Quarterly Report (10-q)

Date : 09/05/2019 @ 3:27PM
Source : Edgar (US Regulatory)
Stock : Shiloh Industries Inc (SHLO)
Quote : 3.65  -0.32 (-8.06%) @ 9:30PM

Quarterly Report (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, 2019
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)
______________________________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of exchange on which registered
Common Stock, $0.01 par value
SHLO
The NASDAQ Global Select Market
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 every Interactive Data File required to be submitted 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 such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large  Accelerated Filer
 ¨
Accelerated Filer
x
Non-accelerated Filer
¨
Smaller Reporting Company
x
Emerging Growth Company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 3, 2019 was 23,791,200.



INDEX
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1A. Risk Factors
 
Item 6. Exhibits


2


PART I— FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements

SHILOH INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
 
July 31,
2019

October 31,
2018
 

 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
11,936

 
$
16,843

Accounts receivable, net
180,502

 
209,733

Related party accounts receivable
466

 
996

Prepaid income taxes
6,341

 
1,391

Inventories, net
67,615

 
71,412

Prepaid expenses
11,854

 
10,478

Other current assets
10,318

 
22,124

Total current assets
289,032

 
332,977

Property, plant and equipment, net
333,840

 
316,176

Goodwill
27,384

 
27,376

Intangible assets, net
13,489

 
14,939

Deferred income taxes
2,811

 
5,665

Other assets
7,732

 
12,542

Total assets
$
674,288

 
$
709,675

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current debt
$
350

 
$
1,327

Accounts payable
170,175

 
177,400

Other accrued expenses
45,411

 
63,031

Accrued income taxes
27

 
1,874

Total current liabilities
215,963

 
243,632

Long-term debt
248,393

 
245,351

Long-term benefit liabilities
14,579

 
15,553

Deferred income taxes
792

 
2,894

Other liabilities
3,440

 
2,723

Total liabilities
483,167

 
510,153

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 per share; 5,000,000 shares authorized; no shares issued and outstanding at July 31, 2019 and October 31, 2018, respectively

 

Common stock, par value $0.01 per share; 75,000,000 and 50,000,000 shares authorized at July 31, 2019 and October 31, 2018, respectively; 23,799,035 and 23,417,107 shares issued and outstanding at July 31, 2019 and October 31, 2018, respectively
238

 
234

Paid-in capital
115,977

 
114,405

Retained earnings
129,518

 
135,813

Accumulated other comprehensive loss, net
(54,612
)
 
(50,930
)
Total stockholders’ equity
191,121

 
199,522

Total liabilities and stockholders’ equity
$
674,288

 
$
709,675




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

3


SHILOH INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
Net revenues
$
263,445

 
$
294,883

 
$
795,748

 
$
839,889

Cost of sales
239,857

 
262,003

 
729,790

 
747,616

Gross profit
23,588

 
32,880

 
65,958

 
92,273

Selling, general & administrative expenses
18,105

 
22,773

 
51,069

 
66,159

Amortization of intangible assets
518

 
607

 
1,558

 
1,767

Restructuring
3,905


1,965

 
11,371

 
4,962

Operating income
1,060

 
7,535

 
1,960

 
19,385

Interest expense
4,633

 
3,209

 
11,836

 
8,194

Interest income
(4
)
 
(1
)
 
(10
)
 
(9
)
Other (income) expense, net
113

 
289

 
(959
)
 
1,119

Income (loss) before income taxes
(3,682
)
 
4,038

 
(8,907
)
 
10,081

Benefit for income taxes
(973
)
 
(7,014
)
 
(2,612
)
 
(9,854
)
Net income (loss)
$
(2,709
)
 
$
11,052

 
$
(6,295
)
 
$
19,935

Income (loss) per share:
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
(0.11
)
 
$
0.47

 
$
(0.27
)
 
$
0.86

Basic weighted average number of common shares
23,557

 
23,278

 
23,486

 
23,202

Diluted earnings (loss) per share
$
(0.11
)
 
$
0.47

 
$
(0.27
)
 
$
0.85

Diluted weighted average number of common shares
23,557

 
23,453

 
23,486

 
23,341



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

4


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

 
 
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
 
 
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
(2,709
)
 
$
11,052

 
$
(6,295
)
 
$
19,935

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Defined benefit pension plans & other post-retirement benefits
 
 
 
 
 
 
 
 
 
 
Amortization of net actuarial loss
289

 
328

 
865

 
984

 
 
 
Cumulative effect of adoption of ASU 2018-02 (1)

 
(6,138
)
 

 
(6,138
)
 
 
 
Income tax provision
(66
)
 
(76
)
 
(198
)
 
(258
)
 
 
Total defined benefit pension plans & other post retirement benefits, net of tax
223

 
(5,886
)
 
667

 
(5,412
)
 
Marketable securities
 
 
 
 
 
 
 
 
 
 
Unrealized loss on marketable securities

 
(22
)
 

 
(151
)
 
 
 
Cumulative effect of adoption of ASU 2018-02 (1)

 
(7
)
 

 
(7
)
 
 
 
Income tax benefit

 
4

 

 
38

 
 
 
Realized income

 
122

 
18

 
122

 
 
Total marketable securities, net of tax

 
97

 
18

 
2

 
Derivatives and hedging
 
 
 
 
 
 
 
 
Unrealized (loss) gain on interest rate swap agreements
(301
)
 
171

 
(1,030
)
 
1,331

 
 
 
Cumulative effect of adoption of ASU 2018-02 (1)

 
(213
)
 

 
(213
)
 
 
 
Income tax benefit (provision)
58

 
(76
)
 
195

 
(533
)
 
 
 
Reclassification adjustments for settlement of derivatives included in net income (loss)
51

 
153

 
181

 
648

 
 
Change in fair value of derivative instruments, net of tax
(192
)
 
35

 
(654
)
 
1,233

 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
Foreign currency translation loss
(1,940
)
 
(2,834
)
 
(3,713
)
 
(2,953
)
 
 
Unrealized loss on foreign currency translation
(1,940
)
 
(2,834
)
 
(3,713
)
 
(2,953
)
Comprehensive income (loss), net
$
(4,618
)
 
$
2,464

 
$
(9,977
)
 
$
12,805


(1) The adoption of ASU 2018-02 required reclassification from accumulated other comprehensive loss to retained earnings for stranded tax effects in accumulated other comprehensive loss results from the Tax Cuts and Jobs Act of 2017.  


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,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
(6,295
)
 
$
19,935

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
35,010

 
33,775

Restructuring
1,610

 
672

Amortization of deferred financing costs
1,033

 
935

Deferred income taxes
232

 
(2,251
)
Stock-based compensation expense
1,576

 
1,557

(Gain) loss on sale of assets
(3,562
)
 
2,300

Loss on marketable securities
29

 
154

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
30,213

 
18,599

Inventories, net
3,900

 
(2,656
)
Prepaids and other assets
(1,564
)
 
(4,884
)
Payables and other liabilities
(30,965
)
 
(6,989
)
Prepaid and accrued income taxes
(6,863
)
 
(10,266
)
Net cash provided by operating activities
24,354

 
50,881

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(48,643
)
 
(38,668
)
Proceeds from sale of marketable securities
14

 

Acquisitions, net of cash required

 
(62,481
)
Derivative settlements
5,855

 

Proceeds from sale of assets
12,339

 
2,696

Net cash used in investing activities
(30,435
)
 
(98,453
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Payment of capital leases
(495
)
 
(667
)
Proceeds from long-term borrowings
223,400

 
218,300

Repayments of long-term borrowings
(220,000
)
 
(161,793
)
Payment of deferred financing costs
(1,948
)
 
(105
)
Proceeds from exercise of stock options

 
41

Net cash provided by financing activities
957

 
55,776

Effect of foreign currency exchange rate fluctuations on cash
217

 
336

Net increase (decrease) in cash and cash equivalents
(4,907
)
 
8,540

Cash and cash equivalents at beginning of period
16,843

 
8,736

Cash and cash equivalents at end of period
$
11,936

 
$
17,276




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

6


SHILOH INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
(Unaudited)
 
Common Stock (.01 Par Value)
 
Paid-in-Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Stockholders' Equity
April 30, 2018
$
234

 
$
113,424

 
$
126,859

 
$
(40,779
)
 
$
199,738

Net income

 

 
11,052

 

 
11,052

Other comprehensive income (loss), net of tax

 

 

 
(2,230
)
 
(2,230
)
Reclassification of stranded tax effects (1)

 

 
6,358

 
(6,358
)
 

Restricted stock and exercise of stock options

 
7

 

 

 
7

Stock-based compensation cost

 
515

 

 

 
515

July 31, 2018
$
234

 
$
113,946

 
$
144,269

 
$
(49,367
)
 
$
209,082

 
 
 
 
 
 
 
 
 
 
April 30, 2019
$
238

 
$
115,391

 
$
132,227

 
$
(52,703
)
 
$
195,153

Net loss

 

 
(2,709
)
 

 
(2,709
)
Other comprehensive income (loss), net of tax

 

 

 
(1,909
)
 
(1,909
)
Stock-based compensation cost

 
586

 

 

 
586

July 31, 2019
$
238

 
$
115,977

 
$
129,518

 
$
(54,612
)
 
$
191,121


 
Common Stock (.01 Par Value)
 
Paid-in-Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Stockholders' Equity
October 31, 2017
$
231

 
$
112,351

 
$
117,976

 
$
(42,237
)
 
$
188,321

Net income

 

 
19,935

 

 
19,935

Other comprehensive income, net of tax

 

 

 
(772
)
 
(772
)
Reclassification of stranded tax effects (1)

 

 
6,358

 
(6,358
)
 

Restricted stock and exercise of stock options
3

 
38

 

 

 
41

Stock-based compensation cost

 
1,557

 

 

 
1,557

July 31, 2018
$
234

 
$
113,946

 
$
144,269

 
$
(49,367
)
 
$
209,082

 
 
 
 
 
 
 
 
 
 
October 31, 2018
$
234

 
$
114,405

 
$
135,813

 
$
(50,930
)
 
$
199,522

Net loss

 

 
(6,295
)
 

 
(6,295
)
Other comprehensive income (loss), net of tax

 

 

 
(3,682
)
 
(3,682
)
Restricted stock and exercise of stock options
4

 
(4
)
 

 

 

Stock-based compensation cost

 
1,576

 

 

 
1,576

July 31, 2019
$
238

 
$
115,977

 
$
129,518

 
$
(54,612
)
 
$
191,121


(1) The adoption of ASU 2018-02 required reclassification from accumulated other comprehensive loss to retained earnings for stranded tax effects in accumulated other comprehensive loss results from the Tax Cuts and Jobs Act of 2017.  

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


7


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





Note 1—Basis of Presentation

The condensed consolidated financial statements have been prepared for Shiloh Industries, Inc. and its subsidiaries (collectively referred to as the "Company," "Shiloh Industries," "us," "our" or "we"), without audit, and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). 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 ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the SEC. Although we believe 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 our Annual Report on Form 10-K for the fiscal year ended October 31, 2018.

Revenues and operating results for the three and nine months ended July 31, 2019 are not necessarily indicative of the results to be expected for the full year.

8


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


Note 2—Recent Accounting Standards

Recently Issued Accounting Standards:
Standard
Description
Effective Date
Effect on our financial statements and other significant matters
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
The amendments change the impairment model for financial assets measured at amortized cost and available for sale equity securities. This new model will apply to instruments such as loans, held-to-maturity debt securities, loan commitments (including lines of credit), financial guarantees accounted for under ASC 460, net investments in leases, reinsurance and trade receivables. This model will result in an earlier recognition of allowances for losses through the establishment of an allowance account. The estimate of expected credit losses should consider historical and current information, and the reasonable and supportable forecasts of future events and circumstances, as well as estimates of prepayments.

November 1, 2020 with early adoption permitted.
We are in the process of evaluating the impact of adoption of this standard on our financial statements and disclosures.

ASU 2018-15 Goodwill and Other-Internal-Use Software
The amendments apply to the accounting for implementation, setup and other upfront costs (collectively referred to as implementation costs) for entities that are a customer in a hosting arrangement and align the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments also require customers to expense capitalized implementation costs over the term of the hosting arrangement and in the same line on the income statement as the fees associated with the hosting service and payments for the capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting service.
November 1, 2020 with early adoption permitted.

We are in the process of evaluating the impact of adoption of this standard on our financial statements and disclosures.

9


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

Standard
Description
Effective Date
Effect on our financial statements and other significant matters
ASU 2016-02 Leases
This amendment requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers. The standard requires a modified retrospective transition for capital and operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial adoption. In January 2018, the FASB issued an amendment to ASC Topic 842 which permits companies to elect an optional transition practical expedient to not evaluate existing land easements under the new standard if the land easements were not previously accounted for under existing lease guidance. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 which clarifies certain areas within ASU 2016-02. ASU 2018-11 Targeted Improvements to Topic 842, Leases. This amendment provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.


November 1, 2019 with early adoption permitted.
We are in the process of evaluating the impact of adoption of this standard on our financial statements and disclosures. Our continued efforts include assessing the available practical expedients, calculating the lease asset and liability balances associated with individual contractual arrangements and assessing disclosure requirements. In addition, we continue to monitor FASB amendments to ASC Topic 842. While we continue to evaluate the effect of the standard, we anticipate that the adoption will result in a material increase in assets and liabilities on our consolidated balance sheet and will not have a material impact on our consolidated income statement or statement of cash flows.

Recently Adopted Accounting Standards:
Standard
Description
Adoption Date
Effect on our financial statements and other significant matters
ASU 2017-09 Compensation - Stock Compensation (Topic 718)
This amendment clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The amendment should be adopted on a prospective basis.

November 1, 2018
The adoption of this framework did not have a material impact on Shiloh's financial position, results of operations or financial statement disclosures. Shiloh's awards are rarely modified after grant.


10


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

Standard
Description
Adoption Date
Effect on our financial statements and other significant matters
ASU 2014-09 Revenue from Contracts with Customers

The amendments require companies to recognize revenue when there is a transfer of 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. The amendments should be applied on either a full or modified retrospective basis, which clarifies existing accounting literature relating to how and when a company recognizes revenue. The Financial Accounting Standards Board ("FASB"), through the issuance of Accounting Standards Updated ("ASU") No. 2015-14, "Revenue from Contracts with Customers," approved a one year delay of the effective date and permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. During fiscal 2016, the FASB issued ASUs 2016-10, 2016-11 and 2016-12. Finally, ASU 2016-20 makes minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities.

November 1, 2018
Refer to Note 3.
ASU 2016-01 Recognition and Measurement of Financial Assets and Financial Liabilities
This amendment addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Most prominent among the amendments is the requirement for changes in the fair value of the Company's equity investments, with certain exceptions, to be recognized through net income rather than other comprehensive income ("OCI"). The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet in year of adoption.
November 1, 2018
The adoption of this framework did not have a material impact on Shiloh's financial position, results of operations or financial statement disclosures.


11


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

Standard
Description
Adoption Date
Effect on our financial statements and other significant matters
ASU 2018-09 Codification Improvements
These amendments provide clarifications and corrections to certain ASC subtopics including the following: Income Statement - Reporting Comprehensive Income – Overall (Topic 220-10), Debt - Modifications and Extinguishments (Topic 470-50), Distinguishing Liabilities from Equity – Overall (Topic 480-10), Compensation - Stock Compensation - Income Taxes (Topic 718-740), Business Combinations - Income Taxes (Topic 805-740), Derivatives and Hedging – Overall (Topic 815-10) and Fair Value Measurement – Overall (Topic 820-10).
The majority of the amendments will be effective November 1, 2019 while others were effective upon the issuance of the ASU.
Adoption of the clarifications and corrections in this ASU did not have a material impact on Shiloh's financial position, results of operations or financial statement disclosures.


Note 3Revenue

On November 1, 2018, we adopted ASU 2014-09, ASC Topic 606, "Revenue from Contracts with Customers" using the modified retrospective transition method with no impact to previously reported periods and no adjustment to retained earnings as of November 1, 2018 as there was no impact to previously reported revenue or expenses associated with the adoption of ASC 606. The new guidance requires new disclosures regarding the nature, timing and uncertainty of revenue and cash flows arising from contracts with customers.

The new standard recognizes revenue when a customer obtains control rather than when substantially all the risks and rewards of a good or service are transferred. The new guidance supersedes most existing revenue recognition guidance, including industry-specific guidance.

We manufacture and sell products, primarily to original equipment manufacturers ("OEMs") and to OEMs through Tier 1 suppliers. We enter into contracts with customers that create enforceable rights and obligations for the sale of those products. While certain production is provided under awarded multi-year programs, these programs do not contain any commitment to volume by the customer. Individual customer volume releases, blanket purchase orders, supply agreements, terms and conditions represent the contract with the customer. Volume releases are limited to near-term customer requirements generally with delivery periods within a few weeks. We do not have contract assets or liabilities as defined under ASC 606.

Each unit produced represents a separate performance obligation. Customer contracts do not provide an enforceable right to payment for performance completed throughout the production process. As such, product revenue is recognized at the point in time when shipment occurs and control has been transferred to the customer.

We participate in certain customers’ materials repurchase programs, under which we purchase materials directly from a customer’s designated supplier, for use in manufacturing products for that customer. We take delivery and title to such materials and bear the risk of loss and obsolescence. We invoice customers based upon negotiated selling prices, which inherently include a component for materials under such repurchase programs. We have risks and rewards of a principal, and as such, for transactions in which we participate in customers' materials resale programs, revenue is recognized on a gross basis for the entire amount, including the component for purchases under that customers' material resale programs.
    
We provide customers with standard warranties customary in the industry that products will operate as intended or designed, which are not separate performance obligations under ASC 606. We do not provide customers with the right to a refund, but provide for product replacement. Returns or refunds for nonconforming products are not separate performance obligations applicable to Shiloh's contract arrangements with customers.


12


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

We continue to include shipping and handling fees billed to customers in revenue, while including costs of shipping and handling in costs of sales as a fulfillment cost.

Taxes collected from customers are excluded from revenues and credited directly to obligations to the appropriate government agencies.

Payment terms with customers are established based on industry and regional practices and do not exceed 180 days.

Disaggregation of Net Revenues

 
 
Net Revenues
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
Region:
 
2019
 
2018
 
2019
 
2018
North America
 
$
203,920

 
$
223,074

 
$
606,872

 
$
648,705

Europe & Asia
 
65,214

 
77,438

 
205,760

 
206,108

Eliminations
 
(5,689
)
 
(5,629
)
 
(16,884
)
 
(14,924
)
Total Company
 
$
263,445

 
$
294,883

 
$
795,748

 
$
839,889


Note 4—Acquisitions

On March 1, 2018, a subsidiary of the Company acquired all of the issued and outstanding capital of Brabant Alucast Italy Site Verres S.r.l., a limited liability company organized under the laws of Italy, and Brabant Alucast The Netherlands Site Oss B.V., a limited liability company organized under the laws of the Netherlands (collectively "Brabant"). The acquisitions were accounted for as business combinations under the acquisition method in accordance with the FASB ASC Topic 805, Business Combinations. The acquisitions complement Shiloh’s global footprint with the expansion of aluminum and magnesium casting capabilities, while providing capacity for growth.
The aggregate fair value of consideration transferred was $65,273 ($62,514 net of cash acquired), on the date of the acquisitions. 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.

Note 5—Accounts Receivable, Net
Accounts receivable, net is expected to be collected within one year and is net of an allowance for doubtful accounts in the amount of $831 and $676 at July 31, 2019 and October 31, 2018, respectively. We recognized bad debt expense of $3 and $329 for the three and nine months ended July 31, 2019, and recognized bad debt expense (benefit) of $(32) and $14 during the three and nine months ended July 31, 2018, in the condensed consolidated statement of operations.
We continually monitor our exposure with our customers and additional consideration is given to individual accounts in light of the market conditions in the automotive and commercial vehicle markets.

As a part of our working capital management, we have entered into factoring agreements with third party financial institutions ("institutions") for the sale of certain accounts receivable with recourse. The activity under these agreements is accounted for as sales of accounts receivable under ASC Topic 860 "Transfers and Servicing." These agreements relate exclusively to the accounts receivable of certain Italian and Swedish customers. The amounts sold vary each month based on the amount of underlying receivables and cash flow requirements. In addition, the agreements address events and conditions which may obligate us to immediately repay the institutions the outstanding purchase price of the receivables sold.

The total amount of accounts receivable factored was $10,829 and $13,545 as of July 31, 2019 and October 31, 2018, respectively. As these sales of accounts receivable are with recourse, $9,915 and $11,742 were recorded in accounts payable as of July 31, 2019 and October 31, 2018, respectively. The cost of selling these receivables is dependent upon the number of days between the sale date of the receivables, the date the customer’s invoice is due and the interest rate. The expense associated with

13


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

the sale of these receivables is recorded as a component of selling, general and administrative expense in the accompanying condensed consolidated statements of operations.

Note 6—Related Party Receivables

MTD Products Inc. and MTD Holdings LLC are affiliates of Oak Tree Holdings LLC, which is a greater than 5% beneficial owner of the Company's shares of Common Stock.
 
Sales to MTD Products Inc. and its affiliates were $1,322 and $5,521 for the three and nine months ended July 31, 2019, respectively and $1,114 and $4,380 for the three and nine months ended July 31, 2018, respectively. At July 31, 2019 and October 31, 2018, we had related party receivable balances of $466 and $996, respectively, due from MTD Products Inc. and its affiliates.

Note 7—Inventories, Net
Inventories, net consists of the following:
 
July 31, 2019
 
October 31, 2018
Raw materials
$
28,978

 
$
28,457

Work in process
23,319

 
24,435

Finished goods
19,785

 
21,637

Reserves
$
(4,467
)
 
$
(3,117
)
Total inventories, net
$
67,615

 
$
71,412


Note 8 —Goodwill and Intangible Assets

Goodwill:

The changes in the carrying amount of goodwill for the nine months ended July 31, 2019 are as follows:
Balance October 31, 2018
 
$
27,376

 
Foreign currency translation
 
8

Balance July 31, 2019
 
$
27,384


Intangible Assets
    
The changes in the carrying amount of finite-lived intangible assets for the nine months ended July 31, 2019 are as follows:
 
 
Customer Relationships
 
Developed Technology
 
Non-Compete
 
Trade Name
 
Trademark
 
Total
Balance October 31, 2018
$
10,311

 
$
3,404

 
$
15

 
$
1,131

 
$
78

 
$
14,939

 
Amortization expense
(998
)
 
(296
)
 
(12
)
 
(93
)
 
(12
)
 
(1,411
)
 
Foreign currency translation
(3
)
 
(36
)
 

 

 

 
(39
)
Balance July 31, 2019
$
9,310

 
$
3,072

 
$
3

 
$
1,038

 
$
66

 
$
13,489


14


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

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:
 
 
July 31, 2019
 
 
Weighted Average Useful Life (years)
 
Gross Carrying Value Net of Foreign Currency
 
Accumulated Amortization
 
Net
 
Customer relationships
7.2
 
17,561

 
$
(8,251
)
 
$
9,310

 
Developed technology
9.1
 
7,129

 
(4,057
)
 
3,072

 
Non-compete
0.2
 
824

 
(821
)
 
3

 
Trade Name
8.4
 
1,875

 
(837
)
 
1,038

 
Trademark
4.0
 
166

 
(100
)
 
66

 
 
 
 
$
27,555

 
$
(14,066
)
 
$
13,489

Total amortization expense was $518 and $1,558 for the three and nine months ended July 31, 2019, respectively, and $607 and $1,767 for the three and nine months ended July 31, 2018, respectively. A favorable lease asset of $1,458 was acquired as part of the Brabant acquisitions in fiscal year 2018 with a 7 year useful life. Amortization expense for the three and nine months ended July 31, 2019 was $49 and $147, respectively. A net balance of $1,050 is included within other assets for the favorable lease asset. Amortization expense related to intangible assets and the favorable lease asset for the following fiscal years ending is estimated to be as follows:
    
Twelve Months Ended July 31,
 
 
2020
 
$
2,060

2021
 
2,057

2022
 
2,057

2023
 
2,056

2024
 
2,041

Thereafter
 
4,268

 
 
$
14,539


Note 9—Financing Arrangements
Debt consists of the following:    
 
July 31,
2019
 
October 31, 2018
Credit Agreement—interest rate of 5.27% at July 31, 2019 and 4.59% at October 31, 2018
$
246,700

 
$
243,300

Capital lease obligations
2,043

 
2,640

Insurance broker financing agreement

 
738

Total debt
248,743

 
246,678

Less: Current debt
350

 
1,327

Total long-term debt
$
248,393

 
$
245,351


At July 31, 2019, we had total debt, excluding capital leases, of $246,700, consisting of a revolving line of credit under the Credit Agreement of floating rate debt of $246,700. The weighted average interest rate of all debt was 5.26% and 3.82% for the nine months ended July 31, 2019 and 2018, respectively.


15


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

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, Dutch 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 The Huntington National Bank, N.A., as Co-Documentation Agents and the other lender parties thereto.

On June 6, 2019, we executed the Ninth Amendment to the Credit Agreement which improved certain thresholds for the consolidated leverage ratio and various baskets related to the indebtedness of foreign subsidiaries, disposition of assets, capital expenditures and sale leaseback transactions. The Ninth Amendment also adjusted the interest rate margins based on the applicable pricing tiers, but did not modify the aggregate revolving commitments under the Credit Agreement.

On October 31, 2017, we executed the Eighth Amendment to the Credit Agreement which, among other things, provided for an aggregate availability of $350,000, $275,000 of which is available to the Company through the Tranche A Facility and $75,000 of which is available to the Dutch borrower through the Tranche B Facility, and eliminated the scheduled reductions in such availability; increased the aggregate amount of incremental commitment increase allowed under the Credit Agreement to up to $150,000 subject to our pro forma compliance with financial covenants, the Administrative Agent’s approval and the Company obtaining commitments for any such increase. The Amendment extended the commitment period to October 31, 2022.

On July 31, 2017, we executed the Seventh Amendment which modified investments in subsidiaries and various cumulative financial covenant thresholds, in each case, under the Credit Agreement. The Amendment also enhanced our ability to take advantage of customer supply chain finance programs.

On October 28, 2016, we executed the Sixth Amendment which increased the permitted consolidated leverage ratio for periods beginning after July 31, 2016; increased the permitted consolidated fixed charge coverage ratio for periods beginning after April 30, 2017, modified various baskets related to sale of accounts receivable, disposition of assets, sale-leaseback transactions, and made other ministerial updates.
    
On October 30, 2015, we executed the Fifth Amendment which increased the permitted leverage ratio with periodic reductions beginning after July 30, 2016. In addition, the Amendment permitted various investments as well as up to $40,000 aggregate outstanding principal amount of subordinated indebtedness, subject to certain conditions. Finally, the Amendment provided for a consolidated fixed charge coverage ratio, and provided for up to $50,000 of capital expenditures by the Company and our subsidiaries throughout the year ending October 31, 2016, subject to certain quarterly baskets.

On April 29, 2015, we executed the Fourth Amendment to the Credit Agreement that maintained the commitment period of September 29, 2019 and allowed for an incremental increase of $25,000 (or if certain ratios are met, $100,000) to the original revolving commitments of $360,000, subject to our pro forma compliance with financial covenants, the administrative agent's approval, and the Company obtaining commitments for such increase.
    
The Fourth Amendment included scheduled commitment reductions beginning after January 30, 2016 totaling $30,000, allocated proportionately between the Aggregate Revolving A and B commitments. On April 30, 2016, the first committed reduction of $5,000 decreased the existing revolving commitment to $355,000, subject to our pro forma compliance with financial covenants.

Borrowings under the Credit Agreement bear interest, at our 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 Fifth Amendment provided for an interest rate margin on LIBOR loans of 1.5% to 3.0% and of 0.5% to 2.0% on base rate loans depending on the Company's leverage ratio.

The Credit Agreement contains customary restrictive and financial covenants, including covenants regarding our outstanding indebtedness and maximum leverage and interest coverage ratios. The Credit Agreement leverage ratio increases in restriction until maturity. 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

16


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

and become immediately due and payable. We were in compliance with the financial covenants under the Credit Agreement as of July 31, 2019 and October 31, 2018.

After considering letters of credit of $6,206 that we have issued, unused commitments under the Credit Agreement were $97,094 as of July 31, 2019. Actual borrowing capacity is subject to Credit Agreement covenants.

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 our domestic subsidiaries and 66% of the stock of our foreign subsidiaries.

Other Debt:

On August 1, 2018, we entered into a finance agreement with an insurance broker for various insurance policies that bears interest at a fixed rate of 2.55% and required monthly payments of $94 through May 2019.

We maintain capital leases for equipment used in our manufacturing facilities with lease terms expiring between 2019 and 2020. As of July 31, 2019, the present value of minimum lease payments under our capital leases amounted to $2,043.
Scheduled repayments of debt for the next five years are listed below:     
Twelve Months Ending July 31,
 
Credit Agreement
 
Capital Lease Obligations
 
Total
2020
 
$

 
$
350

 
$
350

2021
 

 
1,693

 
1,693

2022
 

 

 

2023
 
246,700

 

 
246,700

2024
 

 

 

Total
 
$
246,700

 
$
2,043

 
$
248,743


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, 2019 and 2018 are as follows:    
 
Pension Benefits
 
Other Post-Retirement
Benefits
 
Three Months Ended July 31,
 
Three Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
Interest cost
$
843

 
$
791

 
$
3

 
$
3

Expected return on plan assets
(836
)
 
(839
)
 

 

Amortization of net actuarial loss
288

 
328

 
1

 
1

Net periodic cost
$
295

 
$
280

 
$
4

 
$
4



17


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

 
Pension Benefits
 
Other Post-Retirement
Benefits
 
Nine Months Ended July 31,
 
Nine Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
Interest cost
$
2,525

 
$
2,375

 
$
9

 
$
8

Expected return on plan assets
(2,506
)
 
(2,519
)
 

 

Amortization of net actuarial loss
861

 
984

 
4

 
5

Net periodic cost
$
880

 
$
840

 
$
13

 
$
13

    
We made contributions of $1,183 to our U.S. pension plans during the three and nine months ended July 31, 2019. We expect to contribute an additional $219 to our U.S. pension plans before the end of fiscal 2019.

We report the service cost component of the net periodic pension and post-retirement costs in the same caption as other compensation costs arising from services rendered. The other components of net period costs are presented outside of operating income in other (income) expense, net.
    
Non-U.S. Plans

For our Swedish operations, the majority of the pension obligations are covered by insurance policies with insurance companies. Pension commitments in our Polish operations were $1,233 at July 31, 2019 and $1,081 at October 31, 2018. The liability represents the present value of future obligations and is calculated on an actuarial basis. The Polish operations recognized expense of $40 and $223 for the three and nine months ended July 31, 2019, respectively and $52 and $163 for the three and nine months ended July 31, 2018, respectively.

The insurance contracts guarantee a minimum rate of return. We have no input into the investment strategy of the assets underlying the contracts, but they are typically heavily invested in active bond markets and are highly regulated by local law.


18


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


Note 11—Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss in stockholders' equity by component for the three months ended July 31, 2019 and 2018 is as follows:
 
 
 
Pension and Post Retirement Plan Liability (1)
 
Marketable Securities Adjustment (1)
 
Interest Rate Swap Adjustment (2)
 
Foreign Currency Translation Adjustment (3)
 
Accumulated Other Comprehensive Loss
Balance at April 31, 2018
 
$
(27,373
)
 
$
(97
)
 
$
(121
)
 
$
(13,188
)
 
$
(40,779
)
 
Other comprehensive income (loss), net of tax
 

 
(18
)
 
95

 
(2,834
)
 
(2,757
)
 
Amounts reclassified from accumulated other comprehensive loss
 
252

 
122

 
153

 

 
527

 
Net current-period other comprehensive income (loss)
 
252

 
104

 
248

 
(2,834
)
 
(2,230
)
 
Reclassification to retained earnings (4)
 
(6,138
)
 
(7
)
 
(213
)
 

 
(6,358
)
Balance at July 31, 2018
 
$
(33,259
)
 
$


$
(86
)

$
(16,022
)
 
$
(49,367
)
 
 
 
Pension and Post Retirement Plan Liability (1)
 
Marketable Securities Adjustment (1)
 
Interest Rate Swap Adjustment (2)
 
Foreign Currency Translation Adjustment (3)
 
Accumulated Other Comprehensive Loss
Balance at April 30, 2019
 
$
(28,693
)
 
$

 
$
(358
)
 
$
(23,652
)
 
$
(52,703
)
 
Other comprehensive income (loss), net of tax
 

 

 
(243
)
 
(1,940
)
 
(2,183
)
 
Amounts reclassified from accumulated other comprehensive loss
 
223

 

 
51

 

 
274

 
Net current-period other comprehensive income (loss)
 
223

 

 
(192
)
 
(1,940
)
 
(1,909
)
Balance at July 31, 2019
 
$
(28,470
)
 
$

 
$
(550
)
 
$
(25,592
)
 
$
(54,612
)
(1) Amounts reclassified from accumulated other comprehensive loss, net of tax are classified with other expense included on the statements of operations.
(2) Amounts reclassified from accumulated other comprehensive income loss, net of tax are classified with interest expense included on the statements of operations.
(3) The net investment derivative instrument is recognized in accumulated other comprehensive loss and reclassified to income in the same period when a gain or loss related to that net investment in foreign operation is included in income.
(4) In the three months ended July 31, 2018, Shiloh early adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." As a result, the stranded tax effects resulting from the TCJA enacted in December 2017 were reclassified from accumulated other comprehensive loss to retaining earnings.


19


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

Changes in accumulated other comprehensive loss in stockholders' equity by component for the nine months ended July 31, 2019 and 2018 is as follows:
 
 
 
Pension and Post Retirement Plan Liability (1)
 
Marketable Securities Adjustment (1)
 
Interest Rate Swap Adjustment (2)
 
Foreign Currency Translation Adjustment (3)
 
Accumulated Other Comprehensive Loss
Balance at October 31, 2017
 
$
(27,847
)
 
$
(2
)
 
$
(1,319
)
 
$
(13,069
)
 
$
(42,237
)
 
Other comprehensive income (loss), net of tax
 

 
(113
)
 
798

 
(2,953
)
 
(2,268
)
 
Amounts reclassified from accumulated other comprehensive loss
 
726

 
122

 
648

 

 
1,496

 
Net current-period other comprehensive income (loss)
 
726

 
9

 
1,446

 
(2,953
)
 
(772
)
 
Reclassification to retained earnings (4)
 
(6,138
)
 
(7
)
 
(213
)
 

 
(6,358
)
Balance at July 31, 2018
 
$
(33,259
)
 
$

 
$
(86
)
 
$
(16,022
)
 
$
(49,367
)
 
 
 
Pension and Post Retirement Plan Liability (1)
 
Marketable Securities Adjustment (1)
 
Interest Rate Swap Adjustment (2)
 
Foreign Currency Translation Adjustment (3)
 
Accumulated Other Comprehensive Loss
Balance at October 31, 2018
 
$
(29,137
)
 
$
(18
)
 
$
104

 
$
(21,879
)
 
$
(50,930
)
 
Other comprehensive income (loss), net of tax
 

 

 
(835
)
 
(3,713
)
 
(4,548
)
 
Amounts reclassified from accumulated other comprehensive loss, net of tax
 
667

 
18

 
181

 

 
866

 
Net current-period other comprehensive income (loss)
 
667

 
18

 
(654
)
 
(3,713
)
 
(3,682
)
Balance at July 31, 2019
 
$
(28,470
)
 
$

 
$
(550
)
 
$
(25,592
)
 
$
(54,612
)
(1) Amounts reclassified from accumulated other comprehensive loss, net of tax are classified with other expense included on the statements of operations.
(2) Amounts reclassified from accumulated other comprehensive income loss, net of tax are classified with interest expense included on the statements of operations.
(3) The net investment derivative instrument is recognized in accumulated other comprehensive loss and reclassified to income in the same period when a gain or loss related to that net investment in foreign operation is included in income.
(4) In the nine months ended July 31, 2018, Shiloh early adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." As a result, the stranded tax effects resulting from the TCJA enacted in December 2017 were reclassified from accumulated other comprehensive loss to retaining earnings.


Note 12—Derivatives and Financial Instruments

Shiloh is exposed to, among other risks, the impact of changes in commodity prices, foreign currency exchange rates, and interest rates in the normal course of business. Shiloh’s financial risk management program is designed to manage the exposure and volatility arising from these risks and utilizes derivative financial instruments to offset a portion of these risks. We do not enter into derivative financial instruments for trading or speculative purposes. On an on-going basis, we monitor counterparty credit ratings. We consider credit non-performance risk to be low because we enter into agreements with commercial institutions that have investment grade credit rating.

On March 1, 2018, we entered into a cross-currency swap in which we would settle interest on the notional amount in Euros and settle interest on the notional amount in dollars, both at a variable rate. The objective of the transaction was to protect the initial net investment in Brabant against adverse changes in the exchange rate between the U.S. dollar and the Euro. Hedge effectiveness was assessed based upon changes in the spot foreign exchange rate. As such, the change in value of the cross-currency interest rate swap related to the change in spot rates was perfectly effective at offsetting changes in cumulative translation adjustment related to the portion of our net investment in Brabant up to the notional amount of the cross-currency interest rate swap.

Under the cross-currency interest rate swap, we received €53,000 on which we would settle interest at the 1-month Euribor rate, and we lent to the counterparty $64,930 on which we would settle interest at the 1-month LIBOR rate. Interest payments

20


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

were made at the end of every month. The notional amounts in the respective currencies exchanged at the beginning of the cross-currency interest rate swap period were to be repaid at the end of the cross-currency interest rate swap period. The initial maturity of the cross-currency interest rate swap was October 31, 2022. In the second quarter of fiscal 2019, the cross-currency interest rate swap was discontinued and settled in cash for $5,110. The cash value at settlement was driven by changes in foreign currency exchange rates and debt markets from inception to settlement. There was no impact to net income upon settlement.

On February 25, 2014, we entered into an interest rate swap with an aggregate notional amount of $75,000 designated as a cash flow hedge to manage interest rate exposure on our floating rate LIBOR based debt under the Credit Agreement.  The interest rate swap is an agreement to exchange payment streams based on the notional principal amount. This agreement fixes our future interest rate at 2.74% plus the applicable margin as provided in the Fifth Amendment discussed in Note 9 - Financing Arrangements, on an amount of our 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. The second notional amount of $25,000 commenced on September 1, 2015 and the final notional amount of $25,000 commenced on March 1, 2016. The base notional amount plus each incremental addition to the base notional amount has 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, we designated the interest rate swap as a hedge of the variability of cash flows to be paid relative to our variable rate monies borrowed. Any ineffectiveness in the hedging relationship is recognized immediately into earnings.

Our derivatives at July 31, 2019 consist of interest rate swap contracts, all of which are over-the-counter and not traded through an exchange. The Company uses widely accepted valuation tools to determine fair value, such as discounting cash flows to calculate a present value for the derivatives. The models use Level 2 inputs, such as forward curves and other commonly quoted observable transactions and prices. The fair value of our derivatives and hedging instruments are all classified as Level 2 investments within the three-tier hierarchy.


The following table discloses the fair value and balance sheet location of our derivative instruments:
 
 
 Asset (Liability) Derivatives
 
 
Balance Sheet Location
July 31, 2019
October 31, 2018
Net Investment Hedging Instruments:
 
 
 
 
Cross-currency interest rate swap contract
Other assets
$

$
4,432

Cash Flow Hedging Instruments:
 
 
 
 
Interest rate swap contracts
(Other liabilities) Other assets
$
(715
)
$
135


As a result of the hedging relationships being highly effective, the net interest payments accrued each period are reflected in net income (loss) as adjustments of interest expense, and the remaining change in the fair value of the derivatives is recognized in accumulated other comprehensive loss ("AOCI").

Derivative activity is included in interest expense and cash paid for interest. The following table presents the effect of our derivative instruments on the condensed consolidated statements of operations and the effects of hedging on those line items:
Location
Three Months Ended July 31, 2019
Three Months Ended July 31, 2018
Interest expense
$
4,633

$
3,209

Effect of hedging on interest expense
$
51

$
(274
)
Location
Nine Months Ended
July 31, 2019
Nine Months Ended
July 31, 2018
Interest expense
$
11,836

$
8,194

Effect of hedging on interest expense
$
(564
)
$
27


Note 13—Stock Incentive Compensation

21


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

Stock Incentive Compensation requires us to expense share-based payment awards granted. Compensation cost for share-based payments transactions are measured at fair value. For stock options, we use the simplified method of calculating the expected term 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. New restricted stock and restricted stock unit grants are valued at the closing market price of our common stock on the date of grant. We do not estimate a forfeiture rate at the time of grant. Instead, we recognize share-based compensation expense when actual forfeitures occur.
2019 Equity and Incentive Compensation Plan
Long-Term / Annual Incentives
On February 26, 2019, stockholders approved and adopted the 2019 Equity and Incentive Compensation Plan ("2019 Plan" or "Incentive Plan") which replaced the 2016 Equity and Incentive Compensation Plan. The 2019 Plan authorizes the Compensation Committee of the Board of Directors of the Company to grant to officers and other key employees, including directors, of the Company and our subsidiaries (i) stock options, (ii) appreciation rights, (iii) restricted shares, (iv) restricted stock units, (v) cash incentive awards, performance shares and performance units and (vi) other awards. An aggregate of 1,500,000 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 options and / or appreciation rights is limited to 500,000 shares during any calendar year. Also, an individual's award of restricted shares, restricted share units and performance based awards is limited to 350,000 shares during any calendar year.

22


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


The following table summarizes the Company’s Incentive Plan activity for the nine months ended July 31, 2019 and 2018:    
 
 
 
Stock Options
 
Restricted Stock
 
Restricted Stock Units
 
Outstanding at:
 
Options
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Life
 
Restricted Shares
 
Grant Fair Value
 
Weighted Average Remaining Contractual Life
 
Restricted Share Units
 
Grant Fair Value
 
Weighted Average Remaining Contractual Life
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
November 1, 2017
 
58

 
$8.16
 
2.53
 
441

 
$7.07
 
1.60
 
36

 
$7.69
 
1.82
 
Granted
 

 

 
 
 
296

 
8.12

 
 
 
18

 
7.90

 
 
 
Options exercised or restricted stock vested
 
(12
)
 
3.26

 
 
 
(200
)
 
7.51

 
 
 
(15
)
 
8.30

 
 
 
Forfeited or expired
 
(3
)
 
12.04

 
 
 
(41
)
 
7.08

 
 
 
(12
)
 
6.18

 
 
 
July 31, 2018
 
43

 
$9.33
 
1.83
 
496

 
$7.52
 
1.95
 
26

 
$8.17
 
1.72
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
November 1, 2018
 
33

 
$9.42
 
1.84
 
478

 
$7.45
 
1.87
 
27

 
$8.17
 
1.37
 
Granted
 

 

 
 
 
418

 
6.73

 
 
 
42

 
6.47

 
 
 
Options exercised or restricted stock vested
 

 

 
 
 
(230
)
 
6.84

 
 
 
(14
)
 
7.98

 
 
 
Forfeited or expired
 

 

 
 
 
(54
)
 
7.39

 
 
 
(4
)
 
7.35

 
 
 
July 31, 2019
 
33

 
$9.42
 
1.09
 
612

 
$7.20
 
1.97
 
51

 
$6.84
 
2.00
We recorded stock compensation expense related to stock options, restricted stock and restricted stock units during the three and nine months ended July 31, 2019 and 2018 as follows:
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
 
2019
 
2018
 
2019
 
2018
Restricted stock
 
$
544

 
$
488

 
$
1,461

 
$
1,465

Restricted stock units
 
42

 
27

 
115

 
92

Total
 
$
586

 
$
515

 
$
1,576

 
$
1,557

Stock Options - The exercise price of each stock option equals the market price of our common stock on the grant date. Compensation expense is recorded at the grant date fair value, adjusted for forfeitures as they occur, and is recognized over the applicable vesting periods. Our stock options generally vest over three years, with a maximum term of ten years. Incentive stock options were not granted during the nine months ended July 31, 2019 and 2018.
Cash received from the exercise of options for the nine months ended July 31, 2019 and July 31, 2018 was $0 and $41, respectively. Options that have an exercise price greater than the market price are excluded from the intrinsic value computation. At July 31, 2019 and October 31, 2018, the options outstanding and exercisable had an intrinsic value of $0 and $42, respectively.
Restricted Stock Awards - New restricted stock grants are valued at the closing market price of our common stock on the grant date. Compensation expense is recorded at the grant date fair value, adjusted for forfeitures as they occur and is recognized over the applicable vesting periods. The vesting periods range between one to three years. As of July 31, 2019, there was $3,280 of unrecognized compensation expense related to non-vested restricted stock that is expected to be recognized over the next three fiscal years.
Restricted Stock Units - New restricted stock unit grants are valued at the closing market price of our common stock on the grant date. Compensation expense is recorded at the grant date fair value, adjusted for forfeitures as they occur and is recognized over the applicable vesting periods. The vesting periods range between one to three years. As of July 31, 2019, there was $258 of unrecognized compensation expense related to these restricted stock units that is expected to be recognized over the applicable vesting periods.

23


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


Note 14—Fair Value of Financial Instruments
The methods that we use may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our 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, 2019 and October 31, 2018 are set forth in the table below:
 
Asset (Liability)
Level 1
Level 2
Valuation Technique
October 31, 2018
 
 
 
 
      Cross-Currency Interest Rate Swap
$
4,432


$
4,432

Income Approach
      Interest Rate Swap Contracts
135


135

Income Approach
   Marketable Securities
21

21


Market Approach
 
 
 
 
 
July 31, 2019
 
 
 
 
      Interest Rate Swap Contracts
$
(715
)

$
(715
)
Income Approach

We calculate the fair value of our cross-currency and interest rate swap contracts using quoted interest rate curves to calculate forward values and then discount 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 our counterparties.
We calculate the fair value of our marketable securities by using the closing stock price on the last business day of the quarter.

24


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

Note 15—Restructuring Charges

During the fourth quarter of fiscal 2017, management initiated restructuring activities to reshape Shiloh's global footprint to be flexible to market conditions. Activities included actions such as consolidating manufacturing facilities, making geographical shifts to place production closer to customer facilities, centralizing departments, optimizing our product portfolio and capturing synergies. Management believes these strategic moves will result in a stronger and more agile organization.
    
During the three and nine months ended July 31, 2019, respectively, we incurred $3,905 and $11,371 related to employee, professional, legal and other restructuring related costs. We have incurred restructuring expenses of $22,761 since initiating the restructuring activities.

Global restructuring initiatives have continued to evolve and expand across the organization. We expect to incur additional restructuring costs over and beyond the next twelve months to execute planned restructuring initiatives. Costs of planned restructuring actions will primarily include employee costs and professional fees to execute initiatives. Future restructuring actions will depend upon market conditions, customer actions and other factors.

The following table presents information about restructuring costs recorded for the three and nine months ended July 31, 2019:
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
 
2019
 
2018
 
2019
 
2018
Employee costs
 
$
947

 
$
1,352

 
$
2,377

 
$
2,931

Professional and legal costs
 
2,608

 
58

 
6,769

 
1,170

Other
 
350

 
555

 
2,225

 
861

 
 
$
3,905

 
$
1,965

 
$
11,371

 
$
4,962


The following table presents a rollforward of the beginning and ending liability balances related to the restructuring costs which are included in the condensed consolidated balance sheets in other accrued expenses for the above-mentioned actions through July 31, 2019:

 
Balance as of October 31, 2018
 
Restructuring Expense
 
Payments
 
Balance as of July 31, 2019
Employee costs
$
367

 
2,377

 
2,744

 
$

Professional and legal costs
248

 
6,769

 
$
4,792

 
2,225

Other

 
2,225

 
$
2,225

 

 
$
615

 
$
11,371

 
$
9,761

 
$
2,225



Note 16—Income Taxes

The provision for income taxes for the three months ended July 31, 2019 was a benefit of $973 on loss before income taxes of $3,682 for a consolidated effective tax rate of 26.4%. The provision for income taxes for the nine months ended July 31, 2019 was a benefit of $2,612 on loss before income taxes of $8,907 for a consolidated effective tax rate of 29.3%. The year-to-date benefit was calculated using the year-to-date loss, considering non-taxable and non-deductible items expected to be incurred for the full year multiplied by the statutory rate. This methodology is required by ASC 740, Income Taxes, as the use of an estimated annual effective rate would not be reliable.

The provision for income taxes for the three months ended July 31, 2018 was a benefit of $7,014 on income before income taxes of $4,038 for a consolidated effective tax rate of (173.7)%. Income taxes included a $2,300 net benefit related to a return to provision due to a change in estimate and a $5,500 benefit based on adjusting the estimated annual tax rate used to calculate the quarterly provision related to 2018. The provision for income taxes for the nine months ended July 31, 2018 was a benefit of $9,854 on income before taxes of $10,081 for a consolidated effective tax rate of (97.7)%. The consolidated effective tax rate for

25


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

the year decreased primarily due to a $2,300 net tax benefit related to a return to provision due to a change in estimate, a $5,500 tax benefit based on adjusting estimated annual tax rate and tax benefit of $3,966 due to the enactment of the TCJA.

The U.S. Internal Revenue Service has proposed disallowances of the majority of fiscal year 2012 and fiscal year 2013 U.S. R&D credits claimed. We are disputing this tax credit matter and intend to vigorously defend our position. We believe the ultimate resolution of the matters will not materially impact our results of operations, financial position or cash flows. With any tax controversy and litigation, there is, however, a chance of unforeseen loss which due to the number of years involved could materially impact our results, financial position and cash flows. For open tax years through fiscal year 2019, the total amounts related to the unreserved portion of the tax contingency, inclusive of any related interest, amounts to approximately $8,000, of which the majority has been assessed by management as being remote as to the likelihood of ultimately resulting in a loss to the Company. We routinely assess tax matters as to the probability of incurring a loss and record our best estimate of the ultimate loss in situations where we assess the likelihood of an ultimate loss as probable.


Note 17—Earnings Per Share
Basic earnings per share is computed by dividing net income (loss) 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 restricted stock awards, restricted stock units and stock options outstanding under the 2019 Plan are included in the diluted earnings per share calculation to the extent they are dilutive. For the nine months ended July 31, 2019 and 2018, 141 and 316 stock awards, respectively, were excluded from the computation of diluted earnings per share because their inclusion would be anti-dilutive. The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation for net income (loss) per share:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
Net income (loss) available to common stockholders
$
(2,709
)
 
$
11,052

 
$
(6,295
)
 
$
19,935

Basic weighted average shares
23,557

 
23,278

 
23,486

 
23,202

Effect of dilutive securities:
 
 
 
 
 
 
 
Restricted stock, units and stock options (1)

 
175

 

 
139

Diluted weighted average shares
23,557

 
23,453

 
23,486

 
23,341

Basic income (loss) per share
$
(0.11
)
 
$
0.47

 
$
(0.27
)
 
$
0.86

Diluted income (loss) per share
$
(0.11
)
 
$
0.47

 
$
(0.27
)
 
$
0.85

(1) Due to a loss for the three and nine months ended July 31, 2019, no restricted stock, restricted stock units or stock options are included because the effect would be anti-dilutive.

Note 18—Business Segment Information
We conduct our business and report our information as one operating segment and, therefore, disclose one reportable segment - Automotive and Commercial Vehicles. Our chief operating decision maker is the executive leadership team, which includes certain Vice Presidents, all Senior Vice Presidents and the Chief Executive Officer. This team has the final authority over performance assessment and resource allocation decisions. In determining that one operating segment is appropriate, we considered the nature of the business activities and the existence of managers responsible for the operating activities. Customers and suppliers are substantially the same in the automotive and commercial vehicle industry.
Foreign net revenues (those outside the United States before eliminations) were $82,621 or 31.4% and $245,376 or 30.8% of net revenues for the three and nine months ended July 31, 2019, respectively, and $87,393 or 29.6% and $235,037 or 28.0% for the three and nine months ended July 31, 2018, respectively. Foreign net revenues, and geographic regions quantified in the table below, are based upon the location of the entity recording the sale.

26


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

 
 
Net Revenues