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 July 31, 2015

OR

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

For the transition period from              to             

Commission file number 001-35117

AEP Industries Inc.

(Exact name of registrant as specified in its charter)

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

(201) 641-6600

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.    Yes  x    No  ¨

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

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

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

The number of outstanding shares of the registrant’s common stock, $0.01 par value, as of September 4, 2015 was 5,102,654.

AEP INDUSTRIES INC.

TABLE OF CONTENTS

		Page Number
PART I	FINANCIAL INFORMATION
ITEM 1:	Financial Statements		3
	Consolidated Balance Sheets at July 31, 2015 (unaudited) and October 31, 2014		3
	Consolidated Statements of Operations for the three and nine months ended July  31, 2015 and 2014 (unaudited)		4
	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended July  31, 2015 and 2014 (unaudited)		5
	Consolidated Statements of Cash Flows for the nine months ended July 31, 2015 and 2014 (unaudited)		6
	Notes to Consolidated Financial Statements (unaudited)		7
ITEM 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
ITEM 3:	Quantitative and Qualitative Disclosures About Market Risk		27
ITEM 4:	Controls and Procedures		28
PART II	OTHER INFORMATION
ITEM 1:	Legal Proceedings		30
ITEM 1A:	Risk Factors		30
ITEM 2:	Unregistered Sales of Equity Securities and Use of Proceeds		30
ITEM 3:	Defaults Upon Senior Securities		30
ITEM 4:	Mine Safety Disclosures		30
ITEM 5:	Other Information		30
ITEM 6:	Exhibits		30
	Signatures		31

2

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

AEP INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

	July 31, 2015			October 31, 2014
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	9,468		$	867
Accounts receivable, less allowance for doubtful accounts of $5,565 and $2,831 in 2015 and 2014, respectively		107,077			119,355
Inventories, net		84,146			86,420
Deferred income taxes		2,956			2,697
Other current assets		3,210			6,867
Total current assets		206,857			216,206
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $400,418 and $378,306 in 2015 and 2014, respectively		202,058			216,509
GOODWILL		6,871			6,871
INTANGIBLE ASSETS, net of accumulated amortization of $2,800 and $2,412 in 2015 and 2014, respectively		3,612			4,000
OTHER ASSETS		2,702			3,360
Total assets	$	422,100		$	446,946
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Bank borrowings, including current portion of long-term debt	$	2,324		$	2,636
Accounts payable		69,175			81,890
Accrued expenses		37,629			28,484
Total current liabilities		109,128			113,010
LONG-TERM DEBT		211,434			253,695
DEFERRED INCOME TAXES		18,747			16,322
OTHER LONG-TERM LIABILITIES		4,025			4,222
Total liabilities		343,334			387,249
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Preferred stock, $1.00 par value; 970,000 shares authorized; none issued		—			—
Series A junior participating preferred stock, $1.00 par value; 30,000 shares authorized; none issued		—			—
Common stock, $0.01 par value; 30,000,000 shares authorized; 11,237,749 and 11,215,691 shares issued in 2015 and 2014, respectively		112			112
Additional paid-in capital		114,880			112,978
Treasury stock at cost, 6,135,095 shares in 2015 and 2014, respectively		(189,810	)		(189,810	)
Retained earnings		154,729			136,558
Accumulated other comprehensive loss		(1,145	)		(141	)
Total shareholders’ equity		78,766			59,697
Total liabilities and shareholders’ equity	$	422,100		$	446,946

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

3

AEP INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share data)

	For the Three Months Ended July 31,						For the Nine Months Ended July 31,
	2015			2014			2015			2014
NET SALES	$	301,982		$	308,846		$	863,143		$	876,305
COST OF SALES		253,821			275,634			732,602			788,517
Gross profit		48,161			33,212			130,541			87,788
OPERATING EXPENSES:
Delivery		13,863			13,297			37,454			37,766
Selling		10,204			9,475			27,957			27,263
General and administrative		8,259			5,960			22,879			18,020
Total operating expenses		32,326			28,732			88,290			83,049
OTHER OPERATING INCOME:
Business interruption insurance recovery		—			2,050			—			2,050
Operating income		15,835			6,530			42,251			6,789
OTHER INCOME (EXPENSE):
Interest expense		(4,617	)		(4,945	)		(14,252	)		(14,661	)
Other, net		163			16			220			87
Income (loss) before (provision) benefit for income taxes		11,381			1,601			28,219			(7,785	)
(PROVISION) BENEFIT FOR INCOME TAXES		(4,814	)		(366	)		(10,048	)		2,569
Net income (loss)	$	6,567		$	1,235		$	18,171		$	(5,216	)
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) per common share	$	1.29		$	0.24		$	3.57		$	(0.97	)
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) per common share	$	1.28		$	0.24		$	3.56		$	(0.97	)

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

4

AEP INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(in thousands)

	For the Three Months Ended July 31,					For the Nine Months Ended July 31,
	2015			2014		2015			2014
Net income (loss)	$	6,567		$	1,235	$	18,171		$	(5,216	)
Other comprehensive (loss) income:
Foreign currency translation adjustments		(588	)		42		(1,088	)		(896	)
Amortization of prior service cost and actuarial net loss, net of tax of $9 and $12 for the three months ended July 31, 2015 and 2014 and $29 and $34 for the nine months ended July 31, 2015 and 2014, respectively		28			33		84			98
Total other comprehensive (loss) income		(560	)		75		(1,004	)		(798	)
Comprehensive income (loss)	$	6,007		$	1,310	$	17,167		$	(6,014	)

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

5

AEP INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	For the Nine Months Ended July 31,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	18,171		$	(5,216	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		24,148			23,966
Change in LIFO reserve		(12,348	)		4,637
Amortization of debt fees		715			715
Provision for losses on accounts receivable and inventories		2,950			186
Change in deferred income taxes		(133	)		(2,941	)
Share-based compensation expense		3,328			150
Excess tax benefit from stock option exercises		(1,136	)		—
Other		(40	)		(67	)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable		8,168			(7,997	)
Decrease (increase) in inventories		14,173			(3,082	)
Decrease (increase) in other current assets		1,396			(1,122	)
(Increase) decrease in other assets		(12	)		298
(Decrease) increase in accounts payable		(12,386	)		1,845
Increase (decrease) in accrued expenses		13,749			(194	)
Increase in other long-term liabilities		25			61
Net cash provided by operating activities		60,768			11,239
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(10,021	)		(21,430	)
Net proceeds from dispositions of property, plant and equipment		—			345
Net cash used in investing activities		(10,021	)		(21,085	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings from credit facility		(40,510	)		21,700
Repurchase of common stock		—			(19,984	)
Proceeds from capital lease obligations		—			658
Repayments of Pennsylvania industrial loan		(65	)		(68	)
Principal payments on capital lease obligations		(1,903	)		(2,263	)
Principal payments on mortgage loan note		(95	)		(92	)
Proceeds from exercise of stock options		467			—
Excess tax benefit from stock option exercises		1,136			—
Payments of withholding taxes on performance units		(733	)		(1,235	)
Net cash used in financing activities		(41,703	)		(1,284	)
EFFECTS OF EXCHANGE RATE CHANGES ON CASH		(443	)		(591	)
Net increase (decrease) in cash		8,601			(11,721	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		867			13,319
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	9,468		$	1,598
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Equipment financed through capital lease obligation	$	—		$	1,679
Cash paid during the period for interest	$	9,479		$	9,762
Cash paid during the period for income taxes	$	624		$	1,674

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

6

AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) BASIS OF PRESENTATION

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

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

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

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

New Accounting Pronouncements Not Yet Effective

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

In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The new guidance simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability. Current guidance generally requires entities to capitalize costs paid to third parties that are directly related to issuing debt and that otherwise would not be incurred and present those

7

AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(1) BASIS OF PRESENTATION (Continued)

amounts separately as deferred charges. The guidance is required to be applied by the Company retrospectively beginning in the Company’s second quarter in fiscal 2016, but early adoption is permitted. The Company expects this new guidance will reduce total assets and total long-term debt on its consolidated balance sheets by the amounts classified as deferred costs, but does not expect this update to have any other effect on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under accounting principles generally accepted in the United States of America. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB approved a one-year deferral of the effective date of ASU 2014-09, which will be effective for the Company in the first quarter of fiscal year 2019 and may be applied on a full retrospective or modified retrospective approach. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures, including which transition method it will adopt.

(2) EARNINGS PER SHARE

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

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

	For the Three Months Ended July 31,				For the Nine Months Ended July 31,
	2015		2014		2015		2014
Weighted average common shares outstanding:
Basic		5,102,654		5,080,596		5,090,920		5,404,865
Effect of dilutive securities:
Options to purchase shares of common stock		20,077		6,067		19,145		—
Diluted		5,122,731		5,086,663		5,110,065		5,404,865

For each of the three and nine months ended July 31, 2015 and 2014, the Company had zero and 10,000 stock options outstanding, respectively, that could potentially dilute earnings per share in future periods but were excluded from the computation of diluted EPS because their exercise price was higher than the Company’s average stock price during the respective periods. For the nine months ended July 31, 2014, the Company had 14,328 stock options outstanding that could potentially dilute earnings per share in future periods that were excluded from the computation of diluted EPS because their effect would have been anti-dilutive given the net loss during the period.

8

AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(3) INVENTORIES

Inventories, stated at the lower of cost (last-in, first-out method (“LIFO”) for the U.S. operations, and the first-in, first-out method (“FIFO”) for the Canadian operation, supplies and printed and converted finished goods for the U.S. operations) 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:

	July 31, 2015			October 31, 2014
	(in thousands)
Raw materials	$	42,156		$	46,810
Finished goods		68,948			78,464
Supplies		5,402			5,854
		116,506			131,128
Less: LIFO reserve		(32,360	)		(44,708	)
Inventories, net	$	84,146		$	86,420

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

(4) DEBT

A summary of the components of debt is as follows:

	July 31, 2015		October 31, 2014
	(in thousands)
Credit facility (a)	$	—	$	40,510
8.25% senior notes due 2019		200,000		200,000
Pennsylvania industrial loan		901		966
Mortgage loan note		3,006		3,101
Capital leases (b)		9,851		11,754
Foreign bank borrowings (c)		—		—
Total debt		213,758		256,331
Less: current portion		2,324		2,636
Long-term debt	$	211,434	$	253,695

(a) Credit Facility

Borrowings and letters of credit available under the credit facility with Wells Fargo Bank National Association (“Wells Fargo”) are limited to a borrowing base based upon specific advance percentage rates on

9

AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(4) DEBT (Continued)

eligible accounts receivable and inventory, subject, in the case of inventory, to amount limitations. The Company had weighted average borrowings under the credit facility of $16.4 million and $68.8 million, with a weighted average interest rate of 3.3% and 2.3% during the three months ended July 31, 2015 and 2014, respectively. The Company had weighted average borrowings under the credit facility of $33.1 million and $52.8 million, with a weighted average interest rate of 2.8% and 2.7% during the nine months ended July 31, 2015 and 2014, respectively. The sum of the eligible assets at July 31, 2015 and October 31, 2014 supported a borrowing base of $147.7 million and $150.0 million, respectively. Availability was reduced by the aggregate amount of letters of credit outstanding totaling $2.9 million and $2.1 million at July 31, 2015 and October 31, 2014, respectively. Availability at July 31, 2015 and October 31, 2014 under the credit facility was $144.8 million and $107.4 million, respectively. The credit facility is secured by liens on most of the Company’s domestic assets (other than real property and equipment) and on 66% of the Company’s ownership interest in certain foreign subsidiaries.

Excess Availability (as defined therein) under the credit facility ranged from $86.2 million to $147.1 million during the nine months ended July 31, 2015 and from $54.7 million to $137.8 million during the nine months ended July 31, 2014.

(b) Capital leases

From time to time, the Company enters into capital leases for certain of its machinery and equipment. The interest rates on the capital leases at July 31, 2015 range from 3.5% to 4.1%, with a weighted average interest rate of 3.7%. As a result of the capital lease treatment, the equipment remains as a component of property, plant and equipment in the Company’s consolidated balance sheet and is depreciated in accordance with the Company’s depreciation policy.

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

For the years ending October 31,	Capital Leases
	(in thousands)
Remainder of 2015	$	607
2016		2,429
2017		2,429
2018		2,430
2019		2,261
Thereafter		533
Total minimum lease payments		10,689
Less: Amounts representing interest		838
Present value of minimum lease payments		9,851
Less: Current portion of obligations under capital leases		2,104
Long-term portion of obligations under capital leases	$	7,747

10

AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(4) DEBT (Continued)

(c) Foreign bank borrowings

In addition to the amounts available under the credit facility, the Company also maintains a secured credit facility at its Canadian subsidiary, used to support operations, which is generally serviced by local cash flows from operations. There was zero outstanding under this arrangement at July 31, 2015 and October 31, 2014. Availability under the Canadian credit facility at July 31, 2015 and October 31, 2014 was $5.0 million in Canadian dollars or US$3.8 million and US$4.4 million, respectively.

As of July 31, 2015, principal payments on all debt outstanding required during each of the next five fiscal years and thereafter are as follows:

	(in thousands)
	Debt		Capital leases		Total
Remainder of 2015	$	54	$	519	$	573
2016		222		2,123		2,345
2017		232		2,202		2,434
2018		242		2,284		2,526
2019		200,252		2,199		202,451
Thereafter		2,905		524		3,429
	$	203,907	$	9,851	$	213,758

Fair Value

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

	July 31, 2015				October 31, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
2019 notes	$	200,000	$	205,626	$	200,000	$	205,750
Mortgage loan note (a)		3,006		3,006		3,101		3,101
Pennsylvania industrial loan		901		901		966		966
Capital leases		9,851		9,851		11,754		11,754
Total	$	213,758	$	219,384	$	215,821	$	221,571

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

The fair value of the 2019 notes is based on quoted market rates (Level 1). The Company derives its fair value estimates of the Pennsylvania industrial loan, the mortgage note and the capital leases based on observable inputs (Level 2). Observable market inputs used in the calculation of the fair value of the Pennsylvania industrial loan and the capital leases include evaluating the nature and terms of each instrument, considering prevailing

11

AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(4) DEBT (Continued)

economic and market conditions, and examining the cost of similar debt offered at the balance sheet date. The fair value of the Company’s variable rate debt (credit facility), if any, approximates fair value due to the availability and floating rate for similar instruments.

(5) ACCRUED EXPENSES

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

	July 31, 2015		October 31, 2014
	(in thousands)
Payroll and employee related	$	10,159	$	8,084
Customer rebates		8,362		8,963
Interest		4,812		824
Accrual for performance units		2,607		1,896
Other (A)		11,689		8,717
Accrued expenses	$	37,629	$	28,484

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

(6) SHAREHOLDERS’ EQUITY

Share-Based Compensation

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

	For the Three Months Ended July 31,				For the Nine Months Ended July 31,
	2015		2014		2015		2014
	(in thousands)
Cost of sales	$	232	$	104	$	715	$	(36	)
Selling expense		177		103		613		(41	)
General and administrative expense		502		347		2,000		227
Total	$	911	$	554	$	3,328	$	150

Share-Based Plans

At the annual meeting of stockholders of the Company on April 9, 2013, stockholders approved the AEP Industries Inc. 2013 Omnibus Incentive Plan (the “2013 Plan”). The 2013 Plan provides for the award to non-employee directors and key employees of the Company of options, restricted stock, restricted stock units, stock appreciation rights, performance awards (which may take the form of performance units or performance shares)

12

AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(6) SHAREHOLDERS’ EQUITY (Continued)

and other awards to acquire up to an aggregate of 375,000 shares of the Company’s common stock. These shares of common stock may be made available from authorized but unissued common stock, from treasury shares or from shares purchased on the open market. The issuance of common stock resulting from the exercise of stock options and settlement of the vesting of performance units (for those employees who elected shares) during fiscal 2015 and 2014 was made from new shares.

As a result of stockholder approval of the 2013 Plan, all awards of stock and stock unit awards subsequent to April 9, 2013 have been granted under the 2013 Plan and no new awards have been made after such date under the AEP Industries Inc. 2005 Stock Option Plan (the “2005 Option Plan”), which expired in October 2013 except as to awards previously granted prior to that date. At July 31, 2015, 213,485 shares were available to be issued under the 2013 Plan.

Stock Options

There were no options granted during the nine months ended July 31, 2015 or 2014.

The following table summarizes the Company’s outstanding stock options as of July 31, 2015 and changes during the nine months ended July 31, 2015:

	2005 Option Plan			Weighted Average Exercise Price per Option		Option Price Per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value $(000)
Options outstanding at October 31, 2014 (61,646 options exercisable)		72,446		$	29.62	$	17.07-42.60		3.7	$	1,186
Exercised		(16,446	)	$	28.40	$	17.07-42.60
Options outstanding at July 31, 2015		56,000		$	29.98	$	17.07-42.60		3.9	$	1,029
Vested and expected to vest at July 31, 2015		56,000		$	29.98				3.9	$	1,029
Exercisable at July 31, 2015		50,400		$	29.74				3.6	$	938

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

	For the Three Months Ended July 31,				For the Nine Months Ended July 31,
	2015		2014		2015		2014
	(in thousands)
Total intrinsic value of stock options exercised	$	—	$	—	$	439	$	—
Total fair value of stock options vested	$	—	$	—	$	80	$	155

The fair value of the options, less expected forfeitures, is amortized over five years on a straight-line basis. Share-based compensation expense related to the Company’s stock options recorded in the consolidated statements of operations for the three and nine months ended July 31, 2015 was approximately $13,000 and

13

AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(6) SHAREHOLDERS’ EQUITY (Continued)

$51,000, respectively, and approximately $20,000 and $76,000 for the three and nine months ended July 31, 2014, respectively. No compensation cost related to stock options was capitalized in inventory or any other assets for the three and nine months ended July 31, 2015 and 2014, respectively. For the three and nine months ended July 31, 2015, there was zero and $1.1 million, respectively, in excess tax benefits recognized resulting from share-based compensation awards which reduced taxes otherwise payable. The excess benefit is recorded as additional paid in capital at July 31, 2015. For the three and nine months ended July 31, 2014 there were no excess tax benefits recognized resulting from share-based compensation awards as the Company was not in a federal tax paying position.

As of July 31, 2015, there was $0.1 million of total unrecognized compensation cost related to non-vested stock options granted under the plan. That cost is expected to be recognized over a weighted-average period of 1.5 years.

Non-vested Stock Options

A summary of the Company’s non-vested stock options at July 31, 2015 and changes during the nine months ended July 31, 2015 are presented below:

Non-vested stock options	Shares			Weighted Average Grant Date Fair Value
Non-vested at October 31, 2014		10,800		$	15.36
Granted		—			—
Vested		(5,200	)	$	15.39
Forfeited		—			—
Non-vested at July 31, 2015		5,600		$	15.33

Performance Units

Total share-based compensation expense (income) related to the Company’s performance units (“Units”) was $0.8 million and $3.1 million for the three and nine months ended July 31, 2015, respectively, and $0.5 million and $(0.2) million for the three and nine months ended July 31, 2014, respectively. At July 31, 2015 and October 31, 2014, there was $2.6 million and $1.9 million in accrued expenses, respectively, and $2.2 million and $2.3 million in long-term liabilities, respectively, related to outstanding Units.

14

AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(6) SHAREHOLDERS’ EQUITY (Continued)

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

	2005 Option Plan			2013 Option Plan			Total Number Of Units			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value $(000)
Units outstanding at October 31, 2014		129,311			—			129,311		$	0.00		1.2	$	5,942
Units granted		—			146,497			146,497		$	0.00
Units exercised		(44,209	)		—			(44,209	)	$	0.00			$	2,454
Units forfeited or cancelled		(1,600	)		(2,000	)		(3,600	)
Units outstanding at July 31, 2015		83,502			144,497			227,999		$	0.00		1.9	$	11,024
Vested and expected to vest at July 31, 2015		82,402			134,597			216,999		$	0.00		1.9	$	10,492

During the nine months ended July 31, 2015, the Company paid $1.6 million in cash and issued 867 shares of its common stock (issued from new shares), in each case net of withholdings, in settlement of the vesting of certain Units occurring during the nine months of fiscal 2015. During the nine months ended July 31, 2014, the Company paid $2.4 million in cash and issued 1,067 shares of its common stock (issued from new shares), in each case net of withholdings, in settlement of the vesting of certain Units occurring during the nine months of fiscal 2014.

Restricted Stock

In accordance with the revised non-employee director compensation program each non-employee director receives an annual restricted stock award with a grant date fair value of $55,000 under the 2013 Plan (4,745 shares and 7,575 shares granted, in aggregate, on April 14, 2015 and April 8, 2014, respectively). Total share-based compensation expense related to the restricted stock recorded in the consolidated statements of operations for the three and nine months ended July 31, 2015 was approximately $69,000 and $206,000, respectively. Total share-based compensation expense related to the restricted stock recorded in the consolidated statements of operations for the three and nine months ended July 31, 2014 was approximately $69,000 and $229,000, respectively. As of July 31, 2015, there was $0.2 million of total unrecognized compensation cost related to restricted stock. That cost is expected to be recognized over 8 months.

(7) SEGMENT AND GEOGRAPHIC INFORMATION

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

15

AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(7) SEGMENT AND GEOGRAPHIC INFORMATION (Continued)

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

	For the Three Months Ended July 31, 2015
	United States		Canada		Total
	(in thousands)
Sales—external customers	$	282,107	$	19,875	$	301,982
Intercompany sales		11,878		—		11,878
Gross profit		45,144		3,017		48,161
Operating income		15,383		452		15,835

	For the Three Months Ended July 31, 2014
	United States		Canada		Total
	(in thousands)
Sales—external customers	$	287,252	$	21,594	$	308,846
Intercompany sales		11,412		—		11,412
Gross profit		28,989		4,223		33,212
Operating income		4,410		2,120		6,530

	For the Nine Months Ended July 31, 2015
	United States		Canada		Total
	(in thousands)
Sales—external customers	$	810,539	$	52,604	$	863,143
Intercompany sales		31,006		—		31,006
Gross profit		122,350		8,191		130,541
Operating income		40,217		2,034		42,251

	For the Nine Months Ended July 31, 2014
	United States		Canada		Total
	(in thousands)
Sales—external customers	$	818,720	$	57,585	$	876,305
Intercompany sales		33,477		—		33,477
Gross profit		78,159		9,629		87,788
Operating income		3,075		3,714		6,789

Net sales by product line are as follows:

	For the Three Months Ended July 31,				For the Nine Months Ended July 31,
	2015		2014		2015		2014
	(in thousands)
Custom films	$	91,759	$	95,358	$	266,112	$	268,473
Stretch (pallet) wrap		88,658		93,072		253,135		263,476
Food contact		42,513		45,664		122,957		135,779
Canliners		38,990		32,415		107,075		92,341
PROformance Films®		16,641		21,983		49,420		57,559
Printed and converted films		9,904		8,215		24,086		19,502
Other products and specialty films		13,517		12,139		40,358		39,175
Total	$	301,982	$	308,846	$	863,143	$	876,305

16

AEP INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(7) SEGMENT AND GEOGRAPHIC INFORMATION (Continued)

Certain prior year amounts have been reclassified to conform to current year’s classification.

(8) COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments:

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

For the years ended October 31,	Operating Leases
	(in thousands)
Remainder of 2015	$	1,761
2016		5,899
2017		4,758
2018		3,247
2019		1,959
Thereafter		6,483
Total minimum lease payments	$	24,107

Claims and Lawsuits:

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

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Forward-Looking Statements

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

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

• Overview

• Results of Operations

• Liquidity and Capital Resources

• Contractual Obligations and Off-Balance-Sheet Arrangements

• Critical Accounting Policies

• New Accounting Pronouncements

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

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Company Overview

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

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

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

Market Conditions

As discussed above, the primary raw materials used in the manufacture of our products are PE and PVC resins, which total approximately 92% and 7%, respectively, of our total plastic resin purchases by volume. Following an aggregate increase of $0.23 per pound of resin price increases in fiscal 2013 and 2014, PE resin prices decreased $0.11 per pound during the nine months of fiscal 2015, including a $0.05 per pound increase in the third quarter of fiscal 2015. Comparing average PE resin costs during the three and nine months ended July 31, 2015 versus the three and nine months ended July 31, 2014, prices were 13.9% or $0.12 per pound lower in the third quarter of fiscal 2015 and 10.6 % or $0.09 per pound lower fiscal year-to-date. Although natural gas is used as feedstock in most North American PE production, the global price of crude oil is used to set resin prices worldwide. As the price of oil continues to decline, we expect our resin pricing to decrease during the remainder of the fiscal year.

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

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

19

ability to reduce costs that are fixed in nature. Rising costs in freight, utility, packaging and health costs have negatively impacted our results.

Defined Terms

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

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

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

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

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

	For the Three Months Ended
	July 31, 2015				July 31, 2014				%  increase/ (decrease) of $			$ increase/ (decrease)
	$		$ Per lb. sold		$		$ Per lb. sold
	(in thousands, except for per pound data)
Net sales	$	301,982	$	1.19	$	308,846	$	1.28		(2.2	)%	$	(6,864	)
Gross profit		48,161		0.19		33,212		0.14		45.0	%		14,949
Operating expenses:
Delivery		13,863		0.06		13,297		0.06		4.3	%		566
Selling		10,204		0.04		9,475		0.04		7.7	%		729
General and administrative		8,259		0.03		5,960		0.02		38.6	%		2,299
Total operating expenses	$	32,326	$	0.13	$	28,732	$	0.12		12.5	%	$	3,594
Pounds sold				253,947 lbs.				241,881 lbs.

20

Net Sales

The decrease in net sales for the three months ended July 31, 2015 as compared to the prior year comparable period was the result of a 6% decrease in average selling prices, negatively affecting net sales by $18.5 million, primarily due to the pass through of lower resin costs, partially offset by a 5% increase in sales volume positively affecting net sales by $14.5 million. The third quarter of 2015 also included a $2.9 million negative impact of foreign exchange relating to our Canadian operations.

Gross Profit

There was a $3.6 million increase in the LIFO reserve during the third quarter of fiscal 2015 versus a $1.9 million decrease in the LIFO reserve during the third quarter of fiscal 2014, representing an increase of $5.5 million year-over-year. Excluding the impact of the LIFO reserve change during the quarter, gross profit increased $20.4 million primarily resulting from improved material margins and increased volumes partially offset by an increase in the provision related to employee cash performance incentives of $0.9 million.

Operating Expenses

Operating expenses increased $3.6 million during the third quarter of fiscal 2015 versus the third quarter of fiscal 2014 primarily due to an increase in the provision related to employee cash performance incentives of $2.0 million, an increase of $0.6 million in bad debt expense primarily due to a customer’s bankruptcy filing, an increase in delivery expense of $0.6 million primarily due to an increase in sales volume and a $0.2 million increase in share-based compensation expense associated with our performance units, partially offset by $0.4 million of foreign exchange impact.

Business Interruption Insurance Recovery

During the fiscal year 2013 relocation of equipment purchased from Transco to our Bowling Green, Kentucky facility, a print press was damaged in transit. The damages sustained resulted in a delay in the start-up of the machinery and our inability to supply certain customers. We filed a business interruption claim related to the lost margins from this incident. During the third quarter of fiscal 2014, we collected $2.1 million in business interruption recoveries, which is recorded as a component of operating income in the consolidated statement of operations for the three months ended July 31, 2014.

Interest Expense

Interest expense for the three months ended July 31, 2015 decreased $0.3 million as compared to the prior year period primarily resulting from lower average borrowings on our credit facility during the period.

Income Tax Provision

The provision for income taxes for the three months ended July 31, 2015 was $4.8 million on income before the provision for income taxes of $11.4 million. The difference between our effective tax rate of 42.3 percent for the three months ended July 31, 2015 and the U.S. statutory tax rate of 35.0 percent primarily relates to net permanent differences, and the provision for state taxes in the United States, net of federal provision.

The provision for income taxes for the three months ended July 31, 2014 was $0.4 million on income before the provision for income taxes of $1.6 million. The difference between our effective tax rate of 22.9 percent for the three months ended July 31, 2014 and the U.S. statutory tax rate of 35.0 percent primarily relates to a true-up of prior year estimates in the United States and the differential in the U.S. and Canadian statutory rates, partially offset by the provision for state taxes in the United States, net of federal benefit.

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Results of Operations - Nine Months of Fiscal 2015 Compared to Nine Months of Fiscal 2014

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

	For the Nine Months Ended
	July 31, 2015				July 31, 2014				%  increase/ (decrease) of $			$ increase/ (decrease)
	$		$ Per lb. sold		$		$ Per lb. sold
	(in thousands, except for per pound data)
Net sales	$	863,143	$	1.23	$	876,305	$	1.26		(1.5	)%	$	(13,162	)
Gross profit		130,541		0.19		87,788		0.13		48.7	%		42,753
Operating expenses:
Delivery		37,454		0.05		37,766		0.05		(0.8	)%		(312	)
Selling		27,957		0.04		27,263		0.04		2.5	%		694
General and administrative		22,879		0.04		18,020		0.03		27.0	%		4,859
Total operating expenses	$	88,290	$	0.13	$	83,049	$	0.12		6.3	%	$	5,241
Pounds sold				704,347 lbs.				697,847 lbs.

Net Sales

The decrease in net sales for the nine months ended July 31, 2015 as compared to the prior year comparable period was the result of a 1.7% decrease in average selling prices, negatively affecting net sales by $14.7 million, primarily due to the pass through of lower resin costs, partially offset by a 0.9% increase in sales volume positively affecting net sales by $8.0 million. The decline in volume experienced during the first half of the fiscal year, which we believe primarily was due to customers delaying orders as a result of declining resin prices, was mitigated during the third fiscal quarter as customers resuming purchases within historical ranges. The nine months of fiscal 2015 also included a $6.5 million negative impact of foreign exchange relating to our Canadian operations.

Gross Profit

There was a $12.3 million decrease in the LIFO reserve during the nine months of fiscal 2015 versus a $4.6 million increase in the LIFO reserve during the nine months of fiscal 2014, representing a decrease of $16.9 million year-over-year. Excluding the impact of the LIFO reserve change during the nine months, gross profit increased $25.9 million primarily resulting from improved material margins partially offset by higher manufacturing costs, including employee health costs and utility costs of $1.8 million, an increase in depreciation expense of $1.0 million, an increase in the provision related to employee cash performance incentives of $0.9 million and an increase in share-based compensation expense associated with our performance units of $0.8 million.

Operating Expenses

Operating expenses increased $5.2 million during the nine months of fiscal 2015 versus the nine months of fiscal 2014 primarily due to a bad debt provision of $2.7 million resulting from customers’ bankruptcy filings, $2.4 million increase in share-based compensation expense associated with our performance units and an increase in the provision related to employee cash performance incentives of $2.0 million, partially offset by a decrease in delivery expenses of $0.3 million primarily due to lower fuel costs, a decrease of $0.5 million related to costs of maintaining our former corporate headquarters and $0.8 million of foreign exchange impact.

22

Business Interruption Insurance Recovery

During the third quarter of fiscal 2014, we collected $2.1 million in business interruption recoveries regarding the equipment damaged in transit, which is recorded as a component of operating income in the consolidated statement of operations for the nine months ended July 31, 2014.

Interest Expense

Interest expense for the nine months ended July 31, 2015 decreased $0.4 million as compared to the prior year period primarily resulting from lower average borrowings and interest rates on our credit facility during the period.

Income Tax (Provision) Benefit

The provision for income taxes for the nine months ended July 31, 2015 was $10.0 million on income before the provision for income taxes of $28.2 million. The difference between our effective tax rate of 35.6 percent for the nine months ended July 31, 2015 and the U.S. statutory tax rate of 35.0 percent primarily relates to the provision for state taxes in the United States, net of federal provision, partially offset by net permanent differences.

The benefit for income taxes for the nine months ended July 31, 2014 was $2.6 million on a loss before the benefit for income taxes of $7.8 million. The difference between our effective tax rate of 33.0 percent for the nine months ended July 31, 2014 and the U.S. statutory tax rate of 35.0 percent primarily relates to net permanent differences and foreign taxes paid or accrued during the period on Canadian undistributed earnings, partially offset by a true-up of prior year estimates in the United States, the differential in the U.S. and Canadian statutory rates, and the benefit for state taxes in the United States, net of federal.

Reconciliation of Non-GAAP Measures to GAAP

We define Adjusted EBITDA as net income (loss) before discontinued operations, interest expense, income taxes, depreciation and amortization, changes in LIFO reserve, other non-operating income (expense), net, and 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 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.

23

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

	Third Quarter Fiscal 2015			Third Quarter Fiscal 2014			July YTD Fiscal 2015			July YTD Fiscal 2014
	(in thousands)
Net income (loss)	$	6,567		$	1,235		$	18,171		$	(5,216	)
Provision (benefit) for taxes		4,814			366			10,048			(2,569	)
Interest expense		4,617			4,945			14,252			14,661
Depreciation and amortization expense		7,418			8,039			24,148			23,966
Increase (decrease) in LIFO reserve		3,613			(1,938	)		(12,348	)		4,637
Other non-operating income, net		(163	)		(16	)		(220	)		(87	)
Share-based compensation		911			554			3,328			150
Adjusted EBITDA	$	27,777		$	13,185		$	57,379		$	35,542

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. We continuously monitor our financial position and evaluate capital allocation alternatives, including acquisitions of businesses or assets, repurchases of our equity and debt and the payment of dividends. Generally, our need to access the capital markets is limited to refinancing debt obligations and funding significant acquisitions. Market conditions may limit our sources of funds and the terms for these financing activities.

We believe we continue to maintain a strong balance sheet and sufficient liquidity to provide us with financial flexibility. As of July 31, 2015, we had a net debt position (current bank borrowings plus long term debt less cash and cash equivalents) of $204.3 million, compared with $255.5 million at the end of fiscal 2014. Availability under our credit facility and credit line available to our Canadian subsidiary for local currency borrowings was an aggregate of $148.6 million at July 31, 2015.

Our working capital amounted to $97.7 million at July 31, 2015 compared to $103.2 million at October 31, 2014. We used the LIFO method for determining the cost of approximately 85% of our total inventories at July 31, 2015. Under LIFO, the units remaining in ending inventory are valued at the oldest unit costs and the units sold in cost of sales are valued at the most recent unit costs. If the FIFO method for valuing inventory had been used exclusively, working capital would have been $130.1 million and $147.9 million at July 31, 2015 and October 31, 2014, respectively. During the nine months ended July 31, 2015, the LIFO reserve decreased $12.3 million to $32.4 million primarily as a result of decreased resin costs. Despite the possible negative effects on our results of operations and our financial position during periods of rising inventory costs, we believe the use of LIFO maximizes our after tax cash flow from operations.

As a result of decreasing resin prices during the nine months of fiscal 2015, our investment in working capital has decreased and therefore, has had a favorable impact on our cash flows from operating activities. We believe that our expected cash flows from operations, assuming no material adverse change, combined with the availability of funds under our worldwide credit facilities, will be sufficient to meet our working capital and debt service requirements and planned capital expenditures for at least the next 12 months.

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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 nine months ended July 31, 2015 and 2014:

	For the Nine Months Ended July 31,
	2015			2014
	(in thousands)
Total cash provided by (used in):
Operating activities	$	60,768		$	11,239
Investing activities		(10,021	)		(21,085	)
Financing activities		(41,703	)		(1,284	)
Effect of exchange rate changes on cash		(443	)		(591	)
Increase (decrease) in cash and cash equivalents	$	8,601		$	(11,721	)

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 $9.5 million at July 31, 2015, as compared to $0.9 million at October 31, 2014. Cash provided by operating activities during the nine months ended July 31, 2015 was $60.8 million, which includes net income of $18.2 million adjusted for non-cash items totaling $17.5 million primarily related to depreciation and amortization of $24.1 million, $3.3 million in share-based compensation and $3.0 million provision for losses on accounts receivable and inventories, partially offset by a decrease in LIFO reserve of $12.3 million. As a result of decreasing resin prices during the nine months of fiscal 2015, working capital decreased resulting in a favorable impact on our cash flows from operating activities, including a $14.2 million decrease in inventories, excluding the non-cash effects of LIFO and an $8.2 million decrease in accounts receivable, partially offset by a $12.4 million decrease in accounts payable. There was a $13.7 million increase in accrued expenses primarily as a result of an increase in accrued incentive payments to employees, an increase in interest accrued due to timing of payments on our 2019 notes, and an increase in income taxes payable.

Investing Activities

Net cash used in investing activities during the nine months ended July 31, 2015 was $10.0 million, resulting from capital expenditures during the period.

Financing Activities

Net cash used in financing activities during the nine months ended July 31, 2015 was $41.7 million, primarily resulting from $40.5 million in net repayments of borrowings under our credit facility, $1.9 million in principal payments on capital lease obligations and $0.7 million in payments of withholding taxes related to our performance units.

Sources and Uses of Liquidity

Credit Facility

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

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We utilize the credit facility to provide funding for operations and other corporate purposes through daily bank borrowings and/or cash repayments to ensure sufficient operating liquidity and efficient cash management. Availability at July 31, 2015 and October 31, 2014 under the credit facility was $144.8 million and $107.4 million, respectively.

In addition to the amounts available under the credit facility, we also maintain a credit facility at our Canadian subsidiary which is used to support operations and is serviced by local cash flows from operations. There were no borrowings outstanding under the Canadian credit facility at July 31, 2015 and October 31, 2014. Availability under the Canadian credit facility at July 31, 2015 and October 31, 2014 was $5.0 million Canadian dollars (US$3.8 million and US$4.4 million, respectively).

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

Contractual Obligations and Off-Balance-Sheet Arrangements

Contractual Obligations and Commercial Commitments

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

	For the Years Ending October 31,
	Borrowings (1)		Interest on Fixed Rate Borrowings (2)		Capital Leases, Including Amounts Representing Interest		Operating Leases		Total Commitments
	(in thousands)
Remainder of 2015	$	54	$	8,287	$	607	$	1,761	$	10,709
2016		222		16,644		2,429		5,899		25,194
2017		232		16,634		2,429		4,758		24,053
2018		242		16,625		2,430		3,247		22,544
2019		200,252		8,502		2,261		1,959		212,974
Thereafter		2,905		274		533		6,483		10,195
Total	$	203,907	$	66,966	$	10,689	$	24,107	$	305,669

(1) Borrowings include $200.0 million aggregate principal amount of 2019 notes, a $3.0 million ten-year mortgage note due August 2022 related to the purchase of the Company’s corporate headquarters, and $0.9 million of a Pennsylvania industrial loan. See Note 4 of the consolidated financial statements for further discussion of our debt.

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

In addition to the amounts reflected in the table above, we expect to incur approximately $3 million to $5 million of capital expenditures during the remainder of fiscal 2015.

Off-Balance Sheet Arrangements

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

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Effects of Inflation

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

Critical Accounting Policies

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

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

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

New Accounting Pronouncements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rates

The fair value of our fixed interest rate debt varies with changes in interest rates. Generally, the fair value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. At July 31, 2015, the carrying value of our total debt was $213.8 million, all of which was fixed rate debt (2019 notes, mortgage note, capital leases and the Pennsylvania industrial loan). As of July 31, 2015, the estimated fair value of our 2019 notes, which had a carrying value of $200.0 million, was $205.6 million. As of July 31, 2015, the carrying value of our mortgage note, capital leases and the Pennsylvania industrial loan was $13.8 million, which approximates fair value because the interest rates on these debt instruments approximate market yields for similar debt instruments.

Floating rate debt at July 31, 2015 and October 31, 2014 totaled zero and $40.5 million, respectively. Based on the average floating rate debt outstanding during the nine months ended July 31, 2015 (our credit facility), a one-percentage point increase or decrease in the average interest rate during the period would have resulted in a change to interest expense of $0.3 million for the nine months ended July 31, 2015.

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Foreign Exchange

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

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

Commodities

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

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

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

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Changes in Internal Control over Financial Reporting

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

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

Item 6. Exhibits

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

* Filed herewith

** Furnished herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AEP Industries Inc.
Dated: September 9, 2015	By:	/s/ J. BRENDAN BARBA J. Brendan Barba Chairman of the Board, President and Chief Executive Officer (principal executive officer)
Dated: September 9, 2015	By:	/s/ PAUL M. FEENEY Paul M. Feeney Executive Vice President, Finance and Chief Financial Officer (principal financial officer)

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