The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of AEP Industries Inc. and all of its subsidiaries (the
Company). All significant intercompany transactions and balances have been eliminated in consolidation. In managements opinion, all adjustments necessary for the fair presentation of the consolidated financial position as of
July 31, 2016, the consolidated results of operations and consolidated comprehensive income for the three and nine months ended July 31, 2016 and 2015, and the consolidated cash flows for the nine months ended July 31, 2016 and 2015,
respectively, have been made. The consolidated results of operations for the three and nine months ended July 31, 2016 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 revenue recognition, customer rebates and incentives, allowance for doubtful accounts and income
taxes. 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
Companys Annual Report on Form 10-K for the fiscal year ended October 31, 2015, filed with the SEC on January 14, 2016.
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
In March 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-09,
Compensation-Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting
, which is intended to simplify various aspects of the accounting for share-based payments, including treatment of excess tax benefits and forfeitures and consideration of
minimum statutory tax withholding requirements. The guidance is required to be applied by the Company beginning in the Companys first quarter of fiscal 2018, but early adoption is permitted. The Company is evaluating the effect that ASU
2016-09 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
. The new guidance
amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. The standard requires a modified retrospective transition to recognize and measure leases at the beginning
of the earliest period presented and includes a number of optional practical expedients. ASU 2016-02 is required to be applied by the Company beginning in the Companys first quarter of fiscal 2020. Early adoption is permitted. The Company is
evaluating the effect that ASU 2016-02 will have on its consolidated financial statements.
7
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
(1) BASIS OF
PRESENTATION(Continued)
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred
Taxes
, which simplifies the presentation of deferred income taxes. This new guidance requires that all deferred tax assets and liabilities be classified as non-current in the balance sheet. The guidance is required to be applied by the
Company beginning in the Companys first quarter of fiscal 2018, but early adoption is permitted. The Company expects this new guidance will reduce its total current assets, total assets and total liabilities on its consolidated balance sheet
by the amount classified as deferred income taxes within current assets, and does not expect application to have any other effect on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03,
InterestImputation 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. In August 2015, the FASB issued ASU 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
. This ASU clarified guidance in ASU No. 2015-03 stating that the SEC would not object to a company presenting debt issuance costs
related to a line-of-credit arrangement on the balance sheet as a deferred asset, regardless of whether there were any outstanding borrowings at period-end. The guidance is required to be applied by the Company retrospectively beginning in the
Companys first quarter of fiscal 2017, 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
related to the Companys 8.25% senior notes due 2019 (approximately $1.7 million at July 31, 2016). The Company expects to continue to present those capitalized costs paid related to the Companys credit facility (approximately $0.7
million at July 31, 2016) separately as deferred assets. The Company does not expect the updates to have any other effect on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 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 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, including which transition method it will adopt.
(2) EARNINGS PER COMMON SHARE AND CASH DIVIDENDS
Basic earnings per common share (EPS) is calculated by dividing net income by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period, adjusted to reflect potentially dilutive securities (options) using the treasury stock
method, except when the effect would be anti-dilutive.
8
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
(2) EARNINGS PER COMMON
SHARE AND CASH DIVIDENDS(Continued)
The number of shares used in calculating basic and diluted earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended July 31,
|
|
|
For the Nine Months
Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,113,801
|
|
|
|
5,102,654
|
|
|
|
5,108,790
|
|
|
|
5,090,920
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase shares of common stock
|
|
|
26,676
|
|
|
|
20,077
|
|
|
|
27,152
|
|
|
|
19,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
5,140,477
|
|
|
|
5,122,731
|
|
|
|
5,135,942
|
|
|
|
5,110,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For each of the three and nine month periods ended July 31, 2016 and 2015, the Company had zero stock options
outstanding that could potentially dilute earnings per share in future periods but were excluded from the computation of diluted EPS because their exercise price was higher than the Companys average stock price during the respective periods.
On January 13, 2016, the Company declared a quarterly cash dividend of $0.25 per share payable on February 16, 2016 to shareholders of
record on February 1, 2016. The total dividend of $1.3 million was paid on February 16, 2016. On April 20, 2016, the Company declared a quarterly cash dividend of $0.25 per share payable on May 17, 2016 to shareholders of record on May 2, 2016. The
total dividend of $1.3 million was paid on May 17, 2016. On July 20, 2016, the Company declared a quarterly cash dividend of $0.25 per share payable on August 16, 2016 to shareholders of record on August 1, 2016. The total dividend of $1.3 million
is recorded in accrued expenses at July 31, 2016 and was paid on August 16, 2016.
(3) INVENTORIES
Inventories, stated at the lower of cost (last-in, first-out method (LIFO) for the U.S. operations, except as noted, 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,
2016
|
|
|
October 31,
2015
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
42,208
|
|
|
$
|
47,593
|
|
Finished goods
|
|
|
71,276
|
|
|
|
66,484
|
|
Supplies
|
|
|
4,989
|
|
|
|
5,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,473
|
|
|
|
119,357
|
|
Less: LIFO reserve
|
|
|
(20,691
|
)
|
|
|
(18,093
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
97,782
|
|
|
$
|
101,264
|
|
|
|
|
|
|
|
|
|
|
9
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
(3)
INVENTORIES(Continued)
The LIFO method was used for determining the cost of approximately 88% and 89% of total
inventories at July 31, 2016 and October 31, 2015, 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 Companys 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,
2016
|
|
|
October 31,
2015
|
|
|
|
(in thousands)
|
|
Credit facility (a)
|
|
$
|
|
|
|
$
|
|
|
8.25% senior notes due 2019
|
|
|
200,000
|
|
|
|
200,000
|
|
Pennsylvania industrial loan (b)
|
|
|
|
|
|
|
879
|
|
Mortgage loan note
|
|
|
2,876
|
|
|
|
2,974
|
|
Capital leases (c)
|
|
|
7,946
|
|
|
|
9,573
|
|
Foreign bank borrowings (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
210,822
|
|
|
|
213,426
|
|
Less: current portion
|
|
|
2,452
|
|
|
|
2,475
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
208,370
|
|
|
$
|
210,951
|
|
|
|
|
|
|
|
|
|
|
(a) Credit Facility
On January 29, 2016, the Company entered into Amendment No. 2 to Second Amended and Restated Loan and Security Agreement with Wells Fargo Bank,
National Association (Wells Fargo), as agent and lender, and the other financial institution party thereto, as lender (Amendment No. 2), which amended the Companys Second Amended and Restated Loan and Security
Agreement, dated February 22, 2012 (the base credit facility). As used herein credit facility refers to the base credit facility or as amended by Amendment No. 2 as the context requires. The maximum borrowing amount
remains the same at $150.0 million with a maximum for letters of credit of $20.0 million. The maturity date of the credit facility was extended from February 21, 2017 to February 1, 2019.
Under the credit facility, interest rates are based upon the Quarterly Average Excess Availability (as defined in the credit facility) at a
margin of the prime rate (defined as the greater of Wells Fargos prime rate and the Federal Funds rate plus 0.5%) plus 0% to 0.25%, which remains unchanged, or LIBOR plus 1.50% to 2.00%, revised from 1.75% to 2.50% prior to Amendment No.
2.
The Company is obligated to pay a monthly undrawn commitment fee equal to a percentage of the average daily unused portion of the
commitments under the credit facility. Amendment No. 2 revised such fee from 0.375% per annum to (i) 0.375% per annum, if the sum of the average daily balance of loans and letters of credit accommodations in the month are less than 50% of the
maximum credit, or (ii) 0.250% per annum, if the sum of the average daily balance of loans and letters of credit accommodations in the month are 50% or more of the maximum credit.
10
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
(4) DEBT(Continued)
Amendment No. 2 permits the Companys sale to receivables purchasers of certain accounts
(and all proceeds, supporting obligations and ancillary rights with respect to such accounts) arising from the sales of goods and services, excludes such assets from the borrowing base and permits the release of the lenders liens over such
assets (but not the proceeds therefrom) at the time such assets are sold; provided, among other specified conditions, that the aggregate amount of receivables sold in any month will not exceed 10% of the gross amount of eligible accounts.
The other terms and conditions of the credit facility, including the terms under which the amounts due thereunder may be accelerated or
increased, were not materially amended by Amendment No. 2 and remain in full force and effect.
Borrowings and letters of credit available
under the credit facility are limited to a borrowing base based upon specific advance percentage rates on eligible accounts receivable and inventory, subject, in the case of inventory, to amount limitations. The Company had weighted average
borrowings under the credit facility of zero and $16.4 million during the three months ended July 31, 2016 and 2015, respectively, with a weighted average interest rate of 3.3% during the three months ended July 31, 2015. The Company had
weighted average borrowings under the credit facility of approximately $27,000 and $33.1 million, with a weighted average interest rate of 3.4% and 2.8% during the nine months ended July 31, 2016 and 2015, respectively. The sum of the eligible
assets at July 31, 2016 and October 31, 2015 supported a borrowing base of $150.0 million. Availability was reduced by the aggregate amount of letters of credit outstanding totaling $4.1 million and $2.9 million at July 31, 2016
and October 31, 2015, respectively. Availability at July 31, 2016 and October 31, 2015 under the credit facility was $145.9 million and $147.1 million, respectively. The credit facility is secured by liens on most of the
Companys domestic assets (other than real property and equipment) and on 66% of the Companys ownership interest in certain foreign subsidiaries.
Excess Availability (as defined therein) under the credit facility ranged from $132.9 million to $145.9 million during the nine months
ended July 31, 2016 and from $86.2 million to $147.1 million during the nine months ended July 31, 2015.
During the nine months
ended July 31, 2016, the Company incurred and capitalized $0.5 million of fees related to Amendment No. 2. These fees, along with the unamortized fees of $0.3 million paid to the lenders that were party to the base credit facility, are being
amortized on a straight line basis over 36 months, the revised term of the credit facility.
(b) Pennsylvania industrial loan
On June 30, 2016, the Company repaid in full the $0.8 million remaining balance of the amortizing fixed rate 4.75% loan that was due November
1, 2023. This loan was obtained in connection with the Companys expansion in fiscal 2008 of its Wright Township, Pennsylvania manufacturing facility.
(c) 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, 2016 range from 3.5% to 4.5%, with a weighted average interest rate of 3.7%
.
As a result of
the capital lease treatment, the equipment is included as a component of property, plant and equipment in the Companys consolidated balance sheet and is depreciated in accordance with the Companys depreciation policy.
11
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
(4) DEBT(Continued)
Under the terms of the capital leases, the payments are as follows:
|
|
|
|
|
For the years ending October 31,
|
|
Capital
Leases
|
|
|
|
(in thousands)
|
|
Remainder of 2016
|
|
$
|
706
|
|
2017
|
|
|
2,495
|
|
2018
|
|
|
2,479
|
|
2019
|
|
|
2,261
|
|
2020
|
|
|
469
|
|
Thereafter
|
|
|
64
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
8,474
|
|
Less: Amounts representing interest
|
|
|
528
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
7,946
|
|
Less: Current portion of obligations under capital leases
|
|
|
2,317
|
|
|
|
|
|
|
Long-term portion of obligations under capital leases
|
|
$
|
5,629
|
|
|
|
|
|
|
(d) Foreign bank borrowings
In addition to the amounts available under the credit facility, the Company also maintains a secured credit facility at its Canadian
subsidiary, used to support operations, which is generally serviced by local cash flows from operations. There was zero outstanding under this arrangement at July 31, 2016 and October 31, 2015. Availability under the Canadian credit
facility at July 31, 2016 and October 31, 2015 was $5.0 million in Canadian dollars or US$3.8 million.
As of July 31,
2016, 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 2016
|
|
$
|
33
|
|
|
$
|
626
|
|
|
$
|
659
|
|
2017
|
|
|
136
|
|
|
|
2,264
|
|
|
|
2,400
|
|
2018
|
|
|
141
|
|
|
|
2,333
|
|
|
|
2,474
|
|
2019
|
|
|
200,146
|
|
|
|
2,199
|
|
|
|
202,345
|
|
2020
|
|
|
151
|
|
|
|
460
|
|
|
|
611
|
|
Thereafter
|
|
|
2,269
|
|
|
|
64
|
|
|
|
2,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
202,876
|
|
|
$
|
7,946
|
|
|
$
|
210,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
(4) DEBT(Continued)
Fair Value
The carrying value and fair value of the Companys fixed rate debt at July 31, 2016 and October 31, 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2016
|
|
|
October 31, 2015
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
2019 notes
|
|
$
|
200,000
|
|
|
$
|
202,500
|
|
|
$
|
200,000
|
|
|
$
|
206,750
|
|
Mortgage loan note (a)
|
|
|
2,876
|
|
|
|
2,876
|
|
|
|
2,974
|
|
|
|
2,974
|
|
Pennsylvania industrial loan
|
|
|
|
|
|
|
|
|
|
|
879
|
|
|
|
879
|
|
Capital leases
|
|
|
7,946
|
|
|
|
7,946
|
|
|
|
9,573
|
|
|
|
9,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
210,822
|
|
|
$
|
213,322
|
|
|
$
|
213,426
|
|
|
$
|
220,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 loan 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, the mortgage loan note and the capital
leases include evaluating the nature and terms of each instrument, considering prevailing economic and market conditions, and examining the cost of similar debt offered at the balance sheet date. The fair value of the Companys 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, 2016 and October 31, 2015, accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
July 31,
2016
|
|
|
October 31,
2015
|
|
|
|
(in thousands)
|
|
Payroll and employee related
|
|
$
|
12,160
|
|
|
$
|
12,799
|
|
Customer rebates
|
|
|
8,600
|
|
|
|
8,952
|
|
Interest
|
|
|
4,812
|
|
|
|
688
|
|
Accrued income taxes
|
|
|
11,694
|
|
|
|
3,326
|
|
Accrual for performance units
|
|
|
4,517
|
|
|
|
5,451
|
|
Other (A)
|
|
|
10,276
|
|
|
|
9,179
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
52,059
|
|
|
$
|
40,395
|
|
|
|
|
|
|
|
|
|
|
(A)
|
No individual item exceeded 5% of current liabilities.
|
13
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
(6) SHAREHOLDERS EQUITY
Share-Based
Compensation
The Company has a
share-based
plan that provides for the granting of stock options, performance units,
restricted stock and other awards to officers, directors and key employees of the Company. At July 31, 2016, 169,848 shares were available to be issued under the AEP Industries Inc. 2013 Omnibus Incentive Plan (the 2013 Plan).
Total share-based compensation expense related to the Companys 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,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Cost of sales
|
|
$
|
605
|
|
|
$
|
232
|
|
|
$
|
894
|
|
|
$
|
715
|
|
Selling expense
|
|
|
504
|
|
|
|
177
|
|
|
|
700
|
|
|
|
613
|
|
General and administrative expense
|
|
|
1,785
|
|
|
|
502
|
|
|
|
2,597
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,894
|
|
|
$
|
911
|
|
|
$
|
4,191
|
|
|
$
|
3,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
There were no options granted during the nine months ended July 31, 2016 or 2015.
The following table summarizes the Companys stock options as of July 31, 2016, and changes during the nine months ended
July 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2015 (50,400 options exercisable)
|
|
|
56,000
|
|
|
$
|
29.98
|
|
|
$
|
17.07-42.60
|
|
|
|
3.7
|
|
|
$
|
2,801
|
|
Exercised
|
|
|
(7,200
|
) (a)
|
|
$
|
33.81
|
|
|
$
|
33.67-33.84
|
|
|
|
|
|
|
|
|
|
Options outstanding at July 31, 2016
|
|
|
48,800
|
|
|
$
|
29.41
|
|
|
$
|
17.07-42.60
|
|
|
|
3.2
|
|
|
$
|
2,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at July 31, 2016
|
|
|
48,800
|
|
|
$
|
29.41
|
|
|
|
|
|
|
|
3.2
|
|
|
$
|
2,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at July 31, 2016
|
|
|
46,800
|
|
|
$
|
29.23
|
|
|
|
|
|
|
|
3.1
|
|
|
$
|
2,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes 2,000 options exercised at an exercise price of $33.84 per option and 1,200 options exercised at an exercise price of $33.67 per option for which an aggregate of 1,293 shares of common stock of the Company were
tendered to the Company by the holders of the stock options for the payment of the exercise price of these options.
|
14
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
(6) SHAREHOLDERS
EQUITY(Continued)
The table below presents information related to stock option activity for the three and nine
months ended July 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
July 31,
|
|
|
For the Nine
Months Ended
July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Total intrinsic value of stock options exercised
|
|
$
|
|
|
|
$
|
|
|
|
$
|
314
|
|
|
$
|
439
|
|
Total fair value of stock options vested
|
|
$
|
|
|
|
$
|
|
|
|
$
|
54
|
|
|
$
|
80
|
|
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 Companys stock options recorded in the consolidated statements of operations for the three and nine months ended July 31, 2016 was approximately
$8,000 and $33,000, respectively and approximately $13,000 and $51,000 for the three and nine months ended July 31, 2015, 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, 2016 and 2015, respectively. For the three and nine months ended July 31, 2016, there was no excess tax benefits recognized resulting from
share-based
compensation
awards. 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 each of July 31, 2016 and October 31, 2015.
As of July 31, 2016, there was approximately $21,000 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 0.7 years.
Non-vested Stock Options
A summary of the Companys non-vested stock options at July 31, 2016 and changes during the nine months ended July 31, 2016 are
presented below:
|
|
|
|
|
|
|
|
|
Non-vested stock options
|
|
Shares
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Non-vested at October 31, 2015
|
|
|
5,600
|
|
|
$
|
15.33
|
|
Vested
|
|
|
(3,600
|
)
|
|
$
|
15.08
|
|
|
|
|
|
|
|
|
|
|
Non-vested at July 31, 2016
|
|
|
2,000
|
|
|
$
|
15.79
|
|
|
|
|
|
|
|
|
|
|
Performance Units
Total
share-based
compensation expense related to the Companys performance units
(Units) was $2.8 million and $4.0 million for the three and nine months ended July 31, 2016, respectively, and $0.8 million and $3.1 million for the three and nine months ended July 31, 2015, respectively. At
July 31, 2016 and October 31, 2015, there was $4.5 million and $5.5 million in accrued expenses, respectively, and $3.4 million and $4.3 million in long-term liabilities, respectively, related to outstanding Units.
15
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
(6) SHAREHOLDERS
EQUITY(Continued)
The following table summarizes the Units as of July 31, 2016, and changes during the
nine months ended July 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2015
|
|
|
83,102
|
|
|
|
145,497
|
|
|
|
228,599
|
|
|
$
|
0.00
|
|
|
|
1.6
|
|
|
$
|
18,288
|
|
Units granted
|
|
|
|
|
|
|
40,257
|
|
|
|
40,257
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
Units exercised
|
|
|
(43,016
|
)
|
|
|
(32,057
|
)
|
|
|
(75,073
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
$
|
5,820
|
|
Units forfeited or cancelled
|
|
|
(600
|
)
|
|
|
(2,000
|
)
|
|
|
(2,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units outstanding at July 31, 2016
|
|
|
39,486
|
|
|
|
151,697
|
|
|
|
191,183
|
|
|
$
|
0.00
|
|
|
|
1.8
|
|
|
$
|
15,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at July 31, 2016
|
|
|
39,486
|
|
|
|
145,697
|
|
|
|
185,183
|
|
|
$
|
0.00
|
|
|
|
1.7
|
|
|
$
|
14,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at July 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended July 31, 2016, the Company paid $3.5 million in cash and issued 860 shares
of its common stock, in each case net of withholdings, in settlement of the vesting of certain Units occurring during the nine months of fiscal 2016. During the nine months ended July 31, 2015, the Company paid $1.6 million in cash and
issued 867 shares of its common stock, in each case net of withholdings, in settlement of the vesting of certain Units occurring during the nine months of fiscal 2015.
The issuance of common stock resulting from the exercise of stock options and settlement of the vesting of Units (for those employees who
elected shares) during fiscal 2016 and 2015 was made from new shares.
Restricted Stock
Each non-employee director receives an annual restricted stock award with a grant date fair value of $55,000 under the 2013 Plan (4,380 shares
and 4,745 shares granted, in aggregate, on April 12, 2016 and April 14, 2015, respectively). Total share-based compensation expense related to the restricted stock recorded in the consolidated statements of operations for each of the three
and nine months ended July 31, 2016 and 2015 was approximately $69,000 and $206,000, respectively. As of July 31, 2016, 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 Companys operations are conducted within one business segmentthe 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.
16
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, 2016
|
|
|
|
United
States
|
|
|
Canada
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Salesexternal customers
|
|
$
|
265,183
|
|
|
$
|
18,506
|
|
|
$
|
283,689
|
|
Intercompany sales
|
|
|
10,358
|
|
|
|
|
|
|
|
10,358
|
|
Gross profit
|
|
|
43,226
|
|
|
|
2,977
|
|
|
|
46,203
|
|
Operating income
|
|
|
12,485
|
|
|
|
1,286
|
|
|
|
13,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended July 31, 2015
|
|
|
|
United
States
|
|
|
Canada
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Salesexternal 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 Nine Months
Ended July 31, 2016
|
|
|
|
United
States
|
|
|
Canada
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Salesexternal customers
|
|
$
|
761,319
|
|
|
$
|
49,085
|
|
|
$
|
810,404
|
|
Intercompany sales
|
|
|
28,882
|
|
|
|
|
|
|
|
28,882
|
|
Gross profit
|
|
|
136,118
|
|
|
|
7,894
|
|
|
|
144,012
|
|
Operating income
|
|
|
53,752
|
|
|
|
2,904
|
|
|
|
56,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
Ended July 31, 2015
|
|
|
|
United
States
|
|
|
Canada
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Salesexternal 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
|
|
17
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
(7) SEGMENT AND GEOGRAPHIC
INFORMATION(Continued)
Net sales by product line are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended July 31,
|
|
|
For the Nine Months
Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Custom films
|
|
$
|
85,854
|
|
|
$
|
91,759
|
|
|
$
|
244,916
|
|
|
$
|
266,112
|
|
Stretch (pallet) wrap
|
|
|
80,645
|
|
|
|
88,658
|
|
|
|
235,778
|
|
|
|
253,135
|
|
Food contact
|
|
|
44,944
|
|
|
|
42,513
|
|
|
|
124,258
|
|
|
|
122,957
|
|
Canliners
|
|
|
37,715
|
|
|
|
38,990
|
|
|
|
105,868
|
|
|
|
107,075
|
|
PROformance Films
®
|
|
|
13,732
|
|
|
|
16,641
|
|
|
|
39,270
|
|
|
|
49,420
|
|
Printed and converted films
|
|
|
9,679
|
|
|
|
9,904
|
|
|
|
22,825
|
|
|
|
24,086
|
|
Other products and specialty films
|
|
|
11,120
|
|
|
|
13,517
|
|
|
|
37,489
|
|
|
|
40,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
283,689
|
|
|
$
|
301,982
|
|
|
$
|
810,404
|
|
|
$
|
863,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
|
Sublease
Income
|
|
|
|
(in thousands)
|
|
Remainder of 2016
|
|
$
|
2,005
|
|
|
$
|
13
|
|
2017
|
|
|
7,926
|
|
|
|
47
|
|
2018
|
|
|
6,735
|
|
|
|
21
|
|
2019
|
|
|
5,008
|
|
|
|
|
|
2020
|
|
|
3,617
|
|
|
|
|
|
Thereafter
|
|
|
9,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
34,347
|
|
|
$
|
81
|
|
|
|
|
|
|
|
|
|
|
Claims and Lawsuits:
The Company and its subsidiaries are subject to claims and lawsuits which arise in the ordinary course of business. On the basis of information
presently available and advice received from counsel representing the Company and its subsidiaries, it is the opinion of management that the disposition or ultimate determination of such claims and lawsuits against the Company will not have a
material adverse effect on the Companys financial condition or results of operations.
(9) SUBSEQUENT EVENT
On August 24, 2016, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Berry Plastics Group,
Inc., a Delaware corporation (Parent), Berry Plastics Corporation, a Delaware corporation and a direct, wholly owned subsidiary of Parent (Holdings), Berry Plastics Acquisition Corporation XVI, a Delaware corporation and a
direct, wholly owned subsidiary of Holdings (Merger Sub), and Berry Plastics Acquisition Corporation XV, LLC, a Delaware limited liability company and a direct wholly owned subsidiary of Holdings (Merger Sub LLC), providing
for (i) the merger of Merger Sub with and into the
18
AEP INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
(9) SUBSEQUENT
EVENT(Continued)
Company (the First-Step Merger), with the Company surviving the First-Step Merger, and, (ii) thereafter, the merger of the Company with and into Merger Sub LLC (the Second-Step
Merger and, together with the First-Step Merger, the Integrated Mergers), with Merger Sub LLC surviving as a wholly owned subsidiary of Holdings. In the Integrated Mergers, each share of common stock of the Company will be
converted into the right to receive, at the stockholders election, $110 in cash (the Cash Consideration) or 2.5011 shares (the Exchange Ratio) of Parent common stock (the Stock Consideration and, together
with the Cash Consideration, the Merger Consideration), subject to the terms and conditions set forth in the Merger Agreement. The Merger Consideration in the Integrated Mergers will be prorated as necessary to ensure that 50% of the
total outstanding shares of the Company entitled to receive Merger Consideration will be exchanged for cash and 50% of such shares will be exchanged for Parent common stock. Upon completion of the Integrated Merger, the Companys stockholders
are expected to hold approximately 5% of the shares of common stock of Parent on a fully diluted basis. The transaction value is likely to change until closing due to fluctuations in the price of Parent common stock and is also subject to
anti-dilution protection in limited circumstances as provided in the Merger Agreement.
The transaction is subject to approval by the
Companys stockholders, regulatory approvals and other customary closing conditions. Many of these conditions are outside the Companys control, and it cannot provide any assurance as to whether or when the Integrated Mergers will be
consummated or whether the Companys stockholders will realize the anticipated benefits of completing the Integrated Mergers. Also, if the Integrated Mergers do not receive timely regulatory approval or if an event occurs that delays or
prevents the Integrated Mergers, such delay or failure to complete the Integrated Mergers may cause uncertainty and other negative consequences that may materially and adversely affect the Companys business, financial position and results
of operations.
The Merger Agreement contains certain termination rights for the Company and Parent, including the right of the Company in
certain circumstances to terminate the Merger Agreement and accept a Superior Proposal (as defined in the Merger Agreement). If the Merger Agreement is terminated (i) by either party because the stockholders of the Company fail to adopt the Merger
Agreement or (ii) by Parent as a result of fraud or willful and material breach of any covenant, agreement, representation or warranty of the Merger Agreement by the Company, then in the case of either clause (i) or (ii), the Company will be
required to pay the documented expenses of Parent, Holdings, Merger Sub, Merger Sub LLC and their affiliates up to $5 million. In addition, the Company will be required to pay Parent a termination fee equal to $20 million if the Merger Agreement is
terminated under certain circumstances, including by the Company to enter into an acquisition agreement that constitutes a Superior Proposal or because the Companys board of directors adversely changed its recommendation to stockholders to
vote in favor of the Integrated Mergers or took certain other related adverse actions. The Company also would be required to pay Parent a termination fee equal to $20 million if the Merger Agreement is terminated due to either the failure to obtain
approval of the Companys stockholders or the conditions to close were not satisfied before the End Date (as defined in the Merger Agreement), and an alternative acquisition proposal is consummated within 12 months of the termination, subject
to certain conditions. Further, if the Merger Agreement is terminated by the Company as a result of fraud or willful and material breach of any covenant, agreement, representation, warranty of the Merger Agreement by Parent, Parent will be required
to pay the documented expenses of the Company and its affiliates up to $5 million. The Merger Agreement also provides that either party may specifically enforce the other partys obligations under the Merger Agreement.
Per the Merger Agreement, prior to completion of the Integrated Mergers, there are certain restrictions on our ability to pay dividends.
Management does not expect the restrictions to have an impact on our ability to pay dividends at the current level for the foreseeable future.
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