10-K 1 d249630d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

   

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

For the fiscal year ended October 31, 2016

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

(State or other jurisdiction of

incorporation or organization)

 

22-1916107

(I.R.S. Employer

Identification No.)

95 Chestnut Ridge Road,

Montvale, New Jersey

(Address of principal executive offices)

 

07645

(Zip code)

Registrant’s telephone number, including area code: (201) 641-6600

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.01 par value   Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☐ Yes   ☒ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ☐ Yes   ☒ No

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   ☐ 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   ☐ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ☒

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 ☒   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

The aggregate market value of the common stock held by non-affiliates of the registrant as of April 29, 2016 was $246,181,775, based upon the closing price of $61.63 as reported by the Nasdaq Global Select Market on such date. Shares of common stock held by officers and directors have been excluded from this calculation because such persons may be deemed to be affiliates; such exclusion shall not be deemed to constitute an admission that any such person is an affiliate of the registrant.

The number of shares of the registrant’s common stock outstanding as of January 11, 2017 was 5,113,801.

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

 


Table of Contents

AEP INDUSTRIES INC.

INDEX TO FORM 10-K

 

         Page
Number
 

Cautionary Note Regarding Forward-Looking Statements

     2   
  PART I   

ITEM 1.

  Business      3   

ITEM 1A.

  Risk Factors      11   

ITEM 1B.

  Unresolved Staff Comments      26   

ITEM 2.

  Properties      26   

ITEM 3.

  Legal Proceedings      26   

ITEM 4.

  Mine Safety Disclosures      26   
  PART II   

ITEM 5.

  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      27   

ITEM 6.

  Selected Financial Data      29   

ITEM 7.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      31   

ITEM 7A.

  Quantitative and Qualitative Disclosures About Market Risk      42   

ITEM 8.

  Financial Statements and Supplementary Data      44   

ITEM 9.

  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      45   

ITEM 9A.

  Controls and Procedures      45   

ITEM 9B.

  Other Information      46   
  PART III   

ITEM 10.

  Directors, Executive Officers and Corporate Governance      47   

ITEM 11.

  Executive Compensation      51   

ITEM 12.

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      77   

ITEM 13.

  Certain Relationships and Related Transactions, and Director Independence      80   

ITEM 14.

  Principal Accounting Fees and Services      81   
  PART IV   

ITEM 15.

  Exhibits and Financial Statement Schedules      83   

Signatures

     128   

 

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Cautionary Note Regarding 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 (the “Securities Act”), 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 facilities, the anticipated pricing in resin markets, our ability to maintain or increase sales and profits of our operations (including our attempt to drive future costs out of our business), the sufficiency of our cash balances and cash generated from operating, investing, and financing activities for our future liquidity and capital resource needs, the expected closing of the Integrated Mergers (as defined below) and our intention to issue quarterly dividends. 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 full, of the significant capacity increase by North American resin producers in future years and its impact on future resin pricing; the ability to manage resin price volatility, including passing raw material price increases to customers in full or in a timely fashion; 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; resin price reductions leading to the utilization of LIFO reserves and resulting in the payment of additional taxes in cash; limited contractual relationships with customers; Board discretion to pay future dividends; future cash flows, liquidity, contractual and legal restrictions related thereto; that the Integrated Mergers may not be consummated in a timely manner or at all; the failure to complete the Integrated Mergers could negatively impact the stock price and the future business and financial results of the Company; that the definitive Merger Agreement (as defined below) may be terminated in circumstances that require the Company to pay Berry (as defined below) a termination fee of $20 million and/or reimbursement of its expenses of up to $5 million; the diversion of management’s attention from the Company’s ongoing business operations to the closing of the Integrated Mergers; the effect of the announcement of the Integrated Mergers on the Company’s business relationships (including, without limitation, customers and suppliers), operating results and business generally; 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 this Annual Report on Form 10-K. 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.

 

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PART I

 

ITEM 1. BUSINESS

Overview

AEP Industries Inc., founded in 1970 and incorporated in Delaware in 1985, is a leading manufacturer of flexible plastic packaging films in North America. We manufacture and market an extensive and diverse line of polyethylene and polyvinyl chloride flexible plastic 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.

We manufacture both industrial grade products, which are manufactured to general industry specifications, and specialty products, which are manufactured under more exacting standards to assure certain required chemical and physical properties. Specialty products generally sell at higher margins than industrial grade products.

The Company’s operations are conducted within one business segment. Information about our operations by geographical area, with United States and Canada stated separately, as of and for the years ended October 31, 2016, 2015 and 2014, respectively, is as follows:

 

     United
States
     Canada      Total  
     (in thousands)  

2016

        

Sales—external customers

   $ 1,030,603       $ 65,227       $ 1,095,830   

Operating income

     62,441         4,066         66,507   

Geographical area assets

     375,534         17,097         392,631   

 

     United
States
     Canada      Total  
     (in thousands)  

2015

        

Sales—external customers

   $ 1,073,417       $ 67,974       $ 1,141,391   

Operating income

     60,231         2,487         62,718   

Geographical area assets(a)

     413,992         24,102         438,094   

 

     United
States
     Canada      Total  
     (in thousands)  

2014

        

Sales—external customers

   $ 1,117,404       $ 75,586       $ 1,192,990   

Operating income

     5,448         4,413         9,861   

Geographical area assets(a)

     422,812         21,413         444,225   

 

  (a) Amounts are different from prior year presentation due to debt issuance costs of $2.1 million and $2.7 million reclassified from total assets to long-term debt in fiscal 2015 and 2014, respectively. This is in accordance with ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.

 

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Merger with Berry Plastics Group

On August 24, 2016, the Company entered into an Agreement and Plan of Merger (as amended from time to time, the “Merger Agreement”) with Berry Plastics Group, Inc., a Delaware corporation (“Berry”), Berry Plastics Corporation, a Delaware corporation and a direct, wholly owned subsidiary of Berry (“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”), whereby Berry will acquire the Company through a two-step merger process that will result in the Company merging with and into an indirect, wholly owned limited liability company subsidiary of Berry (the “Integrated Mergers”). On December 7, 2016, the Company, Berry, Holdings, Merger Sub and Merger Sub LLC entered into Amendment No. 1 to the Merger Agreement (“Merger Agreement Amendment”). The Integrated Mergers are expected to close shortly after the special meeting of the Company’s stockholders scheduled for January 18, 2017, although consummation of the Integrated Mergers is subject to customary conditions, including the approval by the holders of at least a majority of the outstanding shares of the Company’s common stock entitled to vote thereon. For additional information related to the Merger Agreement, refer to the definitive proxy statement/prospectus filed with the SEC on December 15, 2016 and the supplemental disclosures filed with the SEC in the Company’s Current Report on Form 8-K on January 10, 2017.

Products

As stated above, we manufacture and market an extensive and diverse line of polyethylene and polyvinyl chloride flexible plastic packaging products, with consumer, industrial and agricultural applications. Flexible packaging and film products are thin, ductile bags, sacks, labels and films used for food and non-food consumer, agricultural and industrial items.

The following table summarizes our product lines:

 

Product

   Material   

Examples of Uses

custom films

   polyethylene co-

extruded and
monolayer custom
designed films

  

•     drum, box, carton, and pail liners

•     furniture and mattress bags

•     pallet covers

•     shrink bundle film

•     magazine overwrap

stretch (pallet) wrap

   polyethylene   

•     pallet wrap

food contact

   polyethylene

polyvinyl chloride

  

•     reclosable food storage plastic bags with press-to-seal zipper closures

•     fold-top plastic bags

•     food and freezer wrap

•     retail and institutional films and products

PROformance Films®

   co-extruded and
monolayer
polyethylene films
  

•     direct food contact packaging

•     laminated layers

•     protective masking

•     medical and pharmaceutical

canliners

   polyethylene   

•     retail kitchen and standard garbage bags

•     retail lawn and leaf trash bags

•     institutional trash bags

 

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Product

   Material   

Examples of Uses

printed and converted films

   polyethylene   

•     printed shrink films

•     printed, converted films for flexible packaging to consumer markets

other products and specialty films

   unplasticized
polyvinyl chloride
and polyethylene
  

•     battery labels

•     credit card laminate

•     table covers, aprons, bibs and gloves

•     agricultural films

Net sales by product line for each of the years ended October 31, 2016, 2015 and 2014 are as follows:

 

     2016      2015      2014  
     (in thousands)  

Custom films

   $ 334,418       $ 357,742       $ 372,204   

Stretch (pallet) wrap

     323,876         332,857         361,067   

Food contact

     167,997         165,566         183,366   

PROformance Films®

     52,270         63,158         76,698   

Canliners

     144,404         144,416         126,737   

Printed and converted films

     29,906         30,552         25,648   

Other products and specialty films

     42,959         47,100         47,270   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,095,830       $ 1,141,391       $ 1,192,990   
  

 

 

    

 

 

    

 

 

 

No single customer accounted for more than 10% of net sales in any of the last three fiscal years. No single customer accounted for more than 10% of our accounts receivable balance at October 31, 2016 or 2015. See Note 13 in our consolidated financial statements for information regarding the Company’s operations by geographical area (United States and Canada).

Custom Films

We believe that the strength of our custom film operations lies in our variety of product applications, high quality control standards, well-trained and knowledgeable sales force and commitment to customer service. Most of the custom films manufactured by us, which may be as many as 35,000 separate and distinct products in any given year, are custom designed to meet the specific needs of our customers.

We manufacture a broad range of custom films, generally for industrial applications, including sheeting, tubing and bags. Bags are drum, box, carton and pail liners that are usually cut, rolled or perforated. These bags can also be used to package specialty items such as furniture and mattresses. We also manufacture films to protect high value items stored outdoors or in transit, such as boats and cars, and a wide array of shrink films, barrier films and overwrap films.

Stretch (Pallet) Wrap

We manufacture an extensive line of stretch film products for both hand wrap and rotary applications, using both monolayer and co-extruded constructions used to wrap pallets of industrial and commercial goods for shipping or storage. We also market a wide variety of pre stretch and high performance products designed for specialty uses.

Food Contact

We manufacture specifically formulated in-store and pre-store films with our Resinite® line of polyvinyl chloride (“PVC”) food wrap for the supermarket and industrial markets. We offer a broad

 

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range of products with approximately 50 different formulations. Our Griffin, Georgia facility also produces dispenser (Zip Safe® cutter) boxes containing polyvinyl chloride food wrap for sale to consumers and institutions, including restaurants, schools, hospitals and penitentiaries. These institutional polyvinyl chloride food wrap products are marketed under several private labels and under our own SealWrap® name. The oxygen transmission properties of our PVC films make them ideal for packaging fresh red meats, poultry, fish, fruits, vegetables and bakery products.

We also produce high quality plastic cast film bags with a non-color reclosable zipper seal (“Seal’N’Loc”) and other food contact products including blown plastic film fold-top bags. The Seal’N’Loc product line consists of sandwich bags, snack bags, quart size and gallon size bags.

PROformance Films®

We offer a comprehensive range of coextruded polyethylene film products used as a critical component in flexible packaging laminations, direct food contact, protective masking, medical, pharmaceutical and industrial applications. We manufacture these products using both blown and cast processes and offer mono to seven layer films. They are custom designed for strength, clarity, oxygen and moisture barriers, as well as other specifications required for demanding packaging applications.

Canliners

The canliners product line includes retail kitchen and standard trash bags, retail lawn and leaf trash bags and institutional trash bags all of which are available with flap ties, handles and draw tape closures. In addition to the different closures, the canliners come in different sizes, gauges (thickness), colors, scents and strengths.

Printed and Converted Films

We manufacture up to ten color printing, sheeting, and wicketed bags. Our printed and converted films provide printed rollstock to the food and beverage industries and other manufacturing and distributing companies. We also convert printed rollstock to bags for use by bakeries, fresh or frozen food processors, manufacturers or other dry goods processors.

Other Products and Specialty Films

We also manufacture other products in order to meet the full spectrum of our customers’ total packaging requirements. We manufacture unplasticized polyvinyl chloride (“UPVC”) film for use in battery labels, credit card laminates, and a variety of film products with agricultural applications such as silage (Sunfilm® sheet materials), smooth mulch films, and fumigation films. We also produce disposable consumer and institutional plastic products for the food service, party supply and school/collegiate markets, marketed under the Sta-Dri® brand name. Products produced include table covers and skirts, aisle runners, aprons, bibs, gloves, boots, freezer/storage bags, saddle pack bags, locker wrap and custom imprint designs.

Manufacturing

We currently conduct our manufacturing operations at 14 strategically located and integrated facilities in the United States and Canada. 12 manufacturing facilities are ISO-certified (International Organization for Standardization), with the exception of our Mankato institutional products facility and the West Hill, Ontario, Canada facility. We manufacture both industrial grade products, which are manufactured to industry specifications or for distribution from inventory, and specialty products, which are manufactured under more exacting standards to assure that their chemical and physical properties meet the particular requirements of the customer or the specialized application appropriate to its intended market. Specialty products generally sell at higher margins than industrial grade products. The size and location of our manufacturing facilities, as well as their ability to manufacture multiple

 

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types of flexible packaging products and to flexibly adjust product mix as market conditions warrant enable us to minimize overhead and transportation costs to better serve our customers and remain competitive. See Item 2, “Properties” for a discussion of product lines manufactured at each facility as of October 31, 2016.

In the film manufacturing process, resins with various properties are blended with chemicals and other additives to achieve a wide range of specified product characteristics, such as color, clarity, tensile strength, toughness, thickness, shrinkability, surface friction, transparency, sealability and permeability. The gauges of our products range from less than one mil (.001 inches) to more than 10 mils (.01 inches). Our extrusion equipment can produce printed products and film up to 40 feet wide. The blending of various kinds of resin combined with chemical and color additives is computer controlled to avoid waste and to maximize product consistency. The blended mixture is melted by a combination of applied heat and friction under pressure and is then mechanically mixed. The mixture is then forced through a die, at which point it is expanded into a flat sheet or a vertical tubular column of film and cooled. Several mixtures can be forced through separate layers of a co-extrusion die to produce a multi-layered film (co-extrusion), each layer having specific and distinct characteristics. The cooled film can then be shipped to a customer or can be further processed and then shipped. Generally, our manufacturing plants operate 24 hours a day, seven days a week.

We regularly upgrade or replace older equipment in order to keep abreast of technological advances and to maximize production efficiencies by reducing labor costs, waste, maintenance and production time. During the past four fiscal years, we have invested an aggregate of $101.3 million, of which $15.9 million was spent in fiscal 2016, primarily in new machinery and equipment in order to boost output and productivity in those product lines we believe provide us significant growth opportunities, enhance automation to control labor costs, satisfy increasing demand in certain product lines, improve service to our customers and prepare us for anticipated long term growth concurrent with anticipated increase in resin production. Capital expenditures in fiscal 2016 focused primarily in our custom films and canliner businesses.

Raw Materials

We manufacture film products primarily from polyethylene and polyvinyl chloride resins, all of which are available from a number of domestic and foreign suppliers. We select our suppliers based on the price, quality and characteristics of the resins they produce. We currently purchase resins from major North American resin suppliers and believe any combination of purchases from such suppliers, as well as other suppliers we do not currently do business with, could satisfy our ongoing resin requirements. Our top three suppliers of resin during fiscal 2016 supplied us with 28%, 22% and 13%, respectively, of our aggregate resin purchases, which is consistent with our historical resin purchases from our top three suppliers in aggregate. Given the significant effect of resin costs on our operations and financial results, we have elected to focus our purchases with three suppliers in order to take advantage of the volume rebates which are customary among resin suppliers and critical to our success. Although the plastics industry has from time to time experienced shortages of resin supply and we have limited contractual protections in the event of such shortage, we believe we are well positioned to deal with such risks given our significant relationships and history with existing suppliers, as well as suppliers with whom we currently do not do business.

The resins used by us are produced from petroleum and natural gas. Instability in the world markets for petroleum and natural gas could adversely affect the prices of our raw materials, and this could have an adverse effect on our profitability if there is an increase in resin costs that cannot be passed on to customers in full or on a timely basis. See Item 1A, “Risk Factors.”

 

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Quality Control

We believe that maintaining the highest standards of quality in all aspects of our manufacturing operations plays an important part in our ability to maintain our competitive position. We have adopted strict quality control systems and procedures designed to test the mechanical properties of our products, such as strength, puncture resistance, elasticity, abrasion characteristics and sealability, which we regularly review and modify as appropriate. As part of our commitment in providing the highest level of quality to our customers, we maintain an ISO 9001:2008 quality system in 12 of our 14 of manufacturing operations. ISO 9001:2008 is a quality management standard that helps organizations achieve standards of quality that are recognized and respected throughout the world.

Marketing and Sales

We believe that our ability to provide superior service to our customers is critical to our success. Even in those markets where our products are considered commodities and price is the single most important factor, we believe that our sales and marketing capabilities, our ability to offer a broad line of products to our customers, and our timely delivery is a competitive advantage. To that end, we have established good relations with our suppliers and have long-standing relationships with most of our customers. We serve approximately 3,000 customers worldwide, none of which individually accounted for more than 10% of our net sales in fiscal 2016.

We believe that our research and development efforts, much of our high-efficiency, automated and microprocessor-controlled equipment, and the technical training given to our sales personnel enhance our ability to expand our sales in all of our product lines. An important component of our marketing philosophy is the ability of our sales personnel to provide technical assistance to customers. Our sales force regularly consults with customers with respect to performance of our products and the customer’s particular needs and then communicates with appropriate research and development staff regarding these matters. In conjunction with the research and development staff, sales personnel are often able to recommend a product or suggest a resin blend to produce the product with the characteristics and properties which best suit the customer’s requirements.

We generally sell either directly to customers who are end-users of our products or to distributors, including nation-wide brokers, for resale to end-users. In each of fiscal 2016, 2015 and 2014, approximately 60% of our worldwide sales were directly to distributors with the balance representing sales to end-users.

Distribution

We believe that the timely delivery of our products to customers is a critical factor in our ability to maintain and grow our market position. In North America, the majority of our deliveries are by contracted third parties, with approximately 12.5% of US shipments handled by the AEP private fleet in fiscal 2016. The private fleet is used strategically to support most of the AEP logistics facilities. The Company is increasing its use of the private fleet and will continue to do so as it provides the Company a cost effective option in areas where there are carrier capacity issues. We monitor and control all shipments through “On Demand” Transportation Management System (TMS) software. The TMS system provides detailed reports, tracking of every shipment to customer delivery and carrier management. This enables us to better control the distribution process and ensure priority handling and direct transportation of products to our customers, thus improving the speed, reliability and efficiency of delivery.

Because of the geographic dispersion of our plants, we are able to deliver most of our products within a 500 mile radius of our plants. This enables us to reduce our use of warehouse space to store products and utilize the most efficient and economical shipping methods. We also ship products great distances when necessary and export from the United States and Canada.

 

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Research and Development

As of October 31, 2016, we had a research and development department with a staff of 17 persons. In addition, other members of management and supervisory personnel, from time to time, devote various amounts of time to research and development activities. The principal efforts of our research and development department are directed to assisting sales personnel in designing specialty products to meet an individual customer’s needs, developing new products and reformulating existing products to improve quality and/or reduce production costs. During fiscal 2016, due to the anticipated increase in raw material supply in the next few years, our research and development department increased its focus on approving new suppliers and new resin which resulted in short-term savings as well as expected long-term savings. Our research and development department has developed a number of products with unique properties, which we consider proprietary, certain of which are protected by patents. In each of fiscal 2016, 2015 and 2014, we spent $2.0 million for research and development activities. Research and development expense is included in cost of sales in our consolidated statements of operations.

Intellectual Property

We own a number of patents, trademarks and licenses that relate to some of our products and manufacturing processes, and apply for new patents on significant product and process developments when appropriate. Although we believe that our patents and trademarks collectively provide us with a competitive advantage, we are not dependent on any single patent or trademark. Rather, we believe our success depends on our marketing, manufacturing, and purchasing skills, as well as our ongoing research and development and unpatented proprietary know-how. We believe that the expiration or unenforceability of any of our patents, trademark registrations or licenses would not be material to our financial conditions or results of operations.

Competition

The business of supplying flexible plastic packaging products is extremely competitive, and we face competition from a substantial number of companies which sell similar and substitute packaging products. Some of our competitors are subsidiaries or divisions of large, international, diversified companies with extensive production facilities, well-developed sales and marketing staffs and substantial financial resources.

We compete principally with (i) local manufacturers, who compete with us in specific geographic areas, generally within a 500 mile radius of their plants, (ii) companies which specialize in the extrusion of a limited group of products, which they market nationally, and (iii) a limited number of manufacturers of flexible packaging products who offer a broad range of products and maintain production and marketing facilities domestically and internationally.

Because many of our products are available from a number of local, national and international manufacturers, competition is highly price-sensitive and margins are relatively low. We believe that all of our products require efficient, low cost and high-speed production to remain cost competitive. We believe we also compete on the basis of quality, service and product differentiation.

We believe that there are few barriers to entry into many of our markets, enabling new and existing competitors to rapidly affect market conditions. As a result, we may experience increased competition resulting from the introduction of products by new manufacturers. In addition, in several of our markets, products are generally regarded as commodities. As a result, competition in such markets is based almost entirely on price and service.

Environmental Matters

We believe that there are no current environmental matters which would have a material adverse effect on our financial condition or results of operations. See discussion of environmental risk factors in Item 1A, “Risk Factors.”

 

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Employees

At October 31, 2016, we had approximately 2,600 full and part time employees worldwide, including officers and administrative personnel. As of such date, we had three collective bargaining agreements covering 479 employees, which expire in March 2017, December 2018 and January 2020, respectively. While we believe that our relations with our employees are satisfactory, a dispute between our employees and us could have a material adverse effect on our business, which could affect our financial condition and results of operations.

Available Information

Our Internet address is www.aepinc.com. In the “Investor Relations” section of our website, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and our proxy statement on Schedule 14A related to our annual stockholders’ meeting. All such filings are available in the Investor Relations section of our web- site free of charge. Copies of any of the above-referenced information will also be made available, free of charge, by calling (201) 641-6600 or upon written request to: Corporate Secretary, AEP Industries, Inc., 95 Chestnut Ridge Road, Montvale, NJ 07645. The content on our website is not incorporated by reference into this Form 10-K unless expressly noted.

In connection with the Integrated Mergers, Berry has filed a registration statement on Form S-4 (File No. 333-213803) with the SEC that includes the definitive proxy statement of the Company and that also constitutes a definitive prospectus of Berry. The registration statement was declared effective on December 15, 2016, and the Company first mailed the definitive proxy statement/prospectus to holders of record of the Company’s common stock as of December 12, 2016 on December 16, 2016. The Company and Berry may also file other documents with the SEC regarding the proposed transaction. This Annual Report on Form 10-K is not a substitute for the proxy statement/prospectus or registration statement or any other document which the Company or Berry may file with the SEC. Investors are urged to read the registration statement, the proxy statement/prospectus and any other relevant documents when they are available, as well as any amendments or supplements to these documents, carefully and in their entirety because they contain important information. Investors may obtain free copies of the registration statement, including the definitive proxy statement/prospectus, and other relevant documents filed by Berry and the Company with the SEC through the website maintained by the SEC at www.sec.gov, or by contacting the Company’s information agent at Georgeson, 1290 Avenue of the Americas, 9th Floor, New York, New York 10104, (800) 561-3947 or Berry at Berry Plastics Group, Inc., 101 Oakley Street, Evansville, Indiana 47710, Attn: Dustin Stilwell, Head of Investor Relations, (812) 306-2964.

Berry, the Company and their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the Company’s stockholders in respect of the proposed transaction. Information regarding Berry’s directors and executive officers can be found in the proxy statement/prospectus, Berry’s 2016 Annual Report on Form 10-K for the year ended October 1, 2016, which was filed with the SEC on November 30, 2016, as well as Berry’s other filings with the SEC. Information regarding the Company’s directors and executive officers can be found in Part III herein as well as the Company’s other filings with the SEC. Additional information regarding the interests of such potential participants are included in the proxy statement/prospectus and other relevant documents filed with the SEC in connection with the proposed transaction. These documents are available free of charge on the SEC’s website and from Berry and the Company, as applicable, using the sources indicated above.

 

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ITEM 1A. RISK FACTORS

You should carefully consider each of the risks and uncertainties described below and elsewhere in this Annual Report on Form 10-K, as well as any amendments or updates reflected in subsequent filings with the SEC. We believe these risks and uncertainties, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results and could materially and adversely affect our business operations, results of operations and financial condition.

Risks Related to the Integrated Mergers

On August 24, 2016, we entered into the Merger Agreement with Berry, Holdings, Merger Sub and Merger Sub LLC, pursuant to which, among other things, the Integrated Mergers will occur. In connection with the proposed Integrated Mergers, we are subject to certain risks including, but not limited to, those set forth below. For additional information related to the Merger Agreement, refer to the definitive proxy statement/prospectus filed with the SEC on December 15, 2016. The description of each of the Merger Agreement and the Merger Agreement Amendment herein is qualified in its entirety by reference to the full text of the Merger Agreement and Merger Agreement Amendment included in Annex A to the definitive proxy statement/prospectus.

Completion of the Integrated Mergers is subject to various conditions which, if not satisfied, may cause the Integrated Mergers not to be completed in a timely manner or at all.

The completion of the Integrated Mergers is subject to certain conditions, including, among others, (i) the approval by the holders of at least a majority of the outstanding shares of our common stock entitled to vote on the Integrated Mergers to adopt the Merger Agreement pursuant to which the Company’s stockholders would be entitled to receive, at the holder’s election, $110.00 in cash (the “Cash Consideration”) or 2.5011 shares of Berry common stock (the “Stock Consideration” and together with the Cash Consideration, the “Merger Consideration”) in exchange for each share of the Company’s common stock (the “base merger consideration”), subject to the proration mechanics in the Merger Agreement, which will result in the Company merging with and into a wholly owned subsidiary of Berry (the “base merger consideration proposal”), unless Berry has made the Alternative Funding Election (as defined below) and the Alternative Funding Election Period (as defined in the Merger Agreement) is not yet complete; (ii) in the event that Berry has made the Alternative Funding Election and the Alternative Funding Election Period is not yet complete, in which event the approval by the holders of at least a majority of the outstanding shares of our common stock entitled to vote on the Integrated Mergers to adopt the Merger Agreement pursuant to which, in certain limited circumstances (as specified in the Merger Agreement) Berry may elect, in its sole discretion, to pay $110.00 in cash for each share of the Company’s common stock (the “alternative merger consideration”), subject to certain conditions, which will result, in those circumstances and subject to those conditions, in the Company merging with and into a wholly owned subsidiary of Berry (the “alternative merger consideration proposal”); (iii) the expiration or early termination of the waiting period applicable to the consummation of the Integrated Mergers under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”); (iv) the absence of any law, injunction, judgment or ruling restraining, enjoining, preventing or prohibiting the consummation of the Integrated Mergers; (v) no governmental authority having instituted any legal proceeding (which remains pending) seeking to restrain, enjoin, prevent or prohibit the Integrated Mergers; (vi) unless Berry has made the Alternative Funding Election (as defined in the Merger Agreement), a registration statement on Form S-4 will have been declared effective by the SEC in accordance with the provisions of the Securities Act, and no stop order suspending the effectiveness of the Form S-4 shall have been issued by the SEC and remain in effect and no proceedings to that effect shall have been commenced or threatened by the SEC; and (vii) unless Berry has made the Alternative Funding Election, the shares of Berry common stock to be issued in the Integrated Mergers will have been approved for listing on the New York Stock Exchange,

 

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subject only to official notice of issuance. On November 2, 2016, the U.S. Federal Trade Commission notified Berry and the Company that early termination of the waiting period under the HSR Act, was granted, effective immediately. Therefore, the closing condition to the Integrated Mergers in the Merger Agreement relating to the expiration or termination of the waiting period applicable to the Integrated Mergers under the HSR Act has been satisfied. Furthermore, on December 15, 2016, the SEC declared the registration statement on Form S-4 effective, and the Company first mailed its definitive proxy statement/prospectus to its stockholders on December 16, 2016.

Each party’s obligation to consummate the Integrated Mergers is subject to certain other conditions, including without limitation (a) the accuracy of the other party’s representations and warranties, (b) the other party’s material compliance with its covenants and agreements contained in the Merger Agreement, (c) there having not been since the date of the Merger Agreement a material adverse effect with respect to Company or Berry and (d) each of the Company and Berry having received written opinions from certain specified parties that the Integrated Mergers will qualify as a tax-free reorganization for United States federal income tax purposes. However, in the event of a material adverse effect with respect to Berry or if the written tax opinion required to be delivered to the Company in connection with the Integrated Mergers cannot be delivered, Berry may elect, in its sole discretion, to pay $110.00 in cash for each share of the Company’s common stock, subject to certain conditions. If the Integrated Mergers are not consummated on or before February 24, 2017, either party may terminate the Merger Agreement. As a result of these conditions, we cannot provide assurance that the Integrated Mergers will be completed on the terms or timeline currently contemplated, or at all.

We will continue to incur substantial transaction-related costs in connection with the Integrated Mergers.

We have incurred significant legal, advisory and financial services fees in connection with our Board of Directors’ review of strategic alternatives and the process of negotiating and evaluating the terms of the Integrated Mergers. We have incurred, and expect to continue to incur, additional costs in connection with the satisfaction of the various conditions to closing, including seeking approval from our stockholders and from applicable regulatory agencies. Such costs were significant in fiscal 2016 and, subject to the timing of closing of the Integrated Mergers, may be significant in fiscal 2017.

The pendency of the Integrated Mergers could adversely affect our business, results of operations and financial condition.

The pendency of the Integrated Mergers could cause disruptions in and create uncertainty surrounding our business, including affecting our relationships with our existing and future customers, suppliers and employees, which could have an adverse effect on our business, results of operations, financial condition and internal controls, regardless of whether the Integrated Mergers are completed. In particular, we could potentially lose important personnel as a result of the departure of employees who decide to pursue other opportunities in light of the Integrated Mergers. We could also potentially lose customers or suppliers, and new customer or supplier contracts could be delayed or decrease. In addition, we have expended, and continue to expend, significant management resources in an effort to complete the Integrated Mergers, which are being diverted from our day-to-day operations.

If the Integrated Mergers are not completed and we do not complete a Superior Proposal (as such term is defined in the Merger Agreement), our stock price will likely fall to the extent that the current market price of our common stock reflects an assumption that the Integrated Mergers will be completed. In addition, the failure to complete the Integrated Mergers may result in negative publicity and/or a negative impression of us in the investment community, may affect our relationship with employees, customers and other partners in the business community and our industry, and may cause Berry to retain knowledge that could be detrimental to the Company’s business and competitive position.

 

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While the Merger Agreement is in effect, we are subject to restrictions on our business activities and our pursuit of strategic alternatives.

Under the Merger Agreement, we are subject to certain restrictions on the conduct of our business and generally must operate our business in the ordinary course in all material respects prior to completing the Integrated Mergers unless we obtain the consent of Berry, which may restrict our ability to exercise certain of our business strategies. These restrictions may prevent us from entering into any new line of business outside of our existing businesses or existing business plans, making certain investments or acquisitions, selling assets, hiring or promoting key personnel, entering into or amending contractual relationships, engaging in capital expenditures in excess of certain agreed limits, incurring indebtedness or making changes to our business prior to the completion of the Integrated Mergers or termination of the Merger Agreement. These restrictions could have an adverse effect on our business, financial condition and results of operations.

In addition, the Merger Agreement also restricts our ability to solicit alternative acquisition proposals from third parties and to provide information to, and participate in discussions and engage in negotiations with, third parties regarding alternative acquisition proposals. However, prior to approval of the Integrated Mergers by our stockholders, the solicitation restrictions are subject to a customary “fiduciary-out” provision, which allows us, under certain circumstances, to provide information to, and participate in discussions and engage in negotiations with, third parties with respect to an unsolicited alternative acquisition proposal that our Board of Directors has determined is or could reasonably be expected to lead to a Superior Proposal. In addition, we will be required to pay Berry a termination fee equal to $20 million if the Merger Agreement is terminated under certain circumstances, including by us to enter into an acquisition agreement that constitutes a Superior Proposal or because our Board of Directors adversely changes its recommendation to stockholders to vote in favor of the Integrated Mergers or takes certain other related adverse actions. We also would be required to pay Berry a termination fee equal to $20 million if the Merger Agreement is terminated due to either the failure to obtain approval of our stockholders or the conditions to close were not satisfied before the end date of February 24, 2017, and an alternative acquisition proposal is consummated within 12 months of the termination, subject to certain conditions. These provisions limit our ability to pursue offers from third parties that could result in greater value to our stockholders than the value resulting from the Integrated Mergers. The termination fee may also discourage third parties from pursuing an alternative acquisition proposal with respect to us.

Because the market value of Berry’s common stock that our stockholders may receive in the Integrated Mergers may fluctuate, our stockholders cannot be sure of the market value of the stock portion of the consideration that they will receive in the Integrated Mergers.

The stock portion of the Merger Consideration that some of our stockholders will receive is a fixed number of shares of Berry common stock, not a number of shares that will be determined based on a fixed market value. The market value of Berry common stock and our common stock at the effective time of the Integrated Mergers may vary significantly from their respective values on the date that the Merger Agreement was executed or at other dates, such as the date on which our stockholders vote on the approval of the Merger Agreement. Stock price changes may result from a variety of factors, including changes in Berry’s and our respective businesses, operations or prospects, regulatory considerations, and general business, market, industry or economic conditions. The exchange ratio relating to the stock portion of the Merger Consideration will not be adjusted to reflect any changes in the market value of Berry common stock or our common stock.

If the Integrated Mergers are completed, the combined company may not be able to successfully integrate our business with Berry and therefore may not be able to realize the anticipated benefits of the Integrated Mergers.

Because a portion of the Merger Consideration consists of Berry common stock, realization of the anticipated benefits in the Integrated Mergers will depend, in part, on the combined company’s ability

 

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to successfully integrate our business with Berry. The combined company will be required to devote significant management attention and resources to integrating its business practices and support functions. The diversion of management’s attention and any delays or difficulties encountered in connection with the Integrated Mergers and the integration of the two companies’ operations could have an adverse effect on the business, financial results, financial condition or stock price of Berry (including the combined company following the Integrated Mergers). The integration process may also result in additional and unforeseen expenses and loss of customers and suppliers. There can be no assurance that the contemplated synergies anticipated from the Integrated Mergers will be realized.

After the completion of the Integrated Mergers, sales of Berry common stock may negatively affect its market price.

The shares of Berry common stock to be issued in the Integrated Mergers to our stockholders will generally be eligible for immediate resale. The market price of Berry common stock could decline as a result of sales of a large number of shares of Berry common stock in the market after the completion of the Integrated Mergers or the perception in the market that these sales could occur.

We may be the target of securities class action and derivative lawsuits which could result in substantial costs and may delay or prevent the Integrated Mergers from being completed.

Securities class action lawsuits and derivative lawsuits are often brought against companies that have entered into merger agreements. Even if the lawsuits are without merit, defending against these claims can result in substantial costs to us and divert management time and resources. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting consummation of the Integrated Mergers, then that injunction may delay or prevent the Integrated Mergers from being completed, which may materially and adversely affect the Company’s business, financial position and results of operations.

Industry Risks

Our business is dependent on the price and availability of resin, our principal raw material, and our ability to manage resin price volatility and resin availability.

The primary raw materials that we use in our products are polyethylene (“PE”) and polyvinyl chloride (“PVC”) resins. Our ability to operate profitably is dependent, in a large part, on the markets for these resins. These resins are derived from petroleum and natural gas, and therefore prices of such resins fluctuate substantially as a result of changes in petroleum and natural gas prices, demand and the capacity of resin suppliers. Instability in the world markets for petroleum and natural gas could adversely affect the prices of our raw materials and their general availability. During the past several years, we have experienced significant fluctuations in resin prices, including periods of rapidly increasing resin prices. This significant volatility in resin prices within and between consecutive periods creates instability in customer purchasing and may have a material impact on our pounds of product sold, revenue and profitability. During periods of price increases, 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. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a further discussion of the impact of resin costs on results of operations in fiscal 2016.

Our ability to maintain profitability during periods of resin price increases is heavily dependent upon our ability to pass through to our customers the full amount of any price increases on a timely basis. Since resin costs fluctuate significantly, selling prices are determined generally as a “spread” over resin costs, usually expressed as cents per pound. 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,

 

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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 a higher gross profit margin. 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 periods 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. If there is overcapacity of, or significant competition of comparable quality in any specific product that we manufacture and sell, we frequently are not able to pass through the full amount of any cost increase and we may be required to participate in a re-bid process for future business.

Intense competition in the flexible packaging markets may adversely affect our operating results.

The business of supplying flexible plastic packaging products is extremely competitive and the general economic environment in recent years has only intensified an already competitive marketplace. The competition in our market is highly price sensitive; we also compete on the basis of quality, service, timely delivery and product differentiation, development and availability. We face intense competition from numerous private and public companies, including from local manufacturers that specialize in the extrusion of a limited group of products, which they market nationally, and a limited number of manufacturers of flexible packaging products that offer a broad range of products and maintain production and marketing facilities domestically and internationally. Certain of our competitors may have more efficient production facilities (including more advanced technologies), well-developed sales and marketing staffs and greater financial resources than we do. We believe that there are few barriers to entry into many of our product markets. Many of these competitors have also undertaken significant capital expenditures projects in recent years in anticipation of increased domestic resin production and lower supply costs. As a result, we may not achieve future anticipated benefits from resin supply changes to the same extent as some of our competitors. Further, we have experienced, and may continue to experience, competition from new manufacturers. When new manufacturers enter the market for a flexible plastic packaging product or existing manufacturers increase capacity, they frequently reduce prices to achieve increased market share. In addition, we compete with other packaging product manufacturers, many of which can offer consumers non-plastic packaging solutions. Many of these competitors have greater financial resources than we do, and such competition can result in additional pricing pressures, reduced sales and lower margins.

Polyethylene resin is expected to undergo a major growth phase in the United States. Availability of welders, pipefitters and other specialty labor and a variety of other reasons could delay the production of such new capacity, none of which we influence or control. If any such projects are significantly delayed or cancelled, we could have excess capacity and may not achieve our expected return on investment of our significant capital expenditures in the last five fiscal years. Further, excess capacity in our industry could result in further pricing pressures in our industry that would have a material and adverse impact on our operations, results of operations and financial condition.

An increase in competition could result in material reductions in margins or loss of our market share, which could materially adversely affect our operations and financial condition. In recent years, we have varied on focusing on maintaining margins which has negatively impacted sales volume, and focusing on maintaining market share, which has negatively affected margins. In addition, since we do not have long-term arrangements with many of our customers, these competitive factors could cause our customers to shift suppliers and/or products quickly. Further, we believe intense competition in the industry has precluded us from implementing non-resin price increases to counter rising costs in labor, healthcare costs and packaging, which have negatively impacted our results in recent years. Certain consolidation of our customers has also resulted in customers having greater purchasing power. There can be no assurance that we will be able to compete successfully in the markets for our products or that competition will not intensify.

 

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We are subject to various environmental and health and safety laws and regulations that govern our operations and that may result in potential liability. In addition, consumer preferences and ongoing health and safety studies on plastics and resins may adversely affect our business.

Our operations are subject to various federal, state, local and foreign environmental laws and regulations which govern:

 

   

discharges into the air and water;

 

   

the storage, handling and disposal of solid and hazardous substances and waste;

 

   

the remediation of soil and ground water contaminated by petroleum products or hazardous substances or waste; and

 

   

the health and safety of our employees.

Compliance with these laws and regulations may require material expenditures by us. Actions by federal, state, local and foreign governments concerning environmental and health and safety matters could result in laws or regulations that could increase the cost of manufacturing our products. In addition, the nature of our current and former operations and the history of industrial uses at some of our manufacturing facilities expose us to the risk of liabilities or claims with respect to environmental and worker health and safety matters. We may also be exposed to claims for contamination or violations of environmental laws and regulations arising from the actions of previous owners or operators of our property. Such liability may be imposed without regard to fault, and under certain circumstances, can be joint and several, resulting in one party being held responsible for the entire obligation. In addition, the presence of, or failure to remediate, hazardous substances or waste may adversely affect our ability to sell or rent any property or to use it as collateral for a loan. We also may be liable for costs relating to the investigation, remediation or removal of waste and hazardous substances from a disposal or treatment facility to which we or our predecessors sent waste or hazardous substances. We have limited insurance coverage for potential environmental liabilities associated with historic and current operations and we do not anticipate increasing such coverage in the future. We may also assume, or be deemed to assume, significant environmental liabilities in acquisitions, although we will not pursue acquisitions while the Integrated Mergers are pending.

While we have not been required historically to make significant capital expenditures in order to comply with applicable environmental laws and regulations, we cannot predict with any certainty our future capital expenditure requirements because of continually changing compliance standards and environmental technology. Furthermore, violations or contaminated sites that we do not know about, including contamination caused by prior owners and operators of such sites, or at sites formerly owned or operated by us or our predecessors in connection with discontinued operations, could result in additional compliance or remediation costs or other liabilities, which could be material.

Additionally, a decline in consumer preference for plastic products due to environmental considerations could have a material adverse effect on our business, financial condition and results of operations. In addition, a number of governmental authorities in the United States and abroad, have considered, or are expected to consider, legislation aimed at reducing the amount of plastic wastes disposed. Programs have included, for example, mandating certain rates of recycling and/or the use of recycled materials, imposing deposits or taxes on flexible plastic packaging material and requiring retailers or manufacturers to take back packaging used for their products. Governmental, as well as voluntary initiatives similarly aimed at reducing the level of plastic wastes, could reduce the demand for certain flexible plastic packaging, result in greater costs for flexible plastic packaging manufacturers or otherwise negatively impact our business. Some consumer products companies, including some of our customers, have responded to these initiatives and to perceived environmental concerns of consumers by using containers made in whole or in part of recycled plastic, which we do not manufacture. Future legislation and initiatives could adversely affect us in a manner that would be material.

 

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Also, continuing studies of potential health and safety effects of various resins and plastics, including polyvinyl chlorides and other materials that we use in our products, are being conducted by industry groups, government agencies and others. The results of these studies, along with the development of any other new information, may adversely affect our ability to market and sell certain of our products or may give rise to claims for damages from persons who believe they have been injured by such products, any of which could adversely affect our operations and financial condition.

The Food and Drug Administration (“FDA”) regulates the material content of direct-contact food and drug packages we manufacture pursuant to the Federal Food, Drug and Cosmetic Act. Furthermore, some of our products are regulated by the Consumer Product Safety Commission (“CPSC”) pursuant to various federal laws, including the Consumer Product Safety Act and the Poison Prevention Packaging Act. Both the FDA and the CPSC can require the manufacturer of defective products to repurchase or recall these products and may also impose fines or penalties on the manufacturer. Similar laws exist in some states, cities and other countries in which we sell products. In addition, laws exist in certain states restricting the sale of packaging with certain levels of heavy metals and imposing fines and penalties for noncompliance. Although we use FDA-approved resins and pigments in our products that directly contact food and drug products and we believe our products are in material compliance with all applicable requirements, we remain subject to the risk that our products could be found not to be in compliance with these and other requirements. A recall of any of our products or any fines and penalties imposed in connection with non-compliance could have a materially adverse effect on our operations, results of operations and financial condition.

Company Risks

Disruptions in the global economic and financial market environment may have a negative effect on our business and operations.

Our customers, distributors and suppliers represent a cross-section of the general economy and therefore we are significantly impacted by the global economic and financial markets. In recent years, we have lost volume due to foreign imports, customer bankruptcies and loss of bids due to pricing. Disruptions in the global economy and volatility in the financial markets could cause, among other things, lower levels of liquidity, increased borrowing rates, increased rates of default and bankruptcy, lower consumer and business spending, and lower consumer net worth, all of which may have a negative effect on our business, results of operations and financial condition. Customers, distributors and suppliers may be negatively affected by the ongoing impacts of the economic and financial market difficulties. Current or potential customers and suppliers may no longer be in business, may be unable to fund purchases or may determine to reduce purchases, all of which could lead to reduced demand for our products, reduced gross margins and increased customer payment delays or defaults. Further, suppliers may not be able to supply us with needed raw materials on a timely basis, may increase prices or may go out of business, which could result in our inability to meet consumer demand or affect our gross margins. We are also limited in our ability to reduce costs to offset the results of a prolonged or severe economic downturn given certain fixed costs associated with our operations, difficulties if we overstrained our resources, and our long-term business approach that necessitates we remain in position to respond when market conditions improve. Future weakness in the global economy could adversely affect our operations and financial condition in future periods.

See “—Financial Risks” below for a discussion of additional risks to our liquidity resulting from the economic and financial market environment.

The loss of a key supplier could lead to increased costs, lower profit margins and short-term production issues

The majority of the resins purchased by us are purchased under supply contracts which are typically renewed annually. In fiscal 2016, we purchased approximately 28%, 22% and 13% of our

 

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resin requirements from our three largest suppliers. Each of these suppliers produces resins in multiple locations, and should any one, or a combination of these locations fail to meet our needs, we believe sufficient capacity exists among our remaining contract holders, the open market and the secondary markets to supply any shortfall that may result. Nevertheless, it is not always possible to replace a specialty resin without a disruption in our operations and replacement of significant supply is often at higher prices, and such impact may materially and adversely harm our competitive position.

We negotiate and award our supply contracts annually. The resin contracts generally serve to establish the basic terms and conditions between the parties, including rebates based on the volume of resin purchases, but do not bind us in a materially significant way. Should any of our existing relationships fail to bid or survive the bid process, the position previously enjoyed by that contract holder typically migrates to another supplier. While this process has served us well in the past, there is no guarantee that the future replacement of any supplier will always result in a more effective and efficient relationship in the future.

We have limited contractual relationships with our customers and, as a result, our customers may unilaterally reduce the purchase of our products. The loss of several customers could, in the aggregate, materially adversely affect our operations and financial condition.

A substantial portion of our business is in the merchant market, in which we do not have long-term contractual relationships with our customers. As a result, our customers may unilaterally reduce the purchase of our products or, in certain cases, terminate existing orders for which we may have incurred significant production costs. The loss of several customers could, in the aggregate, materially adversely affect our operations and financial condition.

Many of our larger packaging customers are multinational companies that purchase large quantities of packaging materials, some of whom have recently consolidated. Many of these companies are purchasers with centralized procurement departments. They generally enter into supply arrangements through a tender process of soliciting bids from several potential suppliers and selecting the winning bid based on several attributes, including price and service. The significant negotiating leverage possessed by many of our customers and potential customers limits our ability to negotiate supply arrangements with favorable terms and creates pricing pressure, reducing margins industry wide. In addition, our customers may vary their order levels significantly from period to period, and customers may not continue to place orders with us in the future at the same levels as in prior periods. In the event we lose any of our larger customers, we may not be able to quickly replace that revenue source or replace with not as good pricing, which could harm our financial results.

Loss of third-party transportation providers upon whom we depend or increases in fuel prices could increase our costs or cause a disruption in our operations.

We depend generally upon third-party transportation providers for delivery of our products to our customers. Strikes, slowdowns, transportation disruptions or other conditions in the transportation industry, including, but not limited to, shortages of truck drivers, disruptions in rail service, decreases in the availability of vessels or increases in fuel prices, could increase our costs and disrupt our operations and our ability to service our customers on a timely basis.

We may, from time to time, experience problems in our labor relations.

Unions represent 479 employees, or 18% of our workforce, at October 31, 2016, under three collective bargaining agreements which expire in March 2017, December 2018 and January 2020, respectively. Although we believe that our present labor relations with our employees are satisfactory, our failure to renew these agreements on reasonable terms could result in labor disruptions and increased labor costs, which could adversely affect our financial performance.

 

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We cannot assure you that our relations with the unionized portion of our workforce will remain positive or that such employees will not initiate a strike, work stoppage or slowdown in the future. In the event of such an action, our business, prospects, results of operations and financial condition could be adversely affected and we cannot assure you that we would be able to adequately meet the needs of our customers using our remaining workforce. In addition, we cannot assure you that we will not have similar actions with our non-unionized workforce or that our non-unionized workforce will not become unionized in the future.

We are dependent on the management experience of our key personnel and our ability to attract and retain additional personnel.

Pending the completion of the Integrated Mergers, our future success depends to a large extent on the experience, business relationships and continued service of our key managerial employees, including J. Brendan Barba, our Chairman and Chief Executive Officer, and Paul M. Feeney, our Executive Vice President, Finance and Chief Financial Officer, both of whom are also directors. Although the Company significantly benefits from the 74 years of combined service of Messrs. Barba and Feeney, any failure to ensure effective transfer of institutional knowledge and to implement a well-run succession plan could hinder our strategic planning and growth upon their termination of employment. We do not maintain key-person insurance for any of our officers. We may not be able to retain our executive officers and key personnel or attract additional qualified key employees in the future. Competition for qualified employees is intense, and the loss of such persons, or an inability to attract, retain and motivate additional highly skilled employees, could have a material adverse effect on our results of operations and financial condition and prospects. There can be no assurance that we will be able to retain our existing personnel or attract and retain additional qualified employees.

Our executive officers beneficially own a substantial amount of our common stock and have significant influence over our business.

At October 31, 2016, our executive officers beneficially owned 1,118,893 shares of our common stock, representing 22% of our outstanding shares as of such date. Their ownership and voting control, together with their duties as executive officers and directors, gives them significant influence on the outcome of corporate transactions or other matters submitted to the Board of Directors or stockholders for approval, including acquisitions, mergers, consolidations, substantial asset sales and director elections. In connection with the execution of the Merger Agreement, Berry entered into voting agreements with certain stockholders of the Company, including our executive officers and certain of their relatives, which generally require, subject to certain exceptions, such stockholders to vote, or cause or direct to be voted, all of the shares of common stock beneficially owned by them in favor of adoption of the Merger Agreement and the Integrated Mergers and against matters that would be reasonably be expected to materially impede, interfere with, delay or postpone any of the transactions contemplated by the Merger Agreement.

Our business is subject to risks associated with manufacturing our own products.

We internally manufacture our own products at our production facilities. While we maintain insurance covering our manufacturing and production facilities, including business interruption insurance, a catastrophic loss of the use of all or a portion of our facilities due to accident, fire, explosion, labor or other employee issues, weather conditions, other natural disaster or otherwise, whether short or long-term, could have a material adverse effect on us.

Unexpected failures of our equipment and machinery may result in production delays, loss of customers and revenues, reduced product quality, significant repair costs, injuries to our employees, and customer claims. Any interruption in production capability may require us to make large capital expenditures to remedy the situation, which could have a negative impact on our profitability and

 

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financial condition. Our business interruption insurance may not be sufficient to offset the lost revenues or increased costs that we may experience during a disruption of our operations and our results of operations and financial condition could be harmed. In addition, the installation of new equipment and machinery is expensive and complex, may require various restructuring of existing facilities and the incapacity of certain manufacturing lines, and new equipment may not operate as anticipated. If there is a delay in installing new equipment or machinery, or new automation or other projects are unsuccessful, our operations or results of operations may be adversely impacted.

Security breaches and other disruptions to our information technology networks and systems could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations, and reduce the benefits of our investment in cloud computing and other advanced technologies.

We depend on information technology to record and process Company and customer transactions, inventory control, purchasing and supply chain management, payroll and human resources, and financial reporting, including significant proprietary and sensitive data of the Company and our business partners and personally identifiable information of our employees. The Company’s information technology systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, acts of sabotage, hardware failures, computer viruses, telecommunication failures, user errors or catastrophic events. Failure to effectively prevent, detect and recover from system failures, viruses, security breaches or other cyber incidents could significantly disrupt our operations, result in lost or misappropriated information, and adversely affect our internal control over financial reporting and our ability to timely and accurately report financial results.

Increasingly, we are relying on third parties to provide software, support and management with respect to a variety of business processes and activities as part of our information technology network, and we are utilizing cloud computing through certain of our third-party vendors. The security and privacy measures we and our vendors implement are critical to our business, our key relationships, and compliance with applicable law. Despite security measures and business continuity plans, our information technology networks may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers, natural disasters or catastrophic events, or breaches due to errors or malfeasance by employees, contractors and others who have access to our networks and systems. The occurrence of any of these events could compromise our networks and the information stored therein could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations, and reduce the benefits of our investment in cloud computing and other advanced technologies. Our insurance coverage may not be adequate to cover all of the costs and liabilities related to significant security and privacy violations.

We may not be successful in protecting our intellectual property rights, including our unpatented proprietary know-how and trade secrets, or in avoiding claims that we infringed on the intellectual property rights of others.

In addition to relying on patent and trademark rights, we rely on unpatented proprietary know-how and trade secrets, and employ various methods, including confidentiality agreements with employees and consultants, customers and suppliers to protect our know-how and trade secrets. However, these methods and our patents and trademarks may not afford complete protection and there can be no assurance that others will not independently develop the know-how and trade secrets or develop better production methods than us. Further, we may not be able to deter current and former employees, contractors and other parties from breaching confidentiality agreements and misappropriating proprietary information and it is possible that third parties may copy or otherwise obtain and use our information and proprietary technology without authorization or otherwise infringe on our intellectual

 

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property rights. Additionally, we have licensed, and may license in the future, patents, trademarks, trade secrets, and similar proprietary rights to third parties. While we attempt to ensure that our intellectual property and similar proprietary rights are protected when entering into business relationships, third parties may take actions that could materially and adversely affect our rights or the value of our intellectual property, similar proprietary rights or reputation. In the future, we may also rely on litigation to enforce our intellectual property rights and contractual rights, and, if not successful, we may not be able to protect the value of our intellectual property. Any litigation could be protracted and costly and could have a material adverse effect on our business and results of operations regardless of its outcome.

Our success depends in part on our ability to obtain, or license from third parties, patents, trademarks, trade secrets and similar proprietary rights without infringing on the proprietary rights of third parties. Although we believe our intellectual property rights are sufficient to allow us to conduct our business without incurring liability to third parties, our products may infringe on the intellectual property rights of such persons. Furthermore, no assurance can be given that we will not be subject to claims asserting the infringement of the intellectual property rights of third parties seeking damages, the payment of royalties or licensing fees and/or injunctions against the sale of our products. Any such litigation could be protracted and costly and could have a material adverse effect on our business, financial condition and results of operations.

We face risks related to sales through distributors and other third parties.

In each of fiscal 2016, 2015 and 2014, approximately 60% of our worldwide sales were directly to distributors. Using third parties for distribution exposes us to many risks, including competitive pressure, concentration, credit risk and compliance risks. Distributors may sell products that compete with our products, and we may need to provide financial incentives to focus distributors on the sale of our products. We may rely on one or more key distributors for product sales, and the loss of these distributors could reduce our revenues. Distributors may face financial difficulties, including bankruptcy, which could harm our collection of accounts receivable and financial results. Violations of the Foreign Corrupt Practices Act of 1977 or similar laws by distributors or other third-party intermediaries could have a material impact on our business. Failing to manage risks related to our use of distributors may reduce sales, increase expenses, and weaken our competitive position.

Financial Risks

Our debt could adversely affect our financial health and prevent us from fulfilling our obligations under our indebtedness.

As of October 31, 2016, we had $136.5 million of total debt outstanding (including capital lease obligations of $7.3 million).

Our debt could have important consequences to you. For example, it could:

 

   

make it more difficult for us to satisfy our obligations with respect to our debt;

 

   

increase our vulnerability to general adverse economic and industry conditions;

 

   

require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby limiting our ability to fund acquisitions, working capital, capital expenditures and other general corporate purposes;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

place us at a competitive disadvantage compared to our competitors that may have less debt; and

 

   

limit, among other things, our ability to borrow additional funds.

 

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We and our subsidiaries may be able to incur substantial additional debt in the future. We are party to the Second Amended and Restated Loan and Security Agreement (the “credit facility”), dated February 22, 2012, with Wells Fargo Bank National Association (“Wells Fargo”), which was amended on August 20, 2014, January 29, 2016 and September 13, 2016. We also maintain a secured credit facility at our Canadian subsidiary, used to support operations, which is generally serviced by local cash flows from operations. As of October 31, 2016, we would have been permitted to borrow up to an additional $141.5 million under the credit facility (after taking into account $4.1 million of outstanding letters of credit) and $3.7 million under our credit line available to our Canadian subsidiary, in each case based on the respective available borrowing base; however, certain provisions of the Merger Agreement currently restrict us from incurring more than $65 million in the ordinary course thereunder without the consent of Berry. As of October 31, 2016, we had $1.3 million in borrowings under our credit facilities. In addition, the terms of the indenture that governs the senior notes do not prohibit us or our subsidiaries from issuing and incurring additional debt upon satisfaction of certain conditions. If new debt is added to our current debt levels, the related risks described above that we and our subsidiaries face could intensify.

To service our debt or redeem such debt upon a change of control, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to service our debt and to fund our operations and planned capital expenditures will depend on our financial and operating performance. This, in part, is subject to prevailing economic conditions and to financial, business and other factors beyond our control. If our cash flow from operations is insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, forgo acquisition opportunities, obtain additional equity capital or indebtedness, or refinance or restructure our debt. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial cash flow problems and might be required to sell material assets or operations to meet our debt service and other obligations. We cannot assure you as to the timing of such sales or the proceeds that we could realize from such sales or if additional debt or equity financing would be available on acceptable terms, if at all.

A provision of the senior notes requires us, upon a change of control, to offer to purchase the outstanding senior notes. If a change of control were to occur and we could not obtain a waiver or if we do not have the funds to make the purchase, we would be in default under the senior notes, which could, in turn, cause any of our debt that contains a cross-acceleration or cross-default provision to become immediately due and payable. If our debt were to be accelerated, we cannot assure you that we would be able to repay it.

We are subject to a number of restrictive debt covenants that may restrict our business and financing activities.

Our credit facility and the indenture that governs the senior notes contain restrictive debt covenants that, among other things, restrict our ability to:

 

   

borrow money;

 

   

pay dividends and make distributions;

 

   

issue stock of subsidiaries;

 

   

make certain investments;

 

   

repurchase stock;

 

   

use assets as security in other transactions;

 

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create liens;

 

   

enter into affiliate transactions;

 

   

merge or consolidate; and

 

   

transfer and sell assets.

Our agreement relating to the credit line available to our Canadian subsidiary also contains certain of these restrictive debt covenants. These covenants could adversely limit our ability to plan for or react to market conditions, meet our capital needs and execute our business strategy.

In addition, our credit facility also requires us to meet certain financial tests, and our agreement relating to the credit line available to our Canadian subsidiary requires it to meet certain financial tests. These restrictive covenants may limit our ability to expand or to pursue our business strategies. Furthermore, any indebtedness that we incur in the future may contain similar or more restrictive covenants.

Our ability to comply with the restrictions contained in our credit facility, the senior notes indenture and the credit line available to our Canadian subsidiary may be affected by changes in our business condition or results of operations, adverse regulatory developments or other events beyond our control. A failure to comply with these restrictions could result in a default under our credit facility, the senior notes indenture and the credit line available to our Canadian subsidiary, or any other subsequent financing agreement, which could, in turn, cause any of our debt that contains a cross-acceleration or cross-default provision to become immediately due and payable. If our debt were to be accelerated, we cannot assure you that we would be able to repay it. In addition, a default could give our lenders the right to terminate any commitments that they had made to provide us with additional funds. Further, 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 and, in the event of a default thereunder, the lenders generally would be entitled to seize the collateral.

Risks Related to an Investment in Our Common Stock

Our common stock price has been and may continue to be volatile.

The market price of our common stock has fluctuated regularly and significantly in the past. The market price of our common stock will continue to be subject to significant fluctuations in response to a variety of factors in addition to the pending Integrated Mergers (see above “Risks Related to the Integrated Mergers-The pendency of the Integrated Mergers could adversely affect our business, results of operations and financial condition”), including:

 

   

fluctuations in operating results, including as a result of changes in resin prices, LIFO reserve, and the other variables;

 

   

our liquidity needs and constraints;

 

   

the business environment, including the operating results and stock prices of companies in the industries we serve;

 

   

changes in general conditions in the U.S. and global economies or financial markets, including those resulting from war, incidents of terrorism and natural disasters or responses to such events;

 

   

announcements concerning our business or that of our competitors or customers;

 

   

acquisitions and divestitures;

 

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the introduction of new products or changes in product pricing policies by us or our competitors;

 

   

change in earnings estimates or recommendations by research analysts who track our common stock or the stocks of other companies in our industry or failure of analysts to cover our common stock;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

sales of common stock by our employees, directors and executive officers;

 

   

prevailing interest rates; and

 

   

perceived dilution from stock issuances.

Some companies that have had volatile market prices for their securities have been subject to securities class action suits filed against them. If a suit were to be filed against us, regardless of the outcome, it could result in substantial costs and a diversion of our management’s attention and resources. This could have a material adverse effect on our business, results of operation and financial condition.

Although our common stock has had increased trading volume for periods of time in the last few years, our common stock generally has had a low trading volume historically, which could cause further volatility in the market price of our common stock.

Shares of common stock eligible for future sale, and additional equity offerings by us, may adversely affect our common stock price.

The market price of our common stock could decline as a result of sales of substantial amounts of additional shares of our common stock in the public market or the perception that such sales could occur. This could also impair our ability to raise additional capital through the sale of equity securities at a time and price favorable to us. As of October 31, 2016, under our certificate of incorporation, as amended, we are authorized to issue 30 million shares of common stock, of which approximately 5.1 million shares of common stock were outstanding, approximately 49,000 shares of common stock were issuable upon the exercise of currently outstanding stock options and 0.2 million shares of common stock were issuable upon the settlement of performance units if the performance unit holders elect settlement in stock.

We may also decide to raise additional funds through public or private equity financing to fund our operations or for other business purposes. New issuances of equity securities would reduce your percentage ownership in us and the new equity securities could have rights and preferences with priority over those of our common stock. Additional equity issuances other than in connection with stock-based compensation in the ordinary course of business are not anticipated during the pendency of the Integrated Mergers.

Delaware law and our charter documents may impede or discourage a takeover, which could cause the market price of our shares to decline.

We are a Delaware corporation and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change of control would be beneficial to our existing stockholders. For example, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder.

 

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In addition, our restated certificate of incorporation and seventh amended and restated by-laws contain provisions that may discourage, delay or prevent a third party from acquiring us, even if doing so would be beneficial to our stockholders. These provisions include:

 

   

requiring supermajority approval of stockholders for certain business combinations or an amendment to, or repeal of, the by-laws;

 

   

prohibiting stockholders from acting by written consent without Board approval;

 

   

prohibiting stockholders from calling special meetings of stockholders;

 

   

establishing a classified Board of Directors, which allows approximately one-third of our directors to be elected each year;

 

   

limitations on the removal of directors;

 

   

advance notice requirements for nominating candidates for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings;

 

   

permitting the Board of Directors to amend or repeal the by-laws; and

 

   

permitting the Board of Directors to designate one or more series of preferred stock.

Further, on March 28, 2014, our Board adopted an amended and restated stockholder rights plan, which amended and restated in its entirety the prior three-year stockholder rights plan that was to expire on March 31, 2014. The amended and restated stockholder rights plan is designed to assure that all of our stockholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender offers, open market accumulations and other abusive or coercive tactics without paying stockholders a control premium. The amended and restated stockholder rights plan may have anti-takeover effects by discouraging potential proxy contests and other takeover methods, particularly those that have not been negotiated with the Board, and the amended and restated stockholder rights plan may also inhibit the acquisition of a controlling position in our common stock. Therefore, transactions may not occur that stockholders would otherwise support and/or from which they would receive a substantial premium for their shares over the current market price. The amended and restated stockholder rights plan may also make it more difficult to remove members of the current Board or management. In connection with the Merger Agreement and the Integrated Mergers, the Company entered into the Third Amendment, dated as of August 24, 2016, to the amended and restated rights agreement which, among other things, exempts the Merger Agreement (and the transactions contemplated thereby) from certain provisions of the amended and restated rights agreement and provides for the expiration of the amended and restated stockholder rights plan immediately prior to the effective time of the Integrated Mergers (but only if the effective time occurs).

Furthermore, as discussed above, certain provisions of the Merger Agreement may prevent or discourage a takeover. See above “Risks Related to the Integrated Mergers-While the Merger Agreement is in effect, we are subject to restrictions on our business activities and our pursuit of strategic alternatives”.

Our issuance of preferred stock could adversely affect holders of our common stock.

We are currently authorized to issue 1,000,000 shares of preferred stock in accordance with our restated certificate of incorporation, 30,000 of which is designated as Series A Preferred Stock in connection with the amended and restated stockholder rights plan and none of which is issued and outstanding. Our Board of Directors has the power, without stockholder approval, to set the terms of any such series of preferred stock that may be issued, including voting rights, dividend rights, and preferences over our common stock with respect to dividends or if we liquidate, dissolve or wind up our business and other terms. If we issue preferred stock in the future that has preference over our common

 

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stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of our common stock or the market price of our common stock could be adversely affected. Additional equity issuances other than in connection with stock-based compensation in the ordinary course of business are not anticipated during the pendency of the Integrated Mergers.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

 

ITEM 2. PROPERTIES

Our corporate headquarters is located in Montvale, New Jersey in a 48,000 square foot building.

The following table describes the manufacturing and warehousing facilities that we owned or leased and utilized for operations as of October 31, 2016. All of these facilities are located in the United States and Canada. The following chart sets forth the square footage of such manufacturing facilities, including offsite warehousing space.

 

Location

  Approximate
Square
Footage
   

Types of Film
Produced

Alsip, Illinois

    227,000      Custom

Bowling Green, Kentucky.

    248,000      Printed and converted, custom, PROformance

Chino, California

    274,000      Custom and stretch

Griffin, Georgia

    310,000      Food contact, other products and specialty films

Mankato, Minnesota

    146,000      Custom, PROformance

Mankato, Minnesota

    56,000      Other products and specialty films

Matthews, North Carolina

    408,000      Custom and stretch

Montgomery, Alabama

    334,000      Food contact

Montgomery, Alabama

    349,000      Canliners, Food contact

Nicholasville, Kentucky

    146,000      Stretch

Tulsa, Oklahoma

    138,000      Stretch

Waxahachie, Texas

    361,000      Custom, Canliners

West Hill, Ontario, Canada

    138,000      Food contact

Wright Township, Pennsylvania

    433,000      Custom, PROformance and stretch
 

 

 

   

Total

    3,568,000     
 

 

 

   

We believe that all of our properties are well maintained and in good condition, and that the current operating facilities are adequate for present and immediate future business needs.

As of October 31, 2016, our manufacturing facilities had a combined average annual production capacity exceeding one billion pounds.

 

ITEM 3. LEGAL PROCEEDINGS

We are, from time to time, party to litigation arising in the normal course of our business. We believe that there are currently no legal proceedings, the outcome of which would have a material adverse effect on our financial condition or our results of operations.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is quoted on the Nasdaq Global Select Market under the symbol “AEPI.” The high and low per share sales prices for our common stock, as reported by the Nasdaq Global Select Market for the two fiscal years ended October 31, 2015 and 2016, respectively, are as follows:

 

     Price Range  

Fiscal Year and Period

   High      Low  

2015

     

First quarter (November-January)

   $ 58.88       $ 43.10   

Second quarter (February-April)

     60.64         35.20   

Third quarter (May-July)

     62.75         42.98   

Fourth quarter (August-October)

     84.71         47.43   

2016

     

First quarter (November-January)

   $ 93.94       $ 71.44   

Second quarter (February-April)

     85.20         60.10   

Third quarter (May-July)

     94.91         56.89   

Fourth quarter (August-October)

     114.05         75.26   

On January 11, 2017, the closing price for a share of our common stock, as reported by the Nasdaq Global Select Market, was $119.05.

Holders

On January 11, 2017, our common stock was held by over 1,000 stockholders of record. A substantially greater number of holders are beneficial owners whose shares are held of record by banks, brokers and other nominees.

Dividends

From December 1995 through the end of fiscal 2015, we did not pay dividends to stockholders. However, starting with the first quarter of fiscal 2016, the Board declared quarterly cash dividends to stockholders of record of $0.25 per common share and paid $3.8 million in cash dividends during fiscal 2016. In the fourth quarter of fiscal 2016, the Board declared a cash dividend to stockholders of record of $0.25 per common share and paid $1.3 million for such cash dividend in the first quarter of fiscal 2017 on November 16, 2016. Any determination to declare and pay cash dividends on our common stock in the future will be made at the discretion of our Board of Directors and will depend on our results of operations, financial performance and condition, capital requirements, contractual restrictions under our line of credit and the Merger Agreement, restrictions imposed by applicable law and other factors that our Board of Directors may deem relevant.

Purchases of Equity Securities by the Issuer

There were no shares of our common stock repurchased during the fiscal year ended October 31, 2016.

Performance Graph

The following graph compares, for the five-year period ended on October 31, 2016, the cumulative total stockholder return of our common stock against the cumulative total stockholder return of:

 

   

the S&P 500 Index; and

 

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a peer group consisting of ten publicly traded plastic manufacturing companies that we have selected. The companies in the peer group are as follows: Aptargroup, Inc., Astronics Corporation, Ball Corporation, Bemis Company, Inc., Crown Holdings, Inc., Dean Foods Company, Intertape Polymer Group Inc., Silgan Holdings Inc., Sonoco Products Company, and West Pharmaceutical Services, Inc.

The graph assumes $100 was invested on October 31, 2011 in our common stock, the S&P 500 Index and the peer group consisting of ten companies, and the reinvestment of all dividends.

 

 

 

LOGO

 

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ITEM 6. SELECTED FINANCIAL DATA

The following table presents our selected financial data. The table should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

 

    For the Years Ended October 31,  
    2016     2015     2014     2013     2012  
    (in thousands, except per share data)  

Consolidated Statement of Operations Data:

         

Net sales

  $ 1,095,830      $ 1,141,391      $ 1,192,990      $ 1,143,852      $ 1,152,535   

Gross profit

    190,343        181,662        121,905        154,472        182,743   

Operating income(1)(3)

    66,507        62,718        9,861        33,316        55,648   

Interest expense(6)

    (19,882     (18,790     (19,571     (18,713     (19,077

Other (expense) income, net(2)

    (103     317        270        1,360        829   

Income (loss) before (provision) benefit for income taxes

    46,522        44,245        (9,440     15,963        37,400   

(Provision) benefit for income taxes

    (17,720     (15,408     3,934        (5,215     (14,248

Net income (loss)

  $ 28,802      $ 28,837      $ (5,506   $ 10,748      $ 23,152   

Basic Earnings (Loss) per Common Share:

         

Net income (loss) per common share

  $ 5.64      $ 5.66      $ (1.03   $ 1.93      $ 4.20   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted Earnings (Loss) per Common Share:

         

Net income (loss) per common share

  $ 5.60      $ 5.64      $ (1.03   $ 1.92      $ 4.16   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share(4)

  $ 1.00                               
    2016     2015     2014     2013     2012  

Consolidated Balance Sheet Data (at period end):

         

Total assets(5)

  $ 392,631      $ 438,094      $ 444,225      $ 468,231      $ 427,501   

Total debt (including current portion and capital leases)(5)(6)

    135,525        211,315        253,610        238,934        213,390   

Shareholders’ equity

    113,292        89,648        59,697        85,413        73,729   

 

(1) Fiscal year 2014 included $2.1 million in business interruption insurance recoveries resulting from damages sustained in the relocation of equipment purchased from Transco in Quebec, Canada to our Bowling Green, Kentucky facility.

 

(2) Fiscal years 2013 and 2012 includes a gain on bargain purchase of a business of $1.0 million and $17,000, respectively.

 

(3) Fiscal year 2016 includes $4.1 million in transaction costs incurred related to the proposed Integrated Mergers (see Note 3).

 

(4) Starting with the first quarter of fiscal 2016, the Board declared quarterly cash dividends to stockholders of record of $0.25 per common share and paid $3.8 million in cash dividends during fiscal 2016. In the fourth quarter of fiscal 2016, the Board declared a cash dividend to stockholders of record of $0.25 per common share and paid $1.3 million for such cash dividend in the first quarter of fiscal 2017 on November 16, 2016.

 

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(5) Amounts differ from prior year presentation due to the Company’s adoption of ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, requiring debt issuance costs to be presented as a deduction from the corresponding liability. In accordance with the guidance, the Company retroactively applied the guidance resulting in the reclassification of debt issuance costs of $2.1 million, $2.7 million, $3.3 million and $3.9 million from total assets to long-term debt in fiscal 2015, 2014, 2013 and 2012, respectively.

 

(6) On October 13, 2016, with Board approval, the Company redeemed $75 million of the $200 million aggregate principal amount of the 8.25% senior notes due 2019 and paid a call premium of 2.06% which equated to $1.5 million and is included in interest expense in the consolidated statement of operations for fiscal 2016.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 and Estimates

 

   

New Accounting Pronouncements

Investors should review this MD&A in conjunction with the consolidated financial statements and related notes included in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

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.

Merger with Berry Plastics Group

On August 24, 2016, the Company entered into the Merger Agreement with Berry, Holdings, Merger Sub and Merger Sub LLC, whereby Berry will acquire the Company for a combination of cash and stock through a two-step merger process that will result in the Company merging with and into an

 

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indirect, wholly owned limited liability company subsidiary of Berry. On December 7, 2016, the Company, Berry, Holdings, Merger Sub and Merger Sub LLC entered into the Merger Agreement Amendment. The Integrated Mergers are expected to close shortly after the special meeting of the Company’s stockholders scheduled for January 18, 2017, although consummation of the Integrated Mergers is subject to customary conditions, including the approval by the holders of at least a majority of the outstanding shares of the Company’s common stock entitled to vote thereon of each of the base merger consideration proposal and the alternative merger consideration proposal. For additional information related to the Merger Agreement, refer to the definitive proxy statement/prospectus filed with the SEC on December 15, 2016.

Market Conditions

As discussed above, the primary raw materials used in the manufacture of our products are PE and PVC resins, which combined total approximately 99% of our total plastic resin purchases by volume for the fiscal year ended October 31, 2016. The three month simple average prices per pound, as published by Chem Data, were as follows:

 

     Polyethylene Butene Film      PVC  
     Fiscal 2016      Fiscal 2015      Fiscal 2016      Fiscal 2015  

1st Quarter

   $ 0.68       $ 0.82       $ 0.74       $ 0.87   

2nd Quarter

     0.69         0.73         0.76         0.76   

3rd Quarter

     0.73         0.78         0.80         0.77   

4th Quarter

     0.76         0.70         0.82         0.75   

During the fiscal year ended October 31, 2016, PE resin costs increased due to temporary supply disruptions, including planned maintenance activities and some unexpected operating issues. We believe that the addition of significant new PE resin capacity will put downward pressure on resin prices in fiscal 2017.

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, 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 products to allocate to customers desiring to increase their inventory levels.

The marketplace in which we sell our products is 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 take advantage of automation, control labor costs and 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 ability to reduce costs that are fixed in nature.

 

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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, including share-based

compensation and incentive-based compensation

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, share-based compensation and employee benefits

Facilities and equipment costs, including utilities and insurance

Professional fees, including audit and Sarbanes-Oxley compliance

Provision for bad debts

Costs related to the Integrated Mergers

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

 

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Results of Operations

Fiscal 2016 Compared to Fiscal 2015

The following table presents selected financial data for fiscal 2016 and 2015 (dollars per pound sold is calculated by dividing the applicable consolidated statement of operations category by pounds sold in the period):

 

    For the Years Ended October 31,              
    2016     2015     %  increase
/(decrease)
of $
    $
increase/
(decrease)
 
    $     $ Per pound
sold
    $     $ Per pound
sold
     
    (in thousands, except for per pound data)  

Net sales

  $ 1,095,830      $ 1.14      $ 1,141,391      $ 1.22        (4.0 )%    $ (45,561

Gross profit

    190,343        0.20        181,662        0.19        4.8     8,681   

Operating expenses:

           

Delivery

    47,690        0.05        49,879        0.05        (4.4 )%      (2,189

Selling

    38,516        0.04        37,788        0.04        1.9     728   

General and administrative

    37,620        0.04        32,592        0.04        15.4     5,028   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total operating expenses

  $ 123,826      $ 0.13      $ 120,259      $ 0.13        3.0   $ 3,567   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Pounds sold

      964,727 lbs.          939,049 lbs.       

Net Sales

The decrease in net sales for fiscal 2016 versus fiscal 2015 was the result of a 6% decrease in average selling prices, primarily due to the pass through of lower resin costs negatively affecting net sales by $70.4 million partially offset by a 3% increase in sales volume positively affecting net sales by $29.3 million. Fiscal 2016 also included a $4.5 million negative impact of foreign exchange relating to our Canadian operations.

Gross Profit

There was a $3.8 million increase in the LIFO reserve during fiscal 2016 versus a $26.6 million decrease in the LIFO reserve during fiscal 2015, representing an increase of $30.4 million year-over-year. Excluding the impact of the LIFO reserve change during fiscal 2016, gross profit increased $39.1 million primarily resulting from improved material margins and increased volumes sold. Fiscal 2016 also included a $0.7 million negative impact of foreign exchange relating to our Canadian operations.

Operating Expenses

Operating expenses increased $3.6 million during fiscal 2016 versus fiscal 2015 primarily due to $4.1 million of transaction costs associated with the proposed Integrated Mergers, a $1.7 million increase in the provision related to employee cash performance incentives and a $0.4 million increase in share-based compensation expense associated with our performance units, partially offset by lower fuel costs of $2.6 million during fiscal 2016 and a decrease in bad debt expense of $1.6 million primarily due to customers’ bankruptcy filings in fiscal 2015. Fiscal 2016 also included a $0.4 million positive impact of foreign exchange related to our Canadian operations.

(Loss) gain on sales of property, plant and equipment, net

Included in gain on sales of property, plant and equipment, net of $1.3 million for fiscal 2015 is a $1.2 million gain related to the sale of a warehouse in Texas.

 

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Interest Expense

Interest expense for fiscal 2016 increased $1.1 million as compared to the prior fiscal year primarily resulting from a call premium payment of $1.5 million due to the partial redemption of our 2019 notes and $0.6 million write-off of debt fees associated with the partial redemption of our 2019 notes partially offset by lower average borrowings on our credit facility resulting in a $0.7 million decrease in interest expense as compared to the prior fiscal year and a reduction of interest expense on our senior notes of $0.3 million due to the partial redemption of our 2019 notes.

Income Tax Provision

The provision for income taxes for fiscal 2016 was $17.7 million on income before the provision for income taxes of $46.5 million. The difference between the effective tax rate of 38.1% and the U.S. statutory tax rate of 35.0% primarily relates to a provision for state taxes in the United States, net of federal benefit (+2.8%), a true-up of prior year estimate in the United States (+0.7%), partially offset by permanent differences (-0.5%).

The provision for income taxes for fiscal 2015 was $15.4 million on income before the provision for income taxes of $44.2 million. The difference between the effective tax rate of 34.8% and the U.S. statutory tax rate of 35.0% primarily relates to permanent differences (-3.5%), partially offset by a provision for state taxes in the United States, net of federal benefit (+3.3%).

Key Operating Performance Indicator—Adjusted EBITDA

Management believes Adjusted EBITDA is a key operating performance indicator for the Company. Adjusted EBITDA for fiscal 2016, 2015 and 2014 was $112.8 million, $76.1 million and $46.1 million, respectively.

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, share-based compensation expense (income) and transaction costs associated with the proposed Integrated Mergers. 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, share-based compensation and transaction costs associated with the proposed Integrated Mergers. Furthermore, we use Adjusted EBITDA for business planning purposes and to evaluate and price potential acquisitions. The Company further emphasizes the importance of Adjusted EBITDA as an operating performance measure by utilizing a similarly defined metric as the sole performance measure in its annual bonus plan and performance unit program. In addition to its use by management, we also believe Adjusted EBITDA is a measure widely used by securities analysts, investors and others to evaluate the financial performance of our Company and other companies in the plastic films industry. Other companies may calculate Adjusted EBITDA differently, and therefore our Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

Adjusted EBITDA is not a measure of financial performance under U.S. generally accepted accounting principles (GAAP), and should not be considered in isolation or as an alternative to net income (loss), cash flows from operating activities and other measures determined in accordance with GAAP. Items excluded from Adjusted EBITDA are significant and necessary components to the operations of our business, and, therefore, Adjusted EBITDA should only be used as a supplemental measure of our operating performance.

 

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

 

     Fiscal 2016      Fiscal 2015     Fiscal 2014  
     (in thousands)      (in thousands)     (in thousands)  

Net income (loss)

   $ 28,802       $ 28,837      $ (5,506

Provision (benefit) for income taxes

     17,720         15,408        (3,934

Interest expense

     19,882         18,790        19,571   

Depreciation and amortization expense

     29,476         31,567        31,507   

Increase (decrease) in LIFO reserve

     3,835         (26,615     3,647   

Transaction costs associated with proposed mergers

     4,143                  

Other non-operating expense (income)

     103         (317     (270

Share-based compensation

     8,817         8,403        1,073   
  

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

   $ 112,778       $ 76,073      $ 46,088   
  

 

 

    

 

 

   

 

 

 

Fiscal 2015 Compared to Fiscal 2014

The following table presents selected financial data for fiscal 2015 and 2014 (dollars per pound sold is calculated by dividing the applicable consolidated statement of operations category by pounds sold in the period):

 

    For the Years Ended October 31,              
    2015     2014     %  increase
/(decrease)
of $
    $ increase/
(decrease)
 
    $     $ Per pound
sold
    $     $ Per pound
sold
     
    (in thousands, except for per pound data)  

Net sales

  $ 1,141,391      $ 1.22      $ 1,192,990      $ 1.26        (4.3 )%    $ (51,599

Gross profit

    181,662        0.19        121,905        0.13        49.0     59,757   

Operating expenses:

           

Delivery

    49,879        0.05        51,589        0.05        (3.3 )%      (1,710

Selling

    37,788        0.04        36,550        0.04        3.4     1,238   

General and administrative

    32,592        0.04        25,772        0.03        26.5     6,820   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total operating expenses

  $ 120,259      $ 0.13      $ 113,911      $ 0.12        5.6   $ 6,348   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Pounds sold

      939,049 lbs.          947,782 lbs.       

Net Sales

The decrease in net sales for fiscal 2015 versus fiscal 2014 was the result of a 3% decrease in average selling prices, primarily due to the pass through of lower resin costs negatively affecting net sales by $31.4 million combined with a 1% decrease in sales volume negatively affecting net sales by $10.7 million. The volume decrease primarily was attributed to volatility in the resin markets resulting in soft customer demand in certain of our stock product lines, customer bankruptcies, and the impact of exiting certain low-margin businesses during fiscal 2014. Fiscal 2015 also included a $9.5 million negative impact of foreign exchange relating to our Canadian operations.

Gross Profit

There was a $26.6 million decrease in the LIFO reserve during fiscal 2015 versus a $3.7 million increase in the LIFO reserve during fiscal 2014, representing a decrease of $30.3 million year-over-year. Excluding the impact of the LIFO reserve change during fiscal 2015 gross profit increased $29.5 million primarily resulting from improved material margins partially offset by higher manufacturing costs, including health costs and utility costs of $2.6 million, an increase in share-based

 

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compensation expense associated with our performance units of $1.7 million, an increase in the provision related to employee cash performance incentives of $1.5 million and an asset impairment charge of $1.2 million related to the poor performance of a new machine. Fiscal 2015 also included a $1.4 million negative impact of foreign exchange relating to our Canadian operations.

Operating Expenses

Operating expenses increased $6.3 million during fiscal 2015 versus fiscal 2014 primarily due to a $5.6 million increase in share-based compensation costs associated with our stock options and performance units and an increase in the provision related to employee cash performance incentives of $3.0 million partially offset by a decrease in delivery expenses of $1.3 million primarily due to lower fuel costs and lower volumes sold, a decrease of $0.5 million related to costs of maintaining our former corporate headquarters and $1.1 million positive impact of foreign exchange.    

Business Interruption Insurance Recovery

During the fiscal year 2013 relocation of equipment purchased from Transco in Quebec, Canada 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 other operating income in the consolidated statement of operations for the year ended October 31, 2014.

(Loss) gain on sales of property, plant and equipment, net

Included in gain on sales of property, plant and equipment, net of $1.3 million for fiscal 2015 is a $1.2 million gain related to the sale of a warehouse in Texas.

Interest Expense

Interest expense for fiscal 2015 decreased $0.8 million as compared to the prior fiscal year primarily resulting from lower average borrowings on our credit facility decreasing interest expense by $0.7 million and lower interest expense related to our capital lease obligations of $0.1 million as compared to the prior fiscal year.

Income Tax Provision

The provision for income taxes for fiscal 2015 was $15.4 million on income before the provision for income taxes of $44.2 million. The difference between the effective tax rate of 34.8% and the U.S. statutory tax rate of 35.0% primarily relates to permanent differences (-3.5%), partially offset by a provision for state taxes in the United States, net of federal benefit (+3.3%).

The benefit for income taxes for fiscal 2014 was $3.9 million on a loss before the benefit for income taxes of $9.4 million. The difference between the effective tax rate of 41.7% and the U.S. statutory tax rate of 35.0% primarily relates to a benefit for state taxes in the United States, net of federal benefit (+4.7%), and the differential in the U.S. and Canadian statutory rates (+2.9%), partially offset by foreign withholding taxes paid and accrued (-2.8%).

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

 

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continuously monitor our financial condition 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 October 31, 2016, we had a net debt position (current bank borrowings plus long term debt less cash and cash equivalents) of $132.8 million, compared with $193.3 million at the end of fiscal 2015. Availability under our credit facility and credit line available to our Canadian subsidiary for local currency borrowings was an aggregate of $145.2 million at October 31, 2016; however, certain provisions of the Merger Agreement currently restrict us from incurring more than $65 million thereunder in the ordinary course without the consent of Berry.

Our working capital amounted to $87.0 million at October 31, 2016 compared to $121.0 million at October 31, 2015. We used the LIFO method for determining the cost of approximately 89% of our total inventories at October 31, 2016. 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 $108.9 million and $139.1 million at October 31, 2016 and October 31, 2015, respectively. During the twelve months ended October 31, 2016, the LIFO reserve increased $3.8 million to $21.9 million primarily as a result of increased resin costs. Despite the likely negative effects on our results of operations and our financial condition during periods of rising inventory costs, we believe the use of LIFO maximizes our after tax cash flow from operations.

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 and dividends for at least the next 12 months; provided, such belief assumes we are a stand-alone company and we do not make any forward-looking statements regarding our liquidity following the consummation of the Integrated Mergers.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing of our operations for each of the past three fiscal years:

 

     For the Years Ended October 31,  
     2016      2015      2014  
     (in thousands)  

Total cash provided by (used in):

        

Operating activities

   $ 84,374       $ 70,483       $ 23,649   

Investing activities

     (15,913      (8,496      (26,390

Financing activities

     (84,773      (42,219      (8,835

Effect of exchange rate changes on cash

     (179      (468      (876
  

 

 

    

 

 

    

 

 

 

(Decrease) increase in cash and cash equivalents

   $ (16,491    $ 19,300       $ (12,452
  

 

 

    

 

 

    

 

 

 

 

Note: See consolidated statements of cash flows included in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K for additional information.

 

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Operating Activities

Our cash and cash equivalents were $3.7 million at October 31, 2016, as compared to $20.2 million at October 31, 2015. Cash provided by operating activities during fiscal 2016 was $84.4 million, which includes net income of $28.8 million adjusted for items to reconcile net income to cash provided by operating activities totaling $48.9 million primarily related to depreciation and amortization of $29.5 million, $8.8 million in share-based compensation, an increase in LIFO reserve of $3.8 million and a $1.9 million provision for deferred income taxes. Cash provided by operating activities includes a $4.1 million decrease in trade working capital, excluding the non-cash effects of LIFO, (accounts receivable plus inventories less accounts payable) primarily due to a reduction of inventory quantities on hand and lower sales in the month of October 2016 as compared to the month of October 2015, and a $2.7 million increase in accrued expenses primarily as a result of an increase in accrued expenses associated with our incentive payments to employees and an increase in accrued expenses due to the proposed Integrated Mergers.

Investing Activities

Net cash used in investing activities during fiscal year 2016 was $15.9 million resulting from capital expenditures during the period, primarily increasing capacity in our custom films and improving efficiency in our canliner businesses.

Financing Activities

Net cash used in financing activities during fiscal 2016 was $84.8 million, resulting primarily from the Company’s redemption of $75 million of the $200 million 8.25% senior notes due 2019 (plus a $1.5 million payment of a call premium), $3.8 million of cash dividends paid, $2.3 million in principal payments on capital lease obligations, $2.0 million in payments of withholding taxes related to our performance units, $0.9 million full and final payment of our Pennsylvania industrial loan and $0.5 million of fees paid and capitalized related to Amendment No. 2 to our credit facility.

Sources and Uses of Liquidity

Credit Facilities

We maintain a credit facility with Wells Fargo. On January 29, 2016, we entered into Amendment No. 2 to the credit facility that, among other things, extended the maturity date of the credit facility from February 21, 2017 to February 1, 2019. The maximum borrowing amount remains the same at $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. On September 13, 2016, we entered into Amendment No. 3 to the credit facility. Under Amendment No. 3 the agent and lenders consented to the redemption of up to $75 million aggregate principal amount of the 8.25% senior notes due 2019, together with accrued and unpaid interest and any premium thereon, and agreed to certain amendments to the credit facility to adjust certain permitted transaction baskets in connection with the redemption of the senior notes.

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 October 31, 2016 and October 31, 2015 under the credit facility was $141.5 million and $147.1 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 October 31, 2016 and October 31, 2015. Availability under the Canadian credit facility at October 31, 2016 and October 31, 2015 was $5.0 million Canadian dollars (US$3.7 million and US$3.8 million, respectively).

 

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Notwithstanding the availability under the credit facilities, certain provisions of the Merger Agreement currently restrict us from incurring more than $65 million in the ordinary course thereunder without the consent of Berry. Please refer to Note 8 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 October 31, 2016 were as follows:

 

For the Years Ended October 31,

   Borrowings(1)      Interest on Fixed
Rate Borrowings(2)
     Capital
Leases,
Including
Amounts
Representing
Interest
     Operating
Leases
     Total
Commitments
 
      (in thousands)  

2017

   $ 136       $ 10,412       $ 2,495       $ 8,081       $ 21,124   

2018

     141         10,406         2,479         6,901         19,927   

2019

     126,446         5,331         2,261         5,144         139,182   

2020

     151         84         469         3,665         4,369   

2021

     157         79         64         3,050         3,350   

Thereafter

     2,112         61                 6,148         8,321   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 129,143       $ 26,373       $ 7,768       $ 32,989       $ 196,273   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Borrowings include $125.0 million aggregate principal amount of 2019 notes, a $2.8 million ten-year mortgage note due August 2022 related to the purchase of the Company’s corporate headquarters and $1.3 million under our credit facility maturing on February 1, 2019. See Note 8 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:

Due to the anticipated timing of the consummation of the Integrated Mergers, the timing and amount of most capital expenditures incurred during fiscal 2017 will be determined by Berry following the consummation of the Integrated Mergers.

We expect to contribute $0.2 million during fiscal 2017 to fund the Canadian defined benefit plan and $0.1 million to fund the AEP Alabama Union Employees’ defined benefit plan. With regards to the U.S. 401(k) Savings Plan (“401(k) Plan”), we estimate contributing $3.5 million in cash in February 2017 to the 401(k) Plan effective for the 2016 year contributions.

We expect approximately 68,000 performance units to vest in January 2017 prior to the consummation of the Integrated Mergers, provided that each employee continues to be employed by the Company on the respective anniversary dates. Settlement of the units is based on the Company’s stock price on the anniversary date and will be settled at the employees’ option in cash, Company stock, or a combination thereof. Historically, a significant majority of performance units have been settled in cash. Assuming all units are settled in cash, the amount of expected cash that will be used to settle the 68,000 performance units expected to vest during fiscal 2017 would be $8.1 million, based on a stock price of $119.05 per common share of the Company, the closing price on the Nasdaq Global Select Market on January 11, 2017.

 

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The Merger Agreement provides for specified treatment of the outstanding options, restricted stock and performance units in connection with the consummation of the Integrated Mergers.

In connection with the Integrated Mergers, the Company must pay Merrill Lynch, Pierce, Fenner & Smith Incorporated, its financial advisor, a fee of approximately $11.5 million, $1.0 million of which was paid in connection with the delivery of its opinion with the remainder payable upon the successful completion of the Integrated Mergers.

If the Merger Agreement is terminated, in certain circumstances the Company may be required to pay Berry a termination fee of $20 million and/or reimbursement of its expenses of up to $5 million. See Item 1A, Risk Factors, “Risks Related to the Integrated Mergers—While the Merger Agreement is in effect, we are subject to restrictions on our business activities and our pursuit of strategic alternatives.

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, capital expenditures or capital resources.

Effects of Inflation

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

Critical Accounting Policies and Estimates

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 revenue recognition, customer rebates and incentives and allowance for doubtful accounts. 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.

We believe the following accounting policies are the most critical because they have the greatest impact on the presentation of our financial condition and results of operations.

Revenue Recognition. We recognize revenue when products are shipped and the customer takes ownership and assumes risk of loss, which generally occurs on the date of shipment, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed and determinable. Concurrently, we record reductions to revenue for customer rebate programs, returns, customer deductions, promotions or other incentive programs that are estimated using historical experience and current economic trends. Material differences may result in the amount and timing of net sales for any period if management makes different judgments or uses different estimates.

Accrued Customer Rebates. We offer various rebate programs to our customers that are individually negotiated and contain a variety of different terms and conditions. Certain rebates are calculated as flat percentages of purchases, while others include tiered volume incentives. Rebates may

 

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be paid monthly, quarterly, or annually. The calculation of the accrued rebate balance involves management estimates, especially where the terms of the rebate involve tiered volume levels that require estimates of expected annual sales. These provisions are based on estimates derived from current program requirements, estimated rebate period activity and historical experience.

Allowance for Doubtful Accounts. Management determines the allowance for doubtful accounts based on historical write-off experience and an evaluation of the likelihood of success in collecting specific customer receivables. We review our allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and potential for recovery is considered remote. In addition, we maintain allowances for customer returns, discounts and invoice pricing discrepancies, primarily based on historical experience. Actual results could differ from these estimates under different assumptions and may be affected by changes in general economic conditions.

New Accounting Pronouncements

Please refer to Note 2 of the consolidated financial statements for discussion on recently issued accounting pronouncements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rates

The fair value of our fixed interest rate debt varies with changes in interest rates. Generally, the fair value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. At October 31, 2016, the carrying value of our total debt was $136.5 million (without netting of $0.9 million unamortized senior note debt fees costs) of which $135.2 million was fixed rate debt (2019 notes, mortgage note and capital leases). As of October 31, 2016, the estimated fair value of our 2019 notes, which had a carrying value of $125.0 million (without netting of $0.9 million unamortized senior note debt fee costs) was $127.8 million. As of October 31, 2016, the carrying value of our mortgage note and capital leases was $10.2 million which approximates fair value because the interest rates on these debt instruments approximate market yields for similar debt instruments.

Floating rate debt at October 31, 2016 and October 31, 2015 totaled $1.3 million and zero, respectively. Based on the average floating rate debt outstanding during fiscal 2016 (our credit facility), a one-percent increase or decrease in the average interest rate during the period would have resulted in an immaterial change to interest expense for fiscal 2016.

Foreign Exchange

We enter into derivative financial instruments (principally foreign exchange forward contracts) 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.

 

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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 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.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements and accompanying schedule and related report of our independent registered public accounting firm are set forth in a separate section of this Form 10-K beginning on page 84 and are hereby incorporated by reference.

 

Report of Independent Registered Public Accounting Firm

     84   

Financial Statements:

  

Consolidated Balance Sheets as of October 31, 2016 and 2015

     86   

Consolidated Statements of Operations for the years ended October 31, 2016, 2015 and 2014

     87   

Consolidated Statements of Comprehensive Income (Loss) for the years ended October 31, 2016, 2015 and 2014

     88   

Consolidated Statements of Shareholders’ Equity for the years ended October 31, 2016, 2015 and 2014

     89   

Consolidated Statements of Cash Flows for the years ended October 31, 2016, 2015 and 2014

     90   

Notes to Consolidated Financial Statements

     91   

Financial Statement Schedule:

  

Schedule II: Valuation and Qualifying Accounts

     127   

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

 

ITEM 9A. 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 October 31, 2016, 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 October 31, 2016.

Management Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and Board; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Our management, including our Certifying Officers, recognizes that our internal control over financial reporting cannot prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. 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. Further, because of

 

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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. The design of any system of controls is based in part on 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.

Management, with the participation of the Certifying Officers, assessed our internal control over financial reporting as of October 31, 2016, the end of our fiscal year. Management based its assessment on criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 Framework). Based on this assessment, management has concluded that our internal control over financial reporting was effective as of October 31, 2016.

Our independent registered public accounting firm, KPMG LLP, independently assessed the effectiveness of our internal control over financial reporting as stated in its report included herein.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

None

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Officers

The executive officers and directors of the Company as of January 17, 2017 are as follows:

 

Name

   Age     

Title

J. Brendan Barba      75       Chairman and Chief Executive Officer
Paul M. Feeney      74       Executive Vice President, Finance and Chief Financial Officer and Director
John J. Powers      52       President, Chief Operating Officer and Director
Paul C. Vegliante      51       Executive Vice President, Operations
David J. Cron      62       Executive Vice President, Manufacturing
Robert W. Cron      69       Executive Vice President, Sales and Marketing
Lawrence R. Noll      68       Vice President, Tax and Administration
James B. Rafferty      64       Vice President and Treasurer
Linda N. Guerrera      49       Vice President, Finance, and Controller
Robert T. Bell      73       Director
Ira M. Belsky      64       Director
Richard E. Davis      74       Director
Frank P. Gallagher      73       Director
Lee C. Stewart      68       Director

J. Brendan Barba has served as Chief Executive Officer and a director of the Company since he co-founded the Company in 1970 and has been Chairman of the Board since 1985. From 1970 to November 2015 he served as President. Mr. Barba has led the Company as its principal executive officer and a director for over 46 years and as Chairman for over 31 years. Mr. Barba has a unique perspective and understanding of the Company’s business, culture and history, having led the Company through many economic cycles, global expansion and curtailment, acquisitions and dispositions, and other key operational initiatives. His day-to-day leadership of the Company gives him critical insights into the Company’s operations, strategy and competition, and he facilitates the Board’s ability to perform its oversight function. Throughout his career at the Company, he has demonstrated strong technical, marketing, strategic, and operational expertise and he possesses in-depth knowledge of the plastic packaging films industry on a global basis.

Paul M. Feeney has served as Executive Vice President, Finance, Chief Financial Officer and a director of the Company since 1988. From 1980 to 1988, he served as Vice President and Treasurer of Witco Corporation, a chemical products corporation.

Mr. Feeney has led the Company as its principal financial officer and a director for over 28 years. Mr. Feeney has a unique perspective and understanding of the Company’s business, culture and history, having led the Company through many economic cycles, global expansion and curtailment, acquisitions and dispositions, and other key operational initiatives. His day-to-day leadership of the Company gives him critical insights into the Company’s financial performance, operations and strategy, and he facilitates the Board’s ability to perform its oversight function. Throughout his career at the Company, he has demonstrated strong financial reporting, finance, accounting, strategic, and operational expertise and he possesses in-depth knowledge of the plastic packaging films industry on a global basis.

John J. Powers has served as President and Chief Operating Officer of the Company since November 2015. He has been a director of the Company since November 2013. Mr. Powers served as the Company’s Executive Vice President, Sales and Marketing from 1996 to 2015. Previously, he served the Company as Vice President, Custom Film Division from 1993 to 1996 and various sales positions from 1989 to 1992.

 

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Mr. Powers has been part of the Company’s executive leadership team for over 21 years and has been with the Company for over 28 years. Therefore, Mr. Powers has a unique perspective and understanding of the Company’s business, culture and history. Throughout his career at the Company, he has demonstrated strong expertise regarding sales, marketing and operations generally, and he possesses in-depth knowledge of the plastic packaging films industry on a global basis.

Paul C. Vegliante has been our Executive Vice President, Operations since December 1999. Prior thereto, he was our Vice President, Operations since June 1997 and held various other positions with us since 1994.

David J. Cron has been our Executive Vice President, Manufacturing since June 2016. Previously, he was our Senior Vice President, Manufacturing from November 2011 to June 2016, and held various administrative and manufacturing positions with us since 1976.

Robert W. Cron has been our Executive Vice President, Sales and Marketing since November 2015. Previously, he served as Executive Vice President of National Accounts (2001-2015), Vice President Industrial Division (1996-2001), Executive Vice President Sales (1989-1996) and various other sales positions since 1970.

Lawrence R. Noll has been our Vice President, Tax and Administration since April 2007. Previously, he served as Vice President, Controller and Secretary (2005-2007), Vice President and Controller (1996-2005), Secretary (1993-1998), Vice President, Finance (1993-1996), and Controller (1980-1993). He also served as a director of the Company from 1993 to 2004 and from February 2005 to November 2013.

James B. Rafferty has been our Vice President and Treasurer since November 1996. Previously, he was our Secretary from April 2007 to June 2011 and our Assistant Treasurer from July 1996 to November 1996. From 1989 to 1995, Mr. Rafferty was Director of Treasury Operations at Borden, Inc.

Linda N. Guerrera has been our Vice President, Finance, and Controller since April 2016. Previously, she was our Vice President and Controller from April 2007 to April 2016, Director of Financial Reporting from September 2006 to April 2007, and our Assistant Controller—International Operations from October 1996 to September 2006. Prior to joining the Company, Ms. Guerrera was a manager at Arthur Andersen LLP in New York City.

Robert T. Bell has served as a director of the Company since 2006. Mr. Bell has been an independent financial consultant since 1999. Mr. Bell has served as the Member/Manager of Foundation Consultants LLC since 2002. He served as the Executive Director of the Charles B. Wang International Foundation from 1999 to June 30, 2016, and the Executive Director of the Charles B. Wang Foundation from 1988 to 1999 (merged into International in 2012). From 1965 to 1998, he worked as a Certified Public Accountant for Mendelsohn, Kary, Bell & Natoli, LLP, including as a Partner (1973—1998) and as Managing Partner (1986—1996). Mr. Bell has been a member of the Board of Directors of a number of public charities and private entities throughout his career, including currently with Smile Train Inc. (public charity; serves as Chair on the Audit Committee), the Memorial Day Nursery of Paterson, Inc. (private entity; serves as Chair on the Finance Committee and member of the Compensation Committee), the New York Islanders Children’s Foundation (public charity) and the Charles B. Wang Community Health Center (public charity; serves as Finance Committee Chair and on Audit Committee).

Mr. Bell’s long tenure as a certified public accountant, as well as his civic leadership roles, has provided him with significant experience and expertise on accounting and financial reporting matters, including for public companies. Based on the foregoing, the Board has determined that Mr. Bell is a financial expert in accordance with SEC rules. As the executive director of significant foundations, he also has broad-based senior leadership, global and finance expertise.

 

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Ira M. Belsky has served as a director of the Company since 2011. Mr. Belsky is a seasoned executive, attorney and investor. From 1999 through June 2002, he was Executive Vice President, Business Development and Legal Affairs, and a member of the Executive Committee of FreeRide.com L.L.C., an internet-based media business. Prior to that, he served as special counsel to Time Warner Inc. From 1996 through April 1998, Mr. Belsky served as Senior Vice President, General Counsel and Secretary of Six Flags Entertainment Corporation, a leading national theme park company. Mr. Belsky practiced law with the international law firm O’Melveny & Myers in Los Angeles and New York, where his practice was focused on securities, mergers and acquisitions, and general corporate affairs. Mr. Belsky is a graduate of Stanford Law School and the University of Pennsylvania.

Mr. Belsky has a broad background in legal, governance, financial reporting and general corporate and finance matters, and he possesses extensive senior leadership skills from his service as in-house and outside general counsel to numerous companies as well as various executive management positions. In addition, as a securities attorney, he was involved with numerous public offerings and mergers and acquisitions, and the representation of public reporting companies.

Richard E. Davis has served as a director of the Company since 2004. Mr. Davis has been the Vice President, Finance and Chief Financial Officer of Glatt Air Techniques, Inc., a supplier of solids processing technology to pharmaceutical and manufacturing organizations, since 1988. Since 1988, Mr. Davis also has served as the Vice President of Nortec Development Associates Inc. (an affiliate of Glatt Air Techniques Inc.), providing contract research services. From 1985 to 1988, he was Vice President, Finance and Chief Financial Officer of The GMI Group, a conglomerate with computer graphics, advertising, audio/visual presentations, music and book publishing operations.

Mr. Davis has a broad background in accounting and financial reporting, and he possesses extensive senior leadership and global expertise, based on his service as the principal financial officer at multinational companies, as an auditor for three years and as a teacher of accounting courses at the college and graduate school level. Based on the foregoing, the Board has determined that Mr. Davis is a financial expert in accordance with SEC rules. Mr. Davis has extensive knowledge of the manufacturing and pharmaceutical industries, two key industries served by the Company, based on his employment with Glatt Air Techniques. He also has significant knowledge of the Company based on his years of service as a director of the Company.

Frank P. Gallagher has served as a director of the Company since 2005. Since 2010, Mr. Gallagher has served as the Chairman and CEO of Aadyn Technology LLC, a privately held company that manufactures LED lights for the entertainment industry. From 1996 to 2003, Mr. Gallagher was a director of Coach USA, a transportation company, and also served as its Chairman of the Board (1999—2003), its CEO (2000—2001), and its Executive Vice President and Chief Operating Officer (1998—1999). Mr. Gallagher served as a director of Stagecoach Holding PLC, a transportation company from Perth, Scotland, from 2000 to 2001. From 1985 to 1998, he was the President of Community Coach, a transportation company. Mr. Gallagher is currently a director of ABC Company, a private entity.

Mr. Gallagher has a broad background in strategic and operational planning, and he possesses extensive senior leadership and board leadership expertise, based on his prior employment and board positions. Mr. Gallagher also has extensive knowledge of the transportation industry, a key industry served by the Company and a critical component of the Company’s operations.

Lee C. Stewart has served as a director of the Company since 1996. Mr. Stewart has been an independent financial consultant since March 2001. He served as Executive Vice President and Chief Financial Officer of Foamex International, Inc., a manufacturer of polyurethane products, from March to May 2001. From 1996 to 2001, he was Vice President of Union Carbide Corporation, a manufacturer of petrochemicals, where he was responsible for various Treasury and Finance functions. Prior to such time, Mr. Stewart was an investment banker for over 25 years, most recently with Bear Stearns & Co.,

 

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Inc. for over 10 years. Mr. Stewart has a significant number of years of experience as a director of public companies, including currently one other company besides AEP. Since 2002, he has been a director of P.H. Glatfelter Company, an NYSE-listed company that is a global manufacturer of specialty papers and engineering products. He currently serves as Chair of the Compensation Committee and is a member of the Finance Committee. Previously, he was a director of ITC Holdings Corp., an NYSE-listed company that is an electrical transmission company, from 2005 until his resignation in October 2016 in connection with the sale of ITC Holdings. Prior to his resignation, he served as the Lead Director of the Board for ITC, and served on the Audit and Finance Committee and the Operations Committee. From May 2013 to October 2014, Mr. Stewart was a director of Momentive Performance Materials Inc., a specialty chemical company in silicones and advanced materials. Momentive filed a voluntary bankruptcy petition in April 2014 and it emerged successfully from bankruptcy in October 2014, at which point Mr. Stewart resigned from the Board.

Mr. Stewart has extensive knowledge of finance, capital raising and mergers and acquisitions based on his experience as a treasury officer, an investment banker and a financial consultant. Mr. Stewart also has significant public company board experience, from which he has expertise in finance, financial reporting, accounting, corporate governance, compensation, risk management, manufacturing and global matters. Based on the foregoing, the Board has determined that Mr. Stewart is a financial expert in accordance with SEC rules. In addition, Mr. Stewart has extensive knowledge of the key industries served by the Company based on his employment and board experience. He also has significant knowledge of the Company based on his 18 years of service as a director of the Company.

Family Relationships between Directors and Executive Officers

Mr. Powers and Mr. Vegliante are sons-in-law of Mr. Barba. Further, David Cron and Robert Cron are brothers and are the first cousins of Mr. Barba. Additionally, Ms. Guerrera is the daughter-in-law of Mr. Feeney.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors, our executive officers and persons who beneficially own more than 10% of a registered class of our equity securities (“insiders”) to file reports with the SEC regarding their pecuniary interest in our equity securities and any changes thereto, and to furnish copies of these reports to us. Based on the Company’s review of the insiders’ forms furnished to the Company or filed with the SEC, no insider failed to file on a timely basis a Section 16(a) report in fiscal 2016 except as set forth below.

Robert Cron, one of our executive officers, failed to timely file two transactions on Form 4 during fiscal 2016. On January 5, 2016 and January 13, 2016, shares of common stock were withheld to satisfy his tax withholding obligation related to the vesting of earned performance units, and these transactions were reported on Form 4 on January 26, 2016.

Mr. Barba, one of our directors and executive officers, failed to timely file the acquisition of 36,031 shares of common stock held in certificate form on Form 4 when acquired in 1996. This transaction was reported on Form 4 on June 20, 2016.

KSA Capital Management, LLC, one of our beneficial owners of more than 10% of our common stock, failed to timely file one transaction on Form 4 during fiscal 2016. On December 3, 2015, 38,536 shares of our common stock were distributed in-kind from a private investment fund managed by KSA Capital Management, LLC to an investor in partial satisfaction of a withdrawal from the private investment fund. This transaction was reported on Form 4 on February 12, 2016.

Code of Conduct

The Board has adopted a Code of Conduct, which sets out the basic principles to guide the actions and decisions of our employees, directors and officers, including our principal executive officer,

 

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principal financial officer and principal accounting officer. The Code of Conduct addresses, among other things, ethical principles, insider trading, conflicts of interest, compliance with laws and confidentiality. The Code of Conduct can be found on the Investor Relations section of our website at www.aepinc.com. Any amendments to the Code of Conduct, or any waivers that are required to be disclosed by the rules of either the SEC or Nasdaq, will be posted on our website in the Investor Relations section.

Audit Committee

Robert T. Bell, Ira M. Belsky, Richard E. Davis and Lee C. Stewart are members of the Audit Committee. The Board has affirmatively determined, after considering all of the relevant facts and circumstances that each member of the Audit Committee is independent under the applicable rules of the Nasdaq Global Select Market (“Nasdaq”). The Board has further determined that three Audit Committee members, Messrs. Bell, Davis and Stewart, qualify as “audit committee financial experts” in accordance with SEC rules.

 

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

The Compensation Committee (the “Committee”), composed entirely of independent directors, administers the executive compensation program of the Company, including reviewing annually all compensation decisions relating to the Company’s executive officers. This section of the Form 10-K explains how the Company’s compensation programs are designed and operate in practice with respect to the Chief Executive Officer, the Chief Financial Officer and the other executive officers named in the “Summary Compensation Table for Fiscal 2016” (the “named executive officers”).

“Target annual compensation” referred to herein consists of base salary, a target cash bonus (short-term incentive) in accordance with the MIP, target performance unit grants (long-term incentive) and a company car allowance.

Compensation matters relevant to the Integrated Mergers are not addressed in this Item 11. Stockholders are encouraged to review the Company’s prospectus delivered in connection with the special meeting of stockholders to approve, among other things, the Integrated Mergers, for such information.

Summary of Fiscal 2016 Target and Earned Annual Compensation

Components of Target Annual Compensation

CEO. In fiscal 2016, the CEO’s target annual compensation was comprised of a base salary and company car allowance (24% of target annual compensation), a target annual cash incentive bonus (18%) and target long-term equity incentive compensation (58%). Therefore, 76% of the CEO’s target annual compensation in fiscal 2016 was “at risk” performance-based compensation.

Other Named Executive Officers. In fiscal 2016, the target annual compensation of the other named executive officers was comprised of a base salary and company car allowance (an average of 52% of target annual compensation), a target annual cash incentive bonus (28%) and target long-term equity incentive compensation (20%). Therefore, on average, 48% of the target annual compensation of the other named executive officers in fiscal 2016 was “at risk” performance-based compensation.

See “—Compensation Philosophy, Program Objectives, and Key Features” for a discussion of how each component of compensation is intended to satisfy one or more of the Committee’s compensation objectives.

 

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Fiscal 2016 Target Annual Compensation Determinations

The Compensation Committee generally reviewed and determined target annual compensation of named executive officers for fiscal 2016 in October 2015 through January 2016.

Messrs. Barba, Feeney, Powers and Vegliante. Prior to fiscal 2015, for fiscal years in which the Committee did not commission a benchmarking study, the Committee generally increased target annual compensation of named executive officers by an amount corresponding to the average salary change for all of the Company’s salaried and non-bargaining employees for such fiscal year, typically 3%. In particular, base salaries increased by 3%, the target cash bonus (in dollars) increased by 3% and the target dollar value of performance units increased by approximately 3%. In fiscal 2015, although the average salary change for all of the Company’s salaried and non-bargaining employees was 3%, the Committee departed from historical practice and determined not to increase the base salaries of Messrs. Barba, Feeney, Powers and Vegliante. In lieu of a base salary increase and a resulting increase in the dollar value of the target cash bonus for such named executive officers, the Committee determined to increase the target dollar value of their performance units by slightly more than historical practice, thereby increasing the already significant pay-for-performance focus of the compensation program. As a result, fiscal 2015 target annual compensation increased by a range of approximately 4% to 5%, as compared to fiscal 2014 target annual compensation, for Messrs. Barba, Feeney, Powers and Vegliante.

In fiscal 2016, the Committee determined to increase target annual compensation for Messrs. Barba, Feeney, Powers and Vegliante as if they had received an increase of 3% in each of fiscal 2015 and fiscal 2016 in lieu of the compensation program instituted for fiscal 2015. In furtherance thereof, base salaries increased by 3%, the target cash bonus (in dollars) increased by 3% and the change in the target dollar value of performance units varied from a decrease of 3% to an increase of 3%.

In addition, in connection with Mr. Powers’ promotion to President and Chief Operating Officer in November 2015, the Committee reviewed market data and determined to further increase Mr. Power’s compensation over a two-year transition period as he undertook increasing responsibilities in his new role, including oversight of various Company divisions. In November 2015, Mr. Powers’ target annual compensation increased from $792,000 in fiscal 2015 to $900,800 in fiscal 2016, including a base salary increase of $45,500 to $394,800, an increase in his target bonus from 50% to 60% of his base salary, and a $1,100 increase in the target dollar value of performance units to $269,100. In April 2016, upon Mr. Powers’ assumption of additional division oversight responsibilities, the Committee further increased his base salary to $415,000, which resulted in a corresponding increase in his target bonus (in dollars). Therefore, Mr. Powers’ target annual compensation for fiscal 2016 increased by approximately 17%.

David Cron. David Cron was promoted to Executive Vice President, Manufacturing and became an executive officer in June 2016. Therefore, David Cron’s target annual compensation in fiscal 2016 generally was determined by management, although the Committee did approve his target dollar value of performance units based on historical market data.

See “—Process for Making Compensation Determinations—Target Annual Compensation” for a description of how the components of target annual compensation generally are determined. The Committee also reviewed subjective factors for each named executive officer, although subjective factors did not result in material changes to the target annual compensation.

Fiscal 2016 Pay-For-Performance

The establishment of performance metrics generally is focused on the Company and its management team as a collective unit, to foster teamwork and maximize the Company’s performance. Management runs the Company to maximize Adjusted EBITDA, and the Company emphasizes this through its performance-based plans. Substantially the same definition of Adjusted EBITDA (“Adjusted

 

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EBITDA (Performance Plans)”) is used to determine actual Company performance in the MIP and performance unit programs and both programs utilize one-year performance targets. See “—Adjusted EBITDA (Performance Plans) Definition” for the definition of Adjusted EBITDA (Performance Plans) and further discussion of why the Committee uses one performance measure for its incentive programs.

Fiscal 2016 Target Performance. Fiscal 2016 target performance goals corresponded to the Committee’s reasonable judgment of what would be a good outcome for the Company for fiscal 2016 based on information known at the time of such determination. Despite volatile pricing in the resin markets and otherwise challenging market conditions, the Committee and management believed it was important to incentivize employees by setting target performance goals at levels significantly above the prior fiscal year’s actual and target performance.

 

   

Fiscal 2016 MIP Earnings Target. The fiscal 2016 MIP Earnings Target was $87.2 million, a 16.4% increase from fiscal 2015 Adjusted EBITDA (Performance Plans) for purposes of the MIP of $74.9 million. The 2016 MIP Earnings Target also represented a 20.8% increase from the fiscal 2015 MIP Earnings Target of $72.2 million.

 

   

Fiscal 2016 Performance Unit Earnings Target. The fiscal 2016 Performance Unit Earnings Target was $76.6 million, a 2.3% increase from fiscal 2015 Adjusted EBITDA (Performance Plans) for purposes of the performance unit program of $74.9 million. The fiscal 2016 Performance Unit Earnings Target represented a 28.5% increase from the fiscal 2015 Performance Unit Earnings Target of $59.6 million.

Fiscal 2016 Actual Performance. The following table presents actual Adjusted EBITDA (Performance Plans) for purposes of the MIP and the performance unit program as compared to the threshold, target and maximum earnings performance goals for fiscal 2016. It also provides the percentage of MIP target bonus and percentage of performance units earned for fiscal 2016, which corresponded to each named executive officer earning 200% of the target cash bonus and 100% of the performance unit grant.

 

     Fiscal 2016 Adjusted EBITDA (Performance Plans)  
     Performance Goals***      Actual Performance  
     Threshold*      Target      Maximum**                
            (in millions)             (in millions)      (% of Target)  

MIP

   $ 69.8       $ 87.2       $ 104.6       $ 110.1         126.3

Performance Units

   $ 61.3       $ 76.6       $ 76.6       $ 110.1         143.7

 

* For MIP, represents 80% of Target performance and equates to 50% of target bonus earned. For performance units, represents 80% of Target performance and equates to 80% of target performance units earned.

 

** For MIP, represents 120% of Target performance and equates to 200% of target bonus earned. For performance units, represents 100% of Target performance and equates to 100% of target performance units earned.

 

*** There is a linear increase in the cash bonus and performance units earned between threshold, target and maximum amounts.

For further discussion of our annual cash incentive bonus plan and our long-term equity incentive compensation, see “—Fiscal 2016 Compensation Determinations—Annual Cash Incentive Bonus (MIP)” and “—Fiscal 2016 Compensation Determinations—Long-Term Equity Incentive Compensation.”

 

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Say-On-Pay Stockholder Vote for 2016 Annual Meeting of Stockholders

The Company received 99% approval for its say-on-pay proposal at the 2016 annual meeting of stockholders. The Committee and the Board discussed the results of such stockholder vote in 2016. Given the high level of stockholder support, the Committee did not materially revise the Company’s compensation policies and decisions relating to the named executive officers as a result of such vote.

Compensation Philosophy, Program Objectives, and Key Features

The compensation program for named executive officers is designed to:

 

   

provide competitive pay commensurate with job scope and responsibilities in order to attract, retain and motivate key executives critical to the Company’s operations;

 

   

reward superior Company performance, including the achievement of financial and strategic goals, and to a lesser extent individual performance;

 

   

foster individual growth within the Company and long-term commitment to the Company; and

 

   

align the long-term interests of executives with those of stockholders through performance-based and long-term compensation awards and stock ownership guidelines.

 

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The following table sets forth how each component of compensation is intended to satisfy one or more of the Committee’s compensation objectives.

 

     Component   

Primary Purpose(s)

  

Key Features

FIXED    Base Salary and
Car Allowance
  

     Retains and attracts employees in a competitive market

 

     Preserves an employee’s commitment during downturns in the plastic films industry and/or equity markets

 

     Reflects experience, responsibilities, anticipated individual growth and other subjective factors

  

     Determinations are based on employment agreement, the Adjusted Survey Target, promotions and to a lesser extent an evaluation of the individual’s experience and current performance. Also impacted by changes generally for salaried and non-bargaining employees

AT-RISK    Annual

Cash Incentive

Bonus

  

     Motivates and rewards achievement of annual performance measure

 

     Retains and attracts employees for short term

  

     Target bonus for each employee is a percentage of base salary

 

     Earned bonus is 50% to 200% of target bonus if performance at least satisfies the threshold performance goal

 

     Performance measure is Adjusted EBITDA (Performance Plans) compared to MIP Earnings Target. Target performance is set higher than the Company’s budget

   Performance

Units

  

     Motivate and reward achievement of annual performance measure

 

     Earned awards together with stock ownership guidelines ensure direct alignment with stockholders with focus on medium- and long-term fundamentals, with value of award at-risk based on trading price of common stock at vesting dates

  

     Earned performance units are 80% to 100% of the target award if performance at least satisfies the threshold performance goal

 

     Performance measure is Adjusted EBITDA (Performance Plans) compared to Performance Unit Earnings Target. Target performance is equal to the Company’s budget

 

     Earned units vest pro rata on the first through fifth anniversaries of the grant date. Holders can elect common stock or equivalent cash once vested

 

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Adjusted EBITDA (Performance Plans) Definition

Since fiscal 1997, the Committee has utilized the achievement of Adjusted EBITDA (Performance Plans) compared to the MIP Earnings Target as the applicable performance measure under the MIP. Since fiscal 2008, performance units are earned based on the achievement of Adjusted EBITDA (Performance Plans) compared to the Performance Unit Earnings Target. Beginning in fiscal 2010, substantially the same definition of Adjusted EBITDA (Performance Plans) has been used to calculate Company performance for both the MIP and performance unit programs. The adjustments in Adjusted EBITDA (Performance Plans) may be different than the adjustments disclosed for financial reporting purposes in this Form 10-K and otherwise.

Use of One Performance Measure for Incentive Programs. The Committee utilizes Adjusted EBITDA (Performance Plans) because it believes Adjusted EBITDA (Performance Plans) is an important measure of operating performance. Specifically, this measure focuses on the Company’s core operating results by removing the impact of the Company’s capital structure (interest expense from its outstanding debt), asset base (depreciation and amortization), foreign currency effects, tax consequences, specified non-core operating items, specified non-operating items, specified non-cash items and specified extraordinary items.

The Committee believes the single measure of Adjusted EBITDA is appropriate to utilize in its incentive programs. First, the Company is managed for Adjusted EBITDA and employees understand the performance measure and its components based on the long history of its utilization. In addition, there are key differences in the programs that provide materially different incentives to the participants. The Performance Unit Earnings Target corresponds to budgeted Adjusted EBITDA (Performance Plans), whereas the MIP Earnings Target represents budgeted Adjusted EBTIDA plus an additional dollar amount (recommended by management based on subjective factors, often materially higher than budget) intended to further motivate participants for the achievement of specific strategic or financial goals. Further, all participants in the performance unit program are subject to the Adjusted EBITDA measure for the Company, whereas most non-executive officer MIP participants are subject to only that portion of the Adjusted EBITDA performance target that corresponds to that portion of the Company’s business the performance of which a participant can reasonably influence. Also, earned cash bonuses under the MIP are paid to participants in January subsequent to fiscal year end, whereas performance unit awards are subject to significant market risk due to the five-year pro rata vesting from the grant date for earned performance units.

Defined. Adjusted EBITDA (Performance Plans) is defined as net income before interest expense, income taxes, depreciation and amortization, discontinued operations, non-core business operating income (expense), net, annual change in LIFO reserve, gain or loss on disposal of property, plant and equipment, non-operating income (expense) and share-based compensation expense (income), all as adjusted to remove foreign exchange effect. Further, the Committee has approved certain procedures in calculating Adjusted EBITDA (Performance Plans):

 

   

extraordinary items outside the ordinary course of business, such as a gain (provision) for the sale or acquisition of assets or a business, will be excluded from Adjusted EBITDA (Performance Plans) to the extent not included in the MIP Earnings Target or Performance Unit Earnings Target (the “Earnings Targets”); provided, however, extraordinary items will be included in Adjusted EBITDA (Performance Plans) to the extent of cash received;

 

   

accounting policy changes required by the SEC or the U.S. Financial Accounting Standards Board that are approved by such parties following the approval of the Earnings Targets will not be utilized to calculate Adjusted EBITDA (Performance Plans);

 

   

inter-unit management fees in effect on the date the Earnings Targets are approved by the Committee will be included in Adjusted EBTIDA (Performance Plans);

 

   

inter-unit royalty fees in effect on the date the Earnings Targets are approved by the Committee will be excluded from Adjusted EBTIDA (Performance Plans); and

 

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vendor pricing credits will be included in Adjusted EBITDA (Performance Plans) in the fiscal year in which credits are earned, provided that the Company provides the Committee with sufficient and quantifiable support relating to such credit amounts if such credits are not included in the fiscal year-end financial statements, and provided further that any vendor pricing credits included in Adjusted EBITDA (Performance Plans) for a fiscal year will be excluded from Adjusted EBITDA (Performance Plans) in the following fiscal year.

Process for Making Compensation Determinations

Target Annual Compensation

In making annual compensation determinations for the named executive officers, the Committee primarily focuses on target annual compensation.

As discussed below in “—Benchmarking Data—Survey Target,” the Committee benchmarked fiscal 2013 compensation against the survey data from a study by Mercer to establish the target annual compensation for each named executive officer for fiscal 2013. The Committee primarily relied upon the 50th percentile target annual compensation from the survey data (the “Survey Target,” and as adjusted in subsequent years to take into account annual increases in target annual compensation, the “Adjusted Survey Target”). The Committee believed that the overall executive compensation program was sufficiently meeting its objectives and therefore determined not to engage Mercer to perform a comprehensive executive compensation review in subsequent fiscal years, except that Mercer was engaged to provide updated survey data for Mr. Powers for fiscal 2016 in connection with his promotion to President and Chief Operating Officer; references to Survey Target and Adjusted Survey Target herein include the fiscal 2016 update for Mr. Powers.

In establishing the amounts allocated to each component of target annual compensation, the Committee initially finalizes all compensation other than the target dollar value of the performance units. Base salaries and target cash bonuses (set forth as percentages of base salaries) are based on the Adjusted Survey Target and, to a lesser extent, subjective factors. The car allowance generally remains a constant dollar amount each fiscal year. Upon finalizing the foregoing components of target annual compensation, the Committee calculates a target dollar value for performance unit grants equal to the difference between the Adjusted Survey Target and the target annual compensation otherwise allocated to each named executive officer for the applicable fiscal year. The number of performance units actually granted is equal to the target dollar value divided by the closing price of the Company’s common stock on Nasdaq on the grant date, which occurs in the beginning of the next calendar year at the first regularly scheduled Committee meeting.

The named executive officers will earn their target annual compensation only to the extent target performance measures are achieved. To the extent target performance measures are not achieved or are exceeded, the named executive officers will earn compensation below or above the Adjusted Survey Target, respectively. The Committee generally does not utilize its discretion to provide additional compensation.

Compensation Differences Among Named Executive Officers

The Company does not have a fixed internal pay equity scale but rather determines the compensation for each role based on scope of responsibility and market rates of compensation. Benchmarking in establishing the Survey Target and the Adjusted Survey Target reflects the job responsibilities and positions of the named executive officers of the Company. The job responsibilities and positions of the named executive officers were, as of the date of Mercer’s 2013 study, and continued to be through fiscal 2016, as set forth below, with the exception of John Powers (addressed in Mercer’s 2016 update).

 

   

Mr. Barba, Chairman, President and Chief Executive Officer, led the management of the Company across all departments and was primarily responsible for the operations of the Company, and also served as the leader of the Board.

 

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Mr. Feeney, Executive Vice President, Finance and Chief Financial Officer, was primarily responsible for the financial division of the Company; he shared significant responsibilities, leadership and decision-making authority with Mr. Barba, and served as a director on the Board.

 

   

Mr. Powers was promoted to President and Chief Operating Officer in November 2015, and became directly responsible for oversight of certain Company divisions and continued to report directly to Mr. Barba. Mr. Powers also served as a director of the Board.

 

   

David Cron was our Senior Vice President, Manufacturing when fiscal 2016 compensation determinations were made, and was responsible for a key operating division of the Company and reported to Mr. Barba. In June 2016, he was promoted to Executive Vice President, Manufacturing.

 

   

Mr. Vegliante, Executive Vice President, Operations, was responsible for a key operating division of the Company and reported to Mr. Powers beginning in fiscal 2016.

Advisors Utilized in Determination of Executive Compensation

Management. In determining the compensation of executive officers, the Committee receives significant input from Messrs. Barba and Feeney, who have a combined 74 years’ experience in their executive officer roles with the Company and have the most involvement in, and knowledge of, the Company’s business goals, strategies and performance, the overall effectiveness of the management team and each person’s individual contribution to the Company’s performance. For each named executive officer, the Committee is provided a compensation recommendation as well as information regarding the individual’s experience, current performance, potential for advancement and other subjective factors. Messrs. Barba and Feeney also provide recommendations for the performance metrics to be utilized in the performance-based compensation programs, the appropriate performance targets and analyses of whether such performance targets have been achieved (including recommended adjustments). The Committee retains the discretion to modify the recommendations of Messrs. Barba and Feeney and reviews such recommendations for their reasonableness based on individual and Company performance as well as market information. Messrs. Barba and Feeney do not provide input with respect to their own respective compensation.

The Committee works with management to set the agenda for Committee meetings, and Mr. Feeney is invited regularly to attend such meetings. The Committee also meets regularly in executive session to discuss compensation issues generally outside the presence of management, as well as to review the performance and determine the compensation of Messrs. Barba and Feeney.

Third-Party Consultants. The Committee engaged Mercer in the fourth quarter of fiscal 2015 to perform a compensation benchmarking assessment and market analysis with respect to the fiscal 2016 target annual compensation of Mr. Powers in connection with his promotion. The Committee previously engaged Mercer to conduct a review with respect to the fiscal 2013 executive compensation program for all executive officers at such time. As discussed below in “—Benchmarking Data—Survey Target,” the Committee continued to benchmark target annual compensation for fiscal 2016 with the survey data from Mercer’s 2013 study, except with respect to Mr. Powers.

Benchmarking Data—Survey Target

In connection with the fiscal 2013 executive compensation review, Mercer initially provided analyses using a peer group and survey data. The Committee determined to benchmark fiscal 2013 compensation against the survey data because the survey data included a significantly larger sample size of companies that aligned with the Company’s industry and business, and the survey data had better job position matches given the unique responsibilities of the Company’s executives. The survey analyses for base salaries and bonus targets were based on the average data from two surveys, (x) Mercer’s 2011 US report for companies with revenues of 0.5x to 2x of the Company’s revenues and

 

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(y) Towers Watson’s 2011 US report for companies with revenues of 0.5x to 2.5x of the Company’s revenues, in each case only including non-durable manufacturing companies (or all manufacturing companies if non-durable manufacturing data was not available). The survey analysis for target long-term equity incentives was derived from Mercer’s proprietary interpolation tool using companies in the public, non-durable manufacturing industry. Survey data participants were not available to the Committee and therefore the Company cannot disclose the names of such participants.

In connection with the fiscal 2016 executive compensation review of Mr. Powers, Mercer provided an analysis using survey data of chief operating officers. The survey data for base salaries and bonus targets were based on the average data from two surveys, (x) Mercer’s 2015 US Executive Remuneration Suite survey and (y) Towers Watson Data Services’ 2015 CSR Top Management Compensation Survey—US, in each case only including non-durable manufacturing companies. The survey data for target long-term equity incentives was derived from Mercer’s proprietary interpolation tool using companies in the public, non-durable manufacturing industry. Survey data participants were not available to the Committee and therefore the Company cannot disclose the names of such participants.

Fiscal 2016 Compensation Determinations

Base Salary

Each named executive officer receives a base salary paid in cash. The employment agreements for each named executive officer established a base salary as of the agreement’s execution date, with annual increases guaranteed to be at least equal to the percentage increase in the Consumer Price Index for all Urban Consumers for the New York-Northeastern New Jersey metropolitan area as published by the Bureau of Labor & Statistics for the twelve months ended on the September 30th immediately prior to the applicable fiscal year. For the twelve months ended October 31, 2016, the Consumer Price Index for all Urban Consumers for the New York-Northeastern New Jersey metropolitan area increased by 1.2%. The Committee may increase base salaries further at its discretion.

The following table sets forth the base salaries approved for the named executive officers in fiscal 2016 and 2015, effective November 1 of each such fiscal year except as set forth below.

 

Name

   Fiscal 2016
($)
    Fiscal 2015
($)
 

J. Brendan Barba

     987,500        958,700   

Paul M. Feeney

     477,700        463,800   

John J. Powers

     406,583 (1)      349,300   

David J. Cron.

     343,200        333,200   

Paul C. Vegliante

     326,800        317,300   

 

  (1) In November 2015, Mr. Powers’ base salary increased to $394,800 in connection with his promotion. In April 2016, upon Mr. Powers’ assumption of additional division oversight responsibilities, the Committee further increased his base salary to $415,000.

Annual Cash Incentive Bonus (MIP)

Performance Target. Each named executive officer participates in the MIP, pursuant to which eligible employees earn a cash bonus upon the satisfaction of one or more annual performance targets established by the Committee. Since 1997, the Committee has utilized the achievement of Adjusted EBITDA (Performance Plans) compared to the MIP Earnings Target as the applicable performance measure under the MIP. The performance goal for each participant is dependent upon job classification, with the intent to capture that portion of the Company’s business the performance of which a participant can reasonably influence. Since fiscal 2009, the performance goal for all of the named executive officers has been based on the performance of the Company as a whole.

 

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Target Cash Bonus. The target cash bonus for each employee is set forth as a percentage of base salary and the earned cash bonus is 0% to 200% of such target based on Adjusted EBITDA (Performance Plans) compared to the MIP Earnings Target, as set forth in the table below.

 

Adjusted EBITDA (Performance Plans)

   Degree of  Performance
Achieved
   Percent of MIP Target Bonus
Earned
 

Less than 80% of MIP Earnings Target

   Below Threshold      0

80% of MIP Earnings Target

   Threshold      50

100% of MIP Earnings Target

   Target      100

120% or more of MIP Earnings Target

   Maximum      200

There is a linear increase in the target bonus between such threshold, target and maximum amounts. Reductions (but not increases) of such bonuses are at the sole discretion of the Committee and certain management. For fiscal 2016, the Committee confirmed the reasonableness of the target bonus, as a percentage of base salary, for Messrs. Feeney and Vegliante that was established or confirmed in connection with Mercer’s 2013 study; however, the value of such target cash bonuses increased by 3% due to the corresponding increases in base salaries. In fiscal 2016, the Committee revised the target bonuses of Mr. Powers from 50% to 60%, and Mr. Barba from 80% to 75%, as a percentage of base salary, due to the transition of certain oversight responsibilities from Mr. Barba to Mr. Powers.

Fiscal 2016-Earned. The following table sets forth summary information regarding the fiscal 2016 MIP. Each named executive officer earned 200% of the target bonus.

 

     MIP Target Bonus      MIP Bonus  Earned
$
 

Name

   % of Base Salary      $     

J. Brendan Barba

     75         740,625         1,481,250   

Paul M. Feeney

     65         310,505         621,010   

John J. Powers

     60         243,950         487,900   

David J. Cron

     50         171,600         343,200   

Paul C. Vegliante

     50         163,400         326,800   

Long-Term Equity Incentive Compensation

Performance Target. The Committee has granted long-term equity incentive compensation to a limited number of employees, including the named executive officers, in the form of performance units since fiscal 2006. The Committee currently grants equity awards to Company employees under the 2013 Omnibus Incentive Plan. Prior to such time and including all grants made to the named executive officers in fiscal 2013, the Committee granted such awards under the 2005 Stock Option Plan.

Since fiscal 2008, performance units are earned based on the achievement of Adjusted EBITDA (Performance Plans) compared to the Performance Unit Earnings Target, as set forth in the table below.

 

Adjusted EBITDA (Performance Plans)

   Degree of Performance
Achieved
   Percent of
Performance Units
Earned
 

Less than 80% of Performance Unit Earnings Target

   Below Threshold      0

80% of Performance Unit Earnings Target

   Threshold      80

100% or more of Performance Unit Earnings Target

   Target/Maximum      100

If the Company’s Adjusted EBITDA (Performance Plans) is between 80% and less than 100% of the Performance Unit Earnings Target, such employee forfeits such number of performance units equal to (A) the performance units granted multiplied by (B) the percentage Adjusted EBITDA (Performance Plans) is less than the Performance Unit Earnings Target.

 

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Earned performance units vest pro rata on the first through fifth anniversaries of the grant date and therefore are subject to significant market risk over the vesting period. Holders have no rights as stockholders with respect to specified units until vesting.

Performance Unit Target. See “—Process for Making Compensation Determinations—Target Annual Compensation” for information as to how the Committee determines the number of performance units granted.

Fiscal 2016-Earned. The table below sets forth for each named executive officer the number of performance units granted and earned in fiscal 2016 under the 2013 Omnibus Incentive Plan. None of the performance units were forfeited for fiscal 2016 grants.

 

Name

   Performance  Units
Granted
     Performance  Units
Earned
 

J. Brendan Barba

     31,995         31,995   

Paul M. Feeney

     3,954         3,954   

John J. Powers

     3,612         3,612   

David J. Cron

     1,022         1,022   

Paul C. Vegliante

     869         869   

Post-Employment Benefits

Each named executive officer has an employment agreement with the Company, which includes specified severance benefits. In general, cash severance is only paid upon termination by the Company without cause, or upon termination by the executive for good reason or upon termination within 30 days following a change in control. The change in control provision is a “double trigger,” which means that two events must occur for payments to be made (a change in control and, within 30 days subsequent thereto, the termination of employment); this is consistent with the purpose of the employment agreements, to provide employees or their heirs with a guaranteed level of financial protection upon employment loss. The change in control protection also ensures that executives can advise the Board regarding a potential transaction without being unduly influenced by personal considerations, such as fear of the economic consequences of losing a job as a result of such change in control. Further, it is imperative to provide competitive benefits relative to peer companies and to diminish the inevitable distraction by virtue of personal uncertainties and risks created by a pending or threatened change in control or termination without cause. Finally, the Committee believes that these agreements are beneficial to the Company because, in consideration for these severance arrangements, the executives agree to non-competition and non-solicitation covenants for a period of time following such termination of employment.

Additionally, certain of the Company’s equity compensation plans and arrangements, including the 2005 Stock Option Plan and the 2013 Omnibus Incentive Plan, permit (but do not require) the Committee to accelerate the earnings and vesting of securities granted thereunder upon specified terminations of employment. See “Named Executive Officer Compensation Tables—Potential Payments Upon Termination or Change in Control” for further information on post-employment benefits.

Other Equity-Related Policies

Executive Stock Ownership Guidelines

The Company has had stock ownership guidelines for executive officers for many years. The Nominating and Corporate Governance Committee most recently revised the guidelines in conjunction with revisions to the executive compensation program in fiscal 2013 and as a result of the significant increase in the Company’s common stock price since the prior guidelines were first implemented in 2010. The current guidelines are available on the Investor Relations section of our website at www.aepinc.com.

 

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The executive stock ownership guidelines in effect currently and throughout fiscal 2016 require executive officers to own a minimum number of shares of the Company’s common stock equal to a multiple of such person’s base salary in effect on November 1, 2012 (or such later date he or she becomes an executive under the guidelines) divided by the share price of the Company’s common stock. The applicable multiples of base salaries are set forth in the table below. The share price is computed as the average of the closing price of the Company’s common stock within 30 consecutive days ending October 31, 2012 (or a later 30-day period reasonably close to the date such person becomes an executive under the guidelines). The minimum number of shares required changes upon a promotion, but is not impacted by changes in base salaries subsequent to becoming subject to the current guidelines.

 

Position

   Value of Common
  Stock to be Owned
 

Chief Executive Officer and President

     4x base salary   

Chief Financial Officer and Executive Vice Presidents

     2x base salary   

Other Executive Officers

     1x base salary   

The guidelines set forth how to value the stock held for purposes of compliance testing. The guidelines also set forth how indirect and/or derivative securities, as well as securities held by specified family members, are taken into account in determining the satisfaction of the guidelines, and the ramifications of noncompliance.

All of our named executive officers are in compliance with the current guidelines as of the date hereof, except David Cron due to recently being appointed as an executive officer and therefore has five years to comply. Further, no executive officer has pledged any shares of the Company’s common stock.

Timing and Pricing of Share-Based Grants

The Committee and the Board do not coordinate the timing of share-based grants with the release of material non-public information. Performance units were granted to the named executive officers consistent with historical practice at the first regular meeting of the Committee during the calendar year, and remain subject to both the satisfaction of a one-year Adjusted EBITDA performance measure and five-year pro rata vesting from the grant date. The Committee generally establishes dates for regularly scheduled meetings at least a year in advance.

In accordance with the 2013 Omnibus Incentive Plan, the exercise price of each stock option is the closing price for the Company’s common stock on the date approved by the Committee to be the grant date (which date is not earlier than the date the Committee approved such grant).

Policy on Pledging and Hedging Company Securities

In addition to the restrictions set forth in SEC regulations, the Company’s insider trading policy prohibits the hedging of Company securities and significantly limits any pledging of Company securities. In particular, the policy prohibits directors, executive officers and other employees, with respect to the Company’s securities, from trading on a short-term basis (open market purchases and sales within six months), short sales, trading in puts, calls, options or other derivative securities, or trading otherwise for short-term gain or speculative purposes. In addition, the policy prohibits pledging of Company securities or holding Company securities in a margin account, except in situations and on conditions pre-approved by the Chief Financial Officer. At a minimum, such person must have the financial capacity to repay the applicable loan without resort to the margin or pledged securities. No Company securities beneficially owned by a director or executive officer have been pledged or subject to a margin account at any time in the last five fiscal years.

 

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Tax and Accounting Implications

Deductibility of Executive Compensation

The Committee has reviewed the Company’s compensation programs and policies in light of Section 162(m) of the Code, which provides that annual compensation in excess of $1 million paid to a company’s chief executive officer and the three other highest compensated executive officers (excluding the chief financial officer) is not deductible by the company for federal income tax purposes, subject to specified exemptions (the most significant of which is certain performance-based compensation). Amounts payable under the MIP, which was last approved by our stockholders at the 2013 annual meeting, are intended to qualify as performance-based compensation in accordance with Section 162(m) of the Code.

Incentive stock options, non-qualified stock options and stock appreciation rights granted under our 2005 Stock Option Plan and 2013 Omnibus Incentive Plan qualify for the performance-based compensation exemption from the $1 million deduction limitation of Section 162(m) of the Code. Performance shares and performance units granted under our 2005 Stock Option Plan and 2013 Omnibus Incentive Plan may also qualify for the performance-based compensation exemption if, among other things, the Company obtains stockholder approval of the material terms of the performance goals applicable to performance shares and performance units every five years. Such stockholder approval was last received with respect to the 2005 Stock Option Plan at the 2012 annual meeting. The stockholders approved the 2013 Omnibus Incentive Plan, including for purposes of Section 162(m) of the Code, at the 2013 annual meeting.

To maintain flexibility in compensating the Company’s executive officers to meet a variety of objectives, the Committee does not have a policy that all executive compensation must be tax-deductible.

Nonqualified Deferred Compensation

Section 409A of the Code provides that amounts deferred under nonqualified deferred compensation arrangements will be included in an employee’s income when vested, as well as be subject to penalties and interest, unless certain requirements are complied with. The Company’s applicable employment and severance arrangements and benefit plans, as well as the 2013 Omnibus Incentive Plan, are intended to comply with or be exempt from the requirements of Section 409A.

Change in Control Payments

Section 280G of the Code disallows a company’s tax deduction for “excess parachute payments.” For this purpose, parachute payments generally are defined as payments to specified persons that are contingent upon a change in control in an amount equal to or greater than three times the person’s base amount (the five-year average Form W-2 compensation). The excess parachute payments, which are nondeductible, equal the amount of the parachute payments less the base amount. Additionally, Code Section 4999 imposes a 20% excise tax on any person who receives excess parachute payments. The Company does not pay tax gross-ups with respect to such excise tax.

All of the named executive officers currently have employment agreements which entitle them to payments upon termination of their employment following a change in control of the Company that may qualify as “excess parachute payments.” The Company’s 2005 Stock Option Plan and 2013 Omnibus Incentive Plan also entitle participants to payments in connection with a change in control that may result in excess parachute payments.

 

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Named Executive Officer Compensation Tables

Summary Compensation Table for Fiscal 2016

The table below summarizes the total compensation paid or earned by the named executive officers in fiscal 2016, 2015 and 2014.

 

Name and Principal Position

   Year(1)      Salary
($)
     Bonus
($)
     Stock
Awards
($)(2)
     Non-Equity
Incentive Plan
Compensation
($)
     All Other
Compensation
($)(3)
     Total ($)  

J. Brendan Barba

     2016         987,500                 2,383,628         1,481,250         27,930         4,880,308   

Chairman and Chief Executive Officer

     2015         958,700                 2,355,284         909,995         27,726         4,251,705   
     2014         958,700                 2,195,865                 27,476         3,182,041   

Paul M. Feeney

     2016         477,700                 294,573         621,010         25,063         1,418,346   

Executive Vice President, Finance and Chief Financial Officer

     2015         463,800                 303,897         357,693         24,835         1,150,225   
     2014         463,800                 254,659                 24,585         743,044   
                    

John J. Powers

     2016         406,583                 269,094         498,000         24,941         1,198,618   

President and Chief Operating Officer

     2015         349,300                 267,957         207,222         24,630         849,110   
     2014         349,300                 232,380                 24,380         606,060   

David J. Cron

     2016         343,200                 76,139         343,200         24,835         787,374   

Executive Vice President, Manufacturing

                    
                    

Paul C. Vegliante

     2016         326,800                 64,741         326,800         24,806         743,147   

Executive Vice President, Operations

     2015         317,300                 73,885         188,238         24,572         603,995   
     2014         317,300                 46,455                 24,322         388,077   

 

(1) Fiscal year: November 1—October 31.

 

(2) The amounts reported reflect the grant date fair value (excluding the effect of estimated forfeitures). All awards in the Stock Awards column for 2016 relate to performance units granted in January 2016 under the 2013 Omnibus Incentive Plan. The grant date fair value of each performance unit assumes all units are earned in full and is calculated as the closing price of a share of common stock as of the grant date. Due to the cash settlement feature, the performance units are liability classified on the Company’s balance sheets and the (income) expense is remeasured at each balance sheet date based on the market value of the Company’s common stock, although no remeasurements are reflected herein.

 

(3) Represents a car allowance ($13,000 for Mr. Barba and $11,000 each for Messrs. Feeney, Powers, Vegliante and Cron), amounts contributed by the Company to such person’s account in the 401(k) Savings Plan ($13,250 for each executive officer), life insurance premiums and accidental death and dismemberment insurance premiums.

Narrative Discussion of Summary Compensation Table for Fiscal 2016

Executive Officer Promotions in Fiscal 2016. In November 2015, Mr. Powers was appointed as President and Chief Operating Officer. Mr. Powers had a base salary of $394,800 from November 2015 to April 2016, and his base salary was further increased to $415,000 in April 2016.

In June 2016, David Cron was promoted to Executive Vice President, Manufacturing and became an executive officer of the Company. Therefore, the table does not include David Cron’s compensation for fiscal 2014 and 2015.

 

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Employment Agreements. See “—Potential Payments Upon Termination or Change in Control” for a description of the material terms of the employment agreements of the named executive officers.

Stock Awards. The Compensation Committee provides long-term equity incentive compensation to the named executive officers in the form of performance units. Each performance unit represents the right to receive, upon vesting and the satisfaction of any required withholding obligation, either one share of the Company’s common stock or the corresponding cash value of such stock or a combination of shares and cash value (at the employee’s option at the time of vesting). Actual fiscal 2016 Adjusted EBITDA (Performance Plans) was $110.1 million for purposes of the performance unit program, which represents 143.7% of the fiscal 2016 Performance Unit Earnings Target. This resulted in 100% of the performance units being earned and none of the performance units being forfeited for fiscal 2016. In fiscal 2015, the Company achieved 125.7% of the fiscal 2015 Performance Unit Earnings Target, which resulted in 100% of the performance units being earned and none of the performance units being forfeited for fiscal 2015. In fiscal 2014, the Company did not achieve at least 80% of the Performance Unit Earnings Target, and therefore all of the performance units were forfeited in fiscal 2014.

Non-Equity Incentive Plan Compensation. Actual fiscal 2016 Adjusted EBITDA (Performance Plans) was $110.1 million for purposes of the MIP, which represents 126.3% of the fiscal 2016 MIP Earnings Target, which corresponded to a payment of 200% of the target cash bonus of each named executive officer in fiscal 2016.

The Company achieved 103.7% of the fiscal 2015 MIP Earnings Target, which corresponded to a payment of 118.6% of the target cash bonus of each named executive officer in fiscal 2015. The Company did not achieve at least 80% of the MIP Earnings Target in fiscal 2014, and therefore no bonuses were earned by the named executive officers in fiscal 2014.

Grants of Plan-Based Awards in Fiscal 2016

The following table provides information about equity and non-equity awards granted to the named executive officers in fiscal 2016.

 

          

 

Estimated Possible Payouts Under
Non-Equity Incentive Plan Awards(1)

   

 

Estimated Possible Payouts Under
Equity Incentive Plan Awards(2)

    Grant Date
Fair Value
of Stock
and
Option
Awards
($)(3)
 

Name

  Grant Date       Threshold  
($)
      Target  
($)
      Maximum  
($)
    Threshold
(#)
    Target
(#)
    Maximum
(#)
   

J. Brendan Barba

    N/A        370,313        740,625        1,481,250                               
    01/07/2016                             25,596        31,995        31,995        2,383,628   

Paul M. Feeney

    N/A        155,253        310,505        621,010                               
    01/07/2016                             3,163        3,954        3,954        294,573   

John J. Powers

    N/A        124,500        249,000        498,000                               
    01/07/2016                             2,890        3,612        3,612        269,094   

David J. Cron

    N/A        85,800        171,600        343,200                               
    01/07/2016                             818        1,022        1,022        76,139   

Paul C. Vegliante

    N/A        81,700        163,400        326,800                               
    01/07/2016                             695        869        869        64,741   

 

(1) Relates to the possible cash bonus payouts under the fiscal 2016 MIP.

 

(2) Relates to the performance units granted, subject to forfeiture, under the 2013 Omnibus Incentive Plan.

 

(3) The Company assumed that the target/maximum amount of performance units would be earned in determining the grant date fair value. Each performance unit had a grant date fair value of $74.50, which was the closing price of a share of common stock on the grant date. See Note 2 to the Summary Compensation Table.

 

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Narrative Discussion of Grants of Plan-Based Awards in Fiscal 2016 Table

MIP. The target cash bonuses of the named executive officers were subject to the satisfaction of Adjusted EBITDA (Performance Plans) of the Company. Target bonuses are set forth as percentages of base salaries and the earned bonus is 0% to 200% of such targets based on fiscal 2016 Adjusted EBITDA (Performance Plans) compared to the MIP Earnings Target. The threshold amount of 50% of the target bonuses is based on achievement of 80% of the MIP Earnings Target, the target amount of 100% of the target bonuses is based on achievement of 100% of the MIP Earnings Target, and the maximum amount of 200% of the target bonuses is based on the achievement of 120% or more of the MIP Earnings Target, with a linear increase in the target bonuses between such threshold, target and maximum amounts. The Company achieved 126.3% of the MIP Earnings Target in fiscal 2016, which corresponded to a payment of 200% of the target bonus of the named executive officers.

Performance Units. Each performance unit represents the right to receive, upon the achievement of specified performance goals and vesting criteria and the satisfaction of any required withholding obligation, either one share of the Company’s common stock or the corresponding cash value of such stock or a combination of shares and cash value (at the employee’s option on each vesting date). The earned performance units vest in five equal installments on the first through fifth anniversaries of the grant date, provided the person continues to be employed by the Company on such respective dates. The threshold amount of 80% of the performance units is based on Adjusted EBITDA (Performance Plans) of 80% of the Performance Unit Earnings Target, and the target and maximum amount of 100% of the performance units is based on Adjusted EBITDA (Performance Plans) of 100% or more of the Performance Unit Earnings Target, with a linear increase between the threshold and target/maximum amounts. All performance units granted in fiscal 2016 were earned since actual fiscal 2016 Adjusted EBITDA (Performance Plans) was 143.7% of the fiscal 2016 Performance Unit Earnings Target.

 

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Outstanding Equity Awards at October 31, 2016

The following table presents information on the unvested performance units held by the named executive officers as of October 31, 2016. As of October 31, 2016, no named executive officer held any unexercised stock options.

 

             Stock Awards  

Name

   Grant Date(1)      Number of Shares or
Units of Stock
That Have Not
Vested
(#)
     Market Value of
Shares  or Units of
Stock That Have
Not Vested

($)(2)
 

J. Brendan Barba

     01/05/2012         7,094         777,148   
     01/07/2013         13,297         1,456,686   
     01/07/2015         33,816         3,704,543   
     01/07/2016         31,995         3,505,052   

Paul M. Feeney

     01/05/2012         1,345         147,345   
     01/07/2013         1,540         168,707   
     01/07/2015         4,364         478,076   
     01/07/2016         3,954         433,161   

John J. Powers

     01/05/2012         1,123         123,025   
     01/07/2013         1,405         153,918   
     01/07/2015         3,848         421,548   
     01/07/2016         3,612         395,695   

David J. Cron

     01/05/2012         215         23,553   
     01/07/2013         400         43,820   
     01/07/2015         1,231         134,856   
     01/07/2016         1,022         111,960   

Paul C. Vegliante

     01/05/2012         187         20,486   
     01/07/2013         280         30,674   
     01/07/2015         1,061         116,233   
     01/07/2016         869         95,199   

 

(1) The performance units vest in five equal installments on the first through fifth anniversaries of the grant date. All performance units granted in fiscal 2014 were forfeited due to the Company’s failure to satisfy the threshold performance measure.

 

(2) Based on the closing price of our common stock on Nasdaq on October 31, 2016, which was $109.55.

Option Exercises and Stock Vested in Fiscal 2016

The following table provides information on the vesting of earned performance units in fiscal 2016. The number of shares acquired and the value realized for each award excludes the payment of any fees, commissions or taxes. No named executive officer exercised any stock options during fiscal 2016.

 

      Stock Awards(1)  

Name

   Number of Shares
Acquired  on Vesting
(#)
     Value Realized  on
Vesting
($)
 

J. Brendan Barba

     29,694         2,287,085   

Paul M. Feeney

     4,657         358,007   

John J. Powers

     3,982         306,164   

David J. Cron

     945         72,979   

Paul C. Vegliante

     815         63,032   

 

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  (1) The value realized is based on the number of performance units received on the vesting date multiplied by the closing price of our common stock on Nasdaq on the vesting date. If Nasdaq is closed on the vesting date, the closing price on the preceding business day is used. For all vesting in fiscal 2016, the named executive officers elected to receive cash in lieu of shares, as permitted under the award agreements.

Potential Payments Upon Termination or Change in Control

The following section describes potential payments and benefits to the named executive officers under the Company’s compensation and benefit plans and arrangements upon termination of employment or a change in control of the Company as of October 31, 2016. All of the named executive officers have employment agreements with the Company as of October 31, 2016, and certain of the Company’s benefit plans and arrangements contain provisions regarding acceleration of vesting and payment upon specified events.

AEP Industries Inc. 2005 Stock Option Plan

The Compensation Committee retains discretionary authority at any time, including immediately prior to or upon a change in control, to accelerate the exercisability of any award.

Performance Units. The earned performance units will immediately vest in the event of (A) the death of an employee, (B) the permanent disability of an employee (within the meaning of the Code) or (C) a termination of employment due to a transaction (or series of transactions) that results in the disposition of any asset, division, subsidiary, business unit, product line or group of the Company or any of its affiliates.

In the event of a Change of Control (as defined in the Plan) or immediately prior to a Change of Control, the Company may, in its complete discretion as set forth in the Plan, cause all unvested performance units to become immediately vested; provided, the Company elect to exercise such discretion during the calendar year in which the Change of Control occurs.

In the case of any other termination, any unvested performance units will be forfeited.

A “change in control” is defined in the Plan as the occurrence of any one of the following conditions:

 

   

any person or group becomes the beneficial owner of 20% or more of the voting power of the Company, except for those persons in control as of the Effective Date (undefined term; SEC filings note effective date of Plan as January 1, 2005), any person acting on behalf of the Company in a public equity distribution or a trustee or other fiduciary under an employee benefit plan of the Company;

 

   

as a result of, or in connection with, any tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing, the persons who were directors of the Company prior to the transaction cease to be a majority of the Board of the Company or any successor to the Company or its assets; or

 

   

at any time (A) the Company consolidates with or merges with any other person and the Company is not the continuing or surviving corporation, (B) any person consolidates with or merges with the Company, the Company is the continuing or surviving corporation, and in connection therewith, all or part of the outstanding stock of the Company is changed into or exchanged for stock or other securities of any other person, cash or other property, (C) the Company is party to a statutory share exchange with any other person after which the Company is a subsidiary of any other person, or (D) the Company sells or otherwise transfers 50% or more of the assets or earning power of the Company and its subsidiaries, taken as a whole, to any person.

 

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AEP Industries Inc. 2013 Omnibus Incentive Plan

The Compensation Committee retains discretionary authority at any time, including immediately prior to or upon a change in control, to accelerate the exercisability of any award or the end of a performance period.

Performance Units. The earned performance units will vest (A) immediately, in the event of an employee’s death; (B) in the Compensation Committee’s discretion, in the event of an employee’s disability; and (C) in the Compensation Committee’s discretion with respect to the pro rata portion of the award that is earned based on the Company’s actual performance as of the end of the fiscal year, in the event of an employee’s retirement or termination by the Company without cause. If the events specified in (A), (B) or (C) occur before the end of the fiscal year in which the initial grant was made, the Committee may, in its discretion, waive all or a portion of the performance conditions and determine that the employee has earned all or a lesser portion of the performance units subject to the award. In the case of any termination other than upon death, disability or retirement or termination by the Company without cause, any unearned or unvested performance units will be forfeited.

In the event of a Change in Control or immediately prior to a Change in Control, the Committee may, in its discretion as provided in the Plan, cause all performance units granted not then vested to become immediately vested, provided that it must elect such discretion during the calendar year in which the Change in Control occurs. If a Change in Control occurs before the end of the fiscal year in which the grant was made, for purposes of determining the Adjusted Grant Amount for such participant, year-to-date Adjusted EBITDA as of the end of the fiscal quarter immediately preceding the date of such event shall be annualized and compared to Forecasted Adjusted EBITDA for such fiscal year, in lieu of actual Adjusted EBITDA as described in the award agreement. If the Change in Control occurs after the end of the fiscal year in which the grant was made, the Adjusted Grant Amount for such Participant shall be determined in accordance with Section 2(b) of the award agreement.

A “Change in Control” is defined in the Plan as the occurrence of any one of the following conditions:

 

   

any person or group becomes the beneficial owner of 30% or more of the voting power of the Company, except for (for this subjection only) by J. Brendan Barba and his issue (or any of their respective descendants, heirs, beneficiaries or donees and any entity owned by such persons), any acquisition directly from the Company or by the Company, any acquisition by any employee benefit plan (or related trust) that is sponsored or maintained by the Company or an affiliate of the Company, or any transaction that falls under the exception in bullet #3;

 

   

as transaction from which the persons who were directors of the Company prior to the transaction cease to be a majority of the Board of the Company or any successor to the Company or its assets; or

 

   

consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company, a sale or disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries, unless (i) the beneficial owners of the voting securities immediately prior to such transaction beneficially own more than 50% of the voting power of the resulting entity after such transaction, (ii) no person or group (excluding any corporation resulting from the transaction or any employee benefit plan or trust resulting from the transaction) beneficially owns 30% or more of the voting power of the Company, and (iii) at least a majority of the Board resulting from such transaction were members of the incumbent Board at the time of the execution of the initial agreement or the action of the Board providing for such transaction.

If a Change in Control is a payment trigger and not merely a vesting trigger, the Change in Control must also constitute a change in control event for purposes of Section 409A of the Code.

 

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Under the 2013 Omnibus Incentive Plan, if the aggregate payments and benefits under all compensation arrangements provided to an executive constitute “parachute payments” subject to the excise tax imposed by section 4999 of the Code (the “Excise Tax”), then the payments and benefits payable under all compensation arrangements will be either (i) delivered in full or (ii) delivered to such lesser amount as would result in no portion of the amounts payable under the 2013 Omnibus Incentive Plan being subject to the Excise Tax, whichever results in the receipt by the executive on an after-tax basis of the greatest amount.

AEP Industries Inc. 2016 Management Incentive Plan

If an employee is terminated during the plan period:

 

   

due to the employee’s voluntary termination, including retirement, no bonus will be earned by the employee;

 

   

due to the employee’s involuntary termination as a result of job elimination or reorganization, the bonus will be earned and paid, if the MIP Earnings Target is achieved, on a pro rata basis as of the termination date;

 

   

due to the employee’s involuntary termination for other reason, including but not limited to termination due to unsatisfactory performance or other cause, no bonus will be earned by the employee; and

 

   

due to death, the bonus will be earned and paid, if the MIP Earnings Target is achieved, on a pro rata basis as of the termination date.

If any employee is disabled for more than 30 days during the plan period, then the bonus may only be earned for fiscal quarters in which the employee worked more than 60 days.

The payment of pro rata bonuses will be made only if the applicable performance measure is satisfied for the applicable year.

Employment Agreements

The employment agreements, effective November 2004 (or June 2016 for David Cron), provided for an initial term of three years, and are extended for successive one-year periods unless either party gives sufficient notice.

The employment agreements established a base salary as of November 2004 (or, for David Cron, June 2016) with annual increases guaranteed to be at least equal to the percentage increase in the Consumer Price Index for all Urban Consumers for the New York-Northeastern New Jersey metropolitan area as published by the Bureau of Labor Statistics for the twelve-month period ended on the September 30th immediately prior to the applicable fiscal year. The Compensation Committee may increase base salaries further at its discretion.

The named executive officers are also entitled to an annual bonus pursuant to the MIP. Grants of share-based compensation awards are determined by the Board or Compensation Committee, in their sole discretion. The named executive officers are entitled to coverage under all employee pension and compensation programs, plans and practices that are available generally to the Company’s senior executives.

Termination Due to Death or Disability, By Company For Cause or By Executive Without Good Reason. If the named executive officer’s employment is terminated by reason of death or disability, by the Company for cause or by the executive without good reason, the executive will receive:

 

   

earned but unpaid base salary through the termination date (payable in accordance with ordinary payroll practices);

 

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earned but unpaid bonus for the prior fiscal year (payable at the same time payment is made to participants employed through the end of the fiscal year);

 

   

if other than for cause, a pro rata portion of the bonus for the current fiscal year (calculated in the manner set forth in the MIP and payable at the same time payment is made to participants employed through the end of the fiscal year);

 

   

if due to death or disability, payment for any accrued and unused vacation; and

 

   

the continuation of benefits through the termination date, or in cases of death or disability, in accordance with the terms of the Company’s plans and policies.

The named executive officer’s employment will terminate immediately upon death. If the named executive officer has a disability during the employment period, the Company may terminate such employee by giving at least 30 days written notice of such termination. Disability is defined as:

 

   

if the person has elected coverage under the Company’s long-term disability plan, the person’s inability to perform the duties and obligations required by the job by reason of any medically determined physical or mental impairment, as determined in accordance with the provisions of the long-term disability coverage of the Company’s plan; or

 

   

if the person has not elected coverage under the Company’s long-term disability plan, any medically determined physical or mental impairment by the Compensation Committee or the Company’s insurers, and acceptable to such executive, that prevents such person from performing the duties and obligations required by such person’s job for more than 90 days during any 180-day consecutive period.

“Cause” is defined as:

 

   

the commission of a crime of moral turpitude or a felony involving financial misconduct, moral turpitude or which has resulted, or reasonably may result, in adverse publicity regarding such executive or the Company or economic injury to the Company;

 

   

a dishonest or willful act or omission that has resulted, or reasonably may result, in adverse publicity regarding such executive or the Company or demonstrable and serious economic injury to the Company; or

 

   

a material breach of the employment agreement or any other agreement between such executive and the Company or any of its subsidiaries or affiliates (other than as a result of a disability or other factors outside such person’s control), after notice and a reasonable opportunity to cure, if cure is possible.

“Good reason” is defined as:

 

   

any material breach by the Company of the employment agreement;

 

   

a significant diminution in the responsibilities or authority of such person which are materially inconsistent with such person’s position, except for an insubstantial and inadvertent diminution that is remedied promptly after notice or if such person is terminated for cause or disability; or

 

   

a significant diminution in base salary and bonus, except for general compensation reductions not limited to any particular person.

Further, the executive must notify the Company of the event qualifying for a “good reason” termination, and the Company must have failed to cure such event within 15 days, in the case of a material breach of the employment agreement, or within 30 days for any other reason.

Termination By Company Other than for Cause or by Executive with Good Reason or Subsequent to Change in Control (and not due to Death or Disability). If the named executive officer’s

 

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employment is terminated by the Company other than for cause, or by the executive for good reason or within 30 days subsequent to a change in control, and in either case is not due to death or disability, the executive will receive:

 

   

severance payments equal to two times the sum of such executive’s (A) annual base salary in effect immediately prior to the event giving rise to the termination and (B) the bonus earned for the fiscal year immediately preceding the fiscal year in which the termination event occurs (payable in equal pro rata installments over two years in accordance with ordinary payroll practices, but no less frequently than semi-monthly);

 

   

a pro rata portion of the bonus for the current fiscal year (calculated in the manner set forth in the MIP and payable at the same time payment is made to participants employed through the end of the fiscal year);

 

   

earned but unpaid bonus for the prior fiscal year (payable at the same time payment is made to participants employed through the end of the fiscal year);

 

   

payment for any accrued and unused vacation; and

 

   

continued participation in Company’s medical and dental plans at normal contribution rates, ending on the earlier of (A) the last day of the severance period or (B) until the Company ceases to be obligated to make such plans available to executive under COBRA. If (A) is applicable, executive and eligible family members can continue participation in plans until the date specified in (B) by paying full monthly premiums.

A “change in control” (referred to as a “discontinuation event”) occurs upon any one of the following:

 

   

any person or group becomes the beneficial owner of 50% or more of the voting power of the Company, except for those persons in control as of November 2004 (or, for David Cron, June 2016), any person acting on behalf of the Company in a public equity distribution or a trustee or other fiduciary under an employee benefit plan of the Company;

 

   

as a result of, or in connection with, any tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing, the persons who were directors of the Company prior to the transaction cease to be a majority of the Board of the Company or any successor to the Company or its assets; or

 

   

at any time (A) the Company consolidates with or merges with any other person and the Company is not the continuing or surviving corporation, (B) any person consolidates with or merges with the Company, the Company is the continuing or surviving corporation, and in connection therewith, all or part of the outstanding stock of the Company is changed into or exchanged for stock or other securities of any other person, cash or other property, (C) the Company is party to a statutory share exchange with any other person after which the Company is a subsidiary of any other person, or (D) the Company sells or otherwise transfers 50% or more of the assets or earning power of the Company and its subsidiaries, taken as a whole, to any person.

Confidentiality, Non-Solicit and Non-Compete. The employment agreements contain customary confidentiality terms. The employment agreements also contain non-solicitation and non-competition provisions effective until the later of (A) the second anniversary of the termination date or (B) the first anniversary of the date the executive ceases to receive any payments from the Company related to salary, bonus or severance. If the executive violates any of the foregoing, the Company’s payment obligations under the employment agreement cease.

 

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Change in Control/Severance Payment Table

The following table estimates the potential payments and benefits to the named executive officers upon termination of employment or a change in control, assuming such event occurred on October 31, 2016. These estimates do not reflect the actual amounts that will be paid to such persons upon such events in the future, if any, including but not limited to upon the closing the proposed Integrated Mergers, the amounts of which would only be known at the time the persons become eligible for payment and would be payable only if the specified event occurs.

The table reflects that 100% of the fiscal 2016 performance units were earned and assumes that the Compensation Committee exercises its discretion to accelerate all other unvested share-based awards earned as of October 31, 2016 for any termination of employment and upon a change in control (with termination), except in respect of terminations for cause, resignation without good reason or a change in control (without termination). The table reflects the intrinsic value of such acceleration or vested securities, which for each performance unit is $109.55, the closing price of the Company’s common stock on Nasdaq on October 31, 2016. Further, the table assumes the MIP bonus will be paid at 200% of target for fiscal 2016.

The following items are not reflected in the table set forth below:

 

   

earned and unpaid salary and accrued and unused vacation through October 31, 2016, all of which is de minimis;

 

   

costs of COBRA or any other mandated governmental assistance program to former employees, which is de minimis; and

 

   

amounts outstanding under the Company’s 401(k) Savings Plan.

 

Named Executive Officer

  Cash
Severance
($)
    Acceleration
of  Share-
Based
Awards
($)
    Life
Insurance
Proceeds
($)(1)
    Miscellaneous
Health
Benefits
($)(2)
    Total
($)
 

J. Brendan Barba

         

Retirement

           9,443,429                      9,443,429   

Death

           9,443,429        988,000               10,431,429   

Disability

           9,443,429                      9,443,429   

By Company (for cause)

                                  

By Executive (without good reason)

                                  

By Company (without cause)

    5,276,240        9,443,429               7,291        14,726,960   

By Executive (for good reason)

    5,276,240        9,443,429               7,291        14,726,960   

Change in Control (without termination of employment)

                                  

Change in Control (with termination of employment)

    5,276,240        9,443,429               7,291        14,726,960   

Paul M. Feeney

         

Retirement

           1,227,289                      1,227,289   

Death

           1,227,289        478,000               1,705,289   

Disability

           1,227,289                      1,227,289   

By Company (for cause)

                                  

By Executive (without good reason)

                                  

By Company (without cause)

    2,291,796        1,227,289               7,291        3,526,376   

By Executive (for good reason)

    2,291,796        1,227,289               7,291        3,526,376   

Change in Control (without termination of employment)

                                  

Change in Control (with termination of employment)

    2,291,796        1,227,289               7,291        3,526,376   

 

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Named Executive Officer

  Cash
Severance
($)
    Acceleration
of  Share-
Based
Awards
($)
    Life
Insurance
Proceeds
($)(1)
    Miscellaneous
Health
Benefits
($)(2)
    Total
($)
 

John J. Powers

         

Retirement

    N/A        N/A        N/A        N/A        N/A   

Death

           1,094,185        415,000               1,500,768   

Disability

           1,094,185                      1,094,185   

By Company (for cause)

                                  

By Executive (without good reason)

                                  

By Company (without cause)

    1,732,365        1,094,185               7,291        2,833,841   

By Executive (for good reason)

    1,732,365        1,094,185               7,291        2,833,841   

Change in Control (without termination of employment)

                                  

Change in Control (with termination of employment)

    1,732,365        1,118,506               7,291        2,833,841   

David J. Cron

         

Retirement

    N/A        N/A        N/A        N/A        N/A   

Death

           314,189        344,000               658,189   

Disability

           314,189                      314,189   

By Company (for cause)

                                  

By Executive (without good reason)

                                  

By Company (without cause)

    1,424,940        314,189               7,291        1,746,420   

By Executive (for good reason)

    1,424,940        314,189               7,291        1,746,420   

Change in Control (without termination of employment)

                                  

Change in Control (with termination of employment)

    1,424,940        314,189               7,291        1,746,420   

Paul C. Vegliante

         

Retirement

    N/A        N/A        N/A        N/A        N/A   

Death

           262,592        327,000               589,592   

Disability

           262,592                      262,592   

By Company (for cause)

                                  

By Executive (without good reason)

                                  

By Company (without cause)

    1,356,876        262,592               7,291        1,626,759   

By Executive (for good reason)

    1,356,876        262,592               7,291        1,626,759   

Change in Control (without termination of employment)

                                  

Change in Control (with termination of employment)

    1,356,876        262,592               7,291        1,626,759   

 

(1) Employees receive term life insurance in the amount of their base salary up to a maximum of $1 million. This column excludes any supplemental benefits with premiums paid solely by the employee.

 

(2) The Company pays the health benefit claims of its covered employees up to a stop loss gap and also pays a monthly administrative fee. The amounts in this column represent (A) an estimated dollar amount paid by the Company per covered employee based on the Company’s recent historical average of claims paid and (B) the administrative fee.

 

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DIRECTOR COMPENSATION

Non-employee directors of the Board receive a mix of cash and share-based compensation. The compensation mix is intended to encourage non-employee directors to continue Board service, further align the interests of the Board and stockholders, and attract new non-employee directors with outstanding qualifications. Directors who are employees or officers of the Company do not receive any additional compensation for Board service.

The following table sets forth the compensation program for non-employee directors in fiscal 2016.

 

Annual retainer:

  

Board

   $ 50,000   

Additional retainer:

  

Audit Committee-Chair

     15,000   

Audit Committee-Member

     8,000   

Compensation Committee-Chair

     10,000   

Nominating and Corporate Governance Committee-Chair

     7,500   

Board attendance fees per meeting

       

Committee attendance fees per meeting(1)

     1,500   

Annual grant of restricted stock ($ value)

     55,000   

 

  (1) For in-person Committee meetings, generally fees are paid only for in-person attendance.

As of the 2016 annual meeting, each non-employee director was granted an annual restricted stock award with a grant date fair value of approximately $55,000, or 876 shares.

The restricted stock vests in full on the first anniversary of the grant date, subject to the director’s continued service to the Company through such date. The restricted stock may be forfeited in the event of termination of service as a non-employee director of the Company prior to the first anniversary of the grant date, subject to the Compensation Committee’s right to accelerate the vesting of all or a portion of the restricted stock at any time. During the restricted period, the restricted stock entitles the participant to all of the rights of a stockholder, including the right to vote the shares and the right to receive any dividends thereon. Prior to the end of the restricted period, restricted stock generally may not be sold, assigned, pledged, or otherwise disposed of or hypothecated by participants.

The Company does not provide any perquisites to directors.

Fiscal 2016 Compensation Table

The table below sets forth the compensation of each non-employee director in fiscal 2016.

 

Name

   Fees Earned
or
Paid in  Cash
($)(1)
     Restricted
Stock
($)(2)
     Other
Compensation
($)
     Total
($)
 

Robert T. Bell

     71,000         54,987                 125,987   

Ira M. Belsky

     67,000         54,987                 121,987   

Richard E. Davis

     76,000         54,987                 130,987   

Frank P. Gallagher

     69,500         54,987                 124,487   

Lee C. Stewart

     83,000         54,987                 137,987   

 

(1) Reflects cash retainers and meeting fees.

 

(2)

Reflects restricted stock awards granted under the 2013 Omnibus Incentive Plan. The amounts reported represent the grant date fair value of the restricted stock award, which is the closing

 

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  trading price of a share of common stock on the grant date multiplied by the number of shares subject to the award. The closing trading price of a share of common stock on April 12, 2016 was $62.77. The Company does not pay in cash the value of fractional shares.

As of October 31, 2016, each non-employee director had the following number of shares underlying outstanding option awards: Robert T. Bell, 12,000; Ira M. Belsky, 800; Richard E. Davis, 12,000; Frank P. Gallagher, 12,000; and Lee C. Stewart, 12,000. In addition, each non-employee director had 876 shares of restricted stock outstanding on October 31, 2016 relating to the annual equity grant.

Compensation Committee Interlocks and Insider Participation

During fiscal 2016, the Compensation Committee consisted of Lee C. Stewart, Richard E. Davis and Frank P. Gallagher. All members of the Committee during fiscal 2016 were independent directors and none of them is or has been an employee or officer of ours. During fiscal 2016, none of our executive officers served on the compensation committee (or equivalent) or the board of directors of another entity whose executive officer(s) served on the Committee or the Board.

Compensation Committee Report

The Compensation Committee of the Board has reviewed and discussed the Compensation Discussion and Analysis (CD&A) in this Form 10-K with management, including Messrs. Barba and Feeney. Based on such review and discussion, the Committee recommended to the Board that the CD&A be included in the Company’s annual report on Form 10-K for the fiscal year ended October 31, 2016.

The Compensation Committee

Lee C. Stewart, Chairman

Richard E. Davis

Frank P. Gallagher

 

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plans

The following table sets forth certain information as of October 31, 2016 concerning our equity compensation plans:

 

Plan category

   Number of securities  to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
    Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
    Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
 

Equity compensation plans approved by security holders

     247,677 (1)    $ 29.41 (2)      166,534 (3) 

Equity compensation plans not approved by security holders

                     
  

 

 

   

 

 

   

 

 

 

Total

     247,677      $ 29.41        166,534   

 

(1) Consists of (A) 48,800 outstanding options for our common stock under the 2005 Stock Option Plan, (B) 194,497 outstanding performance units under the 2005 Stock Option Plan and the 2013 Omnibus Incentive Plan and (C) 4,380 outstanding shares of restricted stock under the 2013 Omnibus Incentive Plan. Upon vesting of each performance unit, employees have the option to receive one share of the Company’s common stock or the equivalent cash value or a combination of both. This column reflects no forfeiture of performance units granted for the fiscal 2016 performance period and assumes the election by all employees to receive common stock upon the vesting of earned performance units. However, in January 2017, many employees elected to receive cash in lieu of common stock upon the vesting of performance units on such date and therefore the number of performance units included in the table overstates the expected dilution by 68,497 shares of common stock.

 

(2) Excludes performance units and restricted stock, which have no exercise price.

 

(3) Consists of shares of common stock that may be issued pursuant to stock options, restricted stock, performance units and other equity awards under the 2013 Omnibus Incentive Plan. No additional awards may be issued under the 2005 Stock Option Plan.

 

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Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding the beneficial ownership (as defined in Rule 13d-3 of the Exchange Act) of our common stock as of December 31, 2016 by (A) each of the directors and named executive officers, (B) all of the directors and executive officers as a group, and (C) to our knowledge, beneficial owners of more than 5% of our common stock. As of December 31, 2016, there were 5,113,801 shares of our common stock outstanding. Unless otherwise indicated and subject to applicable community property laws, each owner has sole voting and investment powers with respect to the securities listed below.

 

Name of Beneficial Owner

   Shares
Owned
(1)
     Right  to
Acquire
(2)
     Total      Aggregate
Percent of
Class
 

J. Brendan Barba(3)

     568,714                 568,714         11.1

Robert T. Bell

     6,623         11,600         18,223         *   

Ira M. Belsky

     7,867         400         8,267         *   

David J. Cron

     1,142                 1,142         *   

Richard E. Davis

     6,286         11,600         17,886         *   

Paul M. Feeney

     55,249                 55,249         1.1

Frank P. Gallagher

     9,123         11,600         20,723         *   

John J. Powers(4)

     263,580                 263,580         5.2

Lee C. Stewart

     7,123         11,600         18,723         *   

Paul C. Vegliante(5)

     314,666                 314,666         6.2

Executive officers and directors as a group

(14 persons)

     1,141,647         46,800         1,188,447         23.2

Berry Plastics Group, Inc.(6)

     1,099,189                 1,099,189         21.5

101 Oakley Street

Evansville, Indiana 47710

           

KSA Capital Management, LLC, et al.(7)

67 East Park Place, 8th Floor, Suite 800

Morristown, NJ 079604

     650,643                 650,643         12.7

Renaissance Technologies LLC, et al.(8)

800 Third Avenue

New York, NY 10022

     400,946                 400,946         7.8

First Eagle Investment Management, LLC(9)

1345 Avenue of the Americas

New York, NY 10105

     281,314                 281,314         5.5

 

* Less than one percent.

 

(1) These amounts include the following number of shares credited under our 401(k) Savings Plan as of December 31, 2016: Mr. Barba, 0 shares; Mr. Feeney, 0 shares; Mr. Powers, 4,433 shares; Mr. Cron, 0 shares; and Mr. Vegliante, 4,511 shares (including 310 shares held by spouse). ‘Executive officers and directors as a group’ includes 11,427 shares credited under such plan.

 

(2) These amounts reflect the number of shares that such holder could acquire through the exercise of stock options within 60 days of December 31, 2016.

 

(3) Includes 51,500 shares in each of the 2012 Carolyn Vegliante Children’s Trust and the 2012 Paul Vegliante Children’s Trust of which Mr. Barba is a trustee.

 

(4) Includes 144,391 shares held by Mr. Powers’ spouse and 93,162 shares held in four trusts established in 2012 by Mrs. Powers for her children of which Mr. Powers is a trustee.

 

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(5) Includes 200,413 shares held by Mr. Vegliante’s spouse, 51,500 shares in the 2012 Carolyn Vegliante Children’s Trust of which Mr. Vegliante is a trustee, 51,500 shares in the 2012 Paul Vegliante Children’s Trust and 2,346 shares held by Mr. Vegliante’s spouse as UGMA custodian for her children.

 

(6) Based on Schedule 13D filed with the SEC on September 2, 2016. Berry Plastics Group Inc. reports shared voting power over all of such shares pursuant to a voting agreement, dated August 24, 2016, with certain stockholders of the Company in connection with the Merger Agreement, including (i) J. Brendan Barba and The Brendan Barba GRAT Number Nine; (ii) Carolyn D. Vegliante, on behalf of herself and her children; (iii) Lauren K. Powers; (iv) John J. Powers, the 2012 Lauren Powers Trust FBO Kyle Powers, the 2012 Lauren Powers Trust FBO Ryan Powers, the 2012 Lauren Powers Trust FBO Griffin Powers and the 2012 Lauren Powers Trust FBO Brenna Powers; (v) Paul C. Vegliante, the 2012 Paul Vegliante Children’s Trust and the 2012 Carolyn Vegliante Children’s Trust; (vi) Paul M. Feeney; and (vii) Soko Marie Angel.

 

(7) Based on Schedule 13D/A (Amendment No. 9) filed with the SEC on September 26, 2016, by KSA Capital Management, LLC (or “KSA”) and Daniel Khoshaba, the managing member of KSA. In the Schedule 13D/A, all persons report shared voting and dispositive power over all of such shares.

 

(8) Based on Schedule 13G/A (Amendment No. 2) filed with the SEC on February 11, 2016 by Renaissance Technologies LLC and Renaissance Technologies Holdings Corporation. Each of such persons has sole power to vote 364,848 shares and sole power to dispose 397,954 shares and shared power to dispose 2,992 shares.

 

(9) Based on Schedule 13G filed with the SEC on January 29, 2015 by First Eagle Investment Management, LLC.

 

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Related Person Transactions

Under SEC rules, a related person transaction is any transaction or series of transactions in which the Company or a subsidiary is a participant, the amount involved exceeds $120,000 and a related person has a direct or indirect material interest. A “related person” is a director, officer, nominee for director or a more than 5% stockholder since the beginning of the Company’s last completed fiscal year, and their immediate family members.

The Audit Committee is responsible for review and approval or ratification of related person transactions involving the Company or its subsidiaries to ensure there are no conflicts of interest. The Company’s Code of Conduct sets forth the Company’s written policy on procedures for reviewing and approving or ratifying potential conflicts of interests, which include related person transactions. The Code of Conduct requires officers and directors to provide full disclosure of any potential conflicts of interest to the Audit Committee, while other Company employees must provide such information to the Company’s compliance officer. Persons are encouraged to speak with the Company’s compliance officer (or, if an officer or director, to members of the Audit Committee) if there is any doubt as to whether a transaction could comprise a conflict of interest. Further, each of the Company’s officers and directors is required to complete an annual questionnaire in connection with the proxy statement for the annual meeting of stockholders, which includes questions regarding potential and ongoing related person transactions.

If a related person transaction is proposed and it involves an officer or director, the Audit Committee reviews such transaction to ensure that the Company’s involvement in such transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third party and is in the best interests of the Company and its stockholders. The Committee affirmatively determined that none of the related person transactions below constituted a conflict of interest.

Mr. Feeney’s son-in-law, is a principal of the publisher of our annual report to stockholders and certain advertising material. Competitive bids for annual report services were solicited by an independent business consultant in June 2004 and have not increased since such time. We paid $88,263 to such vendor for services in fiscal 2016, and we paid $0 to such vendor for services from November 1, 2016 through December 31, 2016.

Mr. Feeney’s daughter-in-law, Linda N. Guerrera, is the Company’s Vice President, Finance, and Controller and an executive officer. Ms. Guerrera is party to an employment agreement with the Company effective November 1, 2008; the agreement is substantially identical to the existing employment agreements entered into with each of the named executive officers. In fiscal 2016, she earned $518,735 in total compensation, which consisted of a base salary of $258,416, a car allowance of $11,000, bonus earned under the MIP of $174,552, performance units having a grant date fair value of $62,770 and $11,997 contributed by the Company to her account in the 401(k) Savings and Employee Stock Ownership Plan.

The brother of Ms. Guerrera is a partner of Skadden, Arps, Slate, Meagher & Flom LLP, an entity that provides legal services to us. We paid $1,107,513 for legal services in fiscal 2016 and we paid $581,754 for legal services from November 1, 2016 through December 31, 2016.

In September 2008, Mr. Powers’ brother became the principal of a distributor who purchases product from us. Prior to such date, he was a sales representative in the FIAP Films Division of the Company from May 2002 to September 2008. We sold $916,183 of product to such distributor in fiscal 2016, and we sold $95,559 of product to such distributor from November 1, 2016 through December 31, 2016.

 

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Robert Cron, David J. Cron’s brother, is the Company’s Executive Vice President, Sales and Marketing and an executive officer. Robert Cron is party to an employment agreement with the Company effective November 1, 2004; the agreement is substantially identical to the existing employment agreements entered into with each of the named executive officers. In fiscal 2016, he earned $572,616 in total compensation, which consisted of a base salary of $310,000, a car allowance of $11,000, bonus earned under the MIP of $155,000, performance units having a grant date fair value of $83,366 and $13,250 contributed by the Company to his account in the 401(k) Savings and Employee Stock Ownership Plan.

Mark Cron, Robert Cron’s and David J. Cron’s brother, is a sales representative in the Custom Films Division. In fiscal 2016, he earned $165,129 in total compensation, which consisted of a base salary and commission of $155,791 and $9,338 contributed by the Company to his account in the 401(k) Savings and Employee Stock Ownership Plan.

The brother of David J. Cron and Robert Cron is a principal of Omni Products, Inc., a supplier that provides the Company with thermal labels. We paid $74,891 to Omni Products for services in fiscal 2016, and we paid $10,634 to Omni Products for services from November 1, 2016 through December 31, 2016.

Director Independence

The Board believes that there should be at least a majority of independent directors on the Board. The Board recently undertook its annual review of director independence in accordance with the applicable rules of Nasdaq. The independence rules include a series of objective tests, including that the director is not employed by us and has not engaged in various types of business dealings with us. In addition, the Board is required to make a subjective determination as to each independent director that no relationships exist that, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Pursuant to such authority, the Board has adopted additional categorical standards regarding relationships that the Board does not consider material for purposes of determining a director’s independence, as set forth in the Company’s Corporate Governance Guidelines, which are available on the Investor Relations section of our website at www.aepinc.com. In making these determinations, the Board reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities as they may relate to us and our management. The Board has affirmatively determined, after considering all of the relevant facts and circumstances, that Messrs. Bell, Belsky, Davis, Gallagher and Stewart are independent directors under the applicable rules of Nasdaq. Messrs. Barba, Feeney and Powers are employed by us and therefore are not independent directors.

Each member of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee is independent under Nasdaq rules. In addition, the Board has affirmatively determined that the members of the Audit Committee and Compensation Committee qualify as independent in accordance with the additional independence rules established by the SEC and Nasdaq.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

KPMG Fees

The following table sets forth the fees we were billed for audit and other services provided by KPMG in fiscal 2016 and 2015. All of such services described below were approved in conformity with the Audit Committee’s pre-approval policies and procedures described above.

 

     Fiscal 2016
($)
     Fiscal 2015
($)
 

Audit Fees(1)

     1,222,822         1,460,940   

Audit-Related Fees(2)

     9,695           

Tax Fees

     334,500           
  

 

 

    

 

 

 

Total Fees

     1,567,017         1,460,940   

 

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  (1) Audit fees in 2016 and 2015 consisted of fees related to the annual audit of our financial statements, the audit of the effectiveness of internal controls over financial reporting and review of quarterly financial statements.

 

  (2) Audit-related fees in 2016 consisted of fees for a limited scope audit of The Pension Plan for Bargaining Employees of AEP Canada Inc.

 

  (3) Other fees in 2016 consisted of fees for due diligence, consents and other accounting services performed related to the Berry Plastics acquisition.

Pre-Approval Policies and Procedures

In accordance with Audit Committee policy and applicable law, the Committee pre-approves all services to be provided by KPMG, including audit services, audit-related services, tax services and other services. In determining whether to pre-approve such services, the Committee must consider whether the provision of such services is consistent with the independence of KPMG. Generally, the full Committee provides pre-approval for up to a year related to a particular defined task or scope of work and subject to a specific budget. In other cases, the chair of the Committee may pre-approve such services between Committee meetings pursuant to delegated authority from the Committee; the chair then communicates such pre-approvals to the full Committee at the next regularly scheduled meeting.

 

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PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)        1.       Financial Statements:
    The financial statements of the Company filed in this Annual Report on Form 10-K are listed in Part II, Item 8.
  2.   Financial Statement Schedule:
    The financial statement schedule of the Company filed in this Annual Report on Form 10-K is listed in Part II, Item 8.
  3.   Exhibits:
    The exhibits required to be filed as part of this Annual Report on Form 10-K are listed in the attached Index to Exhibits.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

AEP Industries Inc.:

We have audited the accompanying consolidated balance sheets of AEP Industries Inc. and subsidiaries as of October 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the years in the three-year period ended October 31, 2016. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. We also have audited AEP Industries Inc.’s internal control over financial reporting as of October 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). AEP Industries Inc.’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule, and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AEP Industries Inc. and subsidiaries as of October 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period

 

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ended October 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, AEP Industries Inc. maintained, in all material respects, effective internal control over financial reporting as of October 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

/s/ KPMG LLP
Short Hills, New Jersey
January 17, 2017

 

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AEP INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS

AS OF OCTOBER 31, 2016 AND 2015

(in thousands, except share amounts)

 

     October 31,
2016
    October 31,
2015
 
ASSETS     

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 3,676      $ 20,167   

Accounts receivable, less allowance for doubtful accounts of $5,702 and $5,432 in 2016 and 2015, respectively

     99,510        104,930   

Inventories, net

     92,685        101,264   

Deferred income taxes

     3,721        3,606   

Other current assets

     2,268        2,678   
  

 

 

   

 

 

 

Total current assets

     201,860        232,645   
  

 

 

   

 

 

 

PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization

     179,666        193,993   

GOODWILL

     6,871        6,871   

INTANGIBLE ASSETS, net of accumulated amortization of $3,455 and $2,931 in 2016 and 2015, respectively

     2,957        3,481   

OTHER ASSETS

     1,277        1,104   
  

 

 

   

 

 

 

Total assets

   $ 392,631      $ 438,094   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

CURRENT LIABILITIES:

    

Bank borrowings, including current portion of long-term debt

   $ 2,400      $ 2,475   

Accounts payable

     62,888        68,734   

Accrued expenses

     49,588        40,395   
  

 

 

   

 

 

 

Total current liabilities

     114,876        111,604   

LONG-TERM DEBT

     133,125        208,840   

DEFERRED INCOME TAXES

     23,434        21,750   

OTHER LONG-TERM LIABILITIES

     7,904        6,252   
  

 

 

   

 

 

 

Total liabilities

     279,339        348,446   
  

 

 

   

 

 

 

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; 11,248,896 and 11,237,749 shares issued in 2016 and 2015, respectively

     112        112   

Additional paid-in capital

     115,482        114,963   

Treasury stock at cost, 6,135,095 shares

     (189,810     (189,810

Retained earnings

     189,085        165,395   

Accumulated other comprehensive loss

     (1,577     (1,012
  

 

 

   

 

 

 

Total shareholders’ equity

     113,292        89,648   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 392,631      $ 438,094   
  

 

 

   

 

 

 

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

 

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Table of Contents

AEP INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED OCTOBER 31, 2016, 2015 AND 2014

(in thousands, except per share data)

 

     2016     2015     2014  

NET SALES

   $ 1,095,830      $ 1,141,391      $ 1,192,990   

COST OF SALES

     905,487        959,729        1,071,085   
  

 

 

   

 

 

   

 

 

 

Gross profit

     190,343        181,662        121,905   

OPERATING EXPENSES: