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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, 2011
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 0-14450
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.) | |
125 Phillips Avenue South Hackensack, New Jersey |
07606 | |
(Address of principal executive offices) | (Zip code) |
(201) 641-6600
(Registrants 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 ¨ 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 registrants common stock, $0.01 par value, as of March 10, 2011 was 6,137,196.
Table of Contents
TABLE OF CONTENTS
Page Number |
||||||
PART I | FINANCIAL INFORMATION | |||||
ITEM 1: | 3 | |||||
Consolidated Balance Sheets at January 31, 2011 (unaudited) and October 31, 2010 |
3 | |||||
4 | ||||||
5 | ||||||
6 | ||||||
ITEM 2: | Managements Discussion and Analysis of Financial Condition and Results of Operations |
21 | ||||
ITEM 3: | 30 | |||||
ITEM 4: | 30 | |||||
PART II | OTHER INFORMATION | |||||
ITEM 1: | 31 | |||||
ITEM 1A: | 31 | |||||
ITEM 2: | 32 | |||||
ITEM 3: | 32 | |||||
ITEM 4: | 32 | |||||
ITEM 5: | 32 | |||||
ITEM 6: | 32 | |||||
33 |
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Item 1. | FINANCIAL STATEMENTS |
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
January 31, 2011 |
October 31, 2010 |
|||||||
(unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 990 | $ | 1,049 | ||||
Accounts receivable, less allowance for doubtful accounts of $3,651 and $4,345 in 2011 and 2010, respectively |
81,414 | 86,625 | ||||||
Inventories, net |
89,415 | 72,978 | ||||||
Deferred income taxes |
3,165 | 3,336 | ||||||
Other current assets |
3,047 | 3,262 | ||||||
Assets of discontinued operations |
185 | 188 | ||||||
Total current assets |
178,216 | 167,438 | ||||||
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $286,570 and $281,292 in 2011 and 2010, respectively |
167,860 | 169,343 | ||||||
GOODWILL |
7,790 | 8,135 | ||||||
INTANGIBLE ASSETS, net of accumulated amortization of $791 and $726 in 2011 and 2010, respectively |
2,116 | 2,181 | ||||||
OTHER ASSETS |
3,652 | 3,699 | ||||||
Total assets |
$ | 359,634 | $ | 350,796 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
CURRENT LIABILITIES: |
||||||||
Bank borrowings, including current portion of long-term debt |
$ | 342 | $ | 441 | ||||
Accounts payable |
70,255 | 72,564 | ||||||
Accrued expenses |
23,689 | 23,886 | ||||||
Total current liabilities |
94,286 | 96,891 | ||||||
LONG-TERM DEBT |
196,728 | 185,259 | ||||||
DEFERRED INCOME TAXES |
4,352 | 4,836 | ||||||
OTHER LONG-TERM LIABILITIES |
6,432 | 7,180 | ||||||
Total liabilities |
301,798 | 294,166 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
SHAREHOLDERS EQUITY: |
||||||||
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued |
| | ||||||
Common stock, $0.01 par value; 30,000,000 shares authorized; 11,090,230 and 11,086,485 shares issued in 2011 and 2010, respectively |
111 | 111 | ||||||
Additional paid-in capital |
109,155 | 109,047 | ||||||
Treasury stock at cost, 4,948,683 and 4,942,783 shares in 2011 and 2010, respectively |
(150,578 | ) | (150,424 | ) | ||||
Retained earnings |
96,841 | 95,776 | ||||||
Accumulated other comprehensive income |
2,307 | 2,120 | ||||||
Total shareholders equity |
57,836 | 56,630 | ||||||
Total liabilities and shareholders equity |
$ | 359,634 | $ | 350,796 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands, except per share data)
For the Three Months Ended January 31, |
||||||||
2011 | 2010 | |||||||
NET SALES |
$ | 217,727 | $ | 157,170 | ||||
COST OF SALES |
188,217 | 139,125 | ||||||
Gross profit |
29,510 | 18,045 | ||||||
OPERATING EXPENSES: |
||||||||
Delivery |
10,293 | 8,094 | ||||||
Selling |
8,711 | 8,403 | ||||||
General and administrative |
5,471 | 5,838 | ||||||
Total operating expenses |
24,475 | 22,335 | ||||||
OTHER OPERATING (EXPENSE) INCOME: |
||||||||
(Loss) gain on sales of property, plant and equipment, net |
(22 | ) | 210 | |||||
Operating income (loss) |
5,013 | (4,080 | ) | |||||
OTHER INCOME (EXPENSE): |
||||||||
Interest expense |
(3,813 | ) | (3,760 | ) | ||||
Other, net |
107 | 35 | ||||||
Income (loss) before (provision) benefit for income taxes |
1,307 | (7,805 | ) | |||||
(PROVISION) BENEFIT FOR INCOME TAXES |
(242 | ) | 2,905 | |||||
Net income (loss) |
$ | 1,065 | $ | (4,900 | ) | |||
BASIC EARNINGS (LOSS) PER COMMON SHARE: |
||||||||
Net income (loss) per common share |
$ | 0.17 | $ | (0.72 | ) | |||
DILUTED EARNINGS (LOSS) PER COMMON SHARE: |
||||||||
Net income (loss) per common share |
$ | 0.17 | $ | (0.72 | ) | |||
For the Three Months Ended January 31, |
||||||||
2011 | 2010 | |||||||
Consolidated Statements of Other Comprehensive Income (Loss): | ||||||||
Net income (loss) |
$ | 1,065 | $ | (4,900 | ) | |||
Other comprehensive income: |
||||||||
Foreign currency translation adjustments |
163 | 377 | ||||||
Amortization of prior service cost, net of tax |
24 | 20 | ||||||
Comprehensive income (loss) |
$ | 1,252 | $ | (4,503 | ) | |||
The accompanying notes to consolidated financial statements are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
For the Three Months Ended January 31, |
||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | 1,065 | $ | (4,900 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
||||||||
Depreciation and amortization |
5,368 | 5,244 | ||||||
Change in LIFO reserve |
4,087 | 2,097 | ||||||
Amortization of debt fees |
273 | 274 | ||||||
Provision for losses on accounts receivable and inventories |
96 | 69 | ||||||
Change in deferred income taxes |
(16 | ) | (2,881 | ) | ||||
Share-based compensation expense |
669 | 1,039 | ||||||
Other |
40 | (160 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Decrease in accounts receivable |
5,259 | 6,182 | ||||||
Increase in inventories |
(20,461 | ) | (19,103 | ) | ||||
Decrease in other current assets |
228 | 279 | ||||||
(Increase) decrease in other assets |
(249 | ) | 6 | |||||
Decrease in accounts payable |
(2,368 | ) | (1,297 | ) | ||||
Decrease in accrued expenses |
(1,019 | ) | (4,877 | ) | ||||
Decrease in other long-term liabilities |
(94 | ) | (8 | ) | ||||
Net cash used in operating activities |
(7,122 | ) | (18,036 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Capital expenditures |
(3,743 | ) | (2,175 | ) | ||||
Net proceeds from dispositions of property, plant and equipment |
17 | 294 | ||||||
Net cash used in investing activities |
(3,726 | ) | (1,881 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net borrowings from Credit Facility |
11,505 | 21,586 | ||||||
Repayments of Pennsylvania Industrial Loans |
(135 | ) | (132 | ) | ||||
Principal payments on capital lease obligations |
(270 | ) | (255 | ) | ||||
Buyback of common stock |
(154 | ) | (1,934 | ) | ||||
Proceeds from issuance of common stock |
| 398 | ||||||
Proceeds from exercise of stock options |
37 | 170 | ||||||
Other |
(176 | ) | | |||||
Net cash provided by financing activities |
10,807 | 19,833 | ||||||
EFFECTS OF EXCHANGE RATE CHANGES ON CASH |
(18 | ) | 360 | |||||
Net (decrease) increase in cash |
(59 | ) | 276 | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
1,049 | 301 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 990 | $ | 577 | ||||
SUPPLEMENTAL CASH FLOW DISCLOSURE: |
||||||||
Cash paid during the period for interest |
$ | 364 | $ | 293 | ||||
Cash paid during the period for income taxes |
$ | 309 | $ | 136 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
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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 managements opinion, all adjustments necessary for the fair presentation of the consolidated financial position as of January 31, 2011, the consolidated results of operations for the three months ended January 31, 2011 and 2010, and consolidated cash flows for the three months ended January 31, 2011 and 2010, respectively, have been made. The consolidated results of operations for the three months ended January 31, 2011 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 customer rebates and incentives, product returns, doubtful accounts, inventories, including LIFO inventory valuations, litigation and contingency accruals, income taxes, including valuation of deferred taxes and assessment of unrecognized tax benefits for uncertain tax positions, share-based compensation, leasing arrangements, impairment of long-lived assets and intangibles, including goodwill, acquisitions, and costs associated with the restructuring of the Atlantis plants. Management bases its estimates and judgments on historical experience and various other factors, including the current economic environment, which it believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Volatility in the credit, equity, and foreign currency markets and in the world markets for petroleum and natural gas, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes to estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods, as necessary.
Certain information and footnote disclosures normally included in audited 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 Companys Annual Report on Form 10-K for the year ended October 31, 2010, filed with the Commission on January 14, 2011.
The Company evaluates all subsequent events prior to filing and has implemented all new accounting pronouncements that are in effect and that may impact its financial statements, and the Company does not believe that there are any other new accounting pronouncements that have been issued that would be expected to have a material impact on its financial position, results of operations or cash flows.
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AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(2) | EARNINGS (LOSS) 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 per share is as follows:
For the Three Months Ended January 31, |
||||||||
2011 | 2010 | |||||||
Weighted average common shares outstanding: |
||||||||
Basic |
6,142,360 | 6,823,000 | ||||||
Effect of dilutive securities: |
||||||||
Options to purchase shares of common stock |
33,631 | | ||||||
Diluted |
6,175,991 | 6,823,000 | ||||||
For the three months ended January 31, 2011 and 2010, the Company had 122,180 and 27,000 stock options outstanding, respectively, that could potentially dilute earnings per share in future periods and were excluded from the computation of diluted EPS as their exercise price was higher than the Companys average stock price. For the three months ended January 31, 2010, the Company had 67,210 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.
(3) | ACQUISITIONS |
On October 30, 2008, the Company completed the acquisition of substantially all of the assets of the stretch films, custom films and institutional products divisions of Atlantis Plastics, Inc. and certain of its subsidiaries (Atlantis) for an adjusted purchase price of $98.8 million after expenses. The purchase price was allocated to the specific tangible and intangible assets acquired and liabilities assumed, including the restructuring of the Atlantis plants, based upon the relative fair value, after allocating the negative goodwill resulting from the transaction to property, plant and equipment and intangible assets.
Concurrent with the closing of the Atlantis acquisition, the Companys Board of Directors (the Board) approved a plan to realign and reorganize the Atlantis businesses. Management finalized its reorganization plan in October 2009. The Company completed the shutdowns of the acquired Fontana, California plant in November 2008, and the acquired Cartersville, Georgia plant in October 2009. Costs of approximately $5.9 million associated with shutting down these plants were recorded as an adjustment to the allocation of the purchase price. Costs associated with this restructuring include additional severance costs, lease costs, costs to be incurred as a result of the contractual obligation to put the facilities back to their original condition, equipment dismantling costs and operating costs of the facilities from November 1, 2009 until lease expiration, including estimated costs for security service, minimal utilities and property taxes. The Company completed its restructuring activities related to the Fontana facility in December 2010 and expects to complete such activities in the Cartersville facility by
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AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(3) | ACQUISITIONS (Continued) |
July 2015 (commensurate with the expiration of the Fontana and Cartersville leases, respectively). The Company has entered into a sublease for the Cartersville property aggregating approximately $0.4 million in sublease income for the period January 2011 to July 2015 and as such, the estimated future costs associated with this facility have been reduced. Due to this sublease and the settlement of certain obligations for less than expected, $2.2 million of the $5.9 million restructuring reserve was reversed in the fourth quarter of fiscal 2010 with a corresponding $2.1 million decrease in property, plant and equipment and a $0.1 million decrease in intangible assets.
The roll forward of the restructuring reserve, included in accrued expenses ($0.3 million and $0.4 million at January 31, 2011 and October 31, 2010, respectively) and other long-term liabilities ($0.7 million and $0.8 million at January 31, 2011 and October 31, 2010, respectively) in the consolidated balance sheets, is as follows:
Severance | Facility Closure Costs |
Lease Costs |
Operating Costs |
Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Balance at October 31, 2009 |
$ | 87 | $ | 2,350 | $ | 2,280 | $ | 1,010 | $ | 5,727 | ||||||||||
Payments during the first quarter of fiscal 2010 |
(44 | ) | (27 | ) | (201 | ) | (127 | ) | (399 | ) | ||||||||||
Payments during the remainder of fiscal 2010 |
(37 | ) | (933 | ) | (620 | ) | (326 | ) | (1,916 | ) | ||||||||||
Adjustment to reserve |
| (1,313 | ) | (444 | ) | (443 | ) | (2,200 | ) | |||||||||||
Balance at October 31, 2010 |
6 | 77 | 1,015 | 114 | 1,212 | |||||||||||||||
Payments during the first quarter of fiscal 2011 |
| (26 | ) | (117 | ) | (28 | ) | (171 | ) | |||||||||||
Balance at January 31, 2011 |
$ | 6 | $ | 51 | $ | 898 | $ | 86 | $ | 1,041 | ||||||||||
(4) | 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 and for U.S. supplies and printed and converted finished goods) 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.
Inventories are comprised of the following:
January 31, 2011 |
October 31, 2010 |
|||||||
(in thousands) | ||||||||
Raw materials |
$ | 33,251 | $ | 27,600 | ||||
Finished goods |
52,835 | 41,892 | ||||||
Supplies |
3,425 | 3,596 | ||||||
89,511 | 73,088 | |||||||
Less: Inventory reserve |
96 | 110 | ||||||
Inventories, net |
$ | 89,415 | $ | 72,978 | ||||
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AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(4) | INVENTORIES (Continued) |
The LIFO method was used for determining the cost of approximately 87% and 85% of total inventories at January 31, 2011 and October 31, 2010, respectively. Inventories would have increased by $26.2 million and $22.1 million at January 31, 2011 and October 31, 2010, respectively, if the FIFO method had been used exclusively. Since the actual valuation of inventory under the LIFO method can only be made at the end of the fiscal year based on inventory levels and costs at that time, the interim LIFO calculations are based on managements best estimate of expected fiscal year-end inventory levels and costs. Due to the volatility of resin pricing, the Company consistently uses current pricing as its estimate of fiscal year-end costs. Therefore, interim LIFO calculations are subject to the final fiscal year-end LIFO inventory valuation. Because of the Companys continuous manufacturing process, there is no significant work in process at any point in time.
(5) | GOODWILL AND INTANGIBLE ASSETS |
Changes in the carrying amount of goodwill during the three months ended January 31, 2011 are as follows:
(in thousands) | ||||
Goodwill at October 31, 2010 |
$ | 8,135 | ||
Realization of deferred tax assets related to Borden Global Packaging acquisition |
(345 | ) | ||
Goodwill at January 31, 2011 |
$ | 7,790 | ||
Changes in the carrying amount of intangible assets during the three months ended January 31, 2011 are as follows:
Customer List (Mercury) |
Tradenames (Atlantis) |
Leasehold Interests |
Customer relationships |
Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Balance at October 31, 2010 |
$ | 78 | $ | 828 | $ | (29 | ) | $ | 1,304 | $ | 2,181 | |||||||||
Amortization Quarter 1 2011 |
(15 | ) | (23 | ) | 2 | (29 | ) | (65 | ) | |||||||||||
Balance at January 31, 2011 |
$ | 63 | $ | 805 | $ | (27 | ) | $ | 1,275 | $ | 2,116 | |||||||||
Total amortization of intangible assets for the three months ended January 31, 2010 was $77,000.
Amortization periods over a straight-line basis are as follows:
In Years | ||||
Customer list |
6 | |||
Trade namesLinear Films |
10 | |||
Trade namesSta-Dri |
20 | |||
Customer relationships |
13 | |||
Unfavorable lease |
6.8 | |||
Favorable lease |
2 |
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AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(6) | DEBT |
A summary of the components of debt is as follows:
January 31, 2011 |
October 31, 2010 |
|||||||
(in thousands) | ||||||||
Credit facility(a) |
$ | 35,250 | $ | 23,745 | ||||
7.875% senior notes due 2013(b) |
160,160 | 160,160 | ||||||
Pennsylvania Industrial Loans(c) |
1,660 | 1,795 | ||||||
Foreign bank borrowings(d) |
| | ||||||
Total debt |
197,070 | 185,700 | ||||||
Less: current portion |
342 | 441 | ||||||
Long-term debt |
$ | 196,728 | $ | 185,259 | ||||
(a) Credit Facility
The Company maintains a secured credit facility with Wells Fargo Bank N.A., successor to Wachovia Bank N.A., as initial lender thereunder and as agent for the lenders thereunder, which was last amended and restated on October 30, 2008 (the Credit Facility). The Credit Facility has a maximum borrowing amount of $150.0 million, including a maximum of $20.0 million for letters of credit, and matures on December 15, 2012.
The Company utilizes 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. The Company had average borrowings under the Credit Facility of approximately $39.1 million and $25.8 million, with a weighted average interest rate of 2.9% and 3.3%, during the three months ended January 31, 2011 and 2010, respectively. Under the Credit Facility, interest rates are based upon Excess Availability (as defined therein) at a margin of the prime rate (defined as the greater of Wells Fargos prime rate and the Federal Funds rate plus 0.50%) plus 0% to 0.25% for overnight borrowings and LIBOR plus 2.25% to 2.75% for LIBOR borrowings up to six months.
Borrowings and letters of credit available under the Credit Facility are limited to a borrowing base based upon specific advance percentage rates on eligible domestic assets (including receivables), subject, in the case of inventory, equipment and real property, to amount limitations. The sum of the eligible assets at January 31, 2011 and October 31, 2010 supported a borrowing base of $134.2 million and $128.0 million, respectively. Availability was reduced by the aggregate amount of letters of credit outstanding totaling $0.8 million at January 31, 2011 and October 31, 2010, respectively. Availability at January 31, 2011 and October 31, 2010 under the Credit Facility was $98.2 million and $103.5 million, respectively. The Credit Facility is secured by mortgages and liens on most of the Companys domestic assets and on 66% of the Companys ownership interest in certain foreign subsidiaries.
The Credit Facility provides for events of default. If an event of default occurs and is continuing, amounts due under the Credit Facility may be accelerated and the commitments to extend credit thereunder terminated. The Credit Facility also contains customary bank covenants, including, but not limited to, limitations on the incurrence of debt and liens, the disposition and acquisition of assets, and the making of investments and restricted payments, including the payment of cash dividends. The key
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AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(6) | DEBT (Continued) |
covenants are applicable only if the Excess Availability is below a specified amount. In particular, if at any time average Excess Availability is less than $35.0 million for the immediately preceding fiscal quarter, a fixed charge coverage ratio test of 1.0x must be met. In addition, a minimum EBITDA (as defined therein) covenant of $35.0 million for the preceding 12-month period is triggered at any time Excess Availability is less than $25.0 million, and an annual capital expenditure limitation of $35.0 million is triggered at any time Excess Availability is less than $20.0 million. In addition, if Excess Availability under the Credit Facility is less than $15.0 million, a springing lock-box is activated and all remittances received from customers in the United States will automatically be applied to repay the balance outstanding. The automatic repayments through the lock-box remain in place until the Excess Availability exceeds $15.0 million for 30 consecutive days. During any period in which the lock-box is activated, all debt outstanding under the Credit Facility would be classified as a current liability, which classification may materially affect the Companys working capital ratio. Excess Availability under the Credit Facility ranged from $78.7 million to $114.8 million during the three months ended January 31, 2011 and from $70.2 million to $126.3 million during the three months ended January 31, 2010.
The Company was in compliance with the financial and other covenants at January 31, 2011 and October 31, 2010.
(b) 7.875% Senior Notes due 2013
On March 18, 2005, the Company completed the sale of $175 million aggregate principal amount of 7.875% Senior Notes due March 15, 2013 (2013 Notes) through a private offering. With Board approval, the Company repurchased and retired $14.8 million (principal amount) of the Companys 2013 Notes at a price of 62.8% of par on April 1, 2009.
On November 2, 2009, the Board terminated the 2009 Senior Note Repurchase Program and authorized the 2010 Senior Note Repurchase Program which allows the Company to spend up to $25.0 million to repurchase its outstanding 2013 Notes. Repurchases may be made in the open market, privately negotiated transactions or by other means from time to time, subject to conditions, applicable legal requirements and other factors, including the limitations set forth in the Companys debt covenants. The amounts involved in any such transactions, individually or in the aggregate, may be material and may be funded from available cash or from additional borrowings. The program does not obligate the Company to acquire any particular amount of the 2013 Notes, and the program may be suspended at any time at managements discretion. As of January 31, 2011, no repurchases have been made under the 2010 Senior Note Repurchase Program.
The 2013 Notes contain certain customary covenants that, among other things, limit the Companys ability and the ability of its subsidiaries to incur additional indebtedness, pay dividends, sell assets, merge or consolidate or create liens. The Company was in compliance with the covenants at January 31, 2011 and October 31, 2010.
Interest is paid semi-annually on March 15 and September 15.
The 2013 Notes are subject to redemption, at the option of the Company, in whole or in part, at any time prior to maturity at certain fixed redemption prices plus accrued interest. The 2013 Notes do not have any sinking fund requirements. The 2013 Notes contain a provision that in the event of a
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AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(6) | DEBT (Continued) |
change in control, the Company is required to offer to purchase the outstanding 2013 Notes. If a change of control were to occur and the Company was unable to obtain a waiver or did not have funds to make the purchase, the Company would be in default under the 2013 Notes.
(c) Pennsylvania Industrial Loans
The Company has certain amortizing fixed rate term loans in connection with the construction in fiscal 1995 and the expansion in fiscal 2008 of its Wright Township, Pennsylvania manufacturing facility. These financing arrangements are secured by the real property of the manufacturing facility located in Wright Township, Pennsylvania, which had a net carrying value of $12.3 million at January 31, 2011.
(d) 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, 2011 and October 31, 2010, respectively. Availability under the Canadian credit facility at January 31, 2011 and October 31, 2010 was $5.0 million and $4.9 million, respectively.
Fair Value Measurements
At January 31, 2011 and October 31, 2010, there was $161.8 million and $162.0 million, respectively, of fixed rate debt outstanding, substantially all of which relates to the 2013 Notes. The carrying value of the 2013 Notes was $160.2 million at January 31, 2011 and October 31, 2010, respectively. The fair value of the 2013 Notes at January 31, 2011 and October 31, 2010 was estimated to be $160.2 million and $161.9 million, respectively, based on quoted market rates (Level 1). The Company believes that the carrying value of the Companys Pennsylvania Industrial Loans of $1.7 million at January 31, 2011 approximates its fair value based on observable inputs (Level 2).
(7) | ACCRUED EXPENSES |
At January 31, 2011 and October 31, 2010, accrued expenses consist of the following:
January 31, 2011 |
October 31, 2010 |
|||||||
(in thousands) | ||||||||
Payroll and employee related |
$ | 6,617 | $ | 7,675 | ||||
Customer rebates |
5,005 | 6,076 | ||||||
Interest |
4,833 | 1,656 | ||||||
Taxes (other than income) |
1,171 | 2,255 | ||||||
Accrual for performance units |
1,711 | 1,409 | ||||||
Accrued professional fees |
567 | 1,100 | ||||||
Current portion of capital lease |
1,117 | 1,101 | ||||||
Reserve for Atlantis restructuring (see Note 3) |
334 | 425 | ||||||
Other |
2,334 | 2,189 | ||||||
Accrued expenses |
$ | 23,689 | $ | 23,886 | ||||
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AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(8) | SHAREHOLDERS EQUITY |
Share-Based Compensation
At January 31, 2011, the Company has a share-based plan which provides for the granting of stock options and performance units to officers, directors and key employees of the Company. The Company also had an employee stock purchase plan which was terminated effective immediately following the end of the six-month offering period ended June 30, 2010. Total share-based compensation expense related to the Companys stock options plans and employee stock purchase plan are recorded in the consolidated statements of operations as follows:
For the Three Months Ended January 31, |
||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Cost of sales |
$ | 107 | $ | 190 | ||||
Selling expense |
110 | 203 | ||||||
General and administrative expense |
452 | 646 | ||||||
Total |
$ | 669 | $ | 1,039 | ||||
Stock Option Plans
The Companys 1995 Stock Option Plan (1995 Option Plan) expired on December 31, 2004, except as to options granted prior to that date. The Board adopted the AEP Industries Inc. 2005 Stock Option Plan (2005 Option Plan) and the Companys shareholders approved the 2005 Option Plan at its annual shareholders meeting. The 2005 Option Plan became effective January 1, 2005 and will expire on December 31, 2014. The 2005 Option Plan provides for the granting of incentive stock options which may be exercised over a period of ten years, and the issuance of stock appreciation rights, restricted stock, performance units and non-qualified stock options, including fixed annual grants to non-employee directors. Under the 2005 Option Plan, each non-employee director receives a fixed annual grant of 2,000 stock options as of the date of the annual meeting of shareholders. The Company has reserved 1,000,000 shares of the Companys common stock for issuance under the 2005 Option Plan. 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 2011 and 2010 has been made from new shares. At January 31, 2011, 533,203 shares are available to be issued under the 2005 Option Plan.
Stock Options
The fair value of options granted is estimated on the date of grant using a Black-Scholes options pricing model. Expected volatilities are calculated based on the historical volatility of the Companys stock. Management monitors stock option exercise and employee termination patterns to estimate forfeitures rates within the valuation model. Separate groups of employees, including executive officers, and directors, that have similar historical exercise behavior are considered separately for valuation purposes. The expected holding period of stock options represents the period of time that
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AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(8) | SHAREHOLDERS EQUITY (Continued) |
stock options granted are expected to be outstanding. The risk-free interest rate is based on the Treasury note interest rate in effect on the date of grant for the expected term of the stock option.
There were no options granted during the three months ended January 31, 2011 or 2010.
The following table summarizes the Companys stock option plans as of January 31, 2011, and changes during the three months ended January 31, 2011:
1995 Option Plan |
2005 Option Plan |
Total Number Of Options |
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, 2010 (184,009 options exercisable) |
151,409 | 75,400 | 226,809 | $ | 22.87 | $ | 7.87-51.00 | 4.0 | $ | 1,410 | ||||||||||||||||||
Granted |
| | | | | |||||||||||||||||||||||
Exercised |
(3,745 | ) | | (3,745 | ) | $ | 9.77 | $ | 9.30-11.74 | |||||||||||||||||||
Forfeited/Cancelled |
| | | | | |||||||||||||||||||||||
Expired |
| | | | | |||||||||||||||||||||||
Options outstanding at January 31, 2011 |
147,664 | 75,400 | 223,064 | $ | 23.09 | $ | 7.87-51.00 | 3.8 | $ | 1,703 | ||||||||||||||||||
Vested and expected to vest at January 31, 2011 |
147,664 | 75,400 | 223,064 | $ | 23.09 | 3.8 | $ | 1,703 | ||||||||||||||||||||
Exercisable at January 31, 2011 |
147,664 | 35,000 | 182,664 | $ | 21.96 | 2.9 | $ | 1,590 | ||||||||||||||||||||
The table below presents information related to stock option activity for the three months ended January 31, 2011 and 2010:
For the Three Months Ended January 31, |
||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Total intrinsic value of stock options exercised |
$ | 62 | $ | 1,120 | ||||
Total fair value of stock options vested |
$ | 59 | $ | 59 |
Share-based compensation expense related to the Companys stock options recorded in the consolidated statements of operations for the three months ended January 31, 2011 and 2010 was approximately $71,000 and $67,000, respectively. No compensation cost related to stock options was capitalized in inventory or any other assets for the three months ended January 31, 2011 and 2010. For the three months ended January 31, 2011 and 2010, there were no excess tax benefits recognized resulting from share-based compensation awards as the Company was not in a federal tax paying position.
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AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(8) | SHAREHOLDERS EQUITY (Continued) |
As of January 31, 2011, there was $0.5 million of total unrecognized compensation cost related to non-vested stock options granted under the plans. That cost is expected to be recognized over a weighted-average period of 2.9 years.
Non-vested Stock Options
A summary of the Companys non-vested stock options at January 31, 2011 and changes during the three months ended January 31, 2011 are presented below:
Non-vested stock options |
Shares | Weighted Average Grant Date Fair Value |
||||||
Non-vested at October 31, 2010 |
42,800 | $ | 17.85 | |||||
Granted |
| | ||||||
Vested |
(2,400 | ) | $ | 24.42 | ||||
Forfeited |
| | ||||||
Non-vested at January 31, 2011 |
40,400 | $ | 17.46 | |||||
If an employee is terminated for any reason by the Company, or due to disability or retirement, any outstanding stock options that are exercisable as of the termination date may be exercised until the earlier of (a) three months following the termination date and (b) the expiration of the stock option term. If an employee ceases to be employed due to death, any outstanding stock options will become exercisable in full and the employees beneficiary may exercise such stock options until the earlier of (a) one year following the date of death and (b) the expiration of the stock option term. Notwithstanding the foregoing, the Compensation Committee retains discretionary authority at any time, including immediately prior to or upon a change of control, to accelerate the exercisability of any award.
Performance Units
The 2005 Option Plan also provides for the granting of Board approved performance units (Units). Outstanding Units are subject to forfeiture based on an annual Adjusted EBITDA performance goal, as determined and adjusted by the Board. If the Companys Adjusted EBITDA equals or exceeds the performance goal, no Units will be forfeited. If the Companys Adjusted EBITDA is between 80% and less than 100% of the performance goal, such employee will forfeit such number of Units equal to (a) the Units granted multiplied by (b) the percentage Adjusted EBITDA is less than the performance goal. If Adjusted EBITDA is below 80% of the performance goal, the employee will forfeit all Units. Subsequent to the satisfaction of the performance goal, the vesting of the Units will occur equally over five years on the first through the fifth anniversaries of the grant date, provided that such person continues to be employed by the Company on such respective dates.
The Units will immediately vest (subject to pro-ration, if such termination event occurs during or as of the end of the fiscal year in which the initial grant was made) in the event of (1) the death of an employee, (2) the permanent disability of an employee (within the meaning of the Internal Revenue Code of 1986, as amended) or (3) a termination of employment due to the disposition of any asset, division, subsidiary, business unit, product line or group of the Company or any of its affiliates. In the
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AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(8) | SHAREHOLDERS EQUITY (Continued) |
case of any other termination, any unvested performance units will be forfeited. Notwithstanding the foregoing, the Compensation Committee retains discretionary authority at any time, including immediately prior to or upon a change of control, to accelerate the exercisability of any award, or the end of a performance period. For each Unit, upon vesting and the satisfaction of any required tax withholding obligation, the employee has the option to receive one share of the Companys common stock, the equivalent cash value or a combination of both.
Due to the cash settlement feature, the Units are liability classified and are recognized at fair value, depending on the percentage of requisite service rendered at the reporting date, and are remeasured at each balance sheet date to the market value of the Companys common stock at the reporting date.
As the Units contain both a performance and service condition, the Units have been treated as a series of separate awards or tranches for purposes of recognizing compensation expense. The Company will recognize compensation expense on a tranche-by-tranche basis, recognizing the expense as the employee works over the requisite service period for that specific tranche. The Company has applied the same assumption for forfeitures as employed in the Companys stock option plans, discussed above.
Total share-based compensation expense related to the Units was approximately $598,000 and $911,000 for the three months ended January 31, 2011 and 2010, respectively. At January 31, 2011 and October 31, 2010, there are $1.7 million and $1.4 million in current liabilities, respectively, and $0.8 million and $1.1 million in long-term liabilities, respectively, related to outstanding Units.
The following table summarizes the Units as of January 31, 2011, and changes during the three months ended January 31, 2011:
2005 Option Plan |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (years) |
Aggregate Intrinsic Value $(000) |
|||||||||||||
Units outstanding at October 31, 2010 |
160,790 | $ | 0.00 | 1.4 | $ | 3,918 | ||||||||||
Units granted |
52,931 | $ | 0.00 | |||||||||||||
Units exercised |
(35,380 | ) | $ | 0.00 | $ | 887 | ||||||||||
Units forfeited or cancelled |
(600 | ) | ||||||||||||||
Units outstanding at January 31, 2011 |
177,741 | $ | 0.00 | 1.9 | $ | 4,922 | ||||||||||
Vested and expected to vest at January 31, 2011 |
174,891 | 1.9 | $ | 4,843 | ||||||||||||
Exercisable at January 31, 2011 |
| |||||||||||||||
The Company paid in January 2011, $0.4 million in cash, net of withholdings, in partial settlement of the vesting of Units occurring during the first quarter of fiscal 2011. The Company paid in February 2011, $0.1 million in cash and issued 2,009 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 2011. The Company paid in February 2010, $0.9 million in cash, net of withholdings, in settlement of the vesting of Units occurring during the first quarter of fiscal 2010.
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AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(8) | SHAREHOLDERS EQUITY (Continued) |
Employee Stock Purchase Plan
The Company terminated the Companys 2005 Employee Stock Purchase Plan, as amended (2005 Purchase Plan), effective immediately following the end of the six-month offering period ended June 30, 2010.
The 2005 Purchase Plan became effective July 1, 2005 and provided for an aggregate of 250,000 shares of the Companys common stock to be made available for purchase by eligible employees of the Company, including directors and officers, through payroll deductions over successive six-month offering periods. The purchase price of the common stock under the 2005 Purchase Plan was 85% of the lower of the closing sales price per share of the Companys common stock on Nasdaq on either the first or last trading day of each six-month offering period. During the three months ended January 31, 2010, 17,285 shares were purchased by employees pursuant to the 2005 Purchase Plan. At July 1, 2010, 99,264 shares remained unsold under the 2005 Purchase Plan and were subsequently deregistered.
Total share-based compensation expense related to the 2005 Purchase Plan was approximately $61,000 for the three months ended January 31, 2010.
Treasury Shares
On June 6, 2008, the Board approved an $8.0 million stock repurchase program (the June 2008 Stock Repurchase Program). Between November 9 and November 20, 2009, the Company repurchased under its June 2008 Stock Repurchase Program, 52,500 shares of its common stock in the open market at an average cost of $36.84 per share, totaling $1.9 million.
On June 7, 2010, the Board terminated the June 2008 Repurchase Program (which had approximately $6.1 million remaining as of such date) and approved a new $10.0 million stock repurchase program (the June 2010 Repurchase Program). During fiscal 2010 through August 3, 2010, the Company repurchased under its June 2010 Stock Repurchase Program 186,200 shares of its common stock in the open market at an average cost of $25.68 per share, totaling $4.8 million.
On August 4, 2010, the Board authorized a $6.5 million increase to the June 2010 Repurchase Program. On August 5, 2010, the Company repurchased 400,476 shares of its common stock from investment funds affiliated with KSA Capital Management, LLC (KSA Capital), whose managing member is Daniel D. Khoshaba (who served as a director on the Companys Board at such time), in a privately negotiated transaction at an aggregate purchase price of $10.9 million, or $27.28 per share (including brokerage commissions). The purchase price per share represented a discount of 4.8% to the previous days closing price of the Companys common stock.
On September 15, 2010, the Board terminated the June 2010 Stock Repurchase Program (which had approximately $0.8 million remaining as of such date) and approved a new $8.0 million stock repurchase program (the September 2010 Stock Repurchase Program). Repurchases may be made in the open market, in privately negotiated transactions or by other means, from time to time, subject to market conditions, applicable legal requirements and other factors, including the limitations set forth in the Companys debt covenants. The program does not obligate the Company to acquire any particular amount of common stock and the program may be suspended at any time at the Companys discretion. During the fiscal year 2010, the Company repurchased under its September 2010 Stock Repurchase
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AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(8) | SHAREHOLDERS EQUITY (Continued) |
Program 143,449 shares of its common stock in a privately negotiated transaction and in the open market at an average cost of $21.62 per share, totaling $3.1 million.
During the first quarter of fiscal 2011, the Company repurchased 5,900 shares of its common stock under the September 2010 Stock Repurchase Program in the open market at an average cost of $26.17 per share, totaling approximately $154,000. As of January 31 2011, $4.7 million remains available for repurchase under such program.
Preferred Shares
The Board may direct the issuance of up to one million shares of the Companys $1.00 par value Preferred Stock and may, at the time of issuance, determine the rights, preferences and limitations of each series.
(9) | INCOME TAXES |
Income taxes are accounted for using the asset and liability method. Such approach results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. A valuation allowance is established against deferred tax assets and is recorded when management estimates that it is more likely than not that the asset will not be realized.
In November 2009, the Company received approximately $4.5 million as a dividend from its Canadian subsidiary at no federal tax cost due to the utilization of tax attributes.
The provision for income taxes for the three months ended January 31, 2011 was $0.2 million on income before the provision for income taxes of $1.3 million. The difference between the Companys effective tax rate of 18.5 percent for the three months ended January 31, 2011 and the U.S. statutory tax rate of 35.0 percent, primarily relates to the differential in the U.S and the Canadian statutory rates (-4.5%) and a reduction in the valuation allowance for foreign tax credits (-16.4%), partially offset by a provision for state taxes in the United States, net of federal benefit (+1.1%) and a provision for foreign taxes paid (+2.8%).
The benefit for income taxes for the three months ended January 31, 2010 was $2.9 million on a loss before the benefit for income taxes of $7.8 million. The difference between the Companys effective tax rate of 37.2 percent and the U.S. statutory tax rate of 35.0 percent primarily relates to a benefit for state taxes in the United States, net of federal benefit (+2.8%), a true-up of deferred taxes as a result of a reduction in the Canadian statutory tax rate (+1.9%), and a provision for state taxes related to U.S. receipt of the Canadian dividend (-2.8%).
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AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(10) SEGMENT | AND GEOGRAPHIC INFORMATION |
The Companys operations are conducted within one business segmentthe production, manufacture and distribution of 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, 2011 |
||||||||||||
United States |
Canada | Total | ||||||||||
(in thousands) | ||||||||||||
Salesexternal customers |
$ | 202,060 | $ | 15,667 | $ | 217,727 | ||||||
Intercompany sales |
7,974 | | 7,974 | |||||||||
Gross profit |
25,992 | 3,518 | 29,510 | |||||||||
Operating income |
3,889 | 1,124 | 5,013 |
For the Three Months Ended January 31, 2010 |
||||||||||||
United States |
Canada | Total | ||||||||||
(in thousands) | ||||||||||||
Salesexternal customers |
$ | 143,693 | $ | 13,477 | $ | 157,170 | ||||||
Intercompany sales |
6,970 | | 6,970 | |||||||||
Gross profit |
15,420 | 2,625 | 18,045 | |||||||||
Operating (loss) income |
(4,699 | ) | 619 | (4,080 | ) |
Net sales by product line are as follows:
For the Three Months Ended January 31, |
||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Custom films |
$ | 72,760 | $ | 52,723 | ||||
Stretch (pallet) wrap |
73,009 | 48,166 | ||||||
PROformance® films |
16,738 | 12,029 | ||||||
Polyvinyl chloride wrap |
21,366 | 18,312 | ||||||
Printed and converted films |
2,468 | 2,086 | ||||||
Other products and specialty films |
31,386 | 23,854 | ||||||
Total |
$ | 217,727 | $ | 157,170 | ||||
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AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(11) COMMITMENTS | AND CONTINGENCIES |
Capital Lease Commitments:
During the second quarter of fiscal 2009, the Company entered into a transaction with General Electric Capital Corporation (GE Capital), whereby GE Capital purchased certain of the Companys manufacturing equipment for $7.0 million and leased the equipment back to the Company under two six-year capital leases. The interest rates on the capital leases range from 3.9% to 8.5% with a weighted average rate of 5.78%. The current portion of these obligations is included in accrued liabilities and the long-term portion is included in other long-term liabilities in the consolidated balance sheets. As a result of the capital lease treatment, the equipment remained a component of property, plant and equipment in the Companys consolidated balance sheet and will continue to be depreciated. No gain or loss was recognized related to this transaction.
Under the terms of the capital leases, the payments are as follows:
For the years ending October 31, |
Capital Leases |
|||
Remainder of 2011 |
$ | 1,040 | ||
2012 |
1,386 | |||
2013 |
1,386 | |||
2014 |
1,386 | |||
2015 |
578 | |||
Thereafter |
| |||
Total minimum lease payments |
5,776 | |||
Less: Amounts representing interest |
662 | |||
Present value of minimum lease payments |
5,114 | |||
Less: Current portion of obligations under capital leases |
1,117 | |||
Long-term portion of obligations under capital leases |
$ | 3,997 | ||
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 Companys financial position, results of operations, or liquidity.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
Forward-Looking Statements
Managements 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 sales and profits of our operations, 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 availability of raw materials; the ability to pass raw material price increases to customers in a timely fashion; the implementation of the final phase of a new operating system; the continuing impact of the economic slowdown in the United States and the global credit and financial environment and other changes in the United States or international economic or political conditions; the potential of technological changes that would adversely affect the need for our products; price fluctuations which could adversely impact our inventory; 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, 2010 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.
Managements 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, 2010 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 plastic packaging films. We manufacture and market an extensive and diverse line of polyethylene, polyvinyl chloride and polypropylene flexible packaging products, with consumer, industrial and agricultural applications. Our 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, polypropylene and polyvinyl chloride 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.
As of November 1, 2009, we implemented the initial phase of a new integrated operating system to improve our ability to address the needs of our customers, as well as to create additional efficiencies and strengthen internal control over financial reporting. During the three months ended January 31, 2011 and 2010, we incurred and charged to operations approximately $0.1 million and $0.6 million, respectively, in consulting costs related to improving user functionality of the system. During the first quarter of fiscal 2011, we began implementing the final phase of our new system, which is centered in our manufacturing facilities. Completion is expected in early fiscal 2012.
Concurrent with the closing of the Atlantis acquisition in October 2008, our Board approved a plan to realign and reorganize the combined businesses. The reorganization plan included the shutdown of the acquired Fontana, California plant which commenced in November 2008, and the shut down of the acquired Cartersville, Georgia plant. The consolidation of these plants has been completed. All manufacturing lines from the Fontana and Cartersville plants are either producing in or are in the process of being installed in other AEP plants. Approximately $1.0 million remains in the restructuring reserve and primarily relates to lease costs, net of sublease income, and certain operating costs of the Cartersville plant. The lease ends July 2015.
Market Conditions
As discussed above, the primary raw materials used in the manufacture of our products are polyethylene, polypropylene and polyvinyl chloride resins. In recent years, the market for resins has been extremely volatile, with record price increases followed by significant decreases and vice versa. Average resin cost during the three months ended January 31, 2011 was 20% higher, or $0.12 per pound, than the average resin cost during the three months ended January 31, 2010. We believe that resin prices will continue to fluctuate widely during the remainder of fiscal 2011 due to production issues among the resin suppliers, combined with fluctuating prices of oil and natural gas and exporting
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activities. The industry is currently experiencing a shortage of certain raw materials. At this time, we have been able to secure sufficient supply to meet our production needs; however, the shortage has further increased raw material costs. There can be no assurance that we will be able to continue to secure sufficient supply or be able to pass on resin price increases on a penny-for-penny basis in the future, if such costs were to continue to increase.
The marketplace in which we sell our products remains very competitive, and has been further complicated in recent years by adverse economic circumstances affecting many of our customers, distributors and suppliers. We have begun to see positive signs of stabilization in the economy although the impacts of the recent recession continue. Our net sales increased 38.5% in the first three months of fiscal 2011 compared to the prior period, which is due to a 9% increase in average selling prices and a 27% increase in sales volume. Our sales volume increase is attributable to increased demand from our customers as well as increased market share due to our market leadership, consolidation and bankruptcies of competitors, and fewer new market entrants. In spite of such net sales growth, forecasts for the remainder of 2011 remain uncertain. It is difficult to predict the continuing impact of the economic slowdown on our business. The economy may continue to strain the resources of our customers, distributors and suppliers and negatively impact our businesses and operations. We have implemented cost-reduction initiatives in recent years that are designed to increase efficiency and improve the way we run our business 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 to offset the results of a prolonged or severe downturn given the fixed cost nature of our business combined with our long term business strategy which demands that we remain in a position to respond when market conditions improve. We believe we have taken appropriate steps to minimize the impact of these conditions, primarily through staff reductions, shut downs of idle equipment and plant closures.
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 to 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 |
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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 costs 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 OperationsFirst Quarter of Fiscal 2011 Compared to First Quarter of Fiscal 2010
The following table presents unaudited selected financial data for the three months ended January 31, 2011 and 2010 (dollars per lb. sold is calculated by dividing the applicable consolidated statements of operations category by pounds sold in the period):
For the Three Months Ended | % increase/ (decrease) of $ |
$ increase/ (decrease) |
||||||||||||||||||||||
January 31, 2011 | January 31, 2010 | |||||||||||||||||||||||
$ | $ Per lb. sold |
$ | $ Per lb. sold |
|||||||||||||||||||||
(in thousands, except for per pound data) | ||||||||||||||||||||||||
Net sales |
$ | 217,727 | $ | 1.08 | $ | 157,170 | $ | 0.99 | 38.5 | % | $ | 60,557 | ||||||||||||
Gross profit |
29,510 | 0.15 | 18,045 | 0.11 | 63.5 | % | 11,465 | |||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Delivery |
10,293 | 0.05 | 8,094 | 0.05 | 27.2 | % | 2,199 | |||||||||||||||||
Selling |
8,711 | 0.04 | 8,403 | 0.05 | 3.7 | % | 308 | |||||||||||||||||
General and administrative |
5,471 | 0.03 | 5,838 | 0.04 | (6.3 | )% | (367 | ) | ||||||||||||||||
Total operating expenses |
$ | 24,475 | $ | 0.12 | $ | 22,335 | $ | 0.14 | 9.6 | % | $ | 2,140 | ||||||||||||
Pounds sold |
201,999 lbs. | 159,071 lbs. |
Net Sales
Net sales for the first quarter of fiscal 2011 increased $60.5 million, or 38.5%, to $217.7 million from $157.2 million for the first quarter of fiscal 2010. The increase was the result of a 9% increase in average selling prices primarily attributable to higher resin costs during the comparable periods, positively affecting net sales by $13.7 million, combined with a 27% increase in sales volume positively affecting net sales by $46.1 million. The first quarter of fiscal 2011 also included a $0.7 million positive impact of foreign exchange relating to our Canadian operations.
Gross Profit
Gross profit for the first quarter of 2011 increased $11.5 million, or 63.5%, to $29.5 million from $18.0 million in the same quarter of the prior fiscal year. There was a $4.1 million increase in the LIFO reserve during the first quarter of fiscal 2011 versus a $2.1 million increase in the LIFO reserve during the first quarter of fiscal 2010, representing an increase of $2.0 million year-over-year. Excluding the effects of the LIFO reserve increase, gross profit increased $13.5 million primarily due to increased sales volumes and improved plant utilization, partially offset by a lag in selling price increases during the period. The first quarter of fiscal 2011 also included a $0.2 million positive impact of foreign exchange relating to our Canadian operations and a $0.3 million decrease of consulting costs associated with the implementation of our new operating system.
Operating Expenses
Operating expenses for the first quarter of fiscal 2011 increased $2.1 million, or 9.6%, to $24.5 million from the comparable period in the prior fiscal year. The increase in operating expenses is primarily due to increased volumes sold in the current period increasing delivery and selling expenses by $2.8 million, partially offset by a decrease of $0.3 million related to share-based compensation costs
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associated with our stock options and performance units and a $0.2 million decrease of consulting costs associated with the implementation of our new operating system. The remaining decrease reflects the positive effects of our ongoing effort in cost cutting initiatives. The first quarter of fiscal 2011 also includes a $0.1 million unfavorable effect of foreign exchange increasing reported total operating expenses.
Interest Expense
Interest expense for the three months ended January 31, 2011 increased $0.1 million as compared to the prior year period, resulting primarily from higher average borrowings on our Credit Facility.
Income Tax Provision
The provision for income taxes for the three months ended January 31, 2011 was $0.2 million on income before the provision for income taxes of $1.3 million. The difference between our effective tax rate of 18.5 percent for the three months ended January 31, 2011 and the U.S. statutory tax rate of 35.0 percent, primarily relates to the differential in the U.S and the Canadian statutory rates (-4.5%) and a reduction in the valuation allowance for foreign tax credits (-16.4%), partially offset by a provision for state taxes in the United States, net of federal benefit (+1.1%) and a provision for foreign taxes paid (+2.8%).
The benefit for income taxes for the three months ended January 31, 2010 was $2.9 million on a loss before the benefit for income taxes of $7.8 million. The difference between our effective tax rate of 37.2 percent and the U.S. statutory tax rate of 35.0 percent primarily relates to a benefit for state taxes in the United States, net of federal benefit (+2.8%), a true-up of deferred taxes as a result of a reduction in the Canadian statutory tax rate (+1.9%), and a provision for state taxes related to U.S. receipt of the Canadian dividend (-2.8%).
Reconciliation of Non-GAAP Measures to GAAP
We define Adjusted EBITDA as income (loss) before discontinued operations, interest expense, income taxes, depreciation and amortization, changes in LIFO reserve, other non-operating income (expense) and non-cash share-based compensation expense (income). We believe Adjusted EBITDA is an important measure of operating 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 non-cash 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.
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The following is a reconciliation of our net income (loss), the most directly comparable GAAP financial measure, to Adjusted EBITDA:
First Quarter Fiscal 2011 |
First Quarter Fiscal 2010 |
|||||||
(in thousands) | (in thousands) | |||||||
Net income (loss) |
$ | 1,065 | $ | (4,900 | ) | |||
Provision (benefit) for taxes |
242 | (2,905 | ) | |||||
Interest expense |
3,813 | 3,760 | ||||||
Depreciation and amortization expense |
5,368 | 5,244 | ||||||
Increase in LIFO reserve |
4,087 | 2,097 | ||||||
Other non-operating income |
(107 | ) | (35 | ) | ||||
Non-cash share-based compensation |
669 | 1,039 | ||||||
Adjusted EBITDA |
$ | 15,137 | $ | 4,300 | ||||
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, and to buy back shares of our common stock and 2013 Notes.
Despite the challenging financial markets and economic conditions in recent years, we continue to maintain a strong balance sheet and sufficient liquidity to provide us with financial flexibility. Availability under our Credit Facility and credit lines available to our Canadian subsidiary for local currency borrowings was an aggregate of $103.2 million at January 31, 2011. We have no significant debt maturities until the first half of fiscal 2013. We ended the first three months of fiscal 2011 with a net debt position (current bank borrowings plus long term debt less cash and cash equivalents) of $196.1 million, compared with $184.7 million at the end of fiscal 2010. Our working capital amounted to $83.9 million at January 31, 2011 compared to $70.5 million at October 31, 2010. The increase in working capital of $13.4 million was primarily due to an increase in our investment in inventories, excluding the non-cash effects of LIFO, of $20.5 million due to increased volumes and increased average resin costs, partially offset by a decrease in accounts receivable of $5.3 million as a result of improved collections and lower dollar sales in the first quarter of fiscal 2011 as compared to the fourth quarter of fiscal 2010. Generally, our need to access the capital markets is limited to refinancing debt obligations and funding significant acquisitions. We have begun to see positive signs of stabilization in the capital markets although the impacts of the recent environment continue to impact the cost of capital. As market conditions change, we continue to monitor our liquidity position.
We believe that our cash flow 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.
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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, 2011 and 2010:
For the Three Months Ended January 31, |
||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Total cash (used in) provided by: |
||||||||
Operating activities |
$ | (7,122 | ) | $ | (18,036 | ) | ||
Investing activities |
(3,726 | ) | (1,881 | ) | ||||
Financing activities |
10,807 | 19,833 | ||||||
Effect of exchange rate changes on cash |
(18 | ) | 360 | |||||
(Decrease) increase in cash and cash equivalents |
$ | (59 | ) | $ | 276 | |||
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 $1.0 million at January 31, 2011, as compared to $1.1 million at October 31, 2010. Net cash used in operating activities during the three months ended January 31, 2011 was $7.1 million, which includes net income of $1.1 million adjusted for non-cash operating income totaling $10.5 million primarily related to depreciation and amortization and change in LIFO reserve. Cash used by operating activities also includes a $20.5 million increase in inventories excluding the non-cash effects of LIFO and a $3.4 million decrease in accounts payable and accrued expenses as a result of timing of payments, partially offset by a $5.3 million decrease in accounts receivable resulting primarily from improved collections and a decrease in dollar sales in the first quarter of fiscal 2011 as compared to the fourth quarter of fiscal 2010.
Investing Activities
Net cash used in investing activities during the three months ended January 31, 2011 was $3.7 million, resulting from capital expenditures during the period.
Financing Activities
Net cash provided by financing activities during the three months ended January 31, 2011 was $10.8 million, resulting primarily from $11.5 million in borrowings under our Credit Facility, partially offset by repurchases of our common stock totaling $0.2 million, $0.3 million of capital lease payments and $0.1 million of repayments of our Pennsylvania loans.
Sources and Uses of Liquidity
Debt
We maintain a secured credit facility with Wells Fargo Bank N.A., successor to Wachovia Bank N.A, as initial lender thereunder and as agent for the lenders thereunder, which was last amended and restated on October 30, 2008 (the Credit Facility). The Credit Facility has a maximum borrowing amount of $150.0 million, including a maximum of $20.0 million for letters of credit, and matures on December 15, 2012. 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
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and efficient cash management. Availability at January 31, 2011 and October 31, 2010 under the Credit Facility was $98.2 million and $103.5 million, respectively.
In addition to the amounts available under the Credit Facility, we also maintain a secured 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, 2011 and October 31, 2010. Availability under the Canadian credit facility at January 31, 2011 and October 31, 2010 was $5.0 million and $4.9 million, respectively,
Please refer to Note 6 of the consolidated financial statements for further discussion of our debt.
Repurchase Programs
On November 2, 2009, our Board of Directors terminated the 2009 Senior Note Repurchase Program and authorized the 2010 Senior Note Repurchase Program which allows us to spend up to $25.0 million to repurchase our outstanding 2013 Notes, all of which remains available for repurchase as of January 31, 2011. Please refer to Note 6 of the consolidated financial statements for further discussion of the program.
On September 15, 2010, our Board of Directors terminated the June 2010 Stock Repurchase Program (which had approximately $0.8 million remaining as of such date) and approved a new $8.0 million stock repurchase program (the September 2010 Stock Repurchase Program). As of January 31, 2011, $4.7 million remains available for repurchase under such program. Please refer to Note 8 of the consolidated financial statements for further discussion of the program.
Contractual Obligations and Off-Balance-Sheet Arrangements
Contractual Obligations and Commercial Commitments
Our contractual obligations and commercial commitments as of January 31, 2011 are as follows:
For the Years Ending October 31, | ||||||||||||||||||||
Borrowings | Interest on Fixed Rate Borrowings |
Capital Leases, Including Amounts Representing Interest |
Operating Leases |
Total Commitments |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
Remainder of 2011 |
$ | 306 | $ | 12,664 | $ | 1,040 | $ | 4,211 | $ | 18,221 | ||||||||||
2012 |
145 | 12,674 | 1,386 | 4,561 | 18,766 | |||||||||||||||
2013(1) |
195,563 | 6,361 | 1,386 | 4,112 | 207,422 | |||||||||||||||
2014 |
89 | 48 | 1,386 | 3,449 | 4,972 | |||||||||||||||
2015 |
87 | 44 | 578 | 1,756 | 2,465 | |||||||||||||||
Thereafter |
880 | 181 | | 675 | 1,736 | |||||||||||||||
Total(1) |
$ | 197,070 | $ | 31,972 | $ | 5,776 | $ | 18,764 | $ | 253,582 | ||||||||||
(1) | Borrowings include $160.2 million Senior Notes due on March 15, 2013 and $35.3 million of variable rate borrowings (outstanding borrowings under our Credit Facility) due December 15, 2012. See Note 6 of the consolidated financial statements for further discussion of our debt. |
In addition to the amounts reflected in the table above:
Concurrent with the closing of the Atlantis acquisition in October 2008, our Board approved a plan to realign and reorganize the Atlantis businesses. The Company completed the shutdowns of the acquired Fontana, California plant in November 2008 and the acquired Cartersville, Georgia plant in
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October 2009. All manufacturing lines from the Fontana and Cartersville plants are either producing in or are in the process of being installed in other AEP plants. Approximately $1.0 million remains in the restructuring reserve as of January 31, 2011 and primarily relates to lease costs, net of sublease income, and certain operating costs of the Cartersville plant. The lease ends July 2015. We estimate paying $0.2 million during the remainder of fiscal 2011, net of sublease income, related to the restructuring reserve and $0.8 million thereafter.
We expect to incur approximately $11.0 million of capital expenditures during the remainder of fiscal 2011.
With regards to the US 401(k) Savings and Employee Stock Ownership Plan (ESOP), we estimate contributing approximately $2.6 million in cash in March 2011 to our 401(k) and ESOP plan effective for the 2010 ESOP 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 the Companys 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 customer rebates and incentives, product returns, doubtful accounts, inventories, including LIFO inventory valuations, litigation and contingency accruals, income taxes, including valuation of deferred taxes and assessment of unrecognized tax benefits for uncertain tax positions, share-based compensation, impairment of long-lived assets and intangibles, including goodwill, and acquisitions, including costs associated with the restructuring of the Atlantis plants. 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 Managements 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, 2010, filed with the U.S. Securities and Exchange Commission on January 14, 2011.
There were no material changes to our critical accounting policies during the three months ended January 31, 2011.
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New Accounting Pronouncements
We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements and do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position, results of operations or cash flows.
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 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, 2011, the carrying value of our total debt was $197.1 million of which approximately $161.8 million was fixed rate debt (2013 Notes and the Pennsylvania Industrial Loans). As of January 31, 2011, the estimated fair value of our 2013 Notes was approximately $160.2 million. As of January 31, 2011, the carrying value of our Pennsylvania Industrial Loans was $1.7 million which approximates fair value.
Floating rate debt at January 31, 2011 and October 31, 2010 totaled $35.3 million and $23.7 million, respectively. Based on the floating rate debt outstanding during fiscal 2011 (our Credit Facility), a one-percent increase or decrease in the average interest rate would result in a change to interest expense of approximately $0.1 million.
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.
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
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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, 2011, 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, 2011.
Changes in Internal Control over Financial Reporting
There was no change in our internal controls over financial reporting that occurred during the quarter ended January 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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, 2010, and in other reports filed thereafter with the SEC, including this report, before deciding to invest in or retain shares of our common stock. These are not the only risks and uncertainties that we face. Additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial, or that we have not predicted, may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, operating results or liquidity could be materially and adversely affected. 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, 2010.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The table below sets forth the total number of shares of our common stock that we repurchased in each month of the quarter ended January 31, 2011.
Fiscal 2011 period |
Total number of shares purchased |
Average price paid per share |
Total number of shares purchased as part of publicly announced plans or programs |
Approximate dollar value of shares that may yet be purchased under the plans or programs |
||||||||||||
November 1-November 30 |
2,900 | $ | 25.03 | | $ | 4,826,547 | (a) | |||||||||
December 1-December 31 |
| $ | | | $ | 4,826,547 | ||||||||||
January 1-January 31 |
3,000 | $ | 27.28 | | $ | 4,744,699 | ||||||||||
Total |
5,900 | $ | 26.17 | | $ | 4,744,699 | ||||||||||
(a) | On September 15, 2010, our Board terminated the June 2010 Repurchase Program and approved a new $8.0 million stock repurchase program (the September 2010 Stock Repurchase Program). Please refer to Note 8 of the Consolidated Financial Statements for further discussion of the program. |
Item 3. | Defaults Upon Senior Securities |
None
Item 4. | Removed and Reserved |
Item 5. | Other Information |
None
Item 6. | Exhibits |
Exhibit # |
Description | |||
31.1 | * | Certification of the Chief Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.2 | * | Certification of the Chief Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32.1 | * | Certification of the Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
32.2 | * | Certification of the Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Filed herewith |
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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 14, 2011 | By: | /S/ J. BRENDAN BARBA | ||
J. Brendan Barba Chairman of the Board, President and Chief Executive Officer (principal executive officer) | ||||
Dated: March 14, 2011 | By: | /S/ PAUL M. FEENEY | ||
Paul M. Feeney Executive Vice President, Finance and Chief Financial Officer (principal financial officer) |
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