<PAGE> 1
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-21964
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SHILOH INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 51-0347683
- -------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 202, 103 Foulk Road, Wilmington, Delaware 19803
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(Address of principal executive offices - zip code)
(302) 998-0592
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
- -------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Number of shares of Common Stock outstanding as of September 13, 1999 was
13,080,563 shares.
<PAGE> 2
SHILOH INDUSTRIES, INC.
-----------------------
INDEX
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<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SHILOH INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
July 31, October 31,
1999 1998
------------ ------------
ASSETS
- ------
<S> <C> <C>
Cash and cash equivalents $ 5,956,055 $ 642,723
Accounts receivable 61,276,034 46,802,379
Inventory 48,156,039 44,783,947
Deferred income taxes 1,290,357 1,290,357
Prepaid expenses 5,000,559 3,543,716
------------ ------------
Total current assets 121,679,044 97,063,122
------------ ------------
Property, plant and equipment, net 260,950,064 240,440,580
Goodwill 11,749,636 12,056,054
Other assets 5,887,648 5,269,086
------------ ------------
Total assets $400,266,392 $354,828,842
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable $ 35,778,096 $ 23,863,107
Short-term debt 20,549,000 --
Accrued income taxes 6,485,602 1,020,204
Advanced billings 1,809,168 2,836,203
Other accrued expenses 11,929,203 12,983,892
------------ ------------
Total current liabilities 76,551,069 40,703,406
------------ ------------
Long-term debt 134,810,000 135,865,000
Deferred income taxes 14,562,840 14,562,840
Long-term pension liability 879,800 879,800
Other Liabilities 467,426 --
------------ ------------
Total liabilities 227,271,135 192,011,046
------------ ------------
Stockholders' equity
Common stock 130,805 130,805
Paid-in capital 39,399,805 39,399,805
Retained earnings 133,464,647 123,287,186
Total stockholders' equity ------------ ------------
172,995,257 162,817,796
------------ ------------
Total liabilities and stockholders' equity $400,266,392 $354,828,842
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended July 31, Nine Months ended July 31,
--------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 83,869,151 $ 64,367,661 $255,035,030 $220,335,409
Cost of sales 68,721,222 52,228,665 211,209,259 176,010,373
------------ ------------ ------------ ------------
Gross Profit 15,147,929 12,138,996 43,825,771 44,325,036
Selling, general and administrative expenses 6,719,541 6,481,529 22,522,103 19,403,770
------------ ------------ ------------ ------------
Operating income 8,428,388 5,657,467 21,303,668 24,921,266
Interest expense 2,062,727 976,653 5,550,534 3,069,045
Interest income 10,272 47,190 91,341 122,667
Minority interest 85,799 34,361 420,822 164,402
Other income, net 125,602 62,697 149,964 158,165
------------ ------------ ------------ ------------
Income before income taxes 6,587,334 4,825,062 16,415,261 22,297,455
Provision for income taxes 2,454,048 1,840,886 6,237,800 8,550,287
------------ ------------ ------------ ------------
Net income (loss) $ 4,133,286 $ 2,984,176 $ 10,177,461 $ 13,747,168
============ ============ ============ ============
Basic earnings per share:
Net Income $ .32 $ .23 $ .78 $ 1.05
Weighted average number of common
shares: 13,080,563 13,077,030 13,080,563 13,053,881
Diluted earnings per share:
Net Income $ .32 $ .23 $ .78 $ 1.05
Weighted average number of common
shares: 13,086,310 13,126,725 13,086,857 13,108,280
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
SHILOH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended July 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 10,177,461 $ 13,747,168
Adjustments to reconcile net income from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization 13,565,777 11,076,187
Minority interest (420,822) (164,402)
Gain on sale of assets (535,072) (28,364)
Changes in operating assets and liabilities net of
Effects of business acquired:
Accounts receivable (14,473,655) 14,359,619
Inventories (3,372,092) (9,376,004)
Prepaids and other assets (1,681,050) (463,343)
Payables and accruals 10,300,693 1,870,623
Accrued income taxes 5,465,397 2,312,702
------------ ------------
Net cash provided by operating activities 19,026,637 33,334,189
------------ ------------
Cash Flows From Investing Activities:
Capital expenditures (44,616,016) (55,934,240)
Proceeds from sale of assets 11,408,711 30,900
------------ ------------
Net cash used in investing activities (33,207,305) (55,903,340)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from short-term borrowings 38,929,000 --
Repayments of short-term borrowings (19,545,000) (3,000,000)
Proceeds from long-term borrowings 4,110,000 26,000,000
Repayments of long-term borrowings (4,000,000) --
Issuance of common stock -- 656,816
------------ ------------
Net cash provided by financing activities 19,494,000 23,656,816
------------ ------------
Net increase in cash and cash equivalents 5,313,332 1,087,665
Cash and cash equivalents at beginning of period 642,723 191,688
------------ ------------
Cash and cash equivalents at end of period $ 5,956,055 $ 1,279,353
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
SHILOH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Basis of Presentation and Business
- -------------------------------------------
The condensed consolidated financial statements have been prepared by Shiloh
Industries, Inc. (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 generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. Although
the Company believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these condensed consolidated
financial statements be read in conjunction with the audited financial
statements and the notes thereto included in the Company's 1998 Annual Report to
Shareholders.
Revenues and operating results for the nine months ended July 31, 1999
are not necessarily indicative of the results to be expected for the full year.
NOTE 2 - Inventories:
- ---------------------
Inventories consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
------------ ------------
<S> <C> <C>
Raw materials $ 22,819,614 $ 17,725,301
Work-in-process 17,292,078 21,012,774
Finished goods 9,332,350 7,253,874
------------ ------------
Total at average cost 49,444,042 45,991,949
LIFO reserve (1,288,003) (1,208,002)
------------ ------------
Total $ 48,156,039 $ 44,783,947
============ ============
</TABLE>
<PAGE> 7
NOTE 3 - Property, Plant and Equipment:
- ---------------------------------------
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
------------- -------------
<S> <C> <C>
Land $ 8,100,247 $ 6,098,992
Buildings and improvements 91,932,081 87,837,749
Machinery and equipment 183,816,944 180,474,182
Furniture and fixtures 10,770,639 9,896,521
Construction in progress 53,285,636 31,768,168
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Total, at cost 347,905,547 316,075,612
Less: Accumulated depreciation (86,955,483) (75,635,032)
------------- -------------
Net property, plant and equipment $ 260,950,064 $ 240,440,580
============= =============
</TABLE>
NOTE 4 - Financing Arrangements:
- --------------------------------
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
------------ ------------
<S> <C> <C>
Short-term debt consists of the following:
Revolving credit loan - interest at 6.45% at July 31, 1999 $ 20,549,000 --
------------ ------------
Long-term debt consists of the following:
Revolving credit loan - interest at 5.80% at July 31, 1999 129,410,000 130,465,000
Variable rate industrial development bond, secured by letter of
credit, weighted average interest rate at 3.55% payable on
February 1, 2010 5,400,000 5,400,000
------------ ------------
Total long-term debt 134,810,000 135,865,000
------------ ------------
Total $155,359,000 $135,865,000
============ ============
</TABLE>
<PAGE> 8
Prior to January 22, 1998, the Company had a $70.0 million unsecured revolving
credit facility ("Shiloh Facility") with KeyBank National Association
("KeyBank") and Shiloh of Michigan had a $28.0 million credit facility ("Shiloh
of Michigan Facility") with KeyBank. On January 22, 1998, the Company increased
the Shiloh Facility to $135.0 million. The term of the Shiloh Facility extends
to January 31, 2003. The Company has the option to select the applicable
interest rate at KeyBank's prime rate or the LIBOR rate plus a factor determined
by a pricing matrix based on the Company's ratio of Funded Debt to earnings
before interest, taxes, depreciation and amortization ("EBITDA"). As of July 31,
1999, the factor as determined by the pricing matrix was 0.4%. The terms of the
agreement also require an annual facility fee as determined by a pricing matrix
based on the Company's ratio of Funded Debt to EBITDA. This annual facility fee
is currently 0.225% of the outstanding loan balance. On January 22, 1998, the
Company used $28 million of the Shiloh Facility to retire the outstanding
balance of the Shiloh of Michigan Facility. On December 28, 1998 the Company
amended the existing facility with KeyBank to include an additional $35.0
million that expired on April 30, 1999. The $35.0 million amendment was
increased to $45.0 million on April 30, 1999 and expired on July 31, 1999. On
August 1, 1999 the term of the $45.0 million amendment was extended to September
15, 1999.
In March 1995, Medina County, Ohio issued on the behalf of the Company an
aggregate of $5.4 million in principal amount of variable rate interest bonds
due 2010, which are collateralized by the Company with a letter of credit. The
funds from these bonds, in the amount of $5.4 million, were used to finance a
portion of the expansion at the Company's steel pickling operations in Valley
City, Ohio in 1996. The entire $5.4 million principal amount was outstanding as
of July 31, 1999.
The Company executed a promissory note as of December 6, 1996 in favor of The
Richland Bank in the aggregate principal amount of $4.0 million. Interest
accrues on the outstanding principal balance thereunder at LIBOR plus 0.75%.
As of July 31, 1999, there were no borrowings outstanding under this note.
Certain of the debt agreements described above contain various restrictive
covenants which, among other things, require the Company's various operating
subsidiaries to maintain minimum net worth levels and financial ratios. The
agreements also place certain restrictions on additional indebtedness and
capital expenditures. As of July 31, 1999 the Company was in compliance with the
applicable covenants under its debt agreements.
Total availability at July 31, 1999 under the Company's unsecured lines of
credit and revolving credit facilities was $184.0 million, of which $28.6 was
unused.
NOTE 5 - Other Information:
- ---------------------------
During the nine months ended July 31, 1999 and 1998, cash payments for interest
amounted to $6.2 million and $5.1 million respectively, while cash payments,
net of refunds, for income taxes amounted to $0.9 million and $6.3 million,
respectively. The provision for income taxes was $6.2 million for the first nine
months of fiscal 1999 compared with $8.6 million for the comparable period in
fiscal 1998, representing effective tax rates of 38.0% and 38.3%, respectively.
The Company's non-qualified stock option plan, adopted in May 1993, provides for
granting officers and employees of the Company options to acquire an aggregate
of 1,200,000 shares at an exercise price equal to 100% of market price on the
date of grant. During the third quarter of fiscal 1999, 45,000 options were
granted.
<PAGE> 9
NOTE 6 - Subsequent Event:
- --------------------------
On September 13, 1999 the Company entered into a new credit agreement with
KeyBank, National Association, as agent for a group of lenders. The Company now
has a $210.0 million commitment under the credit agreement, which expires in
September 2004. The credit agreement is secured by an interest in all of the
Company's and its domestic subsidiaries, accounts receivable, inventory and
machinery and equipment. The credit agreement includes, without limitation,
covenants involving minimum interest coverage, minimum net worth coverage and
a minimum leverage ratio. In addition, the credit agreement limits the
incurrence of additional indebtedness, capital expenditures, investments,
dividends, transactions with affiliates, asset sales, acquisitions, prepayments
of other debt and liens and encumbrances.
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
- -------
The Company is an integrated steel processor that supplies blanks, stampings and
processed steel as well as designs and builds tools and dies for the automotive
and other industries. The Company currently provides a broad range of
intermediate steel processing services, which include: (i) blanking and
stamping; and (ii) other steel processing services (which include pickling hot
rolled steel, slitting, edge trimming, roller leveling and cutting to length of
both hot and cold rolled steel). The Company operates through ten subsidiaries,
Shiloh Corporation, Valley City Steel Company, The Sectional Die Company, Medina
Blanking, Inc. ("Medina Blanking"), Sectional Stamping, Inc.("Sectional
Stamping"), Liverpool Coil Processing, Inc., Shiloh of Michigan, L.L.C., the
Company's joint venture with Rouge Steel Company, Greenfield Die & Manufacturing
Company, C&H Design Company, d.b.a. C&H Die Technology and Jefferson Blanking,
Inc. ("Jefferson Blanking").
The Company typically experiences decreased revenue and operating income during
the first fiscal quarter of each year, usually resulting from generally slower
overall automobile production during the winter months. The revenues and
operating income in the third fiscal quarter can also be affected by the
typically lower automobile production activities in July due to manufacturers'
changeover in production lines.
In analyzing the financial aspects of the Company's steel processing operations,
a number of factors must be considered. First, plant utilization levels are very
important to profitability because of the capital-intensive nature of these
operations. Because the Company performs a number of different processing
operations, however, it is not meaningful to analyze simply the total tons of
steel processed. For example, blanking and stamping involve more operational
processes, from the design and manufacture of tools and dies to the production
and packaging of the final product, than the Company's other steel processing
services and therefore generally have higher margins. Second, a significant
portion of the Company's steel processing products and services is provided to
the customers on a toll-processing basis. Under these arrangements, the Company
charges a specified toll processing fee for the processing operations performed
without acquiring ownership of the steel and being burdened with the attendant
costs of ownership and risk of loss. Although the proportion of tons processed
by the Company that are directly owned and toll processed may fluctuate from
quarter to quarter primarily based on the customers for which the Company is
providing services during the period, the Company estimates that during the past
three years approximately 87.4%, 87.2% and 85.9%, respectively, of total tons
processed were on a toll processing basis. Revenues from operations involving
directly owned steel include a component of raw material cost whereas toll
processing revenues do not, consequently, toll processing generally results in
lower gross profit, but higher gross margin, than directly owned steel
processing. Therefore, an increase in the proportion of total revenues
attributable to directly owned steel processing may result in higher revenues
and gross profits but lower gross margins. The Company's blanking and stamping
operations use more directly owned steel than do its other steel processing
operations. In addition, changes in the price of steel can impact the Company's
results of operations because raw material costs are by far the largest
component of cost of sales in processing directly owned steel.
<PAGE> 11
Results of Operations
- ---------------------
THREE MONTHS ENDED JULY 31, 1999
COMPARED TO THREE MONTHS ENDED JULY 31, 1998
REVENUES. Revenues increased by $19.5 million, or 30.3%, to $83.9 million for
the third quarter of fiscal 1999 from $64.4 million for the comparable period
in fiscal 1998. The increase in revenue is primarily due to increased volumes
at the stamping facility as a result of increased production principally from
three customers, increased tailor welded blanking revenue, increased tool and
die sales and the inclusion of Jefferson Blanking which was in the initial
start-up stages during the third quarter of fiscal 1998. Revenues from the
blanking and stamping operations and other steel processing operations
increased approximately 35.9% and 11.6% respectively for the third quarter of
fiscal 1999 from the comparable period in fiscal 1998. The percentage of
revenues from directly owned steel processed increased to 71.3% for the third
quarter of fiscal 1999 from 70.2% for the comparable period in fiscal 1998. The
percentage of revenues from toll processed steel decreased to 28.7% for the
third quarter of fiscal 1999 from 29.8% for the comparable period in fiscal
1998. This shift of 1.1% between the mix of revenue from toll processed steel
and directly owned steel processing resulted from a shift in customer orders
for the quarter.
GROSS PROFIT. Gross profit increased by $3.0 million, or 24.8%, to $15.1 million
for the third quarter of fiscal 1999 from $12.1 million for the comparable
period in fiscal 1998. Gross margin decreased to 18.1% for the third quarter of
fiscal 1999 from 18.9% for the comparable period in fiscal 1998. The increase in
gross profit is a direct result of the $19.5 million increase in revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 3.7% to $6.7 million for the third quarter of
fiscal 1999 from $6.5 million for the comparable period in fiscal 1998. As a
percentage of revenues, selling, general and administrative expenses decreased
to 8.0% for the third quarter of fiscal 1999 from 10.1% for the comparable
period in fiscal 1998. The increase, in dollars, was the result of the addition
of corporate personnel and related benefit costs. In addition, the Company
incurred increased professional fees associated with personnel recruitment and
legal services associated with the negotiation of two union contracts. The
increase was also attributed to a full quarter of operations of
Jefferson Blanking, Inc.
OTHER. The Company incurred interest expense of $2.1 million in the third
quarter of fiscal 1999 compared to $1.0 million in the comparable period of
fiscal 1998. This increase is due primarily to increased average borrowings.
Interest expense of approximately $0.6 million relating to expansion of several
facilities was capitalized during the three-month period. The provision for
income taxes was $2.5 million in the third quarter of fiscal 1999 compared with
$1.8 million for the comparable period in fiscal 1998, representing effective
tax rates of 37.3% and 38.2%, respectively. The lower rate in the third quarter
of fiscal 1999 reflects the effect of certain state tax credits.
NET INCOME. Net income for the third quarter of fiscal 1999 increased by $1.1
million, or 38.5%, to $4.1 million from $3.0 million for the comparable period
in fiscal 1998. This increase was substantially the result of increased
revenue.
<PAGE> 12
NINE MONTHS ENDED JULY 31, 1999
COMPARED TO NINE MONTHS ENDED JULY 31, 1998
REVENUES. Revenues increased by $34.7 million, or 15.8%, to $255.0 million for
the first nine months of fiscal 1999 from $220.3 million for the comparable
period in fiscal 1998. The increase in revenue is primarily due to increased
volumes in our stamping operations, increased tailor-welded blanking revenue,
increased tool and die sales and the inclusion of Jefferson Blanking, Inc. in
the first nine months of fiscal 1999. Jefferson Blanking, Inc. was in
pre-operating stage in the comparable period of fiscal 1998. This increase was
partially offset by a decrease in revenue from sales of scrap steel due to an
approximate 40.9% decline in the average price of scrap steel per gross ton in
the first nine months of fiscal 1999. Revenues from our blanking and stamping
operations for the first nine months of fiscal 1999 increased approximately
21.0%, while revenues from the other steel processing operations for the first
nine months of fiscal 1999 decreased approximately 1.1%, from the comparable
period in fiscal 1998. The percentage of revenues from directly owned steel
processed increased slightly to 71.7% for the first nine months of fiscal 1999
from 71.4% for the comparable period in fiscal 1998. The percentage of revenues
from toll processed steel decreased slightly to 28.3% for the first nine months
of fiscal 1999 from 28.6% for the comparable period in fiscal 1998.
GROSS PROFIT. Gross profit decreased by $0.5 million, or 1.1%, to $43.8 million
for the first nine months of fiscal 1999 from $44.3 million for the comparable
period in fiscal 1998. Gross margin decreased to 17.2% for the first nine months
of fiscal 1999 from 20.1% for the comparable period in fiscal 1998. The decrease
in gross margin is primarily attributable to three factors: a decline in scrap
prices per gross ton, lower margins on specific tool and die projects, and
increased depreciation resulting from increased capital expenditures.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $3.1 million, or 16.1% to $22.5 million for
the first nine months of fiscal 1999 from $19.4 million for the comparable
period in fiscal 1998. As a percentage of revenues, selling, general and
administrative expenses remained unchanged at 8.8% for both the first nine
months of fiscal 1999 and 1998. The increase, in dollars, was the result of the
addition of corporate personnel and related benefits costs. In addition, the
Company incurred increased professional fees associated with personnel
recruitment and legal services associated with the negotiation of two union
contracts. The increase was also attributed to the inclusion of a full quarter
of operations at Jefferson Blanking, Inc.
OTHER. Interest expense increased to $5.6 million for the first nine months of
fiscal 1999 from $3.1 million for the comparable period in fiscal 1998 due
primarily to increased average borrowings during the first nine months of fiscal
1999 that were primarily incurred in connection with significant capital
expenditures made during fiscal 1998 and 1999. Interest expense of approximately
$1.6 million relating to expansion of several facilities was capitalized during
the first nine months of fiscal 1999. The provision for income taxes was $6.2
million for the first nine months of fiscal 1999 compared with $8.6 million for
the comparable period in fiscal 1998, representing effective tax rates of 38.0%
and 38.3%, respectively.
NET INCOME. Net income for the first nine months of fiscal 1999 decreased
by $3.5 million, or 26.0%, to $10.2 million from $13.7 million for the
comparable period in fiscal 1998. This decrease is the result of the factors
described above.
<PAGE> 13
Liquidity and Capital Resources
- -------------------------------
At July 31, 1999, the Company had $45.1 million of working capital, representing
a current ratio of 1.6 to 1 and a debt-to-capitalization ratio of 47.3%. As a
result of the financial condition of the Company, the Company believes that it
will be able to continue its planned investment in new equipment and facilities
through fiscal 1999.
Net cash provided by operating activities is primarily generated from net
income of the Company plus non-cash charges for depreciation and amortization,
which, because of the capital intensive nature of the Company's business, are
substantial. Net cash provided by operating activities during the first nine
months of fiscal 1999 was $19.0 million as compared to $33.3 million for the
comparable period of fiscal 1998, primarily as a result of the increase in
accounts receivable, partially offset by the increase in accounts payable and a
decrease in net income. Net cash provided by operating activities has
historically been used by the Company to fund a portion of its capital
expenditures.
Capital expenditures were $44.6 million during the first nine months of fiscal
1999 and $55.9 million for the comparable period in fiscal 1998. Capital
expenditures during the third quarter of fiscal 1999 were for expansions of the
Company's current blanking and stamping facilities as well as new construction
at Jefferson Blanking, Inc., Medina Blanking, Inc. and the Saltillo welded
blank facility in Mexico. These additions are being constructed or obtained to
support increased business and anticipated new business. The Company's total
capital budget for fiscal 1999, including carryover from the previous year,
amounts to approximately $50.0 million.
Prior to January 22, 1998, the Company had a $70.0 million unsecured revolving
credit facility ("Shiloh Facility") with KeyBank National Association
("KeyBank") and Shiloh of Michigan had a $28.0 million credit facility (the
"Shiloh of Michigan Facility") with KeyBank. On January 22, 1998, the Company
increased the Shiloh Facility to $135.0 million. The term of the Shiloh Facility
extends to January 31, 2003. The Company had the option to select the applicable
interest rate at KeyBank's prime rate or the LIBOR rate plus a factor determined
by a pricing matrix based on the Company's ratio of Funded Debt to EBITDA. As of
July 31, 1999, the factor as determined by the pricing matrix was 0.4%. The
terms of the agreement required an annual facility fee as determined by a
pricing matrix based on the Company's ratio of Funded Debt to EBITDA. As of July
31, 1999, this annual facility fee was 0.225% of the outstanding loan balance.
On January 22, 1998, the Company used $28.0 million of the Shiloh Facility to
retire the outstanding balance of the Shiloh of Michigan facility. On December
28, 1998 the Company amended the existing facility with KeyBank to include an
additional $35.0 million that expired on April 30, 1999. The $35.0 million
amendment was increased to $45.0 million on April 30, 1999 and expired on July
31, 1999. On August 1, 1999, the term of the $45.0 million amendment was
extended to September 15, 1999. On September 13, 1999, the Company entered into
a new credit agreement with KeyBank, National Association as agent for a group
of lenders. The Company now has a $210 million secured commitment under the
credit agreement, which expires in September 2004. Under the new credit
agreement the Company has the option to select the applicable interest rate at
KeyBank's prime rate or the LIBOR rate plus a factor determined by a pricing
matrix based on our funded debt to earnings before interest, taxes, depreciation
and amortization. See "Note to Consolidated Financial Statements-Note
6-Subsequant Event."
The Company executed a promissory note as of December 6, 1996 in favor of
Richland Bank in the aggregate principal amount of $4.0 million. Interest
accrues on the outstanding principal balance thereunder at LIBOR plus 0.75%. As
of July 31, 1999, there were no borrowings outstanding under this note.
In March 1995, Medina County, Ohio issued on the behalf of the Company an
aggregate of $5.4 million in principal amount of variable rate industrial
revenue bonds due 2010, which are collateralized by the Company with a letter of
credit. The funds from these bonds were used to finance a portion of the
expansion at the Company's steel pickling operations in Valley City, Ohio. The
$5.4 million of such proceeds was outstanding as of July 31, 1999.
The Company from time to time is involved in various stages of discussions and
negotiations with acquisition candidates. Other than the proposed acquisition of
the automotive division of MTD Products Inc, no definitive agreement with any
acquisition candidate has been entered into, and there can be no assurance that
any acquisition will be successfully negotiated, financed or consummated. The
Company may seek to finance its acquisitions, if any, to the extent permitted
by the credit agreement.
The Company believes that it currently has sufficient liquidity and available
capital resources to meet its existing needs, and the financial capability to
increase its long-term borrowing level if that becomes appropriate due to
changes in its capital requirements. Total availability under the Company's
unsecured lines of credit and revolving credit facilities is $184.0 million,
$28.6 million of which was unused at July 31, 1999.
<PAGE> 14
Year 2000 Compliance
- --------------------
The "Year 2000" problem relates to the computer systems and software that may
have a problem distinguishing the dates 1900 and 2000 because the calendar year
date is abbreviated by only two digits. As a result of this design decision,
systems could fail to operate or produce the correct results if the "00" is
interpreted to mean 1900 rather than 2000. If this occurs in a system used by
the Company or a third party dealing with the Company, the results could have an
adverse material effect on the Company.
As a key supplier to the automotive and other manufacturing industries, the
Company's major exposure for the Year 2000 problems is the effect of shutting
down production at one of its customer's facilities by failing to provide
materials and parts. While lost revenues from such an event are a concern for
the Company, the greater risks are the consequential damages for which the
Company could be liable if it in fact is found responsible for the shutdown of a
customer's facility. Such a finding could have an adverse material impact on the
Company's operating results.
The most likely way in which the Company would shut down production at a
customer's facility is by being unable to supply material or parts to that
customer. The material supplied by the Company, in many cases is an integral
component of the end products that the customer produces, and the inability to
provide them may make the customer unable to manufacture and sell its products.
Breakdowns in any number of the Company's computer systems and applications
could prevent the Company from being able to manufacture and ship its products.
Examples of such potential failures include, without limitation, failure in the
Company's manufacturing application software, bar-coding system, embedded
computer chips in shop-floor equipment, and lack of supply of material from its
suppliers, or lack of heat, power or water from utilities servicing the
Company's facilities. The Company's products do not contain computer devices
that require remediation to meet the Year 2000 requirements.
For its information technology, the Company currently utilizes an IBM RS6000
computing environment that is complemented by a series of local-area networks
("LANs") that are connected nationwide via a wide-area network ("WAN"). Most of
the operating systems related to the RS6000s, LANs and WAN have been or are in
the process of being updated to comply with the Year 2000 requirements.
Additionally, upgraded and modified versions of the Company's financial,
manufacturing (including bar coding), payroll, human resources and other
software applications which are Year 2000 ready are available and are now in the
process of being integrated into the Company's information systems. The Company
expects that this integration will be substantially complete by the end of the
third calendar quarter of 1999.
The Company utilizes non-mainframe computers and software in its various
production facilities throughout the country. An initial internal review of
these systems have identified that only a few revisions are necessary to these
systems to make them Year 2000 ready. The majority of the revisions that have
been identified relate to old personal computers or memory chips that must be
replaced. Although there can be no assurances that the Company will identify and
correct every Year 2000 problem in the computer applications used in its
business or production processes, the Company believes that it has in place a
comprehensive program to identify and correct any such problem. The program
calls for substantial completion of the remediation of these systems by the end
of the third calendar quarter of 1999. At this time, the Company does not
believe that it requires a contingency plan with respect to the information
technology, business and production processes and has therefore not developed
one.
The Company is also reviewing its building and utility systems (heat,
electrical, water, phones, etc.) for the impact of Year 2000. Many of the
systems in this area are currently Year 2000 compliant. While the Company is
diligently working with the providers of these services and has no reason to
expect that they will not meet their requirements for Year 2000 compliance,
there can be no assurances that these suppliers will in fact meet the Company's
requirement. A failure by any of these suppliers to remediate their systems
could potentially cause a shutdown of one or more of the Company's facilities,
which could impact the Company's ability to meet its
<PAGE> 15
obligations to deliver products to its customers. At this time, the Company has
not developed a contingency plan in the event of a failure caused by a supplier
or third party, but would do so if a specific problem is identified. In some
cases, especially with respect to utilities, there may not, however, be an
alternative source available.
The Company has also started a program to determine the Year 2000 compliance of
their significant equipment and material suppliers. The Company has sent out a
comprehensive questionnaire to all of its suppliers regarding their Year 2000
compliance and is attempting to identify any potential problem areas with
respect to them. This program will be ongoing and the Company's efforts with
respect to specific problems identified will depend, in part on its assessment
of the risk that any such problem may cause the shutdown of a customer's plant
or other problem which the Company believes would have a material effect on
operations. The Company cannot, however, fully control the conduct of its
suppliers and there can be no guarantee that Year 2000 problems originating from
a supplier will not occur. At this time, the Company has not developed a
contingency plan in the event of a failure caused by a supplier or third party,
but would do so if a specific problem is identified. In some cases there may not
be an alternative source available.
As a supplier to the automotive industry, the Company takes an active role in
many industry-sponsored organizations, including the American Iron and Steel
Institute ("AISI") and the Automotive Industry Action Group ("AIAG"). The AIAG
has been proactive in working with OEMs and Tier 1,2 and 3 suppliers to ensure
that the industry as a whole addresses the Year 2000 problem. The AIAG provides
tools to assist in achieving compliance including questionnaires, regular
meetings of members, follow-up by AIAG personnel regarding the answers to the
questionnaires, etc.
To date, the Company has not spent a material amount on specific Year 2000
issues. As of July 31, 1999, the Company spent approximately $11.4 million on a
new business system; however, the Company cannot quantify the amount directly
related to Year 2000 compliance. Similarly, the Company, at this time, cannot
quantify the amount to be spent on Year 2000 issues and compliance matters
related thereto.
The information presented above sets forth the key steps taken by the Company to
address the Year 2000 problem. There can be no assurance that third parties will
convert their systems in a timely manner and in a way that is compatible with
the Company's systems. The Company believes that its actions with suppliers will
minimize these risks and that the costs of Year 2000 compliance for its
information and production systems will not be material in its consolidated and
financial and operational results.
FORWARD-LOOKING STATEMENTS
The statements contained in this Report that are not historical facts are
forward-looking statements. These forward-looking statements are subject to
certain risks and uncertainties with respect to the Company's operations in
fiscal 1999 as well as over the long term such as, without limitation, (i) a
downturn in the automotive industry, which is highly cyclical, dependent on
consumer spending and subject to the impact of domestic and international
economic conditions and regulations and policies regarding international trade,
(ii) the ability of the Company to accomplish its strategic objectives with
respect to external expansion through selective acquisitions, internal expansion
and the construction of new facilities, (iii) the Company's ability to integrate
its acquisitions, and (iv) increases in the price of, or limitations on the
availability of steel, the Company's primary raw material. Any or all of these
risks and uncertainties could cause actual results to differ materially from
those reflected in the forward-looking statements. These forward-looking
statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes are
appropriate in the circumstances. In addition, such statements are subject to a
number of assumptions, risks and uncertainties, including, without limitation,
the risks and uncertainties identified in this Report, general economic and
business conditions, the business opportunities (or lack thereof) that may be
presented to and pursued by the Company, changes in laws or regulations and
other factors, many of which are beyond the control of the
<PAGE> 16
Company. Investors and prospective investors are cautioned that any such
statements are not guarantees of future performance and that actual results or
developments may differ materially from those projected in the forward-looking
statements.
Effect of Inflation
Inflation generally affects the Company by increasing the interest expense of
floating rate indebtedness and by increasing the cost of labor, equipment and
raw material. The general level of inflation has not had a material effect on
the Company's financial results.
Euro Conversion
On January 1, 1999, eleven of the fifteen countries (the "Participating
Countries") that are members of the European Union established a new uniform
currency known as the "Euro". The currency existing prior to such date in the
Participating Countries will be phased out during the transition period
commencing January 1, 1999 and ending January 1, 2002. During such transition
period both the Euro and the existing currency will be available in the
Participating Countries. Because the Company has no foreign operations and no
material foreign sales, the Company does not anticipate that the introduction
and use of the Euro will materially affect the Company" business, prospects,
results of operations or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our major market risk exposure is primarily due to possible fluctuations in
interest rates as they relate to our variable rate debt. We do not enter into
derivative financial investments for trading speculation purposes. As a result,
we believe that our market risk exposure is not material to our financial
position, liquidity or results of operations.
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
a. Exhibits
10 Asset Purchase Agreement, dated June 21, 1999,
among the Company, Shiloh Automotive, Inc. and MTD
Products Inc is incorporated by reference to
Appendix A of the Company's Proxy Statement on
Schedule 14A as filed with the Commission on
August 3, 1999.
27 Financial Data Schedule.
b. Reports on Form 8-K: None.
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 14, 1999 SHILOH INDUSTRIES, INC.
By: /s/ John F. Falcon
----------------------------
John F. Falcon,
President and
Chief Executive Officer
By: /s/ Craig A. Stacy
----------------------------
Craig A. Stacy,
Chief Financial Officer
and Treasurer
<PAGE> 18
Exhibit Index
Exhibit No. Description
- ----------- -----------
10 Asset Purchase Agreement, dated June 21, 1999, among the
Company, Shiloh Automotive, Inc. and MTD Products Inc is
incorporated by reference to Appendix A of the Company's Proxy
Statement on Schedule 14A as filed with the Commission on
August 3, 1999.
27 Financial Data Schedule.
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