaining quoted prices on nationally recognized securities exchanges (level 1 inputs).



38


SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Pooled separate accounts: The fair values of participation units held in pooled separate accounts are based on their net asset values, as reported by the managers of the pooled separate accounts as supported by the unit prices of actual purchase and sale transactions occurring as of or close to the financial statement date (level 2 inputs). With the exception of the Principal U.S. Property Separate Account, a fund sponsored by Principal Financial Group, investment and actuarial advisors of the Company, each of the pooled separate accounts invests in multiple securities. With the exception of the Principal U.S. Property Separate Account, each pooled separate account provides for daily redemptions by the plans with no advance notice requirements, and has redemption prices that are determined by the fund's net asset value per unit. Due to illiquidity of the underlying assets of the Principal U.S. Property Separate Account, which is an open-end, commingled real estate account and a separate account of Principal Life Insurance Company (Principal), Principal has imposed a withdrawal limitation which delays the payment of withdrawal requests and provides for payment of such requests on a pro rata basis as cash becomes available for distribution, as determined by Principal. While the fair value of the plans' interest in the Principal U.S. Property Separate Account has been determined based upon the net asset value of the Principal U.S. Property Separate Account, this fair value measurement is reported as including level 3 inputs because of the nature of the redemption restrictions.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Investments totaling $53,230 at October 31, 2012 and $46,218 at October 31, 2011 measured at fair value on a recurring basis are summarized below:

 
 
 
 
Fair Value Measurements
 
Fair Value Measurements
 
 
 
 
at October 31, 2012 Using
 
at October 31, 2011 Using
 
 
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
 
 
 
 
 
 
 
Significant Unobservable Inputs (Level 3)
 
 
 
Significant Unobservable Inputs (Level 3)
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Large U.S. Equity
 
$
7,805

 
$
10,027

 
$

 
$
8,237

 
$
10,495

 
$

 
 
Small/Mid U.S. Equity
 
2,632

 
3,710

 

 
2,510