AEPI Aep Industries Inc.

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended January 31, 2015

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 001-35117

 

 

AEP Industries Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		22-1916107
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
95 Chestnut Ridge Road Montvale, New Jersey		07645
(Address of principal executive offices)		(Zip code)

(201) 641-6600

(Registrant’s telephone number, including area code)

Not Applicable

(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, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		x
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of outstanding shares of the registrant’s common stock, $0.01 par value, as of March 9, 2015 was 5,083,095.

 

 

 

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AEP INDUSTRIES INC.

TABLE OF CONTENTS

 

				Page Number
PART I		FINANCIAL INFORMATION
ITEM 1:		Financial Statements			3
		Consolidated Balance Sheets at January 31, 2015 (unaudited) and October 31, 2014			3
		Consolidated Statements of Operations for the three months ended January  31, 2015 and 2014 (unaudited)			4
		Consolidated Statements of Comprehensive Loss for the three months ended January  31, 2015 and 2014 (unaudited)			5
		Consolidated Statements of Cash Flows for the three months ended January  31, 2015 and 2014 (unaudited)			6
		Notes to Consolidated Financial Statements (unaudited)			7
ITEM 2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
ITEM 3:		Quantitative and Qualitative Disclosures About Market Risk			25
ITEM 4:		Controls and Procedures			26
PART II		OTHER INFORMATION
ITEM 1:		Legal Proceedings			27
ITEM 1A:		Risk Factors			27
ITEM 2:		Unregistered Sales of Equity Securities and Use of Proceeds			27
ITEM 3:		Defaults Upon Senior Securities			27
ITEM 4:		Mine Safety Disclosures			27
ITEM 5:		Other Information			27
ITEM 6:		Exhibits			27
		Signatures			28

 

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PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

AEP INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

		January 31, 2015				October 31, 2014
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	557			$	867
Accounts receivable, less allowance for doubtful accounts of $2,788 and $2,831 in 2015 and 2014, respectively			102,680				119,355
Inventories, net			91,903				86,420
Deferred income taxes			6,563				2,697
Other current assets			6,345				6,867
Total current assets			208,048				216,206
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $385,838 and $378,306 in 2015 and 2014, respectively			209,986				216,509
GOODWILL			6,871				6,871
INTANGIBLE ASSETS, net of accumulated amortization of $2,541 and $2,412 in 2015 and 2014, respectively			3,871				4,000
OTHER ASSETS			3,140				3,360
Total assets		$	431,916			$	446,946
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Bank borrowings, including current portion of long-term debt		$	2,515			$	2,636
Accounts payable			76,873				81,890
Accrued expenses			27,769				28,484
Total current liabilities			107,157				113,010
LONG-TERM DEBT			242,707				253,695
DEFERRED INCOME TAXES			19,434				16,322
OTHER LONG-TERM LIABILITIES			3,124				4,222
Total liabilities			372,422				387,249
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Preferred stock, $1.00 par value; 970,000 shares authorized; none issued			—				—
Series A junior participating preferred stock, $1.00 par value; 30,000 shares authorized; none issued			—				—
Common stock, $0.01 par value; 30,000,000 shares authorized; 11,218,190 and 11,215,691 shares issued in 2015 and 2014, respectively			112				112
Additional paid-in capital			113,133				112,978
Treasury stock at cost, 6,135,095 shares in 2015 and 2014, respectively			(189,810	)			(189,810	)
Retained earnings			137,034				136,558
Accumulated other comprehensive loss			(975	)			(141	)
Total shareholders’ equity			59,494				59,697
Total liabilities and shareholders’ equity		$	431,916			$	446,946

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

 

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AEP INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share data)

 

		For the Three Months Ended January 31,
		2015				2014
NET SALES		$	275,439			$	272,517
COST OF SALES			242,875				247,933
Gross profit			32,564				24,584
OPERATING EXPENSES:
Delivery			11,617				12,018
Selling			8,603				8,658
General and administrative			6,771				5,576
Total operating expenses			26,991				26,252
Operating income (loss)			5,573				(1,668	)
OTHER (EXPENSE) INCOME:
Interest expense			(4,916	)			(4,783	)
Other, net			—				87
Income (loss) before (provision) benefit for income taxes			657				(6,364	)
(PROVISION) BENEFIT FOR INCOME TAXES			(181	)			2,637
Net income (loss)		$	476			$	(3,727	)
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) per common share		$	0.09			$	(0.67	)
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) per common share		$	0.09			$	(0.67	)

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

 

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AEP INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

(in thousands)

 

		For the Three Months Ended January 31,
		2015				2014
Net income (loss)		$	476			$	(3,727	)
Other comprehensive (loss) income:
Foreign currency translation adjustments			(863	)			(1,224	)
Amortization of prior service cost and actuarial net loss, net of tax of $10 and $11 for 2015 and 2014, respectively			29				33
Total other comprehensive loss			(834	)			(1,191	)
Comprehensive loss		$	(358	)		$	(4,918	)

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

 

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AEP INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

		For the Three Months Ended January 31,
		2015				2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	476			$	(3,727	)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			9,014				7,776
Change in LIFO reserve			(9,362	)			1,874
Amortization of debt fees			238				239
Provision for losses on accounts receivable and inventories			123				26
Change in deferred income taxes			17				(2,671	)
Share-based compensation expense (income)			1,326				(450	)
Other			101				(13	)
Changes in operating assets and liabilities:
Decrease in accounts receivable			15,769				6,404
Decrease (increase) in inventories			3,436				(11,278	)
Decrease (increase) in other current assets			358				(503	)
Decrease (increase) in other assets			15				(68	)
(Decrease) increase in accounts payable			(4,675	)			9,445
Decrease in accrued expenses			(2,078	)			(3,355	)
Increase in other long-term liabilities			6				15
Net cash provided by operating activities			14,764				3,714
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures			(2,952	)			(9,306	)
Net proceeds from dispositions of property, plant and equipment			—				20
Net cash used in investing activities			(2,952	)			(9,286	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on credit facility			(10,410	)			(4,700	)
Proceeds from capital lease obligations			—				658
Repayments of Pennsylvania industrial loan			(21	)			(27	)
Principal payments on capital lease obligations			(646	)			(773	)
Principal payments on mortgage loan note			(32	)			(30	)
Proceeds from exercise of stock options			38				—
Payments of withholding taxes on performance units			(713	)			(698	)
Net cash used in financing activities			(11,784	)			(5,570	)
EFFECTS OF EXCHANGE RATE CHANGES ON CASH			(338	)			(771	)
Net decrease in cash			(310	)			(11,913	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			867				13,319
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	557			$	1,406
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Equipment financed through capital lease obligation		$	—			$	917
Cash paid during the period for interest		$	496			$	412
Cash paid during the period for income taxes		$	325			$	453

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

 

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AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of AEP Industries Inc. and all of its subsidiaries (the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation. In management’s opinion, all adjustments necessary for the fair presentation of the consolidated financial position as of January 31, 2015, and the consolidated results of operations, consolidated comprehensive loss and consolidated cash flows for the three months ended January 31, 2015 and 2014, respectively, have been made. The consolidated results of operations for the three months ended January 31, 2015 are not necessarily indicative of the results to be expected for the full fiscal year.

The consolidated financial information included herein has been prepared by the Company, without audit, for filing with the U.S. Securities and Exchange Commission (the “Commission”) pursuant to the rules and regulations of the Commission. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to product returns, customer rebates and incentives, doubtful accounts, acquisitions, pension obligations, incurred but not reported medical and workers’ compensation claims, litigation and contingency accruals, income taxes, including valuation of deferred taxes, and impairment of long-lived assets and intangibles, including goodwill. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Certain information and footnote disclosures normally included in audited annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2014, filed with the Commission on January 14, 2015.

The Company evaluates all subsequent events prior to filing and has implemented all new accounting pronouncements that are in effect and that may materially impact its consolidated financial statements.

New Accounting Pronouncements Not Yet Effective

Unless otherwise discussed, the Company believes that the impact of recently issued accounting pronouncements that are not yet effective will not have a material impact on the its financial position, results of operations or cash flows.

In May 2014, the FASB issued ASU No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for

 

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AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(1) BASIS OF PRESENTATION (Continued)

 

annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, which is the Company’s first quarter of fiscal year 2018. Early application is not permitted. The new standard allows for the amendment to be applied either retrospectively to each prior reporting period presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures, including which transition method it will adopt.

(2) EARNINGS PER SHARE

Basic earnings (loss) per share (“EPS”) is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of common shares outstanding, adjusted to reflect potentially dilutive securities (options) using the treasury stock method, except when the effect would be anti-dilutive.

The number of shares used in calculating basic and diluted earnings (loss) per share is as follows:

 

		For the Three Months Ended January 31,
		2015				2014
Weighted average common shares outstanding:
Basic			5,080,911				5,601,326
Effect of dilutive securities:
Options to purchase shares of common stock			26,071				—
Diluted			5,106,982				5,601,326

For each of the three month periods ended January 31, 2015 and 2014, the Company had zero stock options outstanding that could potentially dilute earnings per share in future periods but were excluded from the computation of diluted EPS because their exercise price was higher than the Company’s average stock price during the respective periods. For the three months ended January 31, 2014, the Company had 25,587 stock options outstanding that could potentially dilute earnings per share in future periods that were excluded from the computation of diluted EPS because their effect would have been anti-dilutive given the net loss during the period.

(3) INVENTORIES

Inventories, stated at the lower of cost (last-in, first-out method (“LIFO”) for the U.S. operations, and the first-in, first-out method (“FIFO”) for the Canadian operation, supplies and printed and converted finished goods for the U.S. operation) or market, include material, labor and manufacturing overhead costs, less vendor rebates. The Company establishes a reserve in those situations in which cost exceeds market value.

 

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AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(3) INVENTORIES (Continued)

 

Inventories are comprised of the following:

 

		January 31, 2015				October 31, 2014
		(in thousands)
Raw materials		$	45,354			$	46,810
Finished goods			76,184				78,464
Supplies			5,711				5,854
			127,249				131,128
Less: LIFO reserve			(35,346	)			(44,708	)
Inventories, net		$	91,903			$	86,420

The LIFO method was used for determining the cost of approximately 85% and 84% of total inventories at January 31, 2015 and October 31, 2014, respectively. Due to the volatility of resin pricing, the interim LIFO calculations are based on actual inventory levels and current pricing, and are not necessarily indicative of the valuation under the LIFO method at the end of the fiscal year. Because of the Company’s continuous manufacturing process, there is no significant work in process at any point in time.

(4) DEBT

A summary of the components of debt is as follows:

 

		January 31, 2015				October 31, 2014
		(in thousands)
Credit facility (a)		$	30,100			$	40,510
8.25% senior notes due 2019			200,000				200,000
Pennsylvania industrial loan			945				966
Mortgage loan note			3,069				3,101
Capital leases (b)			11,108				11,754
Foreign bank borrowings (c)			—				—
Total debt			245,222				256,331
Less: current portion			2,515				2,636
Long-term debt		$	242,707			$	253,695

 

(a)	Credit Facility

Borrowings and letters of credit available under the credit facility with Wells Fargo Bank National Association (“Wells Fargo”) are limited to a borrowing base based upon specific advance percentage rates on eligible accounts receivable and inventory, subject, in the case of inventory, to amount limitations. The Company had weighted average borrowings under the credit facility of $46.5 million and $33.4 million, with a weighted average interest rate of 2.6% and 3.2% during the three months ended January 31, 2015 and 2014, respectively. The sum of the eligible assets at January 31, 2015 and October 31, 2014 supported a borrowing base of $147.5 million and $150.0 million, respectively. Availability was reduced by the aggregate amount of letters of credit

 

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AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(4) DEBT (Continued)

 

outstanding totaling $2.9 million and $2.1 million at January 31, 2015 and October 31, 2014, respectively. Availability at January 31, 2015 and October 31, 2014 under the credit facility was $114.5 million and $107.4 million, respectively. The credit facility is secured by liens on most of the Company’s domestic assets (other than real property and equipment) and on 66% of the Company’s ownership interest in certain foreign subsidiaries.

Excess Availability (as defined therein) under the credit facility ranged from $87.4 million to $131.7 million during the three months ended January 31, 2015 and from $85.1 million to $137.8 million during the three months ended January 31, 2014.

 

(b)	Capital leases

From time to time, the Company enters into capital leases for certain of its machinery and equipment. The interest rates on the capital leases range from 3.5% to 8.5%, with a weighted average interest rate of 4.5%. As a result of the capital lease treatment, the equipment remains as a component of property, plant and equipment in the Company’s consolidated balance sheet and is depreciated in accordance with the Company’s depreciation policy.

Under the terms of the capital leases, the payments are as follows:

 

For the years ending October 31,		Capital Leases
		(in thousands)
2015		$	2,070
2016			2,429
2017			2,429
2018			2,430
2019			2,261
Thereafter			533
Total minimum lease payments			12,152
Less: Amounts representing interest			1,044
Present value of minimum lease payments			11,108
Less: Current portion of obligations under capital leases			2,299
Long-term portion of obligations under capital leases		$	8,809

 

(c)	Foreign bank borrowings

In addition to the amounts available under the credit facility, the Company also maintains a secured credit facility at its Canadian subsidiary, used to support operations, which is generally serviced by local cash flows from operations. There was zero outstanding under this arrangement at January 31, 2015 and October 31, 2014. Availability under the Canadian credit facility at January 31, 2015 and October 31, 2014 was $5.0 million in Canadian dollars or US$3.9 million and US$4.4 million, respectively.

 

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AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(4) DEBT (Continued)

 

Principal payments required on all debt outstanding during each of the next five fiscal years are as follows:

 

		(in thousands)
		Debt				Capital leases				Total
2015		$	161			$	1,776			$	1,937
2016			222				2,123				2,345
2017			30,332				2,202				32,534
2018			242				2,284				2,526
2019			200,252				2,199				202,451
Thereafter			2,905				524				3,429
		$	234,114			$	11,108			$	245,222

Fair Value

The carrying value and fair value of the Company’s fixed rate debt at January 31, 2015 and October 31, 2014 are as follows:

 

		January 31, 2015								October 31, 2014
		Carrying Value				Fair Value				Carrying Value				Fair Value
		(in thousands)
2019 notes		$	200,000			$	202,126			$	200,000			$	205,750
Mortgage loan note (a)			3,069				3,069				3,101				3,101
Pennsylvania industrial loan			945				945				966				966
Capital leases			11,108				11,108				11,754				11,754
Total		$	215,122			$	217,248			$	215,821			$	221,571

 

(a)	The Company entered into an interest rate swap fixing the variable rate loan to a fixed rate loan at an interest rate of 3.52% per year.

The fair value of the 2019 notes is based on quoted market rates (Level 1). The Company derives its fair value estimates of the Pennsylvania industrial loan, the mortgage note and the capital leases based on observable inputs (Level 2). Observable market inputs used in the calculation of the fair value of the Pennsylvania industrial loan and the capital leases include evaluating the nature and terms of each instrument, considering prevailing economic and market conditions, and examining the cost of similar debt offered at the balance sheet date. The fair value of the Company’s variable rate debt (credit facility) approximates fair value due to the availability and floating rate for similar instruments.

 

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AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(5) ACCRUED EXPENSES

At January 31, 2015 and October 31, 2014, accrued expenses consist of the following:

 

		January 31, 2015				October 31, 2014
		(in thousands)
Payroll and employee related		$	7,920			$	8,084
Customer rebates			5,771				8,963
Interest			4,906				824
Accrual for performance units			1,797				1,896
Other (A)			7,375				8,717
Accrued expenses		$	27,769			$	28,484

 

(A)	No individual item exceeded 5% of current liabilities.

(6) SHAREHOLDERS’ EQUITY

Share-Based Compensation

The Company has a share-based plan, which provides for the granting of stock options, restricted stock, performance units and other awards to officers, directors and key employees of the Company. Total share-based compensation expense (income) related to the Company’s share-based plans is recorded in the consolidated statements of operations as follows:

 

		For the Three Months Ended January 31,
		2015				2014
		(in thousands)
Cost of sales		$	216			$	(103	)
Selling expense			226				(111	)
General and administrative expense			884				(236	)
Total		$	1,326			$	(450	)

Share-Based Plans

At the annual meeting of stockholders of the Company on April 9, 2013, stockholders approved the AEP Industries Inc. 2013 Omnibus Incentive Plan (the “2013 Plan”). The 2013 Plan provides for the award to non-employee directors and key employees of the Company of options, restricted stock, restricted stock units, stock appreciation rights, performance awards (which may take the form of performance units or performance shares) and other awards to acquire up to an aggregate of 375,000 shares of the Company’s common stock. These shares of common stock may be made available from authorized but unissued common stock, from treasury shares or from shares purchased on the open market. The issuance of common stock resulting from the exercise of stock options and settlement of the vesting of performance units (for those employees who elected shares) during fiscal 2015 and 2014 was made from new shares.

 

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AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(6) SHAREHOLDERS’ EQUITY (Continued)

 

As a result of stockholder approval of the 2013 Plan, all awards of stock and stock unit awards subsequent to April 9, 2013 have been granted under the 2013 Plan and no new awards have been made after such date under the AEP Industries Inc. 2005 Stock Option Plan (the “2005 Option Plan”), which expired in October 2013 except as to awards previously granted prior to that date. At January 31, 2015, 218,230 shares were available to be issued under the 2013 Plan.

Stock Options

There were no options granted during the three months ended January 31, 2015 or 2014.

The following table summarizes the Company’s stock option plan as of January 31, 2015, and changes during the three months ended January 31, 2015:

 

		2005 Option Plan				Weighted Average Exercise Price per Option				Option Price Per Share				Weighted Average Remaining Contractual Term (years)				Aggregate Intrinsic Value $(000)
Options outstanding at October 31, 2014 (61,646 options exercisable)			72,446			$	29.62			$	17.07-42.60				3.7			$	1,186
Exercised			(2,000	)		$	19.33			$	19.33
Options outstanding at January 31, 2015			70,446			$	29.91			$	17.07-42.60				3.5			$	1,423
Vested and expected to vest at January 31, 2015			70,446			$	29.91								3.5			$	1,423
Exercisable at January 31, 2015			59,646			$	29.70								3.0			$	1,218

The table below presents information related to stock option activity for the three months ended January 31, 2015 and 2014:

 

		For the Three Months Ended January 31,
		2015				2014
		(in thousands)
Total intrinsic value of stock options exercised		$	72			$	—
Total fair value of stock options vested		$	—			$	—

The fair value of the options, less expected forfeitures, is amortized over five years on a straight-line basis. Share-based compensation expense related to the Company’s stock options recorded in the consolidated statements of operations for the three months ended January 31, 2015 and 2014 was approximately $20,000 and $30,000, respectively. No compensation cost related to stock options was capitalized in inventory or any other assets for the three months ended January 31, 2015 and 2014, respectively. For the three months ended January 31, 2015 and 2014, there was no excess tax benefits recognized resulting from share-based compensation awards, which reduced taxes otherwise payable. For fiscal 2012, there was $1.3 million in excess tax benefits recognized resulting from share-based compensation awards, which reduced taxes otherwise payable, and is included in additional paid in capital at January 31, 2015 and October 31, 2014, respectively.

 

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AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(6) SHAREHOLDERS’ EQUITY (Continued)

 

As of January 31, 2015, there was $0.1 million of total unrecognized compensation cost related to non-vested stock options granted under the plan. That cost is expected to be recognized over a weighted-average period of 1.8 years.

There were no changes in the Company’s non-vested stock options during the three months ended January 31, 2015.

Performance Units

Total share-based compensation expense (income) related to the Company’s performance units (“Units”) was approximately $1.2 million and $(0.6) million for the three months ended January 31, 2015 and 2014, respectively. At January 31, 2015 and October 31, 2014, there was $1.8 million and $1.9 million in accrued expenses, respectively, and $1.2 million and $2.3 million in long-term liabilities, respectively, related to outstanding Units.

The following table summarizes the Units as of January 31, 2015, and changes during the three months ended January 31, 2015:

 

		2005 Option Plan				2013 Option Plan				Total Number Of Units				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (years)				Aggregate Intrinsic Value $(000)
Units outstanding at October 31, 2014			129,311				—				129,311			$	0.00				1.2			$	5,942
Units granted			—				146,497				146,497			$	0.00
Units exercised			(43,609	)			—				(43,609	)		$	0.00							$	2,431
Units forfeited or cancelled			(400	)			(2,000	)			(2,400	)
Units outstanding at January 31, 2015			85,302				144,497				229,799			$	0.00				2.4			$	11,508
Vested and expected to vest at January 31, 2015			83,902				134,597				218,499			$	0.00				2.4			$	10,942
Exercisable at January 31, 2015			600	(a)			—				600											$	23

 

 

(a)	These Units immediately vested during the fourth quarter of 2014 due to the death of an employee. As of January 31, 2015, the Company was awaiting payout of Units to the estate.

During the three months ended January 31, 2015, the Company paid $1.6 million in cash and issued 499 shares of its common stock (issued from new shares), in each case net of withholdings, in settlement of the vesting of certain Units occurring during the first quarter of fiscal 2015. During the three months ended January 31, 2014, the Company paid $1.5 million in cash and issued 613 shares of its common stock (issued from new shares), in each case net of withholdings, in settlement of the vesting of certain Units occurring during the first quarter of 2014. Subsequent to the first quarter of the prior year, in February 2014, the Company paid $0.9 million in cash and issued 454 shares of its common stock (issued from new shares), in each case net of withholdings, in settlement of the vesting of the remaining Units occurring during the first quarter of 2014.

 

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AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(6) SHAREHOLDERS’ EQUITY (Continued)

 

Restricted Stock

Total share-based compensation expense related to the restricted stock recorded in the consolidated statements of operations for each of the three months ended January 31, 2015 and 2014, was $0.1 million. As of January 31, 2015, there was approximately $46,000 of total unrecognized compensation cost related to restricted stock. That cost is expected to be recognized over two months.

(7) SEGMENT AND GEOGRAPHIC INFORMATION

The Company’s operations are conducted within one business segment - the production, manufacture and distribution of flexible plastic packaging products, primarily for the food/beverage, industrial and agricultural markets. The Company operates in the United States and Canada.

Operating income (loss) includes all costs and expenses directly related to the geographical area.

 

		For the Three Months Ended January 31, 2015
		United States				Canada				Total
		(in thousands)
Sales—external customers		$	261,047			$	14,392			$	275,439
Intercompany sales			7,808				—				7,808
Gross profit			30,119				2,445				32,564
Operating income			4,900				673				5,573

 

		For the Three Months Ended January 31, 2014
		United States				Canada				Total
		(in thousands)
Sales—external customers		$	255,525			$	16,992			$	272,517
Intercompany sales			10,079				—				10,079
Gross profit			22,032				2,552				24,584
Operating (loss) income			(2,342	)			674				(1,668	)

Net sales by product line are as follows:

 

		For the Three Months Ended January 31,
		2015				2014
		(in thousands)
Custom films		$	87,458			$	84,668
Stretch (pallet) wrap			81,526				84,500
Food contact			40,550				45,034
Canliners			33,961				28,817
PROformance Films®			16,811				14,201
Printed and converted films			5,186				5,788
Other products and specialty films			9,947				9,509
Total		$	275,439			$	272,517

 

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AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(8) COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments:

Under the terms of noncancellable operating leases with terms greater than one year (including the rental payments for the Cartersville facility), the minimum rental, excluding the provision for real estate taxes, is as follows:

 

For the years ended October 31,		Operating Leases				Sublease Income
		(in thousands)
Remainder of 2015		$	5,764			$	60
2016			5,085				—
2017			3,623				—
2018			1,972				—
2019			1,083				—
Thereafter			1,692				—
Total minimum lease payments		$	19,219			$	60

Claims and Lawsuits:

The Company and its subsidiaries are subject to claims and lawsuits which arise in the ordinary course of business. On the basis of information presently available and advice received from counsel representing the Company and its subsidiaries, it is the opinion of management that the disposition or ultimate determination of such claims and lawsuits against the Company will not have a material adverse effect on the Company’s financial position, results of operations, or liquidity.

(9) SUBSEQUENT EVENT

A collective bargaining agreement in the Pennsylvania plant covering approximately 150 employees expired in January 2015. A new collective bargaining agreement was signed on February 12, 2015 and expires on January 31, 2020.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Forward-Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our goals, beliefs, plans and expectations about our prospects for the future and other future events, such as our ability to generate sufficient working capital, the amount of availability under our credit facility, the anticipated pricing in resin markets, our ability to continue to maintain or increase sales and profits of our operations (including our attempt to drive future costs out of our business), and the sufficiency of our cash balances and cash generated from operating, investing, and financing activities for our future liquidity and capital resource needs. Forward-looking statements include all statements that are not historical fact and can be identified by terms such as “may,” “intend,” “might,” “will,” “should,” “could,” “would,” “anticipate,” “expect,” “believe,” “estimate,” “plan,” “project,” “predict,” “potential,” or the negative of these terms. Although these forward-looking statements reflect our good-faith belief and reasonable judgment based on current information, these statements are qualified by important factors, many of which are beyond our control, that could cause our actual results to differ materially from those in the forward-looking statements, including, but not limited to: the timing and completion, in part or full, of the significant capacity increase by North American resin producers in future years and its impact on future resin pricing; the ability to pass raw material price increases to customers in full or in a timely fashion; the ability to implement non-resin price increases with customers; delayed purchases by certain customers during periods when resin prices are expected to decrease in the near term; the availability of raw materials; competition in existing and future markets; disruptions in the global economic and financial market environment; limited contractual relationships with customers; and other factors described from time to time in our reports filed or furnished with the U.S. Securities and Exchange Commission (the “SEC”), and in particular those factors set forth in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended October 31, 2014 and other reports subsequently filed with the SEC. Given these uncertainties, you should not place undue reliance on any such forward-looking statements. The forward-looking statements included in this report are made as of the date hereof or the date specified herein, based on information available to us as of such date. Except as required by law, we assume no obligation to update these forward-looking statements, even if new information becomes available in the future.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative explanation from the perspective of our management on our business, financial condition, results of operations, and cash flows. Our MD&A is presented in six sections:

 

•

Overview

 

•

Results of Operations

 

•

Liquidity and Capital Resources

 

•

Contractual Obligations and Off-Balance-Sheet Arrangements

 

•

Critical Accounting Policies

 

•

New Accounting Pronouncements

Investors should review this MD&A in conjunction with the consolidated financial statements and related notes included in this report under Item 1, our Annual Report on Form 10-K for the fiscal year ended October 31, 2014 and reports filed thereafter with the SEC, and other publicly available information.

 

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Company Overview

AEP Industries Inc. is a leading manufacturer of flexible plastic packaging films. We manufacture and market an extensive and diverse line of polyethylene and polyvinyl chloride flexible packaging products, with consumer, industrial and agricultural applications. Our flexible plastic packaging films are used in the packaging, transportation, beverage, food, automotive, pharmaceutical, chemical, electronics, construction, agriculture, carpeting, furniture and textile industries.

We manufacture plastic films, principally from resins blended with other raw materials, which we either sell or further process by printing, laminating, slitting or converting. Our processing technologies enable us to create a variety of value-added products according to the specifications of our customers. Our manufacturing operations are located in the United States and Canada.

The primary raw materials used in the manufacture of our products are polyethylene (“PE”) and polyvinyl chloride (“PVC”) resins. The prices of these materials are primarily a function of the price of petroleum and natural gas, and therefore typically are volatile. Since resin costs fluctuate, selling prices are generally determined as a “spread” over resin costs, usually expressed as cents per pound. Consequently, we review and manage our operating revenues and expenses on a per pound basis. The historical increases and decreases in resin costs have generally been reflected over a period of time in the sales prices of the products on a penny-for-penny basis. Assuming a constant volume of sales, an increase in resin costs would, therefore, result in increased sales revenues but lower gross profit as a percentage of sales or gross profit margin, while a decrease in resin costs would result in lower sales revenues with higher gross profit margins. Further, the gap between the time at which an order is taken, resin is purchased, production occurs and shipment is made, has an impact on our financial results and our working capital needs. In a period of rising resin prices, this impact is generally negative to operating results and in periods of declining resin prices, the impact is generally positive to operating results.

Market Conditions

As discussed above, the primary raw materials used in the manufacture of our products are PE and PVC resins, which total approximately 92% and 7%, respectively, of our total plastic resin purchases by volume. Following two fiscal years of resin price increases resulting in an aggregate increase of $0.23 per pound, polyethylene resin prices decreased a total of $0.11 per pound during our first quarter ended January 31, 2015. Comparing average PE resin costs during the three months ended January 31, 2015 versus the three months ended January 31, 2014, prices were 1% or $0.01 per pound lower. Even though natural gas is used as feedstock in most North American PE production, the price of oil is used to set resin prices worldwide. With oil prices lowering and increased PE resin capacity forecasted, we believe that PE resin costs will continue to decrease in fiscal 2015, although the timing and magnitude of the impact is uncertain.

Due to the time lag in passing through changes in resin costs to customers, our results are negatively impacted in the short term when resin costs increase and are positively impacted when resin costs decrease. However, during periods of resin price decreases, as occurred in our first fiscal quarter of fiscal 2015, we do not realize the full benefit of the price reduction in our margin. As resin prices decrease, certain customers, especially in our stretch product line, will keep their inventory levels as low as possible and delay purchases in anticipation of further price decreases. Volatility in resin prices in consecutive periods, both decreases and increases, creates instability in the purchasing by the customer. If such prices were to increase, there can be no assurance that we will be able to pass on resin price increases on a penny-for-penny basis in full or on a timely basis, shorten the time lag in adjusting sell prices, or win in a competitive bid process.

The marketplace in which we sell our products remains very competitive, and has become increasingly competitive in recent years as a result of adverse economic circumstances straining the resources of our customers, distributors and suppliers. In recent years, we have implemented cost-reduction initiatives and invested in machinery and equipment to increase efficiency to meet the challenges of a volatile economic environment, as well as take advantage of opportunities in the marketplace. We are limited, however, in our ability to reduce costs that are fixed in nature. Rising costs in freight, utility, packaging and health costs have negatively impacted our results.

 

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Defined Terms

The following table illustrates the primary costs classified in each major operating expense category:

 

Cost of Sales:		Materials, including packaging
		Fixed manufacturing costs
		Labor, direct and indirect
		Depreciation
		Inbound freight charges, including intercompany transfer freight charges
		Utility costs used in the manufacturing process
		Research and development costs
		Quality control costs
		Purchasing and receiving costs
		Any inventory adjustments, including LIFO adjustments
		Warehousing costs
Delivery Expenses:		All costs related to shipping and handling of products to customers, including transportation costs by third party providers
Selling, General and Administrative Expenses:		Personnel costs, including salaries, bonuses, commissions and employee benefits
		Facilities and equipment costs
		Insurance
		Professional fees, including audit and Sarbanes-Oxley compliance

Our gross profit may not be comparable to that of other companies, since some companies include all the costs related to their distribution network in cost of sales and others, like us, include costs related to the shipping and handling of products to customers in delivery expenses, which is not a component of our cost of sales.

Results of Operations -First Quarter of Fiscal 2015 Compared to First Quarter of Fiscal 2014

The following table presents unaudited selected financial data for the three months ended January 31, 2015 and 2014 (dollars per pound sold is calculated by dividing the applicable consolidated statements of operations category by pounds sold in the period):

 

		For the Three Months Ended
		January 31, 2015								January 31, 2014								% increase/ (decrease) of $
		$				$ Per lb. sold				$				$ Per lb. sold								$ increase/ (decrease)
		(in thousands, except for per pound data)
Net sales		$	275,439			$	1.28			$	272,517			$	1.24				1.1	%		$	2,922
Gross profit			32,564				0.15				24,584				0.11				32.5	%			7,980
Operating expenses:
Delivery			11,617				0.06				12,018				0.05				(3.3	)%			(401	)
Selling			8,603				0.04				8,658				0.04				(0.6	)%			(55	)
General and administrative			6,771				0.03				5,576				0.03				21.4	%			1,195
Total operating expenses		$	26,991			$	0.13			$	26,252			$	0.12				2.8	%		$	739
Pounds sold							214,386 lbs.								219,969 lbs.

 

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Net Sales

The increase in net sales for the three months ended January 31, 2015 as compared to the prior year comparable period was the result of a 4% increase in average selling prices, positively affecting net sales by $11.4 million, partially offset by a 2.5% decrease in sales volume negatively affecting net sales by $7.2 million. The decline in volume was primarily due to delays in customer orders as a result of declining resin prices, most notably in our stretch product line. The first quarter of 2015 also included a $1.3 million negative impact of foreign exchange relating to our Canadian operations.

Gross Profit

There was a $9.4 million decrease in the LIFO reserve during the first quarter of fiscal 2015 versus a $1.9 million increase in the LIFO reserve during the first quarter of fiscal 2014, representing a decrease of $11.3 million year-over-year. Excluding the impact of the LIFO reserve change during the quarter, an increase in depreciation expense of $1.3 million and an increase in share-based compensation costs associated with our performance units of $0.3 million, gross profit decreased $1.7 million resulting primarily from decreased volumes sold and higher manufacturing costs, including employee health costs, partially offset by improved material margins.

Operating Expenses

Operating expenses increased $0.7 million during the first quarter of fiscal 2015 versus the first quarter of fiscal 2014 primarily due to a $1.5 million increase in share-based compensation costs associated with our performance units, partially offset by a decrease in delivery expenses of $0.4 million primarily due to lower volumes sold and a decrease of $0.3 million in salaries expense due to headcount reduction.

Interest Expense

Interest expense for the three months ended January 31, 2015 increased $0.1 million as compared to the prior year period resulting primarily from an increase in unrealized losses on our interest rate swap as compared to the prior year period.

Income Tax Provision

The provision for income taxes for the three months ended January 31, 2015 was $0.2 million on income before the provision for income taxes of $0.7 million. The difference between our effective tax rate of 27.5 percent for the three months ended January 31, 2015 and the U.S. statutory tax rate of 35.0 percent, primarily relates to the differential in the U.S and Canadian statutory rates (-4.4%) and net permanent differences (-5.0%), partially offset by the provision for state taxes in the United States, net of federal provision (+1.8%).

The benefit for income taxes for the three months ended January 31, 2014 was $2.6 million on a loss before the benefit for income taxes of $6.4 million. The difference between our effective tax rate of 41.4 percent for the three months ended January 31, 2014 and the U.S. statutory tax rate of 35.0 percent, primarily relates to the benefit for state taxes in the United States, net of federal (+4.2%) and the remaining (+2.2%) resulted from net permanent differences, the differential in the U.S and Canadian statutory rates and the benefit from foreign withholding taxes paid.

Reconciliation of Non-GAAP Measures to GAAP

We define Adjusted EBITDA as net income (loss) before discontinued operations, interest expense, income taxes, depreciation and amortization, changes in LIFO reserve, other non-operating income (expense) and share-based compensation expense (income). We believe Adjusted EBITDA is an important measure of operating

 

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performance because it allows management, investors and others to evaluate and compare our core operating results, including our return on capital and operating efficiencies, from period to period by removing the impact of our capital structure (interest expense from our outstanding debt), asset base (depreciation and amortization), tax consequences, changes in LIFO reserve (a non-cash charge/benefit to our consolidated statements of operations), other non-operating items and share-based compensation. Furthermore, we use Adjusted EBITDA for business planning purposes and to evaluate and price potential acquisitions. In addition to its use by management, we also believe Adjusted EBITDA is a measure widely used by securities analysts, investors and others to evaluate the financial performance of our company and other companies in the plastic films industry. Other companies may calculate Adjusted EBITDA differently, and therefore our Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

Adjusted EBITDA is not a measure of financial performance under U.S. generally accepted accounting principles (GAAP), and should not be considered in isolation or as an alternative to net income (loss), cash flows from operating activities and other measures determined in accordance with GAAP. Items excluded from Adjusted EBITDA are significant and necessary components to the operations of our business, and, therefore, Adjusted EBITDA should only be used as a supplemental measure of our operating performance.

The following is a reconciliation of our net income (loss), the most directly comparable GAAP financial measure, to Adjusted EBITDA:

 

		First Quarter Fiscal 2015				First Quarter Fiscal 2014
		(in thousands)				(in thousands)
Net income (loss)		$	476			$	(3,727	)
Provision (benefit) for income taxes			181				(2,637	)
Interest expense			4,916				4,783
Depreciation and amortization expense			9,014				7,776
(Decrease) increase in LIFO reserve			(9,362	)			1,874
Other non-operating income, net			—				(87	)
Share-based compensation			1,326				(450	)
Adjusted EBITDA		$	6,551			$	7,532

Liquidity and Capital Resources

Summary

We have historically financed our operations through cash flows generated from operations and borrowings by us and our subsidiaries under various credit facilities. Our principal uses of cash have been to fund working capital, including operating expenses, debt service and capital expenditures. In addition, we evaluate acquisitions of businesses or assets and repurchases of our equity and debt from time to time. Generally, our need to access the capital markets is limited to refinancing debt obligations and funding significant acquisitions. Market conditions may limit our sources of funds and the terms for these financing activities. As market conditions change, we continue to monitor our liquidity position.

We continue to maintain what we believe to be a strong balance sheet and sufficient liquidity to provide us with financial flexibility. As of January 31, 2015, we had a net debt position (current bank borrowings plus long term debt less cash and cash equivalents) of $244.7 million, compared with $255.5 million at the end of fiscal 2014. Availability under our credit facility and credit line available to our Canadian subsidiary for local currency borrowings was an aggregate of $118.4 million at January 31, 2015.

Our working capital amounted to $100.9 million at January 31, 2015 compared to $103.2 million at October 31, 2014. We used the LIFO method for determining the cost of approximately 85% of our total inventories at January 31, 2015. Under LIFO, the units remaining in ending inventory are valued at the oldest

 

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unit costs and the units sold in cost of sales are valued at the most recent unit costs. If the FIFO method for valuing inventory had been used exclusively, working capital would have been $136.2 million and $147.9 million at January 31, 2015 and October 31, 2014, respectively. During the three months ended January 31, 2015, the LIFO reserve decreased $9.4 million to $35.3 million primarily as a result of decreased resins costs. Despite the possible negative effects on our results of operations and our financial position during periods of rising inventory costs, we believe the use of LIFO maximizes our after tax cash flow from operations.

We expect that the trend of decreasing resin prices, to the extent it continues, will result in a decrease in our investment in working capital and therefore, have a favorable impact on our cash flows from operating activities. We believe that our expected cash flows from operations, assuming no material adverse change, combined with the availability of funds under our worldwide credit facilities, will be sufficient to meet our working capital and debt service requirements and planned capital expenditures for at least the next 12 months.

Cash Flows

The following table summarizes our cash flows from operating, investing, and financing of our operations for each of the three months ended January 31, 2015 and 2014:

 

		For the Three Months Ended January 31,
		2015				2014
		(in thousands)
Total cash provided by (used in):
Operating activities		$	14,764			$	3,714
Investing activities			(2,952	)			(9,286	)
Financing activities			(11,784	)			(5,570	)
Effect of exchange rate changes on cash			(338	)			(771	)
Decrease in cash and cash equivalents		$	(310	)		$	(11,913	)

 

Note:

See consolidated statements of cash flows included in Item 1, Financial Statements, of this Form 10-Q for additional information.

Operating Activities

Our cash and cash equivalents were $0.6 million at January 31, 2015, as compared to $0.9 million at October 31, 2014. Cash provided by operating activities during the three months ended January 31, 2015 was $14.8 million, which includes net income of $0.5 million adjusted for non-cash items totaling $1.5 million primarily related to depreciation and amortization of $9.0 million and $1.3 million in share-based compensation, partially offset by a decrease in LIFO reserve of $9.4 million. Cash provided by operating activities also includes a $15.8 million decrease in accounts receivable primarily due to lower sales in the first quarter of fiscal 2015 as compared to the fourth quarter of 2014 and a $3.4 million decrease in inventories, excluding the non-cash effects of LIFO, primarily due to decreased resin prices. Cash used by operating activities primarily includes a $4.7 million decrease in accounts payable primarily due to lower resin costs and a $2.1 million decrease in accrued expenses primarily as a result of timing of payments related to customer annual rebates, property taxes and interest.

Investing Activities

Net cash used in investing activities during the three months ended January 31, 2015 was $3.0 million, resulting from capital expenditures during the period.

 

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Financing Activities

Net cash used in financing activities during the three months ended January 31, 2015 was $11.8 million, resulting primarily from $10.4 million in net repayments of borrowings under our credit facility, $0.7 million in payments of withholding taxes related to our performance units and $0.6 million in principal payments on capital lease obligations.

Sources and Uses of Liquidity

Credit Facility

We maintain a credit facility with Wells Fargo. The credit facility matures on February 21, 2017 and has a maximum borrowing amount of $150.0 million with a maximum for letters of credit of $20.0 million. The credit facility is secured by liens on most of our domestic assets (other than real property and equipment) and on 66% of our ownership interest in certain foreign subsidiaries.

We utilize the credit facility to provide funding for operations and other corporate purposes through daily bank borrowings and/or cash repayments to ensure sufficient operating liquidity and efficient cash management. Availability at January 31, 2015 and October 31, 2014 under the credit facility was $114.5 million and $107.4 million, respectively.

In addition to the amounts available under the credit facility, we also maintain a credit facility at our Canadian subsidiary which is used to support operations and is serviced by local cash flows from operations. There were no borrowings outstanding under the Canadian credit facility at January 31, 2015 and October 31, 2014. Availability under the Canadian credit facility at January 31, 2015 and October 31, 2014 was $5.0 million Canadian dollars (US$3.9 million and US$4.4 million, respectively).

Please refer to Note 4 of the consolidated financial statements for further discussion of our debt.

Contractual Obligations and Off-Balance-Sheet Arrangements

Contractual Obligations and Commercial Commitments

Our contractual obligations and commercial commitments as of January 31, 2015 are as follows:

 

		For the Years Ending October 31,
		Borrowings (1)				Interest on Fixed Rate Borrowings (2)				Capital Leases, Including Amounts Representing Interest				Operating Leases				Total Commitments
		(in thousands)
Remainder of 2015		$	161			$	16,613			$	2,070			$	5,764			$	24,608
2016			222				16,644				2,429				5,085				24,380
2017			30,332				16,634				2,429				3,623				53,018
2018			242				16,625				2,430				1,972				21,269
2019			200,252				8,502				2,261				1,083				212,098
Thereafter			2,905				274				533				1,692				5,404
Total		$	234,114			$	75,292			$	12,152			$	19,219			$	340,777

 

(1)

Borrowings include $30.1 million under our credit facility maturing on February 21, 2017, $200.0 million aggregate principal amount of 2019 notes, a $3.1 million ten-year mortgage note due August 2022 related to the purchase of the Company’s corporate headquarters, and $0.9 million of a Pennsylvania industrial loan. See Note 4 of the consolidated financial statements for further discussion of our debt.

 

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(2)	In connection with the mortgage note on the Company’s corporate headquarters, we entered into a ten-year floating-to-fixed interest rate swap agreement with TD Bank, N.A. that fixes the interest rate at 3.52% per year and matures on July 25, 2022.

In addition to the amounts reflected in the table above:

We expect to incur approximately $15 million to $20 million of capital expenditures during the remainder of fiscal 2015.

With regards to the AEP Industries Inc. 401(k) Savings Plan (“401(k) Plan”), we contributed $3.2 million in cash in February 2015 to the 401(k) Plan effective for the 2014 year contributions.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet financing arrangements with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Effects of Inflation

Inflation is not expected to have a significant impact on our business.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to product returns, customer rebates and incentives, doubtful accounts, acquisitions, pension obligations, incurred but not reported medical and workers’ compensation claims, litigation and contingency accruals, income taxes, including valuation of deferred taxes, and impairment of long-lived assets and intangibles, including goodwill. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies are described in detail in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the notes to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended October 31, 2014, filed with the U.S. Securities and Exchange Commission on January 14, 2015.

There were no material changes to our critical accounting policies during the three months ended January 31, 2015.

New Accounting Pronouncements

Please refer to Note 1 of the consolidated financial statements for further discussion of new accounting pronouncements not yet effective.

 

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in interest rates and foreign currency exchange rates, which may adversely affect our results of operations, cash flows and financial condition. We seek to minimize these risks through operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We do not purchase, hold or sell derivative financial instruments for trading purposes.

Interest Rates

The fair value of our fixed interest rate debt varies with changes in interest rates. Generally, the fair value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. At January 31, 2015, the carrying value of our total debt was $245.2 million of which $215.1 million was fixed rate debt (2019 notes, mortgage note, capital leases and the Pennsylvania industrial loan). As of January 31, 2015, the estimated fair value of our 2019 notes, which had a carrying value of $200.0 million, was $202.1 million. As of January 31, 2015, the carrying value of our mortgage note, capital leases and the Pennsylvania industrial loan was $15.1 million which approximates fair value because the interest rates on these debt instruments approximate market yields for similar debt instruments.

Floating rate debt at January 31, 2015 and October 31, 2014 totaled $30.1 million and $40.5 million, respectively. Based on the average floating rate debt outstanding during the three months ended January 31, 2015 (our credit facility), a one-percentage point increase or decrease in the average interest rate during the period would have resulted in a change to interest expense of $0.1 million for the three months ended January 31, 2015.

Foreign Exchange

We enter into derivative financial instruments (principally foreign exchange forward contracts) primarily to hedge intercompany transactions, trade sales and forecasted purchases. Foreign currency forward contracts reduce our exposure to the risk that the eventual cash inflows and outflows, resulting from these intercompany and third party trade transactions denominated in a currency other than the functional currency, will be adversely affected by changes in exchange rates.

We do not use foreign currency forward contracts for speculative or trading purposes. We enter into foreign exchange forward contracts with financial institutions and have not experienced nonperformance by counterparties. We anticipate performance by all counterparties to such agreements.

Commodities

We use commodity raw materials, primarily resin, and energy products in conjunction with our manufacturing process. Generally, we acquire such components at market prices and do not use financial instruments to hedge commodity prices. As a result, we are exposed to market risks related to changes in commodity prices in connection with these components.

We are exposed to market risk from changes in resin prices that could impact our results of operations, cash flows and financial condition. Our resin purchasing strategy is to deal with only high-quality, dependable suppliers. We believe that we have maintained strong relationships with these key suppliers and expect that such relationships will continue into the foreseeable future. The resin market is a global market and, based on our experience, we believe that adequate quantities of plastic resins will be available to us at market prices, but we can give no assurances as to such availability or the prices thereof. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Market Conditions” for further discussion of market risks related to resin prices.

 

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Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (together, the “Certifying Officers”), as appropriate, to allow for timely decisions regarding required disclosure.

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of January 31, 2015, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including the Certifying Officers, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their stated objectives and our Certifying Officers concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of January 31, 2015.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the three months ended January 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1.

Legal Proceedings

We are involved in routine litigation in the normal course of our business. The proceedings are not expected to have a material adverse impact on our results of operations, financial position or liquidity.

 

Item 1A.

Risk Factors

You should carefully consider the risks and uncertainties we describe in our Annual Report on Form 10-K for the fiscal year ended October 31, 2014, and in other reports filed thereafter with the SEC, before deciding to invest in or retain shares of our common stock. We do not believe there are any material changes to the risk factors discussed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2014.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

 

Item 3.

Defaults Upon Senior Securities

None

 

Item 4.

Mine Safety Disclosures

None

 

Item 5.

Other Information

None

 

Item 6.

Exhibits

 

Exhibit #		Description
31.1*		Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**		Certification of the Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**		Certification of the Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

 

*	Filed herewith

**	Furnished herewith

 

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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.

 

				AEP Industries Inc.
Dated: March 12, 2015				By:		/s/ J. BRENDAN BARBA J. Brendan Barba Chairman of the Board, President and Chief Executive Officer (principal executive officer)
Dated: March 12, 2015				By:		/s/ PAUL M. FEENEY Paul M. Feeney Executive Vice President, Finance and Chief Financial Officer (principal financial officer)

 

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Exhibit 31.1

CHIEF EXECUTIVE OFFICER’S 302 CERTIFICATION

I, J. Brendan Barba, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of AEP Industries Inc. for the quarterly period ended January 31, 2015;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 12, 2015

 

/s/ J. BRENDAN BARBA J. Brendan Barba Chief Executive Officer

Exhibit 31.2

CHIEF FINANCIAL OFFICER’S 302 CERTIFICATION

I, Paul M. Feeney, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of AEP Industries Inc. for the quarterly period ended January 31, 2015;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 12, 2015

 

/s/ PAUL M. FEENEY Paul M. Feeney Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of AEP Industries Inc. (the “Company”) on Form 10-Q for the quarterly period ended January 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Brendan Barba, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 12, 2015

 

/s/ J. BRENDAN BARBA J. Brendan Barba Chief Executive Officer

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of AEP Industries Inc. (the “Company”) on Form 10-Q for the quarterly period ended January 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul M. Feeney, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 12, 2015

 

/s/ PAUL M. FEENEY Paul M. Feeney Chief Financial Officer