Business News

AEP Industries Inc. Reports Fiscal 2008 Second Quarter Results

Tuesday 10. June 2008 - AEP Industries Inc. (NASDAQ:AEPI) today reported financial results for its fiscal second quarter ended April 30, 2008.

Net sales increased $22.9 million, or 14%, in the second quarter of fiscal 2008 to $181.2 million compared with $158.3 million in the second quarter of fiscal 2007. The increase is primarily the result of a 15% increase in average selling prices, driven by higher resin costs in the current period in comparison to the same period of fiscal 2007, partially offset by a 2% decrease in sales volume. The effect of foreign exchange on net sales in the 2008 period was a positive $2.1 million, reflecting the impact of the strengthened Canadian currency.

For the first six months of fiscal 2008, net sales increased $45.0 million to $354.9 million compared with $309.9 million in the same period last year. The increase was primarily due to an 11% increase in average selling prices, combined with a 2% increase in sales volume and the positive impact of foreign exchange of $4.2 million.

Gross profit for the second quarter of fiscal 2008 decreased $10.6 million to $22.3 million as compared to $32.9 million in the prior year quarter. The decrease in gross profit was due to a $6.3 million LIFO benefit recorded in the second quarter of the prior year combined with current quarter margin erosion resulting from difficult economic and competitive conditions and higher manufacturing costs. The effect of foreign exchange on gross profit for the current quarter was a net positive $0.3 million.

For the first six months of fiscal 2008, gross profit decreased $24.2 million to $50.2 million as compared to $74.4 million in the prior year six-month period. The decrease in gross profit for the first six months of fiscal 2008 includes an $8.5 million cumulative impact on gross profit related to the LIFO reserve. Additionally, decreases in material margin (selling prices less material costs) partly due to lagging selling price increases were partially offset by an increase in sales volume and a positive foreign exchange effect of $0.8 million relating to the Company’s Canadian operations.

Operating expenses for the three and six months ended April 30, 2008 increased $2.3 million to $23.1 million and $3.0 million to $44.6 million, respectively, as compared to the same periods of the prior fiscal year. These increases are primarily due to a payment of approximately $1.6 million, excluding professional fees, related to a commercial dispute, an increase in delivery expenses resulting from higher fuel costs, an increase in bad debt expense resulting from a customer’s bankruptcy, and advisory costs incurred as a result of the exploration of strategic alternatives related to the Company’s April 2008 sale of its AEP Industries Nederland B.V. (“AEP Netherlands”) subsidiary, partially mitigated by a decrease in the accrual for bonuses and a decrease in compensation costs recorded in accordance with SFAS 123R for stock options and performance units.

Interest expense for the three and six months ended April 30, 2008 increased $0.4 million to $4.1 million and $0.6 million to $8.1 million, respectively, as compared to the same periods of the prior fiscal year. These increases resulted primarily from higher average borrowings on the Company’s Credit Facility during the three and six months ended April 30, 2008, as compared to the same periods in the prior fiscal year, partially offset by lower interest rates on these borrowings.

On April 4, 2008, the Company completed the sale of AEP Netherlands, the last remaining component of the Company’s European segment that manufactured custom films, stretch wrap and printed and converted films, to Euro-M Flexible Packaging S.A. and Ghlin S.r.L and received in cash approximately $26.8 million (approximately $3.2 million for the shares of AEP Netherlands, net of closing and other costs totaling $1.5 million, and approximately $23.6 million for the settlement of all intercompany loans). In connection with the sale of AEP Netherlands, the Company recorded a $10.7 million gain on disposition from discontinued operations for the three and six months ended April 30, 2008, including a $1.5 million pre-tax gain on sale of shares of AEP Netherlands, $6.9 million of realized foreign currency exchange gains ($4.1 million after tax) resulting from the settlement of all intercompany loans, denominated in Euros ($5.1 million of which had been previously recognized in accumulated other comprehensive income at October 31, 2007), and the reclassification of AEP Netherlands’ accumulated foreign currency translation gains into income in the amount of $2.3 million.

Net income for the three and six months ended April 30, 2008 was $5.5 million or $0.81 per diluted share and $7.5 million or $1.10 per diluted share, respectively. Net income for the three and six months ended April 30, 2007 was $6.2 million or $0.77 per diluted share and $16.8 million or $2.09 per diluted share, respectively.

“Second quarter results reflect the unfortunate but anticipated effects of the economic slow down currently underway in North America,” stated Brendan Barba, Chairman and Chief Executive Officer of the Company. “Despite the continuation of difficult conditions, we are navigating the current economic environment and are positioned for improved operating results in the final two quarters of 2008. We are comfortable with our balance sheet and confident that stronger operating results will follow the market place rationalizations currently underway,” continued Mr. Barba.

Adjusted EBITDA was $2.9 million in the current quarter as compared to $22.9 million for the three months ended April 30, 2007. Adjusted EBITDA for the six months ended April 30, 2008 was $20.4 million, as compared to $41.3 million for the six months ended April 30, 2007.

Reconciliation of Non-GAAP Measures to GAAP

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

Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles (GAAP), and should not be considered in isolation or as an alternative to net income, 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 the Company’s business, and, therefore, Adjusted EBITDA should only be used as a supplemental measure of the Company’s operating performance.

The following is a reconciliation of the Company’s net income, the most directly comparable GAAP financial measure, to Adjusted EBITDA:

Second April Second April
Quarter YTD Quarter YTD
Fiscal Fiscal Fiscal Fiscal
2008 2008 2007 2007
(in (in (in (in
thousands)thousands)thousands)thousands)

Net income $5,523 $7,503 $6,153 $16,845
Income from discontinued
operations 8,810 9,169 1,026 1,594
Income (loss) from
continuing operations (3,287) (1,666) 5,127 15,251
(Benefit)/provision for taxes (1,905) (804) 3,381 10,281
Interest expense 4,093 8,139 3,703 7,462
Depreciation and
amortization expense 3,448 6,816 3,572 7,171
Increase (decrease)
in LIFO reserve 112 7,906 6,280 (605)
Other non-operating income (129) (495) (141) (186)
Non-cash share-based compensation 586 544 1,020 1,963

Adjusted EBITDA $2,918 $20,440 $22,942 $41,337