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AMENDMENT 1
TO
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-14450
AEP INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
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Delaware 22-1916107
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
125 Phillips Avenue 07606
South Hackensack, New Jersey (Zip Code)
(Address of principal executive offices)
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(201) 641-6600
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
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SHARES OUTSTANDING AT MAY 24,
CLASS OF COMMON STOCK 1999
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$.01 Par Value 7,352,688
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED APRIL 30, 1999 AS COMPARED TO THREE MONTHS ENDED APRIL 30,
1998
NET SALES AND GROSS PROFIT
Net sales for the three months ended April 30, 1999 decreased by $3.9
million, or 2.3%, to $165.8 million from $169.7 million for the three months
ended April 30, 1998. Net sales in North America decreased to $99.3 million
during the 1999 period from $99.4 million during the 1998 period. This nominal
decrease was primarily due to a 7.5% decrease in per unit selling prices as a
result of a change in product mix and lower raw material costs which were passed
through to our customers. These reductions in selling prices were offset by a
8.0% increase in sales volume. Net sales in Europe decreased 5.0% to $47.8
million for the second three months of fiscal 1999 from $50.3 million for the
second three months of fiscal 1998 primarily due to a 19.1% decrease in average
selling prices, offset by a 17.3% volume increase. Net sales in Asia/Pacific
decreased 6.6% to $18.7 million during the 1999 period from $20.0 million for
the 1998 period, primarily due to a 6.5% sales volume decrease and a nominal
decrease in average selling prices which resulted from the economic pressures of
the region.
Gross profit for the three months ended April 30, 1999 was $40.9 million
compared to $38.0 million for the three months ended April 30, 1998. Gross
profit in North America increased 16.7% to $28.5 million for the three months
ended April 30, 1999 due to increased sales volume, which lowered fixed overhead
costs per unit, a change in product mix and reduced raw material costs. Gross
profit in Europe decreased 5.7% to $9.7 million for the three months ended April
30, 1999 primarily due to a restructuring charge at our Belgian operations of
approximately $1.5 million relating to employee severance. This charge was
partially offset by additional gross profit realized from the 17.3% increase in
sales volume in spite of continuing general economic pressures in Eastern
Europe, which resulted in lower average selling prices and lower margins.
Asia/Pacific gross profit for the three months ended April 30, 1999 decreased by
$532,000 or 16.2%, due to a 6.5% decrease in volume and lower average per unit
selling prices which resulted from the economic pressures of the region. In
addition, we incurred certain costs associated with the shut down and
consolidation of a plant in Australia.
OPERATING EXPENSES
Operating expenses for the three months ended April 30, 1999 increased $2.6
million, or 9.6%, to $29.9 million from $27.3 million for the three months ended
April 30, 1998. This increase is attributable to a worldwide increase in sales
volume of 8.8% which increased warehousing and delivery costs by $1.7 million
and increased selling expenses by $538,000. Selling expenses related primarily
to commissions paid. Worldwide general and administrative costs increased
$390,000 for the period with no major increase in one area.
INTEREST EXPENSE
Interest expense for the three months ended April 30, 1999 was $8.0 million
compared to $8.4 million for the three months ended April 30, 1998. This
decrease in interest expense resulted from lower average debt outstanding for
the period.
OTHER INCOME (EXPENSE)
Other income (expense) for the three months ended April 30, 1999 amounted to
$443,000.. This amount included foreign currency exchange gains realized during
the period, gains on sales of machinery and equipment, interest income earned
for the period and income from investment in a joint venture.
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DISCONTINUED OPERATIONS
In April, 1999, the Company revised its estimate of the net realizable value
of the Proponite inventory on hand and charged an additional loss on disposal of
assets for $793,000 net of tax benefits.
The Company's second quarter 1998 included a net loss from discontinued
operations of the Rigids businesses of $1,232,000. The sale of these businesses
was completed by October 31, 1998.
NET INCOME FROM CONTINUING OPERATIONS
Net income from continuing operations for the three months ended April 30,
1999 increased 74.5% to $2.1 million from $1.2 million for the three months
ended April 30, 1998. This increase was due to increased sales volume and an
overall increase in gross profit margins.
RESULTS OF CONTINUING OPERATIONS
SIX MONTHS ENDED APRIL 30, 1999 AS COMPARED TO SIX MONTHS ENDED APRIL 30, 1998
NET SALES AND GROSS PROFIT
Net sales for the six months ended April 30, 1999 decreased by $20.3
million, or 6.0%, to $317.7 million from $338.0 million for the six months ended
April 30, 1998. Net sales in North America decreased 5% to $186.8 million during
the 1999 period from $197.2 million during the 1998 period. This decrease was
primarily due to a 9% decrease in per unit selling prices as a result of a
change in product mix and lower raw material costs which were passed through to
our customers. These reductions in selling prices were offset by a 4% increase
in sales volume. Net sales in Europe decreased 5% to $93.1 million for the first
six months of fiscal 1999 from $98.5 million for the first six months of fiscal
1998 primarily due to a 16% decrease in average selling prices, offset by a 12%
volume increase. Net sales in Asia/Pacific decreased 11% to $37.8 million during
the 1999 period from $42.3 million for the 1998 period, primarily due to a 5%
sales volume decrease and a 6% decrease in average selling prices which resulted
from the economic pressures of the region.
Gross profit for the six months ended April 30, 1999 was $78.2 million
compared to $76.4 million for the six months ended April 30, 1998. Gross profit
in North America increased 9% to $4.6 million for the six months ended June 30,
1999 due to increased sales volume, which lowered fixed overhead costs per unit,
a change in product mix and reduced raw material costs. Gross profit in Europe
decreased 7% to $18.2 million for the six months ended April 30, 1999 primarily
due to a restructuring charge at our Belgian operations of approximately $1.5
million relating to employee severance. This charge was partially offset by
additional gross profit realized from the 13% increase in sales volume in spite
of continuing general economic pressures in Eastern Europe, which resulted in
lower average selling prices and lower margins. Asia/Pacific gross profit for
the six months ended April 30, 1999 decreased by $1.4 million, or 20%, due to a
6% decrease in volume and lower average per unit selling prices which resulted
from the economic pressures of the region. In addition, we incurred certain
costs associated with the shut down and consolidation of a plant in Australia.
OPERATING EXPENSES
Operating expenses for the six months ended April 30, 1999 increased $1.6
million, or 2.9%, to $56.6 million from $55.0 million for the six months ended
April 30, 1998. This increase is attributable to a worldwide increase in sales
volume of 5% which increased warehousing and delivery costs by $1.8 million and
increased selling expenses by $287,000. Selling expenses related primarily to
commissions paid. This was partially offset by a reduction in worldwide general
and administrative costs of $454,000.
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INTEREST EXPENSE
Interest expense for the six months ended April 30, 1999 was $16.3 million
compared to $16.6 million for the six months ended April 30, 1998. This decrease
in interest expense resulted from lower average debt outstanding for the period,
slightly offset by higher interest rates paid in the first quarter 1999.
OTHER INCOME (EXPENSE)
Other income (expense) for the six months ended April 30, 1999 increased
369% to $1.2 million from $255,000 for the period ended April 30, 1998. This
amount included foreign currency exchange gains realized during the period,
gains on sales of machinery and equipment, interest income earned for the period
and income from investment in a joint venture.
NET INCOME FROM CONTINUING OPERATIONS
Net income from continuing operations for the six months ended April 30,
1999 increased 25.8% to $3.9 million from $3.1 million for the six months ended
April 30, 1998. This increase was due to increased sales volume and an overall
increase in gross profit margins.
DISCONTINUED OPERATIONS
The loss from discontinued operations for the six months ended April 30,
1999 of $18.4 million includes the net losses of the Proponite business of $1.2
million for the period ended January 31, 1999. This loss also consists of an
after tax reserve of $17.2 million, established to write down property, plant
and equipment, inventory and other assets and to provide for closedown expenses
and the net losses for the period ended April 30, 1999.
The loss from discontinued operations for the six months ended April 30,
1998 of $2.4 million includes the net losses of the Proponite business of
$552,000 and net losses of the Rigids businesses of $1,835,000. The sale of the
Rigids businesses was completed by October 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations through cash flow generated
from operations and borrowings by us or 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.
Our working capital was $55.7 million at April 30, 1999, compared to $81.6
million at October 31, 1998. This decrease of $25.9 million in working capital
is primarily the result of a non-cash provision for disposal of net assets of
the discontinued Proponite business, including a reserve for operating losses
through the disposal date of $28.2 million, and the strengthening of the United
States dollar during fiscal 1998 which further reduced translated working
capital balances. The remaining increases and decreases in components of our
financial position reflect normal operating activity.
On October 11, 1996, we entered into the Credit Agreement with the Morgan
Guaranty Trust Company, as Agent. The Credit Agreement provided us with two
credit facilities consisting of a term credit facility in the amount of $350.0
million and a revolving credit facility for an amount up to $100.0 million. The
proceeds borrowed under the Credit Agreement were used to pay the $263.0 million
cash portion of the purchase price for the Borden packaging acquisition, to
repay the $95.4 million balance under the then existing term credit and
revolving credit obligations and to pay the expenses and related costs of the
acquisition. After the initial drawdown, no further borrowings are permitted
under the term loan. As of April 30, 1999, there was $104.5 million outstanding
under the term credit facility which bears interest at a rate of 6.63% per
annum. There are no outstanding borrowings under the revolving credit facility.
The Credit Agreement, as amended, contains financial covenants, the most
significant of which are a cash flow ratio and a fixed charge coverage ratio.
For the period from May 1, 1999 through July 31, 1999, the cash flow ratio may
not exceed 4.50:1. The fixed charge coverage ratio may not be less than 1.6:1
for
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the same period. The Indenture pursuant to which the 9.875% Senior Subordinated
Notes were issued also contains customary covenants including limitations on the
incurrence of debt, the disposition of assets and the making of restricted
payments. We are currently in compliance with all of these covenants. We do not
foresee any problems in the near future in remaining in compliance with these
covenants.
On November 19, 1997, we completed an offering of 9.875% Senior Subordinated
Notes due November 15, 2007 in the aggregate principal amount of $200.0 million.
The net proceeds from the Notes have been used to repay a portion of the
indebtedness then outstanding under our Credit Agreement.
We also have a $10.0 million unsecured revolving credit facility available
for working capital purposes. As of April 30, 1999, there was no outstanding
borrowing under this credit facility.
We maintain various unsecured short-term credit facilities at our foreign
subsidiaries. At April 30, 1999, our aggregate amount outstanding under these
facilities was approximately $12.0 million and approximately $55.0 million was
available for borrowing. Borrowings from these facilities are used to support
operations at such subsidiaries and are generally serviced by cash flow from
operations at such subsidiaries.
Our cash and cash equivalents were $3.7 million at April 30, 1999, as
compared to $4.0 million at October 31, 1998. Net cash provided by operating
activities during the six months ended April 30, 1999, was $9.2 million,
primarily due to depreciation and amortization expense of $15.9 million and net
income from continuing operations of $3.9 million, offset by a reduction in
trade accounts payable and accrued expenses of $6.1 million and net decreases in
other operating assets and liabilities of $4.5 million. In each period, the net
decreases in other operating assets and liabilities reflect normal operating
activity.
Net cash used in investing activities during the six months ended April 30,
1999 was $2.7 million, resulting primarily from the net investment in capital
expenditures of $14.4 million and the acquisition of the Thermofilm subsidiary
for $1.9 million, which was offset by proceeds received from the sales of
machinery and equipment in the period of $315,000.
In March 1999, we announced that we would discontinue operations at our
Proponite facility and entered into an agreement to sell certain assets of this
division. The sale was closed on April 30, 1999 and we received payment of $13.3
million for these assets. We estimate that net proceeds of approximately $4.5
million should be realized during the final wind down of this non-core business.
Net cash used in financing activities for the six months ended April 30,
1999 was $10.9 million, reflecting net repayments of $12.4 million on current
credit facilities and proceeds from stock issuances of $1.4 million.
The remaining increases and decreases in the components of our financial
position reflect normal operating activity.
We believe that net proceeds from the sale and wind down of the Proponite
operations and our cash flow from operations, combined with the availability of
funds under the Credit Agreement and credit lines available to our foreign
subsidiaries for local currency borrowings, will be sufficient to meet our
working capital, capital expenditure and debt service requirements for the
foreseeable future.
EFFECTS OF INFLATION
Inflation is not expected to have significant impact on our business.
YEAR 2000
We are currently undertaking a systems readiness review that will help
mitigate the risks associated with the Year 2000 issue. The Year 2000 issue
refers to programs that were written to store only two digits of the year
portion of date-related information in order to more efficiently handle and
store data. These programs are unable to properly distinguish between the year
1900 and the year 2000. Our review addresses: (a) our application software and
hardware and related operating systems; (b) embedded
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technology in production equipment; and (c) Year 2000 compliance by third
parties, principally suppliers and customers. In fiscal 1997, we initiated
programs to upgrade and enhance our domestic and international business systems
in order to replace aging technologies and provide infrastructural support to
these businesses. In connection with these upgrades and enhancements, we have
installed new systems which are designed to be Year 2000 compliant in most of
our facilities, and we are in the process of finalizing these installations. The
domestic businesses application software and hardware have been inventoried,
modified or upgraded, and where appropriate, replaced, to assure Year 2000
compliance. We expect to complete all systems installations in our international
facilities by September 1999 to assure compliance.
We have completed our inventories and assessments in regard to embedded
technology, such as microcontrollers in our production equipment, at each of our
worldwide businesses. We expect that all required upgrades will be completed by
June 30, 1999 at our domestic facilities and by September 30, 1999 at our
international facilities.
In evaluating the impact on us of Year 2000 compliance by significant third
parties, each of our business locations has identified and contacted each
significant third party to ascertain such third party's Year 2000 readiness. All
critical suppliers will be continued to be contacted telephonically to ascertain
any changes in their Year 2000 projects. Key customers have been identified and
contacted. The failure of any one customer to complete a sale as a result of its
failure to be Year 2000 compliant will not have an adverse effect on the
financial condition of the Company.
We consider the reasonable worst case scenario to be a disruption in the
resin supply for our PVC business. In order to avoid such problems we intend to
maintain larger than normal inventories of raw materials and commodity
manufactured products at our various facilities. In addition, should the
electricity supply be disrupted we will be prepared to transfer production from
a facility that may be affected by such a power disruption to a facility that is
operational. This should enable us to substantially maintain production and
sales.
Once Year 2000 compliance areas are reviewed and necessary upgrades are
completed, we plan to test systems to verify that compliance has been achieved.
The target completion date for system testing is October 31, 1999. We estimate
the total cost associated with Year 2000 compliance activities, including
upgrades of the international business systems will be approximately $7.2
million, of which $6.0 million has been incurred through April 30, 1999. Cash
flow from operations has funded this project to date and is expected to fund the
balance of the project.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect our results of
operations, liquidity, and financial condition. Because of the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of Year 2000 readiness of third party suppliers and customers, we
are unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on our results of operations, liquidity,
and financial condition.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and the Results
of Operations and other sections of this report contain "Forward Looking
Statements" about the Company's prospects for the future such as its ability to
generate sufficient working capital, its ability to continue to maintain sales
and profits of its operations and its ability to generate sufficient funds to
meet its cash requirements. The Company wishes to caution readers that the
assumptions which form the basis for forward-looking statements with respect to
or that may impact earnings for the year ending October 31, 1999, include many
factors that are beyond the Company's ability to control or estimate precisely.
These risks and uncertainties include, but are not limited to, availability of
raw materials, ability to pass raw material price increases to customers in a
timely fashion, the potential of technological changes which would adversely
affect the need for the Company's products, price fluctuations which could
adversely impact the Company's inventory and changes in United States or
international economic or political conditions, such as inflation or
fluctuations in interest or foreign exchange rates. Parties are cautioned not to
rely on any such forward looking benefits or judgments in this section and in
other parts of this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
AEP INDUSTRIES INC.
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Date: June 8, 1999 /s/ LAWRENCE R. NOLL
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Lawrence R. Noll
Vice President and Controller
Principal Accounting Officer
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