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Shiloh Industries 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1
10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________________________________________ 
FORM 10-Q
______________________________________________________  
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 0-21964
______________________________________________________ 
SHILOH INDUSTRIES, INC.
(Exact name of registrant as specified in its charter) 
______________________________________________________ 
Delaware
51-0347683
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
880 Steel Drive, Valley City, Ohio 44280
(Address of principal executive offices—zip code)
(330) 558-2600
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
______________________________________________________ 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
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 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.
Large accelerated filer
 ¨
Accelerated filer
x
Non-accelerated filer
¨
Smaller Reporting Company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Number of shares of Common Stock outstanding as of September 11, 2015 was 17,249,355.



INDEX
 


2


PART I— FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements

SHILOH INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
(Unaudited)
 
July 31,
2015

October 31,
2014
 

ASSETS
 
 
 
Cash and cash equivalents
$
6,635

 
$
12,014

Investment in marketable securities
493


1,045

Accounts receivable, net of allowance for doubtful accounts of $534 and $601 at July 31, 2015 and October 31, 2014, respectively
164,007

 
171,242

Related-party accounts receivable
752

 
533

Prepaid income taxes
1,500

 
2,142

Inventories, net
94,420

 
91,303

Deferred income taxes
3,141

 
3,496

Prepaid expenses
20,023

 
11,987

Total current assets
290,971

 
293,762

Property, plant and equipment, net
274,633

 
274,828

Goodwill
28,826

 
30,887

Intangible assets, net
19,797

 
21,998

Deferred income taxes
2,355

 
2,605

Other assets
5,325

 
5,445

Total assets
$
621,907

 
$
629,525

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current debt
$
1,355

 
$
1,918

Accounts payable
154,785

 
146,478

Other accrued expenses
32,503

 
41,336

Total current liabilities
188,643

 
189,732

Long-term debt
259,086

 
268,102

Long-term benefit liabilities
17,252

 
19,951

Deferred income taxes
4,563

 
2,739

Interest rate swap agreement
4,162

 
2,510

Other liabilities
1,623

 
1,972

Total liabilities
475,329

 
485,006

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock, $.01 per share; 5,000,000 shares authorized; no shares issued and outstanding at July 31, 2015 and October 31, 2014, respectively

 

Common stock, par value $.01 per share; 25,000,000 shares authorized; 17,250,183 and 17,214,284 shares issued and outstanding at July 31, 2015 and October 31, 2014, respectively
173

 
172

Paid-in capital
69,161

 
68,035

Retained earnings
123,971

 
113,193

Accumulated other comprehensive loss, net
(46,727
)
 
(36,881
)
Total stockholders’ equity
146,578

 
144,519

Total liabilities and stockholders’ equity
$
621,907

 
$
629,525


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

3


SHILOH INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2015
 
2014
 
2015
 
2014
Net revenues
$
275,201

 
$
216,389

 
$
812,285

 
$
608,900

Cost of sales
254,952

 
194,289

 
745,404

 
547,952

Gross profit
20,249

 
22,100

 
66,881

 
60,948

Selling, general and administrative expenses
12,246

 
11,829

 
42,730

 
32,893

Amortization of intangible assets
486

 
545

 
1,795

 
1,635

Asset recovery

 

 

 
(4,026
)
Operating income
7,517

 
9,726

 
22,356

 
30,446

Interest expense
2,885

 
1,191

 
6,714

 
3,004

Interest income
(7
)
 
(2
)
 
(21
)
 
(7
)
Other (income) expense
178

 
(147
)
 
(886
)
 
(104
)
Income before income taxes
4,461

 
8,684

 
16,549

 
27,553

Provision for income taxes
2,480

 
335

 
5,772

 
6,136

Net income
$
1,981

 
$
8,349

 
$
10,777

 
$
21,417

Earnings per share:
 
 
 
 
 
 
 
Basic earnings per share
$
0.11

 
$
0.49

 
$
0.63

 
$
1.25

Basic weighted average number of common shares
17,227

 
17,118

 
17,220

 
17,081

Diluted earnings per share
$
0.11

 
$
0.49

 
$
0.62

 
$
1.25

Diluted weighted average number of common shares
17,246

 
17,175

 
17,247

 
17,157





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

4


SHILOH INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
(Unaudited)

 
 
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
 
 
 
2015
 
2014
 
2015
 
2014
Net income
$
1,981

 
$
8,349

 
$
10,777

 
$
21,417

Other comprehensive income:
 
 
 
 
 
 
 
 
Defined benefit pension plans & other postretirement benefits
 
 
 
 
 
 
 
 
 
 
Recognized gain

 
318

 
593

 
806

 
 
 
Actuarial net loss

 
(816
)
 
(683
)
 
(1,962
)
 
 
 
Asset net gain

 
268

 
391

 
649

 
 
 
Income tax (provision) benefit

 
86

 
(114
)
 
191

 
 
Total defined benefit pension plans & other post retirement benefits, net of tax

 
(144
)
 
187

 
(316
)
 
Marketable securities
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities
(258
)
 
750

 
(552
)
 
854

 
 
 
Income tax (provision) benefit
90

 
(134
)
 
193

 
(171
)
 
 
 
Reclassification adjustments for gain on marketable securities included in net income

 
(365
)
 

 
(365
)
 
 
Total marketable securities, net of tax
(168
)
 
251

 
(359
)
 
318

 
Derivatives and hedging
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate swap agreements
147

 
(457
)
 
(1,651
)
 
(1,360
)
 
 
 
Income tax (provision) benefit
(56
)
 
175

 
625

 
517

 
 
Change in fair value of derivative instruments, net of tax
91

 
(282
)
 
(1,026
)
 
(843
)
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
Unrealized loss on foreign currency translation
(1,062
)
 
(1,433
)
 
(8,648
)
 
(1,433
)
Comprehensive income, net
$
842

 
$
6,741

 
$
931

 
$
19,143




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

5


SHILOH INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
 
 
Nine Months Ended July 31,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
10,777

 
$
21,417

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
26,083

 
20,094

Asset recovery

 
(4,026
)
Amortization of deferred financing costs
519

 
644

Deferred income taxes
3,134

 
(1,078
)
Stock-based compensation expense
851

 
430

Gain (loss) on sale of assets
97

 
(429
)
Gain on sale of marketable securities

 
(332
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
3,391

 
13,175

Inventories
(7,360
)
 
(18,368
)
Prepaids and other assets
(8,456
)
 
(1,689
)
Payables and other liabilities
(12,057
)
 
(11,607
)
Accrued income taxes
558

 
(1,992
)
Net cash provided by operating activities
17,537

 
16,239

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(24,038
)
 
(24,027
)
Investment in marketable securities

 
(1,527
)
Acquisitions, net of cash acquired
195

 
(66,469
)
Proceeds from sale of assets
11,417

 
4,746

Proceeds from sale of marketable securities

 
967

Net cash used for investing activities
(12,426
)
 
(86,310
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Payment of capital leases
(581
)
 
(170
)
Proceeds from long-term borrowings
94,900

 
104,100

Repayments of long-term borrowings
(102,665
)
 
(23,756
)
Payment of deferred financing costs
(1,342
)
 
(150
)
Proceeds from exercise of stock options
159

 
928

Net cash provided by (used for) financing activities
(9,529
)
 
80,952

Effect of foreign currency exchange rate fluctuations on cash
(961
)
 
(159
)
Net increase (decrease) in cash and cash equivalents
(5,379
)
 
10,722

Cash and cash equivalents at beginning of period
12,014

 
398

Cash and cash equivalents at end of period
$
6,635

 
$
11,120

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Cash paid for interest
$
6,547

 
$
2,294

Cash paid for income taxes
$
245

 
$
6,815

 
 
 
 
Non-cash Investing and Financing Activities:
 
 
 
Equipment acquired under capital lease
$

 
$
1,679

Capital equipment included in accounts payable
$
3,958

 
$
2,238


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

6


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

Note 1—Basis of Presentation

The condensed consolidated financial statements have been prepared by Shiloh Industries, Inc. and its subsidiaries (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2014.

Revenues and operating results for the nine months ended July 31, 2015 are not necessarily indicative of the results to be expected for the full year.

 
Note 2—New Accounting Standards
In June 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-10, "Technical Corrections and Improvements." ASU 2015-10 amends a wide range of topics in the existing codification. ASU 2015-10 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, although early adoption is permitted, including adoption in an interim period. The Company does not expect ASU 2015-10 will have a material impact on its statement of financial position or financial statement disclosures.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest." ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in the ASU. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company does not expect ASU 2015-03 will have a material impact on its statement of financial position or financial statement disclosures.
In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern," which is intended to define a company's responsibility to evaluate whether there is substantial doubt about its ability to continue as a going concern and to provide related footnote disclosures. This ASU will be effective for the Company beginning with the first quarter ending January 31, 2017. The Company will prospectively apply the guidance to applicable transactions.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017 including interim periods within those years. Either full retrospective adoption or modified retrospective adoption is permitted. The Company has identified key individuals to evaluate the requirements and review existing customer contracts to determine what impact, if any, the adoption of this ASU will have on its financial position, results of operations and cash flows.
In April 2014, the FASB issued ASU 2014-08, "Presentation of Financial Statements and Property, Plant, and Equipment — Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,'' which revises what qualifies as a discontinued operation, changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. This ASU will be effective for the Company for applicable transactions occurring after January 31, 2016 for fiscal year ending 2016. The Company will prospectively apply the guidance to applicable transactions.
    

7


Note 3—Acquisitions

Radar Industries, Inc.

On September 30, 2014, the Company, through a wholly-owned subsidiary, consummated the transactions contemplated by the Asset Purchase Agreement, dated September 30, 2014 (the "Radar Agreement"), with Radar Industries, Inc., and Radar Mexican Investments, LLC which produce engineered metal stampings and machined parts for the motor vehicle industry.

The Company acquired Radar in order to further its investment in stamping technologies and expand the diversity of its customer base, product offering and geographic footprint. Radar's results of operations are reflected in the Company's condensed consolidated statements of income from the acquisition date.
    
The aggregate fair value of consideration transferred in connection with the Radar Agreement was $57,874 ($57,799 net of cash acquired) in cash on the date of acquisition. Of this amount, $6,500 in cash was placed into escrow to serve as security for any indemnification claims made by the Company under the Radar Agreement. During July 2015, certain settlements occurred resulting in $1,296 in escrow funds being returned to the Company for indemnification of claims and $195 in escrow funds returned as a reduction in the final purchase price. Additionally, $509 in escrow funds were released to Radar, leaving a remaining escrow balance of $4,500 at July 31, 2015.

The acquisition of Radar Industries Inc. has been accounted for using the acquisition method in accordance with the FASB ASC Topic 805, Business Combinations. Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were based on valuations using the income approach and estimates provided by management. The excess of the purchase price over the estimated fair values of the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The allocation of the purchase price is based upon a valuation of certain assets acquired and liabilities assumed. The preliminary purchase price allocation was as follows:
    
Cash and cash equivalents
 
$
75

Accounts receivable
 
14,374

Inventory
 
15,729

Prepaid assets and other
 
95

Property, plant and equipment
 
26,612

Goodwill
 
12,989

Intangible assets
 
6,090

Accounts payable and other
 
(18,285
)
Net assets acquired
 
$
57,679


The purchase price allocation is provisional, pending completion of the valuation of acquired assets, property, plant and equipment and inventories. The Company is utilizing a third party to assist in the fair value determination of certain components of the purchase price allocation, namely inventory, property, plant and equipment, intangible assets and goodwill. The final valuation may change the allocation of the purchase price, which could affect the fair values assigned to the assets.

The Company believes the amount of goodwill resulting from the purchase price allocation is attributable to the workforce of the acquired business (which is not eligible for separate recognition as an identifiable intangible asset) and the synergies expected after the Company's acquisition of Radar. All of the goodwill was allocated to a wholly owned subsidiary of the Company. The total amount of goodwill expected to be deductible for tax purposes is $30,374 and is estimated to be deductible over approximately 15 years.

Of the $6,090 of acquired intangible assets, $3,710 was assigned to customers that have a useful life of approximately 14 years, and $2,300 was assigned to developed technologies with an estimated useful life of approximately 10 years and $80 was assigned to a non-compete agreement with an estimated useful life of 5 years. The Company utilized a third party to assist in assigning a fair value to acquired assets. The total amount of identifiable intangible assets expected to be deductible for tax purposes is $6,090 and is estimated to be deductible over approximately 15 years.





8


Finnveden Metal Structures

On June 30, 2014, Shiloh Holdings Sweden AB, a wholly-owned subsidiary of the Company, entered into and consummated the transactions contemplated by the Share Sale and Purchase Agreement dated May 21, 2014 with FinnvedenBultenAB and Finnveden AB ("Finnveden"), a wholly-owned subsidiary of FinnvedenBulten AB, a producer of aluminum and steel stampings and magnesium die cast and machined parts for the motor vehicle industry.

The Company acquired Finnveden in order to expand its stamping capabilities while adding magnesium die casting to our product line, a key growth segment, and technology being used to address the lightweighting needs of automakers. Additionally, the Finnveden acquisition adds strategic European locations in Poland and Sweden while diversifying its customer base. Finnveden's results of operations are reflected in the Company's condensed consolidated statements of income from the acquisition date.

The aggregate fair value of consideration transferred in connection with the FMS Agreement was $72,618, ($66,396 net of cash acquired), in cash on the date of acquisition.

The acquisition of Finnveden has been accounted for using the acquisition method in accordance with FASB ASC Topic 805, Business Combinations. Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were based on valuations using the income approach and estimates provided by management. The excess of the purchase price over the estimated fair values of the tangible assets, identifiable intangible assets and assumed liabilities were recorded as goodwill. The allocation of the purchase price is based upon a valuation of certain assets acquired and liabilities assumed. The final purchase price allocation was as follows:
Cash and cash equivalents
 
$
6,222

Accounts receivable
 
29,744

Inventory
 
26,858

Prepaid expenses
 
3,681

Property, plant and equipment
 
37,474

Goodwill
 
6,681

Intangible assets
 
136

Other non-current assets
 
3,676

Accounts payable and other
 
(36,416
)
Long term liabilities
 
(5,438
)
Net assets acquired
 
$
72,618


The Company utilized a third party to assist in the fair value determination of certain components of the purchase price allocation, namely inventory, property, plant and equipment and intangible assets. Changes in the final purchase price allocation, as compared to the preliminary purchase price allocation, were primarily a result of an increase of $2,006 in the estimated fair value of property, plant and equipment.

The Company believes the amount of goodwill resulting from the purchase price allocation is attributable to the workforce of the acquired business (which is not eligible for separate recognition as an identifiable intangible asset) and the expected synergies after the Company's acquisition of Finnveden. All of the goodwill was allocated to a wholly owned subsidiary of the Company. The Company does not expect that the amount of goodwill will be deductible for tax purposes under current Polish or Swedish tax law.

The $136 of acquired intangible assets was assigned to customers that have a useful life of approximately 10 years. The fair value assigned to identifiable intangible assets acquired have been determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. The Company is utilizing a third party to assist in assigning a fair value to acquired intangible assets. The Company does not expect that the total amount of identifiable intangible assets will be deductible for tax purposes under current Polish or Swedish tax law.

Pro Forma Consolidated Results

The following supplemental pro forma information presents the actual financial results for the three and nine months ended July 31, 2015, and pro forma financial results for the three and nine months ended July 31, 2014 as if the acquisitions of Radar and Finnveden had occurred on November 1, 2013. The pro forma results do not include any anticipated cost synergies,

9


costs or other effects of the integration of Radar Industries, Inc. and Finnveden. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisitions been completed on the dates indicated, nor are they indicative of the future operating results of the combined Company. In addition, the pro forma information includes amortization expense related to the intangible assets acquired of $57 and $446 for the three and nine months ended July 31, 2015, respectively and $62 for both the three and nine months ended July 31, 2014.
Pro forma consolidated results
 
Three Months Ended July 31,
 
Nine Months Ended July 31
(in thousands, except for per share data):
 
2015
 
2014
 
2015
 
2014
Revenue
 
$
275,201

 
$
283,945

 
$
812,285

 
$
840,861

Net income
 
$
1,981

 
$
9,199

 
$
10,777

 
$
28,350

Basic earnings per share
 
$
0.11

 
$
0.54

 
$
0.63

 
$
1.66

Diluted earnings per share
 
$
0.11

 
$
0.54

 
$
0.62

 
$
1.65


The above pro forma consolidated results include the impact of foreign currency translation. For the three and nine months ended July 31, 2015, the average currency rate of the USD to the Swedish krona was 8.848 and 7.983, respectively. For the three and nine months ended July 31, 2014, the average currency rate of the USD to the Swedish krona was 6.669 and 6.649, respectively.

Note 4—Asset Recoveries

Asset recoveries of $4,026 were recorded during first nine months 2014 for cash received upon sales of assets from the Company's former Mansfield Blanking facility, which were impaired in fiscal 2010.
    
Note 5—Related Party Receivables

The Company had related party receivable balances for the period ended July 31, 2015 and October 31, 2014 of $752 and $533, respectively, due from MTD Products Inc. and its affiliates.

On March 11, 2014, the Company entered into a manufacturing agreement with Velocys, plc (LSE:VLS). As part of the agreement, the Company invested $2,000, which is comprised of Velocys stock with a market value of $1,527 on the date of acquisition and a premium paid of $473, which is being amortized over the remaining life of the related supplier agreement. The Company re-measures available-for-sale securities at fair value and records the unrealized gain or loss in other comprehensive income until realized. A cumulative market-to-market unfavorable adjustment of $168 and $359, net of tax, was recorded as a loss to other comprehensive income for the three and nine months ended July 31, 2015, respectively. A cumulative market-to-market favorable adjustment of $251 and $318, net of tax, was recorded as a gain to other comprehensive income for the three and nine months ended July 31, 2014, respectively.

Note 6—Inventories
Inventories consist of the following:
 
July 31, 2015
 
October 31, 2014
Raw materials
$
33,671

 
$
36,417

Work-in-process
14,120

 
12,044

Finished goods
15,013

 
13,382

Total material
62,804

 
61,843

Tooling
31,616

 
29,460

Total inventory
$
94,420

 
$
91,303


Total cost of inventory is net of reserves to reduce certain inventory from cost to net realizable value by an allowance for excess and obsolete inventories based on management’s review of on-hand inventories compared to historical and estimated future sales and usage. Such reserves aggregated $3,718 and $5,928 at July 31, 2015 and October 31, 2014, respectively.



10


Note 7—Property, Plant and Equipment
Property, plant and equipment consist of the following:
        
 
July 31,
2015
 
October 31,
2014
Land and improvements
$
11,316

 
$
11,452

Buildings and improvements
116,666

 
117,776

Machinery and equipment
477,851

 
455,482

Furniture and fixtures
12,150

 
11,161

Construction in progress
60,637

 
52,345

Total, at cost
678,620

 
648,216

Less: Accumulated depreciation
403,987

 
373,388

Property, plant and equipment, net
$
274,633

 
$
274,828


During the third quarter, the company entered into certain sale-leaseback transactions resulting in proceeds of $9,854. There was no gain or loss as a result of these transactions.

Depreciation expense was $8,613 and $6,664 for the three months and $24,288 and $18,459 for the nine months ended July 31, 2015 and July 31, 2014, respectively.

Capital Leases:
 
July 31,
2015
 
October 31,
2014
Leased Property:
 
 
 
Machinery and equipment
$
6,978

 
$
7,639

Less: Accumulated depreciation
983

 
367

Leased property, net
$
5,995

 
$
7,272


The decrease in machinery and equipment of $661 is due to the foreign currency translation at July 31, 2015 at one of the Company's European manufacturing facilities.

Total obligations under capital leases and future minimum rental payments to be made under capital leases at July 31, 2015 are as follows:

Twelve Months Ending July 31,
 
2016
$
857

2017
859

2018
893

2019
772

2020
442

Thereafter
1,899

 
5,722

Plus amount representing interest ranging from 3.05% to 3.77%
652

Future minimum rental payments
$
6,374





11


Note 8—Goodwill and Intangible Assets

Goodwill:
The changes in the carrying amount of goodwill for the nine months ended July 31, 2015 are as follows:
Balance October 31, 2014
 
$
30,887

 
Acquisitions and purchase accounting adjustments
 
(635
)
 
Divestitures
 

 
Foreign currency translation and other
 
(1,426
)
Balance July 31, 2015
 
$
28,826


During the third quarter, a test for goodwill impairment was conducted related to the FMS acquisition. The Company concluded that there was no impairment of goodwill.


Intangible Assets
    
The changes in the carrying amount of finite intangible assets for the nine months ended July 31, 2015 are as follows :

 
 
Customer Relationships
 
Developed Technology
 
Non-Compete
 
Trade Name
 
Trademark
 
Total
Balance October 31, 2014
$
15,856

 
$
4,311

 
$
62

 
$
1,624

 
$
145

 
$
21,998

 
Acquisition and purchase accounting adjustments
(530
)
 

 
80

 

 

 
(450
)
 
Amortization expense
(1,036
)
 
(579
)
 
(75
)
 
(93
)
 
(12
)
 
(1,795
)
 
Foreign currency translation and other
44

 

 

 

 

 
44

Balance July 31, 2015
$
14,334

 
$
3,732

 
$
67

 
$
1,531

 
$
133

 
$
19,797

Intangible assets are amortized on the straight-line method over their legal or estimated useful lives. The following summarizes the gross carrying value and accumulated amortization for each major class of intangible assets:
 
 
Gross Carrying Value
 
Accumulated Amortization
 
Foreign Currency Adjustment
 
Net
 
Customer relationships
$
17,347

 
$
(2,950
)
 
$
(63
)
 
$
14,334

 
Developed technology
5,007

 
(1,275
)
 

 
3,732

 
Non-compete
824

 
(757
)
 

 
67

 
Trade Name
1,875

 
(344
)
 

 
1,531

 
Trademark
166

 
(33
)
 

 
133

 
 
$
25,219

 
$
(5,359
)
 
$
(63
)
 
$
19,797

Total amortization expense was $486 and $1,795 for the three and nine months ended July 31, 2015, respectively and $545 and $1,635 for the three and nine months ended July 31, 2014, respectively. Amortization expense related to intangible assets for the fiscal years ending is estimated to be as follows:        
Twelve Months Ending July 31,
 
 
2016
 
$
2,242

2017
 
2,242

2018
 
2,141

2019
 
1,799

2020
 
1,688

Thereafter
 
9,685

 
 
$
19,797


12




Note 9—Financing Arrangements
Debt consists of the following:
    
 
July 31,
2015
 
October 31, 2014
Credit Agreement —interest rate of 2.93% for the period ended July 31, 2015 and 2.15% for the period ended October 31, 2014
$
253,100

 
$
260,500

Equipment security note
1,619

 
1,985

Capital lease obligations
5,722

 
6,967

Insurance broker financing agreement

 
568

Total debt
260,441

 
270,020

Less: Current debt
1,355

 
1,918

Total long-term debt
$
259,086

 
$
268,102


The weighted average interest rate of all debt was 2.67% and 1.93% for the nine months ended July 31, 2015 and July 31, 2014, respectively.

The Company and its subsidiaries are party to a Credit Agreement, dated October 25, 2013, as amended (the "Credit Agreement") with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, JPMorgan Chase Bank, N.A. as Syndication Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities, LLC as Joint Lead Arrangers and Joint Book Managers, The PrivateBank and Trust Company, Compass Bank and Citizens Bank, N.A., as Co-Documentation Agents, and the other lender parties thereto.

On April 29, 2015, the Company executed a Fourth Amendment to the Credit Amendment that maintains the commitment period to September 29, 2019 and allows for an incremental increase of $25,000 (or if certain ratios are met, $100,000) in the existing revolving commitments of $360,000, subject to the Company's pro forma compliance with financial covenants, the administrative agent's approval and the Company obtaining commitments for such increase.

Borrowings under the Credit Agreement bear interest, at the Company's option, at LIBOR or the base (or "prime") rate established from time to time by the administrative agent, in each case plus an applicable margin. The Fourth Amendment provides for an interest rate margin on LIBOR loans of 1.25% to 3.00% and of 0.25% to 2.00% on base rate loans depending on the Company's leverage ratio.

The Credit Agreement contains customary restrictive and financial covenants, including covenants regarding the Company’s outstanding indebtedness and maximum leverage and interest coverage ratios. The Credit Agreement also contains standard provisions relating to conditions of borrowing. In addition, the Credit Agreement contains customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company. If an event of default occurs, all amounts outstanding under the Credit Agreement may be accelerated and become immediately due and payable. The Company was in compliance with the financial covenants as of July 31, 2015, and October 31, 2014.

After considering letters of credit of $2,980 that the Company has issued, available funds under the Credit Agreement were $105,020 at July 31, 2015.
Borrowings under the Credit Agreement are collateralized by a first priority security interest in substantially all of the tangible and intangible property of the Company and its domestic subsidiaries and 65% of the stock of foreign subsidiaries.

Other Debt:

On September 2, 2013, the Company entered into an equipment security note that bears interest at a fixed rate of 2.47% and requires monthly payments of $44 through September 2018. As of July 31, 2015, $1,619 remained outstanding under this agreement and $498 was classified as current debt and $1,121 was classified as long term debt in the Company’s condensed consolidated balance sheets.

13


The Company maintains capital leases for equipment used in its manufacturing facilities with lease terms expiring between 2018 and 2020. As of July 31, 2015, the present value of minimum lease payments under its capital leases amounted to $5,722.

Derivatives:

On February 25, 2014, the Company entered into an interest rate swap with an aggregate notional amount of $75,000 designated as a cash flow hedge of a portion of the Company's Credit Agreement to manage interest rate exposure on the Company’s floating rate LIBOR based debt.   The interest rate swap is an agreement to exchange payment streams based on the notional principal amount. This agreement fixes the Company’s future interest payments at 2.74% plus the applicable rate (defined above), on an amount of the Company’s debt principal equal to the then-outstanding swap notional amount. The forward interest rate swap commenced on March 1, 2015 with an initial $25,000 base notional amount with $25,000 increases to the base notional amount on September 1, 2015 and March 1, 2016, respectively.   The base notional amount plus each incremental addition to the base notional amount have a five year maturity of February 29, 2020, August 31, 2020 and February 28, 2021, respectively. On the date the interest swap was entered into, the Company designated the interest rate swap as a hedge of the variability of cash flows to be paid relative to its variable rate monies borrowed.   Any ineffectiveness in the hedging relationship is recognized immediately into earnings. The Company determined the mark-to-market adjustment for the interest rate swap to be a gain of $91 and a loss of $1,026, net of tax, for the three and nine months ended July 31, 2015, respectively, which is reflected in other comprehensive income. The first base notional amount of $25,000 commenced on March 1, 2015 and $108 of cash flow hedge settlements was realized as interest expense.
Scheduled repayments of debt for the next five years are listed below:
     
Twelve Months Ending July 31,
 
Credit Agreement
 
Equipment Security Note
 
Capital Lease Obligations
 
Total
2016
 
$

 
$
498

 
$
857

 
$
1,355

2017
 

 
510

 
859

 
1,369

2018
 

 
523

 
893

 
1,416

2019
 

 
88

 
772

 
860

2020
 
253,100

 

 
442

 
253,542

Thereafter
 

 

 
1,899

 
1,899

Total
 
$
253,100

 
$
1,619

 
$
5,722

 
$
260,441


Note 10—Pension and Other Post-Retirement Benefit Matters

U.S. Plans

The components of net periodic benefit cost for the three and nine months ended July 31, 2015 and 2014 are as follows:        
 
Pension Benefits
 
Other Post-Retirement
Benefits
 
Three Months Ended July 31,
 
Three Months Ended July 31,
 
2015
 
2014
 
2015
 
2014
Interest cost
$
866

 
$
937

 
$
6

 
$
9

Expected return on plan assets
(1,174
)
 
(1,071
)
 

 

Recognized net actuarial loss
297

 
269

 
7

 
10

Net periodic (benefit) cost
$
(11
)
 
$
135

 
$
13

 
$
19


14


        
 
Pension Benefits
 
Other  Post-Retirement
Benefits
 
Nine Months Ended July 31,
 
Nine Months Ended July 31,
 
2015
 
2014
 
2015
 
2014
Interest cost
$
2,599

 
$
2,811

 
$
18

 
$
28

Expected return on plan assets
(3,523
)
 
(3,211
)
 

 

Recognized net actuarial loss
890

 
806

 
21

 
31

Net periodic (benefit) cost
$
(34
)
 
$
406

 
$
39

 
$
59

 
 
 
 
 
 
 
 

The Company made contributions of $950 and $2,820 to the defined benefit pension plans during the three and nine months ended July 31, 2015 and $1,582 and $3,454 to the defined benefit pension plans during the three and nine months ended July 31, 2014, respectively. The Company expects contributions to be $950 for the remainder of fiscal 2015.

Non-U.S. Plans

For the Company's Swedish operations, the majority of the pension obligations are covered by insurance policies with insurance companies. For the Company's Polish operations, the Pension obligations for the fiscal year ended 2015 are expected to be $695 based on actuarial reports. The Polish operations recognized $29 and $87 of expense for the three and nine months ended July 31, 2015, respectively.

Note 11—Stock Options and Incentive Compensation (amounts in thousands except number of shares and per share data)
For the Company, FASB ASC Topic 718 "Compensation – Stock Compensation" affects the stock options that have been granted and requires the Company to expense share-based payment ("SBP") awards with compensation cost for SBP transactions measured at 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.
1993 Key Employee Stock Incentive Plan
The Company maintains the Amended and Restated 1993 Key Employee Stock Incentive Program (the "Incentive Plan"), which authorizes grants to officers and other key employees, including directors, of the Company and its subsidiaries of (i) stock options that are intended to qualify as incentive stock options, (ii) nonqualified stock options and (iii) restricted stock awards. An aggregate of 2,700,000 shares of Common Stock, subject to adjustment upon occurrence of certain events to prevent dilution or expansion of the rights of participants that might otherwise result from the occurrence of such events, was reserved for issuance pursuant to the Incentive Plan. An individual’s award of stock options is limited to 500,000 shares in a five-year period.

Non-qualified stock options, incentive stock options and restricted stock awards have been granted to date and all options have been granted at the market price at the date of grant. Options expire over a period not to exceed ten years from the date of grant and vest ratably over a three year period. The vesting period of the restricted stock awards range between three months and four years. Incentive stock options were not granted in fiscal 2014 or during the first nine months of fiscal 2015. During fiscal 2014, 89,500 shares of restricted stock were granted to several employees as incentives for future performance. The market value of the Company's stock on the date of awards ranged between $14.97 and $20.64. During the first nine months of fiscal 2015, 23,332 shares of restricted stock with a three month vesting were issued to the members of the Company's Board of Directors as part of their director compensation. The market value of the Company's stock on the date of the awards ranged between $12.90 and $14.22. At July 31, 2015, 85,334 shares of restricted stock were outstanding. During the fiscal quarter ended July 31, 2015, 23,129 shares of restricted stock vested and no shares were forfeited. During the first nine months of fiscal 2015, 94,005 shares of restricted stock vested and 6,750 shares were forfeited.


15


Activity in the Company’s incentive plan for the nine months ended July 31, 2015 and 2014 was as follows:        
 
Number of
Shares
 
Weighted
Average
Exercise Price
Per Share
 
Weighted Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
Options outstanding at November 1, 2013
236,134

 
$9.93
 
 
 
 
Options:
 
 
 
 
 
 
 
Granted

 
$0.00
 
 
 
 
Exercised
(88,363
)
 
$9.83
 
 
 
 
Canceled
(12,333
)
 
$7.19
 
 
 
 
Outstanding at July 31, 2014
135,438

 
$9.79
 
5.51
 
$976
Options exercisable at July, 2014
125,771

 
$9.93
 
5.37
 
$890
 
 
 
 
 
 
 
 
Options outstanding at November 1, 2014
123,333

 
$9.77
 
 
 
 
Options:
 
 
 
 
 
 
 
Granted

 
$0.00
 
 
 
 
Exercised
(19,317
)
 
$8.19
 
 
 
 
Canceled
(11,350
)
 
$11.58
 
 
 
 
Outstanding at July 31, 2015
92,666

 
$9.77
 
4.51
 
$244
Options exercisable at July 31, 2015
92,666

 
$9.77
 
4.51
 
$244

At both July 31, 2015 and July 31, 2014, the exercise price of some of the Company’s stock option grants was higher than the market value of the Company’s stock. The stock option grants whose exercise price is higher that the market value of the Company's stock are excluded from the computation of aggregate intrinsic value of the Company’s outstanding and exercisable stock options.
All compensation related to stock options was recognized in the first quarter of fiscal year 2015 as all stock options are fully vested and therefore there was no impact on earnings per share basic and diluted related to the stock option compensation expense. For the nine months ended July 31, 2015, compensation expense related to stock options effectively reduced income before taxes by $15. For the three and nine months ended July 31, 2014, the Company recorded compensation expense related to stock options currently vesting, effectively reducing income before taxes by $21 and $127. There was no impact on earnings per share basic and diluted for the three months ended July 31, 2015 and July 31, 2014. For the nine months ended July 31, 2015 there was a $0.01 impact on earnings per share basic and diluted and for the nine months ended July 31, 2014, there was no impact. The total compensation cost related to the restricted stock currently vested was $836 and $303, for the nine months ended July 31, 2015 and July 31, 2014, respectively. The total estimated compensation cost related to the non-vested restricted stock is $1,015, which will be expensed through June of 2018.

16



Earnings per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares of Common Stock outstanding during the period. In addition, the shares of Common Stock issuable pursuant to stock options outstanding under the Amended and Restated 1993 Key Employee Stock Incentive Program are included in the diluted earnings per share calculation to the extent they are dilutive. For the three and nine months ended July 31, 2015, 153,646 and 119,796 stock awards, respectively, were excluded from the computation of diluted earnings per share because they were anti-dilutive. For the and three and nine months ended July 31, 2014, 35,369 and 42,953 stock awards, respectively, were excluded from the computation of diluted earnings per share because they were anti-dilutive. The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation for net income per share:          
(Shares in thousands)
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2015
 
2014
 
2015
 
2014
Net income available to common stockholders
$
1,981

 
$
8,349

 
$
10,777

 
$
21,417

Basic weighted average shares
17,227

 
17,118

 
17,220

 
17,081

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options
19

 
57

 
27

 
76

Diluted weighted average shares
17,246

 
17,175

 
17,247

 
17,157

Basic income per share
$
0.11

 
$
0.49

 
$
0.63

 
$
1.25

Diluted income per share
$
0.11

 
$
0.49

 
$
0.62

 
$
1.25


Note 12—Fair Value of Financial Instruments
The methods used by the Company 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.
Assets and liabilities remeasured and disclosed at fair value on a recurring basis at July 31, 2015 and October 31, 2014 are set forth in the table below:
 
 
Asset (Liability)
 
Level 2
 
Valuation Technique
October 31, 2014:
 
 
 
 
 
 
Interest Rate Swap Contracts
 
$
(2,510
)
 
$
(2,510
)
 
Income Approach
July 31, 2015:
 
 
 
 
 
 
Interest Rate Swap Contracts
 
$
(4,162
)
 
$
(4,162
)
 
Income Approach
The Company calculates the fair value of its interest rate swap contracts, using quoted interest rate curves, to calculate forward values, and then discounts the forward values.
The discount rates for all derivative contracts are based on quoted swap interest rates or bank deposit rates. For contracts which, when aggregated by counterparty, are in a liability position, the rates are adjusted by the credit spread that market participants would apply if buying these contracts from the Company’s counterparties.        


17


Note 13—Accumulated Other Comprehensive Gain (Loss)

Changes in accumulated other comprehensive gain (loss) in stockholders' equity by component for the nine months ended July 31, 2015 and 2014 are as follows:
 
 
 
Pension and Post Retirement Plan Liability
 
Marketable Securities Adjustment
 
Interest Rate Swap Adjustment
 
Foreign Currency Translation Adjustment
 
Accumulated Other Comprehensive Loss
Balance at October 31, 2014
 
$
(27,371
)
 
$
100

 
$
(1,558
)
 
$
(8,052
)
 
$
(36,881
)
 
Other comprehensive gain (loss)
 
187

 
(359
)
 
(1,026
)
 
(8,648
)
 
(9,846
)
Balance at July 31, 2015
 
$
(27,184
)
 
$
(259
)
 
$
(2,584
)
 
$
(16,700
)
 
$
(46,727
)
 
 
 
Pension and Post Retirement Plan Liability
 
Marketable Securities Adjustment
 
Interest Rate Swap Adjustment
 
Foreign Currency Translation Adjustment
 
Accumulated Other Comprehensive Loss
Balance at October 31, 2013
 
$
(26,082
)
 
$

 
$

 
$

 
$
(26,082
)
 
Other comprehensive gain (loss)
 
(316
)
 
683

 
(843
)
 
(1,433
)
 
(1,909
)
 
Amounts reclassified from accumulated other comprehensive income
 

 
(365
)
 

 

 
(365
)
 
Net current-period other comprehensive income (loss)
 
(316
)
 
318

 
(843
)
 
(1,433
)
 
(2,274
)
Balance at July 31, 2014
 
$
(26,398
)
 
$
318

 
$
(843
)
 
$
(1,433
)
 
$
(28,356
)
Items reclassified out of accumulated other comprehensive income are as follows:
 
 
 
For the Nine Months ended July 31,
 
Affected line item in the Condensed Consolidated Statement of Income
 
 
 
2015
 
2014
 
Pension and Post-Retirement Plan Benefits
 
 
 
 
 
 
 
 
Interest costs
 
$
2,617

 
$
2,839

 
Selling, general and administrative expenses ("SG&A") (1)
 
Return on plan assets
 
(3,523
)
 
(3,211
)
 
SG&A (1)
 
Net actuarial loss
 
911

 
837

 
SG&A (1)
 
 
 
5

 
465

 
Total before taxes
 
 
 
2

 
154

 
Income tax benefit
 
Total reclassifications
 
$
7

 
$
619

 
Net of taxes
 
 
 
 
 
 
 
 
Marketable Securities
 
 
 
 
 
 
 
Realized gain on sale of marketable securities
 

 
$
365

 
Other income
 
 
 

 
$
(138
)
 
Income tax provision
 
Total reclassifications
 

 
$
227

 
Net of taxes
(1) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost. See Note 10- Employee Benefit Plans for further information.

Note 14—Business Segment Information
The Company conducts its business and reports its information as one operating segment-Automotive and Commercial Vehicles. The chief operating decision maker of the Company has been identified as the Executive Leadership Team (ELT), which includes all Vice President’s plus the CEO as this team has the 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 leading global supplier of lightweighting and noise, vibration and harshness (NVH) solutions to the automotive, commercial vehicle and other industrial segments, capable of delivering solutions in alumimum, magnesium, steel and high-strength steel alloys to original equipment manufacturers and suppliers

18


Revenues of foreign geographic regions are attributed to external customers based upon the location of the entity recording the sale. These foreign revenues represent 14.8% and 15.9% for the three and nine months ended July 31, 2015, respectively and 9.8% and 7.2% of total revenues for three and nine months ended July 31, 2014, respectively. Long-lived assets consist primarily of net property, plant and equipment, goodwill and intangibles.
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
 
Revenues
 
Foreign Currency (Gain) Loss
 
Revenues
 
Foreign Currency (Gain)
Geographic Region:
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Europe
 
$
30,682

 
$
9,087

 
$
(207
)
 
$
12

 
$
97,425

 
$
9,087

 
$
622

 
$
11

Mexico
 
$
10,125

 
$
12,061

 
$
147

 
$
(38
)
 
$
31,494

 
$
34,869

 
$
193

 
$
(97
)
United States
 
$
234,394

 
$
195,241

 
 
 
 
 
$
683,366

 
$
564,944

 
 
 
 
Total Company
 
$
275,201

 
$
216,389

 

 

 
$
812,285

 
$
608,900

 
 
 
 
 
 
Long-Lived Assets
Geographic Region:
 
July 31, 2015
 
October 31, 2014
Europe
 
$
41,470

 
$
44,151

Mexico
 
$
23,338

 
$
24,611

United States
 
$
266,128

 
$
267,001

Total Company
 
$
330,936

 
$
335,763

The foreign currency gain or loss is included as a component of other income in the condensed consolidated statements of income.    

Note 15—Income Taxes

For both the three and nine months ended July 31, 2015, the estimated effective tax rate has materially increased compared to the three and nine months of fiscal 2014 primarily from additional research and development credits claimed during the third quarter of fiscal 2014 in the aggregate amount of $2,460 on Shiloh’s 2010, 2011, 2012 and 2013 fiscal year United States corporate income tax returns. Other increases included currency translation losses recorded in deferred tax assets for the Company’s Mexican subsidiary whose functional currency is the U.S. dollar and the Company generated foreign losses in certain jurisdictions with no related tax benefits.


Note 16—Commitments and Contingencies
The Company is from time to time involved in legal proceedings, claims or investigations. In the opinion of management, the Company’s liability or recovery, if any, under pending litigation and claims would not materially affect its financial condition, results of operations or cash flow.


19


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except per share data)

General

The Company is a leading global supplier of lightweighting and noise, vibration and harshness (NVH) solutions to the automotive, commercial vehicle and other industrial markets, capable of delivering solutions in aluminum, magnesium, steel and high-strength steel alloys to original equipment manufacturers and suppliers ("OEMs"). Shiloh delivers these solutions through design, engineering and manufacturing of first operation blanks, engineered welded blanks, complex stampings, modular assemblies and highly engineered aluminum and magnesium die casting and machined components which serve the automotive, commercial vehicle and other industrial sectors of OEMs and, as a Tier II supplier, to Tier I automotive part manufacturers who in turn supply OEMs. 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 locations in Asia, Europe and North America.
The products that the Company produces supply many models of vehicles manufactured by nearly all OEMs that produce vehicles in Europe and North America. The Company’s year to date revenues were dependent upon the production of automobiles and light trucks in both Europe and North America. According to industry statistics (published by IHS Automotive), Europe and North America production volumes for the three and nine months ended July 31, 2015 and 2014 were as follows:
Production Volumes
Europe
 
North America
 
(Number of Vehicles in Thousands)
For the three months ended July 31, 2014
5,365

 
4,329

For the three months ended July 31, 2015
5,459

 
4,364

Increase
94

 
35

Percentage change
1.8
%
 
0.8
%
Production Volumes
Europe
 
North America
 
(Number of Vehicles in Thousands)
For the nine months ended July 31, 2014
15,611

 
12,297

For the nine months ended July 31, 2015
15,887

 
12,752

Increase
276

 
455

Percentage change
1.8
%
 
3.7
%

The Company operates in an extremely competitive industry, driven by global vehicle production volumes. Business is typically awarded to the supplier offering the most favorable combination of cost, quality, technology and service. Customers continue to demand periodic cost reductions that require the Company to assess, redefine and improve operations, products, and manufacturing capabilities to maintain and improve profitability. Management continues to develop and execute initiatives designed to meet challenges of the industry and to achieve its strategy for sustainable global profitable growth.

Capacity utilization levels are very important to profitability because of the capital-intensive nature of the Company’s operations. The Company strives to adapt its capacity to meet customer demand, both expanding capabilities in growth areas as well as reallocating capacity between manufacturing facilities as needs arise. The Company deploys new technologies to differentiate its products from its competitors and to achieve higher quality and productivity. The Company believes that it has sufficient capacity to meet its current and expected manufacturing needs.

The significant majority of the steel purchased for the Company’s stamping and engineered welded blank products is purchased through the customers’ steel buying 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, the customers are responsible for all steel price fluctuations under these programs. The Company also purchases steel directly from local primary steel producers and steel service centers. Steel pricing has been declining over the most recent quarters based on open capacity with the steel producers with nominal increases in demand. The Company blanks and processes steel for some of its customers on a toll processing basis. Under these arrangements, the

20


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. Revenues from operations involving directly owned steel include a component of raw material cost whereas toll processing revenues do not.

For the Company's aluminum and magnesium die casting operations, the cost of aluminum and magnesium is handled one of two ways. The primary method used by the Company is to secure quarterly aluminum and magnesium purchase commitments based on customer releases and then pass the quarterly price changes to those customers utilizing published metal indices. The second method used by the Company is to adjust prices monthly based on a referenced metal index plus additional material cost spreads agreed to by the Company and its customers.


Recent Trends and General Economic Conditions Affecting the Automotive Industry

The Company's business and operating results are directly affected by the relative strength of the North American and European automotive industries, which are driven by macro-economic factors such as gross domestic product growth, consumer income and confidence levels, fluctuating commodity, currency and gasoline prices, automobile discount and incentive offers and perceptions about global economic stability. The automotive industry remains susceptible to these factors that impact consumer spending habits and could adversely impact consumer demand for vehicles.

The production of cars and light trucks for the first nine months of 2015 in North America according to industry results (published by IHS Automotive in August 2015) was approximately 12,752,000 units, which reflects an improvement of 3.7% over the first nine months of 2014’s vehicle production of approximately 12,297,000 units. The improved vehicle production reflects an improvement in economic conditions and consumer demand in North America. The Company continues to closely monitor customer release volumes even though the overall economic environment in North America reflects improvement and there is evidence that the North American economy is strengthening. Changes in the North American government fiscal policy could impact levels of unemployment and consumer confidence, which could adversely impact consumer demand for vehicles.

The production of cars and light trucks for the first nine months of 2015 in Europe according to industry results (published by IHS Automotive in August 2015) was approximately 15,887,000 units, which reflects an increase of 1.8% over the first nine months of 2014's vehicle production of approximately 15,611,000 units. The outlook in Europe is slow and relatively flat as the region is still emerging from a six-year sales slump.

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Critical Accounting Policies
Preparation of the Company’s condensed 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 amounts reported in the condensed 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 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 metal 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 right of offset of 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 its supply chain is optimized, 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

22


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.

Business Combinations. The Company includes the results of operations of the businesses that it acquires as of the respective dates of acquisition. The Company allocates the fair value of the purchase price of its acquisitions to the tangible and intangible assets acquired, and liabilities assumed, based on their estimated fair values. The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill.

Impairment of Long-lived Assets. The Company performs an annual impairment analysis of long-lived 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, earnings before interest, taxes and depreciation 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 and European car builds (published by IHS Automotive), the potential sales that could result from new manufacturing process additions and strategic geographic localities that are important to servicing the automotive industry. This data is collected as part of the Company's 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 for other parts. 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 did not record an impairment charge related to long-lived assets during first nine months 2015 and 2014. See Note 4 to the condensed consolidated financial statements for a discussion of the recoveries recorded during first nine months fiscal 2014. The Company did not recover previously recorded impairment charges during the first nine months 2015. 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 and European 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.

Intangible Assets. Intangible assets with definitive lives are amortized over their estimated useful lives. The Company amortizes its acquired intangible assets with definitive lives on a straight-line basis over periods ranging from three months to fifteen years. See Note 8 to the condensed consolidated financial statements for a description of the current intangible assets and their estimated amortization expense.

The Company performs an annual impairment analysis of intangible assets and is included as a component of the annual impairment of long-lived assets.



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Goodwill. Goodwill, which represents the excess cost over the fair value of the net assets of businesses acquired, was approximately $28,826 as of July 31, 2015, or 5% of its total assets, and approximately $30,887 as of October 31, 2014, or 5% of its total assets.

In accordance with Accounting Standards Codification ("ASC") 350, Intangibles-Goodwill and Other, the Company assesses goodwill for impairment on an annual basis. Such assessment can be done on a qualitative or quantitative basis. To qualitatively assess the likelihood of goodwill being impaired, the Company considers the following factors at the reporting unit level: the excess of fair value over carrying value as of the last impairment test, the length of time since the last fair value measurement, the carrying value, market and industry metrics, actual performance compared to forecasted performance, and its current outlook on the business. If the qualitative assessment indicated it is more likely than not that goodwill is impaired, the Company will perform quantitative impairment testing at the reporting unit level.

To quantitatively test goodwill for impairment, the Company estimates the fair value of a reporting unit and compare the fair value to the carrying value. If the carrying value exceeds the fair value, then a possible impairment of goodwill may exist and further evaluation is required. Fair values are based on the cash flow projected in the reporting units' strategic plans and long-range planning forecasts, discounted at a risk-adjusted rate of return. Revenue growth rates included in the plans are generally based on industry specific data and known awarded business. The projected profit margins assumptions included in the plans are based in the current cost structure and anticipated productivity improvements. If different assumptions were used in the plans, the related cash flows used in measuring fair value could be different and impairment of goodwill might be required to be recorded.

Group Insurance and Workers’ Compensation Accruals. The Company is primarily self-insured for group insurance and workers’ compensation claims in the United States and reviews these accruals on a monthly basis to adjust the balances as determined necessary. The Company is fully insured for workers' compensation at one of its locations. For the self insured plans, 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 $160-180 and $115-500 per plan year, respectively, dependent upon the location where the claim is incurred. At July 31, 2015 and October 31, 2014, the amount accrued for group insurance and workers’ compensation claims was $4,326 and $4,094, 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 and restricted stock 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 volatility and risk-free rate assumptions used in computing the fair value using the Black-Scholes option-pricing model, in consultation with an outside third party. The expected term for the restricted stock award is between three months and four years.

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

The restricted stock was valued based upon the closing date of the grant of the stock. 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 for its U.S. operations. The pension plans were frozen in November of 2006 and therefore contributions are not allowed. 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.


24



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, 2014, the resulting discount rate from the use of the Principal Curve was 4.00%, a decrease of 0.50% from a year earlier resulted in an increase of the benefit obligation of approximately $6,076. A change of 25 basis points in the discount rate at October 31, 2014 would increase or decrease expense on an annual basis by approximately $18.

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 at October 31, 2014 would increase or decrease pension assets by approximately $166.

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, 2014, the actual return on pension plans’ assets for all of the Company’s plans approximated 8%, 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.

For the Company's Swedish operations, the majority of the pension obligations are covered by insurance policies with insurance companies. Pension commitments in the Company's Polish operations are not material. The liability of these comprise the present value of future obligations and is calculated on an actuarial basis.

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 and pension expense will remain similar in fiscal 2016.

Derivative Instruments and Hedging Activities. The Company records derivative instruments in the condensed consolidated balance sheet as either an asset or liability and as a component of other comprehensive income and measured at fair value. Changes in derivative instruments' fair value are recognized currently in earnings, unless the derivative instrument has been designated as a cash flow hedge and specific cash flow hedge accounting criteria are met. Under the cash flow hedge accounting, unrealized gains and losses are reflected in stockholder's equity as accumulated other comprehensive income (AOCI) until the forecasted transaction occurs. If the cash flow hedge is deemed ineffective, the derivative's gains or losses are then recognized in the condensed consolidated statement of income.

Foreign Currency Translation. Two of the Company's Mexican subsidiaries (Shiloh De Mexico S.A. DE C.V. and Shiloh International, S.A. DE C.V.), its Netherlands holding company, its Swedish holding company, and all U.S. subsidiaries functional currency is the U.S. dollar and for all other entities their functional currency is their respective local currency. The translation from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate for the period. The resulting translation adjustments are recorded as a component of Other Comprehensive Income ("OCI"). The Company engages in foreign currency denominated transactions with customers and suppliers, as well as between subsidiaries with different functional currencies. Gains and losses resulting from foreign currency transactions are recognized in net income (loss) in the condensed consolidated statements of income.


25


Results of Operations
Three Months Ended July 31, 2015 Compared to Three Months Ended July 31, 2014

REVENUES. Sales for the third quarter of fiscal 2015 were $275,201, an increase of $58,812 from last year’s third quarter sales of $216,389, or 27.2%. According to industry statistics, Europe and North American combined light vehicle production growth for the third quarter of 2015 increased 2.6% from production levels in the third quarter of fiscal 2014. Incremental sales from the recent acquisitions of $66,263 and organic growth in its newer technologies was partially offset by lower production volumes in the quarter for certain OEM's due to re-tooling and platform changes as well as the impact from declining scrap metal market pricing realized beginning January 2015.

GROSS PROFIT. Gross profit for the third quarter of fiscal 2015 was $20,249 compared to gross profit of $22,100 in the third quarter of fiscal 2014, a decrease of $1,851. Gross profit as a percentage of sales was 7.4% for the third quarter of 2015 and 10.2% for the third quarter of 2014. The strategic acquisitions completed in fiscal 2014 contributed favorably, improving gross profit by $6,188. A change in sales mix of $222 and the lower price recovered for engineered scrap sales of $4,261 negatively impacted gross profit. In addition, labor and benefits increased by $2,052 as well as other manufacturing expenses and depreciation by $1,504.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses support the growth in sales opportunities, new technologies, new product launches and acquisition activities. Expenses of $12,246 in the third quarter of fiscal 2015 were $417 more than expenses of $11,829 in the same period of the prior year. As a percentage of sales, these expenses were 4.4% of sales in the third quarter of fiscal 2015 and 5.5% of sales in the third quarter of 2014. The increase reflects the integration and streamlining of additional personnel and related benefits as a result of acquisitions, growth, and expansion of the Company's technical centers including related infrastructure costs.

INTEREST EXPENSE. Interest expense for the third quarter of fiscal 2015 was $2,885, compared to interest expense of $1,191 during the third quarter of fiscal 2014. The increase in interest expense was the result of higher average borrowing of and rates for use of funds. Borrowed funds averaged $273,640 during the third quarter of fiscal 2015 and the weighted average interest rate was 3.19%. In the third quarter of fiscal 2014, borrowed funds averaged $163,640 and the weighted average interest rate of debt was 1.92%.

OTHER INCOME / EXPENSE. Other expense, net was $178 for the third quarter of fiscal 2015 and other income, net was $147 in the third quarter of fiscal 2014. Both are the result of currency transaction gains and losses realized by the Company's European and Mexican subsidiaries. 

PROVISION FOR INCOME TAXES. The provision for income taxes in the third quarter of fiscal 2015 was an expense of $2,480 on income before taxes of $4,461 for an effective tax rate of 55.6%. The provision for income taxes in the third quarter of fiscal 2014 was an expense of $335 on income before taxes of $8,684 for an effective tax rate of 3.9%. The estimated effective tax rate for the third quarter of fiscal 2015 has materially increased compared to the third quarter of fiscal 2014 primarily from additional research and development credits claimed during the third quarter of fiscal 2014 in the aggregate amount of $2,460 on Shiloh’s 2010, 2011, 2012 and 2013 fiscal year United States corporate income tax returns. Other increases included currency translation losses recorded in deferred tax assets for the Company’s Mexican subsidiary whose functional currency is the U.S. dollar and the Company generated foreign losses in certain jurisdictions with no related tax benefits.

NET INCOME. Net income for the third quarter of fiscal 2015 was $1,981, or $0.11 per share, diluted compared to net income for the third quarter of fiscal 2014 and was $8,349, or $0.49 per share, diluted.

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Results of Operations
Nine Months Ended July 31, 2015 Compared to Nine Months Ended July 31, 2014
The below discussion of the first nine months of fiscal 2015 includes the impact of the restatement of the first and second quarter financial statements of the Company which should be read in conjunction with the financial statements for the period ended July 31, 2015.
 
REVENUES. Sales for the first nine months of fiscal 2015 were $812,285, an increase of $203,385 from last year’s first nine months sales of $608,900, or 33.4%. According to industry statistics, Europe and North American combined light vehicle production growth for the first nine months of 2015 increased 2.8% from production levels in the first nine months of fiscal 2014 with the majority of the increase in North American levels and European levels slowly rebounding. Acceptance of leading technologies and the recent strategic acquisitions completed in fiscal 2014 have contributed to the increase in sales revenue of$222,220. The majority of the increase in sales is from the acquisitions (see Note 2) as certain customer platform volume was lower in the first nine months of 2015 compared to the first nine months of 2014 for re-tooling in preparation for new launches as well as the impact from declining scrap metal market pricing realized beginning in January 2015.

GROSS PROFIT. Gross profit for the first nine months of fiscal 2015 was $66,881 compared to gross profit of $60,948 in the first nine months of fiscal 2014, an increase of $5,933. Gross profit as a percentage of sales was 8.2% in the first nine months of fiscal 2015 and 10.0% in the first nine months of fiscal 2014. The strategic acquisitions completed in fiscal 2014 contributed favorably, improving gross profit by $25,626. A change in sales mix of $7,157 and the lower price recovered for engineered scrap sales of $7,803 negatively impacted gross profit. In addition, labor and benefits increased by $1,802 and manufacturing expenses and depreciation increased by $2,931.
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses support the growth in sales opportunities, new technologies, new product launches and acquisition activities. Expenses of $42,730 in the first nine months of fiscal 2015 were $9,837 more than expenses of $32,893 in the first nine months of fiscal 2014. As a percentage of sales, these expenses were 5.3% of sales in the first nine months of fiscal 2015 and 5.4% of sales in the first nine months of fiscal 2014. The strategic acquisitions completed in fiscal 2014 have incrementally added $9,018 to our infrastructure. In addition, labor and benefits increased $711 and other selling, general and administrative expenses of $108 as a result of additional growth and expansion of our technical centers and infrastructure costs.

ASSET RECOVERIES. Asset recoveries of $4,026 were recorded during the first nine months of fiscal 2014 for cash received upon sales of assets from the Company's Mansfield Blanking facility, which was impaired in fiscal 2010.

INTEREST EXPENSE. Interest expense for the first nine months of fiscal 2015 was $6,714, compared to interest expense of $3,004 during the first nine months of fiscal 2014. The increase in interest expense was the result of higher average borrowing and rates for use of funds. Borrowed funds averaged $272,623 during the first nine months of fiscal 2015 and the weighted average interest rate was 2.67%. In the first nine months of fiscal 2014, borrowed funds averaged $141,261 and the weighted average interest rate of debt was 1.93%.

OTHER INCOME / EXPENSE. Other income, net was $886 for the first nine months of fiscal 2015 and other income, net was $104 in the first nine months of fiscal 2014. Both are the result of currency transaction gains and losses realized by the Company's European and Mexican subsidiary. 

PROVISION FOR INCOME TAXES. The provision for income taxes for the first nine months of fiscal 2015 was an expense of $5,772 on income before taxes of $16,549 for an effective tax rate of 34.9%. The provision for income taxes for the first nine months of fiscal 2014 was an expense of $6,136 on income before taxes of $27,553 for an effective tax rate of 22.3%. The estimated effective tax rate for the first nine months of fiscal 2015 has increased compared to the first nine months of fiscal 2014 primarily from additional research and development credits claimed during the first nine months of fiscal 2014 in the aggregate amount of $2,460 on Shiloh’s 2010, 2011, 2012 and 2013 fiscal year United States corporate income tax returns. Other increases included currency translation losses recorded in deferred tax assets for the Company’s Mexican subsidiary whose functional currency is the U.S. dollar and the Company generated foreign losses in certain jurisdictions with no related tax benefits.
    
NET INCOME. Net income for the first nine months of fiscal 2015 was $10,777, or $0.62 per share, diluted. Net income for the first nine months of fiscal 2014 was $21,417 or $1.25 per share, diluted.

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Liquidity and Capital Resources

Revolving Credit Facility:

The Company and its subsidiaries are party to a Credit Agreement, dated October 25, 2013, as amended (the "Credit Agreement") with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, JPMorgan Chase Bank, N.A. as Syndication Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities, LLC as Joint Lead Arrangers and Joint Book Managers, The PrivateBank and Trust Company, Compass Bank and Citizens Bank, N.A., as Co-Documentation Agents, and the other lender parties thereto.

On April 29, 2015, the Company executed a Fourth Amendment to the Credit Amendment that maintains the commitment period to September 29, 2019 and allows for an incremental increase of $25,000 (or if certain ratios are met, $100,000) in the existing revolving commitments of $360,000, subject to the Company's pro forma compliance with financial covenants, the administrative agent's approval and the Company obtaining commitments for such increase.

Borrowings under the Credit Agreement bear interest, at the Company's option, at LIBOR or the base (or “prime”) rate established from time to time by the administrative agent, in each case plus an applicable margin. The Fourth Amendment provides for an interest rate margin on LIBOR loans of 1.25% to 3.00% and of 0.25% to 2.00% on base rate loans depending on the Company's leverage ratio.
    
The Credit Agreement contains customary restrictive and financial covenants, including covenants regarding the Company’s outstanding indebtedness and maximum leverage and interest coverage ratios. The Credit Agreement also contains standard provisions relating to conditions of borrowing. In addition, the Credit Agreement contains customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company. If an event of default occurs, all amounts outstanding under the Credit Agreement may be accelerated and become immediately due and payable. The Company was in compliance with the financial covenants as of July 31, 2015, and October 31, 2014.

After considering letters of credit of $2,980 that the Company has issued, available funds under the Credit Agreement were $105,020 at July 31, 2015.
Borrowings under the Credit Agreement are collateralized by a first priority security interest in substantially all of the tangible and intangible property of the Company and its domestic subsidiaries and 65% of the stock of foreign subsidiaries.
Other Debt:

On September 2, 2013, the Company entered into an equipment security note that bears interest at a fixed rate of 2.47% and requires monthly payments of $44 through September 2018. As of July 31, 2015, $1,619 remained outstanding under this agreement and $498 was classified as current debt and $1,121 was classified as long-term debt in the Company’s condensed consolidated balance sheets.

The Company maintains capital leases for equipment used in its manufacturing facilities with lease terms expiring between 2018 and 2021. As of July 31, 2015, the present value of minimum lease payments under its capital leases amounted to $5,722.

Derivatives:

On February 25, 2014, the Company entered into an interest rate swap with an aggregate notional amount of $75,000 designated as a cash flow hedge of a portion of the Company's Credit Agreement to manage interest rate exposure on the Company’s floating rate LIBOR based debt.   The interest rate swap is an agreement to exchange payment streams based on the notional principal amount. This agreement fixes the Company’s future interest payments at 2.74% plus the applicable rate (defined above), the designated benchmark interest rate being hedged (the "hedged risk"), on an amount of the Company’s debt principal equal to the then-outstanding swap notional amount. The forward interest rate swap commenced on March 1, 2015 with an initial $25,000 base notional amount with $25,000 increases to the base notional amount on September 1, 2015 and March 1, 2016, respectively. The base notional amount plus each incremental addition to the base notional amount have a five year maturity of February 29, 2020, August 31, 2020 and February 28, 2021, respectively. On the date the interest swap was entered into, the Company designated the interest rate swap as a hedge of the variability of cash flows to be paid relative to its variable rate monies borrowed.   Any ineffectiveness in the hedging relationship is recognized immediately into earnings. On July 31, 2015, the Company determined the mark-to-market adjustment for the interest rate swap to be a loss of $1,026, net of tax, which is reflected in other comprehensive income. The first base notional amount of $25,000 commenced on March 1, 2015 at which time the Company classified $108 of cash flow hedge settlements as interest expense for the quarter ended July 31, 2015.

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Scheduled repayments of debt for the next five years are listed below:    
July 31, 2015
 
Credit Agreement
 
Equipment Security Note
 
Capital Lease Obligations
 
Total
2016
 
$

 
$
498

 
$
857

 
$
1,355

2017
 

 
510

 
859

 
1,369

2018
 

 
523

 
893

 
1,416

2019
 

 
88

 
772

 
860

2020
 
253,100

 

 
442

 
253,542

Thereafter