Item 1. Financial Statements (Unaudited)
Notes to Condensed Consolidated Financial Statements
(In thousands of U.S. dollars, unless otherwise specified)
(Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
The AZEK Company Inc. (the “Company”, “we”, “us” or “our”) is a Delaware corporation that holds all of the limited liability company interests in CPG International LLC, the entity which directly and indirectly holds all of the equity interests in the operating subsidiaries. The Company is an industry-leading designer and manufacturer of beautiful, low-maintenance and environmentally sustainable building products for residential, commercial and industrial markets. The Company’s products include decking, railing, trim, porch, moulding, pavers, bathroom and locker systems, as well as extruded plastic sheet products and other non-fabricated products for special applications in industrial markets. The Company operates in various locations throughout the United States. The Company’s residential products are primarily branded under the brand names AZEK, TimberTech, VERSATEX, ULTRALOX and StruXure, while the commercial products are branded under the brand names Celtec, Playboard, Seaboard, Flametec, Designboard, Cortec, Sanatec, Scranton Products, Aria Partitions, Eclipse Partitions, Hiny Hiders, Tufftec Lockers and Duralife Lockers.
Secondary Offerings
On January 26, 2021, the Company completed an offering of 23,000,000 shares of Class A common stock, par value $0.001 per share, including the exercise in full by the underwriters of their option to purchase up to 3,000,000 additional shares of Class A common stock, at a public offering price of $40.00 per share. The shares were sold by certain of the Selling Stockholders. The Company did not receive any of the proceeds from the sale of the shares by those Selling Stockholders. In connection with the offering the Company incurred approximately $1.2 million in expenses.
On June 1, 2021, the Company completed an offering of 17,250,000 shares of Class A common stock, par value $0.001 per share, including the exercise in full by the underwriters of their option to purchase up to 2,250,000 additional shares of Class A common stock, at a public offering price of $43.50 per share. The shares were sold by certain of the Selling Stockholders. The Company did not receive any of the proceeds from the sale of the shares by those Selling Stockholders. In connection with the offering the Company incurred approximately $1.1 million in expenses.
b. Summary of Significant Accounting Policies
Basis of Presentation
The Company operates on a fiscal year ending September 30. The accompanying unaudited Condensed Consolidated Financial Statements and notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and in management’s opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position, its results of operations and cash flows for the interim periods presented. The results of operations for the three months ended December 31, 2021 and the cash flows for the three months ended December 31, 2021 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.
The Company’s financial condition and results of operations are being, and are expected to continue to be affected by the current COVID-19 public health pandemic. The economic effects of the COVID-19 pandemic will likely continue to affect demand for the Company’s products in the foreseeable future. Although management has implemented measures to mitigate any impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations, these measures may not fully mitigate the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations. Management cannot predict the degree to, or the period over, which the Company will be affected by the COVID-19 pandemic and resulting governmental and other measures.
The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s 2021 Form 10-K. The Condensed Consolidated Balance Sheet as of September 30, 2021 was derived from the audited financial statements at that date. There have been no material changes in the Company’s significant accounting policies from those that were disclosed in the 2021 Form 10-K, except as noted below.
Revision of Previously Reported Financial Information
7
In connection with our retroactive adoption of ASC 842 as of October 1, 2020, quarterly amounts presented in our prior Form 10-Q were revised. The impact of the adjustments was immaterial to the Consolidated Financial Statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Significant estimates include revenue recognition, reserves for excess inventory, inventory obsolescence, product warranties, customer rebates, stock-based compensation, litigation, income taxes, contingent consideration, goodwill and intangible asset valuation and accounting for long-lived assets. Management’s estimates and assumptions are evaluated on an ongoing basis and are based on historical experience, current conditions and available information. Actual results may differ from estimated amounts. Estimates are revised as additional information becomes available.
Accounting Policies
Refer to the Company’s 2021 Form 10-K for a discussion of the Company’s accounting policies, as updated below and for recently adopted accounting standards.
Research and Development Costs
Research and development costs primarily relate to new product development, product claims support and manufacturing process improvements. Such costs are expensed as incurred and are included in “Selling, general and administrative expenses” within the Condensed Consolidated Statements of Comprehensive Income (Loss). Total research and development expenses were approximately $2.0 million and $1.8 million, respectively, for the three months ended December 31, 2021 and 2020.
Recently Adopted Accounting Pronouncements
On October 1, 2020, the Company adopted ASU No. 2016-02, Leases (Topic 842) and the subsequent amendments. Adoption of the new standard resulted in the recording of lease assets and lease liabilities of approximately $15.2 million and $18.7 million, respectively, as of October 1, 2020. The difference between the lease assets and lease liabilities primarily relates to accrued rent and unamortized lease incentives recorded in accordance with the previous leasing guidance. As of the adoption date, accumulated deficit within shareholder's equity on the Company’s consolidated balance sheet decreased by $2.1 million, primarily related to the derecognition of build-to-suit leasing arrangements. The new standard did not materially impact the Company’s consolidated statements of income or cash flows.
On October 1, 2021, the Company adopted ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by removing certain exceptions to general principles in Topic 740 and clarifying and amending existing guidance. The adoption of the standard did not have a material impact on the Company’s Consolidated Financial Statements.
2. REVENUE
The Company recognizes revenues when control of the promised goods is transferred to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods, at a point in time, when shipping occurs.
The Company also engages in customer rebates, which are recorded in “Net sales” in the Condensed Consolidated Statements of Comprehensive Income (Loss) and in “Accrued rebates” and “Trade receivables” in the Condensed Consolidated Balance Sheets. The Company recorded accrued rebates of $49.1 million and $35.8 million as of December 31, 2021 and 2020, respectively, and contra trade receivables of $4.7 million and $3.1 million as of December 31, 2021 and 2020, respectively. The rebate activity was as follows (in thousands):
|
|
Three Months Ended December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Beginning balance
|
|
$
|
47,648
|
|
|
$
|
32,679
|
|
Rebate expense
|
|
|
16,150
|
|
|
|
13,673
|
|
Rebate payments
|
|
|
(9,957
|
)
|
|
|
(7,533
|
)
|
Ending balance
|
|
$
|
53,841
|
|
|
$
|
38,819
|
|
The Company records deferred revenue when cash payments are received or due in advance of the Company’s performance.
8
3. BUSINESS COMBINATIONS
On November 30, 2021, the Company acquired 100% of a regional recycler in the Midwest, for a total purchase price of approximately $4.0 million, subject to customary post-closing working capital adjustments. The regional recycler is a provider of full-service recycled material processing, sourcing, logistical support and scrap management programs. The Company financed the acquisition with cash on hand.
On December 29, 2021, the Company acquired 100% of StruXure Outdoor, LLC, a Georgia limited liability company (“StruXure Outdoor”), for a total purchase price of approximately $87.3 million, subject to customary post-closing working capital adjustments. StruXure Outdoor is located in Dahlonega, Georgia and manufactures customizable outdoor pergolas and cabanas. The Company financed the acquisition with cash on hand.
The acquisitions were accounted for as business combinations under Accounting Standards Codification (“ASC”) 805 Business Combinations. Tangible and identifiable intangible assets acquired and liabilities assumed were recorded at their respective fair values. The excess of the consideration transferred over the fair value of the net assets received has been recorded for both acquisitions as goodwill in the Residential segment. The factors that contributed to the recognition of goodwill primarily relate to future economic benefits arising from expected sales as well as consumption of the recycled PVC materials in current products.
The following table represents the preliminary allocation of assets acquired and liabilities assumed on the acquisition date for both acquisitions as of December 31, 2021 (in thousands):
(US dollars in thousands)
|
|
Total
|
|
Cash and cash equivalents
|
$
|
|
-
|
|
Trade receivables
|
|
|
3,798
|
|
Inventories
|
|
|
11,655
|
|
Other current assets
|
|
|
94
|
|
Property and equipment
|
|
|
3,925
|
|
Intangible assets
|
|
|
43,000
|
|
Other assets
|
|
|
-
|
|
Accounts payable
|
|
|
(3,116
|
)
|
Accrued expenses and other liabilities
|
|
|
(9,169
|
)
|
Total identifiable assets
|
|
|
50,187
|
|
Goodwill
|
|
|
41,123
|
|
Net assets acquired/total consideration
|
|
|
91,310
|
|
Less: cash acquired
|
|
|
-
|
|
Total consideration net of cash acquired
|
$
|
|
91,310
|
|
As of the acquisition dates, total intangible assets and goodwill amounted to $84.1 million, comprised of $23.0 million related to customer relationships, $10.0 million related to proprietary knowledge and $10.0 million related to trademarks, as well as $41.1 million in goodwill. It is expected that $41.1 million of the goodwill is deductible for tax purposes. The estimated useful life for customer relationships and trademarks is 15 years, and proprietary knowledge is 10 years. The intangible assets weighted average useful life at the date of acquisition was 14.2 years.
9
4. INVENTORIES
Inventories are valued at the lower of cost or net realizable value, and are reduced for slow-moving and obsolete inventory. The inventories cost is recorded at standard cost, which approximates actual cost, on a first-in first-out “FIFO”) basis. Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
in thousands
|
|
December 31,
2021
|
|
|
September 30,
2021
|
|
Raw materials
|
|
$
|
66,758
|
|
|
$
|
46,046
|
|
Work in process
|
|
|
30,997
|
|
|
|
27,278
|
|
Finished goods
|
|
|
191,304
|
|
|
|
115,564
|
|
Total inventories
|
|
$
|
289,059
|
|
|
$
|
188,888
|
|
5. PROPERTY, PLANT AND EQUIPMENT—NET
Property, plant and equipment – net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2021
|
|
|
September 30,
2021
|
|
Land and improvements
|
|
$
|
2,812
|
|
|
$
|
2,812
|
|
Buildings and improvements
|
|
|
76,234
|
|
|
|
73,227
|
|
Manufacturing equipment
|
|
|
440,740
|
|
|
|
405,611
|
|
Computer equipment
|
|
|
24,346
|
|
|
|
23,915
|
|
Furniture and fixtures
|
|
|
6,276
|
|
|
|
6,018
|
|
Vehicles
|
|
|
846
|
|
|
|
604
|
|
Total property and equipment
|
|
|
551,254
|
|
|
|
512,187
|
|
Construction in progress
|
|
|
148,815
|
|
|
|
129,886
|
|
|
|
|
700,069
|
|
|
|
642,073
|
|
Accumulated depreciation
|
|
|
(264,765
|
)
|
|
|
(251,061
|
)
|
Total property and equipment – net
|
|
$
|
435,304
|
|
|
$
|
391,012
|
|
Depreciation expense was approximately $15.2 million and $11.6 million in the three months ended December 31, 2021 and 2020, respectively. During the three months ended December 31, 2021 and 2020, $1.1 million and $0.5 million of interest was capitalized, respectively.
6. GOODWILL AND INTANGIBLE ASSETS—NET
Goodwill
Goodwill consisted of the following (in thousands):
|
|
Residential
|
|
|
Commercial
|
|
|
Total
|
|
Goodwill as of September 30, 2021
|
|
$
|
911,001
|
|
|
$
|
40,389
|
|
|
$
|
951,390
|
|
Acquisitions
|
|
|
41,123
|
|
|
|
—
|
|
|
|
41,123
|
|
Goodwill as of December 31, 2021
|
|
$
|
952,124
|
|
|
$
|
40,389
|
|
|
$
|
992,513
|
|
Accumulated impairment losses as of September 30, 2021
|
|
|
—
|
|
|
|
32,200
|
|
|
|
32,200
|
|
Accumulated impairment losses as of December 31, 2021
|
|
$
|
—
|
|
|
$
|
32,200
|
|
|
$
|
32,200
|
|
10
Intangible assets, net
The Company did not have any indefinite lived intangible assets other than goodwill as of December 31, 2021 and September 30, 2021. Finite-lived intangible assets consisted of the following (in thousands):
|
|
|
|
December 31, 2021
|
|
|
|
Lives in
Years
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
Proprietary knowledge
|
|
10 - 15
|
|
$
|
299,300
|
|
|
$
|
(220,899
|
)
|
|
$
|
78,401
|
|
Trademarks
|
|
5 - 20
|
|
|
233,840
|
|
|
|
(144,717
|
)
|
|
|
89,123
|
|
Customer relationships
|
|
15 - 19
|
|
|
169,670
|
|
|
|
(67,331
|
)
|
|
|
102,339
|
|
Patents
|
|
10
|
|
|
7,000
|
|
|
|
(4,327
|
)
|
|
|
2,673
|
|
Other intangibles
|
|
3 - 15
|
|
|
4,076
|
|
|
|
(3,920
|
)
|
|
|
156
|
|
Total intangible assets
|
|
|
|
$
|
713,886
|
|
|
$
|
(441,194
|
)
|
|
$
|
272,692
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
|
Lives in
Years
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
Propriety knowledge
|
|
10 — 15
|
|
|
$
|
289,300
|
|
|
$
|
(216,283
|
)
|
|
$
|
73,017
|
|
Trademarks
|
|
5 — 20
|
|
|
|
223,840
|
|
|
|
(139,631
|
)
|
|
|
84,209
|
|
Customer relationships
|
|
15 — 19
|
|
|
|
146,670
|
|
|
|
(64,412
|
)
|
|
|
82,258
|
|
Patents
|
|
|
10
|
|
|
|
7,000
|
|
|
|
(4,105
|
)
|
|
|
2,895
|
|
Other intangible assets
|
|
3 — 15
|
|
|
|
4,076
|
|
|
|
(3,883
|
)
|
|
|
193
|
|
Total intangible assets
|
|
|
|
|
|
$
|
670,886
|
|
|
$
|
(428,314
|
)
|
|
$
|
242,572
|
|
Amortization expense was approximately $12.9 million and $12.6 million in the three months ended December 31, 2021 and 2020, respectively. As of December 31, 2021, the remaining weighted-average amortization period for acquired intangible assets was 12.4 years.
7. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
Allowance for Doubtful Accounts
Allowance for doubtful accounts consisted of the following (in thousands):
|
Three Months Ended December 31,
|
|
|
2021
|
|
|
2020
|
|
Beginning balance
|
$
|
1,109
|
|
|
$
|
1,332
|
|
Provision
|
|
(45
|
)
|
|
|
6
|
|
Acquisition
|
|
10
|
|
|
|
—
|
|
Ending balance
|
$
|
1,074
|
|
|
$
|
1,338
|
|
11
Accrued Expenses and Other Liabilities
Accrued expenses consisted of the following (in thousands):
|
|
December 31, 2021
|
|
|
September 30, 2021
|
|
Employee related liabilities
|
|
$
|
17,637
|
|
|
$
|
32,996
|
|
Customer deposits
|
|
|
8,724
|
|
|
|
-
|
|
Lease liability - operating
|
|
|
4,668
|
|
|
|
3,906
|
|
Marketing
|
|
|
4,416
|
|
|
|
3,421
|
|
Warranty
|
|
|
2,885
|
|
|
|
2,992
|
|
Construction in progress
|
|
|
2,347
|
|
|
|
4,068
|
|
Professional fees
|
|
|
2,098
|
|
|
|
2,296
|
|
Freight
|
|
|
1,324
|
|
|
|
2,292
|
|
Lease liability - finance
|
|
|
606
|
|
|
|
71
|
|
Other
|
|
|
3,979
|
|
|
|
4,480
|
|
Total accrued expenses and other current liabilities
|
|
$
|
48,684
|
|
|
$
|
56,522
|
|
8. DEBT
Debt consisted of the following (in thousands):
|
|
December 31, 2021
|
|
|
September 30, 2021
|
|
Term Loan due May 5, 2024 — LIBOR + 2.50% (3.25% at December 31, 2021) and LIBOR + 3.75% (4.75% at September 30, 2021)
|
|
$
|
467,654
|
|
|
$
|
467,654
|
|
Revolving Credit Facility through March 31, 2026 - LIBOR + 1.25% at December 31, 2021 and September 30, 2021
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
467,654
|
|
|
|
467,654
|
|
Less unamortized deferred financing costs
|
|
|
(2,371
|
)
|
|
|
(2,625
|
)
|
Less unamortized original issue discount
|
|
|
(284
|
)
|
|
|
(314
|
)
|
Less current portion
|
|
|
—
|
|
|
|
—
|
|
Long-term debt—less current portion and unamortized
deferred financing costs
|
|
$
|
464,999
|
|
|
$
|
464,715
|
|
Term Loan Agreement
The term loan agreement, as amended and restated from time to time (the “Term Loan Agreement”), is a first lien term loan originally entered into on September 30, 2013 by the Company’s wholly-owned subsidiary, CPG International LLC (as successor-in-interest to CPG Merger Sub LLC), as the initial borrower with a syndicate of lenders party thereto. As of December 31, 2021 and September 30, 2021, CPG International LLC had $467.7 million outstanding under the Term Loan Agreement. The Term Loan Agreement matures on May 5, 2024.
The obligations under the Term Loan Agreement are secured by a first priority security interest in the membership interests of CPG International LLC owned by the Company and substantially all of the present and future assets of the borrowers and guarantors named therein including equity interests of their domestic subsidiaries, subject to certain exceptions, (the “Term Loan Priority Collateral”) and a second priority lien on current assets. The obligations under the Term Loan Agreement are guaranteed by the Company and the wholly owned domestic subsidiaries of CPG International LLC other than certain immaterial subsidiaries and other excluded subsidiaries.
On February 2, 2021, the Company entered into an amendment to the Term Loan Agreement. The amendment effected a repricing of the Applicable Margin under the Term Loan Agreement, through reducing (i) the ABR floor by 25 basis points from 2.0% to 1.75%, (ii) the Adjusted LIBOR Rate floor by 25 basis points from 1.0% to 0.75% and (iii) the Applicable Margin with respect to any Effective Date Term Loans, by up to 125 basis points from 3.75% to 2.50% in the case of any Eurocurrency Loan and by up to 125 basis points from 2.75% to 1.50% in the case of any ABR Loan. The Applicable Margin may be reduced by a further 25 basis points in respect of both Eurocurrency Loans and ABR Loans during any period that the Borrower maintains specified public corporate family ratings. Capitalized terms used but not defined in this paragraph are as defined in the Term Loan Agreement.
12
Following the amendment, the Term Loan Agreement provides for interest on outstanding principal thereunder at a fluctuating rate, at CPG International LLC’s option, for (i) alternative base rate (“ABR”) borrowings, the highest of (a) the Federal Funds Rate as of such day plus 50 basis points, (b) the prime commercial lending rate announced as of such day by the Administrative Agent as defined in the Term Loan Agreement, as the “prime rate” as in effect on such day and (c) the LIBOR as of such day for a deposit in U.S. dollars with a maturity of one month plus 100 basis points, provided that in no event shall the ABR be less than 175 basis points, plus the applicable margin of 150 basis points per annum; or (ii) for Eurocurrency borrowings, the highest of (a) the LIBOR in effect for such interest period divided by one, minus the statutory reserves applicable to such Eurocurrency borrowing, if any, and (b) 75 basis points, plus the applicable margin of 250 basis points per annum.
As of December 31, 2021, and September 30, 2021, unamortized deferred financing fees related to the Term Loan Agreement were $2.4 million and $2.6 million, respectively. The Term Loan Agreement may be voluntarily prepaid in whole, or in part, in each case without premium or penalty (other than the Prepayment Premium (as defined in the Term Loan Agreement), if applicable), subject to certain customary conditions.
The Term Loan Agreement requires mandatory prepayments of the term loans thereunder from certain debt issuances, certain asset dispositions (subject to certain reinvestment rights) and a percentage of excess cash flow (subject to step-downs upon CPG International LLC achieving certain leverage ratios). At September 30, 2021, no excess cash flow payment was required based on the current leverage ratio. CPG International LLC is required to repay the outstanding principal amount under the Term Loan Agreement in quarterly installments equal to 0.25253% of the aggregate principal amount under the Term Loan Agreement outstanding on the amendment date of June 18, 2018 and such quarterly payments may be reduced as a result of prepayments. Based on prepayments of $337.7 million made during the three months ended June 30, 2020 with the IPO proceeds, CPG International LLC has prepaid all of the quarterly principal payments through maturity. The Company’s next scheduled principal payment on the term loan is due in fiscal year 2024. The Term Loan Agreement restricts payments of dividends unless certain conditions are met, as defined in the Term Loan Agreement.
Revolving Credit Facility
CPG International LLC has also entered into a revolving credit facility, as amended and restated from time to time (the “Revolving Credit Facility”), with certain of our direct and indirect subsidiaries and certain lenders party thereto. The Revolving Credit Facility provides for maximum aggregate borrowings of up to $150.0 million, subject to an asset-based borrowing base. The borrowing base is limited to a set percentage of eligible accounts receivable and inventory, less reserves that may be established by the administrative agent and the collateral agent in the exercise of their reasonable credit judgment.
CPG International LLC had no outstanding borrowings under the Revolving Credit Facility as of December 31, 2021 and September 30, 2021. In addition, CPG International LLC had $3.3 million and $3.3 million of outstanding letters of credit held against the Revolving Credit Facility as of December 31, 2021 and September 30, 2021, respectively. CPG International LLC had approximately $146.7 million available under the borrowing base for future borrowings as of December 31, 2021. CPG International LLC also has the option to increase the commitments under the Revolving Credit Facility by up to $100.0 million, subject to certain conditions.
On March 31, 2021, CPG International LLC amended the Revolving Credit Facility, resulting in a repricing and extension thereof. Pursuant to such amendment, the interest rate has been reduced by 25 basis points to (i) for ABR borrowings, the highest of (a) the Federal Funds Rate plus 50 basis points, (b) the prime rate and (c) the LIBOR as of such date for a deposit in U.S. dollars with a maturity of one month plus 100 basis points, plus, in each case, a spread of 25 to 75 basis points, based on average historical availability, or (ii) for Eurocurrency borrowings, adjusted LIBOR plus a spread of 125 to 175 basis points, based on average historical availability. The maturity date for the Revolving Credit Facility was extended from May 9, 2022 to the earlier of March 31, 2026 and the date that is 91 days prior to the maturity of the Term Loan Agreement or any permitted refinancing thereof.
Deferred financing costs, net of accumulated amortization, related to the Revolving Credit Facility at December 31, 2021 and September 30, 2021 were $1.1 million and $1.2 million, respectively.
A “commitment fee” accrues on any unused portion of the commitments under the Revolving Credit Facility during the preceding three calendar month period. If the average daily used percentage is greater than 50%, the commitment fee equals 25 basis points, and if the average daily used percentage is less than or equal to 50%, the commitment fee equals 37.5 basis points. The commitment fees were $0.1 million and $0.1 million for the three months ended December 31, 2021 and December 31, 2020, respectively.
The obligations under the Revolving Credit Facility are guaranteed by the Company and its wholly owned domestic subsidiaries other than certain immaterial subsidiaries and other excluded subsidiaries. The obligations under the Revolving Credit Facility are secured by a first priority security interest in substantially all of the accounts receivable, inventory, deposit accounts, securities accounts and cash assets of the Company, CPG International LLC and the subsidiaries of CPG International LLC that are guarantors under the Revolving Credit Facility, and the proceeds thereof (subject to certain exceptions) (the “Revolver Priority Collateral”), plus a second priority security interest in all of the Term Loan Priority Collateral. The Revolving Credit Facility may be voluntarily prepaid
13
in whole, or in part, in each case without premium or penalty. CPG International LLC is also required to make mandatory prepayments (i) when aggregate borrowings exceed commitments or the applicable borrowing base and (ii) during “cash dominion,” which occurs if (a) the availability under the Revolving Credit Facility is less than the greater of (i) $12.5 million and (ii) 10% of the lesser of (x) $150.0 million and (y) the borrowing base, for five consecutive business days or (b) certain events of default have occurred and are continuing.
The Revolving Credit Facility contains affirmative covenants that are customary for financings of this type, including allowing the Revolver Administrative Agent to perform periodic field exams and appraisals to evaluate the borrowing base. The Revolving Credit Facility contains various negative covenants, including limitations on, subject to certain exceptions, the incurrence of indebtedness, the incurrence of liens, dispositions, investments, acquisitions, restricted payments, transactions with affiliates, as well as other negative covenants customary for financings of this type. The Revolving Credit Facility also includes a financial maintenance covenant, applicable only when the excess availability is less than the greater of (i) 10% of the lesser of the aggregate commitments under the Revolving Credit Facility and the borrowing base, and (ii) $12.5 million. In such circumstances, CPG International LLC would be required to maintain a minimum fixed charge coverage ratio (as defined in the Revolving Credit Facility) for the trailing four quarters equal to at least 1.0 to 1.0; subject to CPG International LLC’s ability to make an equity cure (no more than twice in any four quarter period and up to five times over the life of the facility). As of December 31, 2021, CPG International LLC was in compliance with the financial and nonfinancial covenants imposed by the Revolving Credit Facility. The Revolving Credit Facility also includes customary events of default, including the occurrence of a change of control.
Interest expense consisted of the following (in thousands):
|
|
Three Months Ended December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
Term Loan Agreement
|
|
$
|
3,884
|
|
|
$
|
5,677
|
|
Revolving Credit Facility
|
|
|
163
|
|
|
|
165
|
|
Other
|
|
|
866
|
|
|
|
203
|
|
Amortization - Debt issue costs
|
|
|
|
|
|
|
|
|
Term Loan Agreement
|
|
|
254
|
|
|
|
291
|
|
Revolving Credit Facility
|
|
|
66
|
|
|
|
141
|
|
Term Loan OID
|
|
|
30
|
|
|
|
35
|
|
Capitalized interest
|
|
|
(1,115
|
)
|
|
|
(486
|
)
|
Interest expense
|
|
$
|
4,148
|
|
|
$
|
6,026
|
|
See Note 11 for the fair value of the Company’s debt as of December 31, 2021 and September 30, 2021.
9. PRODUCT WARRANTIES
The Company provides product assurance warranties of various lengths ranging from 5 years to lifetime for limited coverage for a variety of material and workmanship defects based on standard terms and conditions between the Company and its customers. Warranty coverage depends on the product involved. The warranty reserve activity consisted of the following (in thousands):
|
|
Three Months Ended December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Beginning balance
|
|
$
|
12,699
|
|
|
$
|
10,913
|
|
Adjustments to reserve
|
|
|
467
|
|
|
|
723
|
|
Warranty claims payment
|
|
|
(485
|
)
|
|
|
(608
|
)
|
Accretion - purchase accounting valuation
|
|
|
—
|
|
|
|
16
|
|
Ending balance
|
|
|
12,681
|
|
|
|
11,044
|
|
Current portion of accrued warranty
|
|
|
(2,885
|
)
|
|
|
(2,681
|
)
|
Accrued warranty – less current portion
|
|
$
|
9,796
|
|
|
$
|
8,363
|
|
10. LEASES
14
As discussed in Note 1, on October 1, 2020, the Company adopted ASU No. 2016-02, Leases (Topic 842), and the related amendments (collectively "ASC 842"). The Company leases vehicles, machinery, manufacturing facilities, office space, land, and equipment under both operating and finance leases. We sublease excess office real estate to a third-party tenant. The Company determines if an arrangement is a lease at inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. As of December 31, 2021 and September 30, 2021, amounts associated with leases are included in Other assets, Accrued expense and other liabilities and Other non-current liabilities in the Company’s Condensed Consolidated Balance Sheet.
For leases with initial terms greater than 12 months, the Company considers these right-of-use assets and records the related asset and obligation at the present value of lease payments over the term. For leases with initial terms equal to or less than 12 months, the Company does not consider them as right-of-use assets and instead considers them short-term lease costs that are recognized on a straight-line basis over the lease term. The Company’s leases may include escalation clauses, renewal options and/or termination options that are factored into the determination of lease term and lease payments when it is reasonably certain the option will be exercised. Renewal options range from 1 year to 20 years.
Lease assets and lease liabilities as of December 31, 2021 and September 30, 2021 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Leases
|
Classification on Balance Sheet
|
|
December 31, 2021
|
|
|
September 30, 2021
|
|
Assets
|
|
|
|
|
|
|
|
|
|
ROU operating lease assets
|
Other assets
|
|
$
|
21,669
|
|
|
$
|
19,431
|
|
Finance lease assets
|
Other assets
|
|
|
54,144
|
|
|
|
49,084
|
|
Total lease assets
|
|
|
$
|
75,813
|
|
|
$
|
68,515
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Operating
|
Accrued expenses and other liabilities
|
|
$
|
4,668
|
|
|
$
|
3,906
|
|
Finance
|
Accrued expenses and other liabilities
|
|
|
606
|
|
|
|
71
|
|
Non-Current
|
|
|
|
|
|
|
|
|
|
Operating
|
Other non-current liabilities
|
|
|
19,962
|
|
|
|
18,585
|
|
Finance
|
Other non-current liabilities
|
|
|
55,862
|
|
|
|
50,590
|
|
Total lease liabilities
|
|
|
$
|
81,098
|
|
|
$
|
73,152
|
|
|
|
|
|
|
|
|
|
|
|
The components of lease expense for the three months ended December 31, 2021 and 2020 were as follows:
|
Three Months Ended December 31,
|
|
(in thousands)
|
2021
|
|
|
|
2020
|
|
Operating lease expense
|
$
|
1,170
|
|
|
|
$
|
784
|
|
Finance lease amortization of assets
|
|
717
|
|
|
|
|
249
|
|
Finance lease interest on lease liabilities
|
|
804
|
|
|
|
|
203
|
|
Short term
|
|
42
|
|
|
|
|
25
|
|
Sublease income
|
|
(119
|
)
|
|
|
|
(71
|
)
|
Total lease expense
|
$
|
2,614
|
|
|
|
$
|
1,190
|
|
15
The tables below present supplemental information related to leases as of December 31, 2021 and September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (years)
|
|
December 31, 2021
|
|
|
September 30, 2021
|
|
Operating leases
|
|
|
7.3
|
|
|
|
7.8
|
|
Finance leases
|
|
|
30.9
|
|
|
|
32.2
|
|
Weighted-average discount rate
|
|
|
|
|
|
|
Operating leases
|
|
|
4.1
|
%
|
|
|
4.3
|
%
|
Finance leases
|
|
|
6.3
|
%
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
The following table summarizes the maturities of lease liabilities at December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Operating Leases
|
|
|
Finance Leases
|
|
|
Total
|
|
2022
|
|
|
$
|
4,248
|
|
|
$
|
2,851
|
|
|
$
|
7,099
|
|
2023
|
|
|
|
5,393
|
|
|
|
4,534
|
|
|
|
9,927
|
|
2024
|
|
|
|
4,468
|
|
|
|
4,233
|
|
|
|
8,701
|
|
2025
|
|
|
|
3,482
|
|
|
|
4,021
|
|
|
|
7,503
|
|
2026
|
|
|
|
2,230
|
|
|
|
3,858
|
|
|
|
6,088
|
|
Thereafter
|
|
|
|
9,285
|
|
|
|
105,220
|
|
|
|
114,505
|
|
Total lease payments
|
|
|
|
29,106
|
|
|
|
124,717
|
|
|
|
153,823
|
|
Less: Interest
|
|
|
|
(4,476
|
)
|
|
|
(68,249
|
)
|
|
|
(72,725
|
)
|
Present Value of lease liability
|
|
|
$
|
24,630
|
|
|
$
|
56,468
|
|
|
$
|
81,098
|
|
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Accounting Standards Codification (“ASC”) requirements for Fair Value Measurements and Disclosures establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels. Level 1 inputs, the highest priority, are quoted prices in active markets for identical assets or liabilities. Level 2 inputs reflect other than quoted prices included in Level 1 that are either observable directly or through corroboration with observable market data. Level 3 inputs are unobservable inputs, due to little or no market activity for the asset or liability, such as internally-developed valuation models. We do not have any assets or liabilities measured at fair value on a recurring basis that are Level 3.
The carrying values and the estimated fair values of the debt financial instruments (Level 2 measurements) consisted of the following (in thousands):
|
|
December 31, 2021
|
|
|
September 30, 2021
|
|
|
|
Carrying
Value
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Value
|
|
|
Estimated
Fair Value
|
|
Term Loan due May 5, 2024
|
|
$
|
467,654
|
|
|
$
|
467,420
|
|
|
$
|
467,654
|
|
|
$
|
467,420
|
|
Financial instruments remeasure at fair value on a recurring basis – During the three months ended December 31, 2021, the Company entered into an arrangement for a contingent payment to the former owner and employee of StruXure Outdoor. The contingent payment is based on achievement of a minimum EBITDA amount and a multiple of EBITDA, for EBITDA exceeding a higher threshold for calendar year 2022. Based on the formula, the potential contingent payout can range from zero to $13.9 million.
16
At the date of acquisition, the fair value was estimated to be $9.5 million. The fair value of the contingent payment will be recognized as compensation expense from date of acquisition through December 31, 2022.
12. SEGMENTS
Operating segments for the Company are determined based on information used by the chief operating decision maker (“CODM”) in deciding how to evaluate performance and allocate resources to each of the segments. The CODM reviews Adjusted EBITDA and Adjusted EBITDA Margin as the key segment measures of performance. Adjusted EBITDA is defined as segment operating income (loss) plus depreciation and amortization, adjusted by adding thereto or subtracting therefrom stock-based compensation costs, business transformation costs, acquisition costs, capital structure transaction costs, and certain other costs. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by net sales.
The Company has two reportable segments, Residential and Commercial. The reportable segments were determined primarily based on products and end markets as follows:
• Residential—The Residential segment manufactures and distributes decking, rail, trim and accessories through a national network of dealers and distributors and multiple home improvement retailers providing extensive geographic coverage and enabling the Company to effectively serve contractors. The addition of StruXure expands our product offerings in the Residential segment. The addition of regional recyclers provides full-service recycled PVC material processing, sourcing, logistical support, and scrap management programs. This segment is impacted by trends in and the strength of home repair and remodel activity.
• Commercial—The Commercial segment manufactures, fabricates and distributes resin based extruded sheeting products for a variety of commercial and industrial applications through a widespread distribution network as well as directly to original equipment manufacturers. This segment includes Scranton Products which manufactures lockers and partitions and Vycom which manufactures resin based sheeting products. This segment is impacted by trends in and the strength of the new construction sector.
The segment data below includes data for Residential and Commercial for the three months ended December 31, 2021 and 2020 (in thousands).
|
Three Months Ended
December 31,
|
|
|
2021
|
|
|
2020
|
|
Net sales to customers
|
|
|
|
|
|
|
|
Residential
|
$
|
221,133
|
|
|
$
|
185,640
|
|
Commercial
|
|
38,575
|
|
|
|
26,638
|
|
Total
|
$
|
259,708
|
|
|
$
|
212,278
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
Residential
|
$
|
69,431
|
|
|
$
|
58,776
|
|
Commercial
|
|
4,748
|
|
|
|
3,316
|
|
Total Adjusted EBITDA for reporting segments
|
$
|
74,179
|
|
|
$
|
62,092
|
|
Unallocated net expenses
|
|
(15,659
|
)
|
|
|
(13,640
|
)
|
Adjustments to Income (loss) before income tax provision
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
(28,082
|
)
|
|
|
(24,278
|
)
|
Stock-based compensation costs
|
|
(4,016
|
)
|
|
|
(2,980
|
)
|
Acquisition costs (1)
|
|
(497
|
)
|
|
|
-
|
|
Other costs (2)
|
|
(485
|
)
|
|
|
(1,664
|
)
|
Interest expense, net
|
|
(4,148
|
)
|
|
|
(6,026
|
)
|
Income (loss) before income tax provision
|
$
|
21,292
|
|
|
$
|
13,504
|
|
(1)
|
Acquisition costs reflect costs directly related to completed acquisitions of $0.5 million in the three months ended December 31, 2021.
|
(2)
|
Other costs include costs for legal expense of $0.3 million and $0.5 million in the three months ended December 31, 2021 and 2020, respectively, costs related to an incentive plan and other ancillary expenses associated with the initial public offering of $0.1 million and $1.0 million in the three months ended December 31, 2021 and 2020, respectively, other costs of $0.1 million for the three months ended December 31, 2021, and the impact of retroactive adoption of ASC 842 of $0.2 million for the three months ended December 31, 2020.
|
13. CAPITAL STOCK
The Company completed its IPO on June 16, 2020, in which it sold 38,237,500 shares of its Class A common stock, including 4,987,500 shares pursuant to the underwriters’ over-allotment option. The shares were sold at an IPO price of $23.00 per share for net
17
proceeds to the Company of approximately $819.7 million, after deducting underwriting discounts and commissions of $50.6 million and offering expenses of approximately $9.2 million payable by the Company.
Immediately prior to the completion of the IPO, the Company converted to a Delaware corporation from a limited liability company. The Company’s certificate of incorporation provides for two classes of common stock: Class A common stock and Class B common stock. In addition, the certificate of incorporation authorizes shares of undesignated preferred stock, the rights, preferences and privileges of which may be designated from time to time by the board of directors. The Company is authorized to issue up to 1.1 billion shares of Class A common stock, up to 1 hundred million shares of Class B common stock and up to 1 million shares of preferred stock, each par value $0.001 per share, in one or more series. The Class A common stock and Class B common stock provide identical economic rights, but holders of Class B common stock have limited voting rights, specifically that such holders have no right to vote, solely with respect to their shares of Class B common stock, with respect to the election, replacement or removal of directors. Holders of Class A common stock and Class B common stock are not entitled to preemptive rights. Holders of Class B common stock may convert their shares of Class B common stock into shares of Class A common stock on a one-for-one basis, in whole or in part, at any time and from time to time at their option. The Company’s Class A common stock is traded on the New York Stock Exchange under the symbol “AZEK.”
In conjunction with the Corporate Conversion and prior to the closing of the IPO, the Company effected a unit split of its then-outstanding unit, resulting in an aggregate of 108,162,741 units, including 75,093,778 Class A units and 33,068,963 Class B units. Concurrently with the Corporate Conversion, the units were converted to an aggregate of 108,162,741 shares of common stock, including 75,093,778 shares of Class A common stock and 33,068,963 shares of Class B common stock. In addition, a class of the Company’s former indirect parent’s partnership interests referred to as “Profits Interests” were exchanged for an aggregate of 2,703,243 shares of Class A common stock and 5,532,057 shares of Class A restricted stock, and 3,477,413 shares of Class A common stock reserved for issuance upon the exercise of stock options.
On January 26, 2021, the Company completed an offering of 23,000,000 shares of Class A common stock, par value $0.001 per share, including the exercise in full by the underwriters of their option to purchase up to 3,000,000 additional shares of Class A common stock, at a public offering price of $40.00 per share. The shares were sold by certain of the Selling Stockholders. The Company did not receive any of the proceeds from the sale of the shares by those Selling Stockholders. In connection with the offering the Company incurred approximately $1.2 million in expenses.
On June 1, 2021, the Company completed an offering of 17,250,000 shares of Class A common stock, par value $0.001 per share, including the exercise in full by the underwriters of their option to purchase up to 2,250,000 additional shares of Class A common stock, at a public offering price of $43.50 per share. The shares were sold by certain of the Selling Stockholders. The Company did not receive any of the proceeds from the sale of the shares by those Selling Stockholders. In connection with the offering the Company incurred approximately $1.1 million in expenses.
14. STOCK-BASED COMPENSATION
The Company grants stock-based awards to attract, retain and motivate key employees and directors.
The 2020 Omnibus Incentive Compensation Plan (“2020 Plan”), provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and performance-based or other equity-related awards to the Company’s employees and directors. The maximum aggregate number of shares that may be issued under the 2020 Plan is 15,852,319 shares with 4,065,270 shares remaining in the reserve. The total aggregate number of shares may be adjusted as determined by the Board of Directors.
Stock-based compensation expense for the three months ended December 31, 2021 and 2020 was $4.0 million and $2.9 million, respectively, recognized in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Comprehensive Income (Loss). Total income tax benefit for the three months ended December 31, 2021 and 2020 was $0.8 million and $0.5 million, respectively. As of December 31, 2021, the Company had not yet recognized compensation cost on unvested stock-based awards of $34.0 million, with a weighted average remaining recognition period of 2.4 years.
The Company uses the Monte Carlo pricing model to estimate the fair value of its performance-based awards as of the grant date, and uses the Black Scholes pricing model to estimate the fair value of its service-based awards as of the grant date. Under the terms of the 2020 Plan, all stock options will expire if not exercised within ten years of the grant date.
18
The following table sets forth the significant assumptions used for the calculation of stock-based compensation expense for the three months ended December 31, 2021 and December 31, 2020:
|
|
November 19,
2021
Grant Date
|
|
|
|
December 4,
2020
Grant Date
|
|
Risk-free interest rate
|
|
|
1.34
|
%
|
|
|
|
0.56
|
%
|
Expected volatility
|
|
|
40.00
|
%
|
|
|
|
35.00
|
%
|
Expected term (in years)
|
|
|
6.00
|
|
|
|
|
6.00
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
|
0.00
|
%
|
Stock Options
The following table summarizes the performance-based stock option activity for the three months ended December 31, 2021:
|
|
Number
of Shares
|
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
Weighted
Average
Remaining
Contract
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
Outstanding at October 1, 2021
|
|
|
1,556,489
|
|
|
$
|
|
23.00
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(91,332
|
)
|
|
|
|
23.00
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2021
|
|
|
1,465,157
|
|
|
|
|
23.00
|
|
|
|
8.3
|
|
|
|
34,050
|
|
Vested and exercisable at December 31, 2021
|
|
|
1,465,157
|
|
|
$
|
|
23.00
|
|
|
|
8.3
|
|
|
|
34,050
|
|
The following table summarizes the service-based stock option activity for the three months ended December 31, 2021:
|
|
Number
of Shares
|
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
Weighted
Average
Remaining
Contract
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
Outstanding at October 1, 2021
|
|
|
3,434,221
|
|
|
$
|
|
23.82
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
97,236
|
|
|
|
|
41.21
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(52,560
|
)
|
|
|
|
23.00
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
(8,606
|
)
|
|
|
|
23.00
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2021
|
|
|
3,470,291
|
|
|
|
|
24.32
|
|
|
|
8.3
|
|
|
|
76,075
|
|
Vested and exercisable at December 31, 2021
|
|
|
1,625,971
|
|
|
$
|
|
23.27
|
|
|
|
8.1
|
|
|
|
37,344
|
|
Restricted Stock Awards
A summary of the service-based restricted stock awards activity during the three months ended December 31, 2021 was as follows:
|
|
Number
of Shares
|
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and unvested at October 1, 2021
|
|
|
717,580
|
|
|
$
|
|
23.00
|
|
Granted
|
|
|
—
|
|
|
|
|
—
|
|
Vested
|
|
|
(151,063
|
)
|
|
|
|
23.00
|
|
Forfeited
|
|
|
(4,399
|
)
|
|
|
|
23.00
|
|
Outstanding and unvested at December 31, 2021
|
|
|
562,118
|
|
|
$
|
|
23.00
|
|
19
Performance Restricted Stock Units
Performance restricted stock units were granted to officers and certain employees of the Company and represent the right to earn shares of Company common stock based on the achievement of company-wide non-GAAP performance conditions, including cumulative net sales, average return on net tangible assets and cumulative EBITDA during the three-year performance period. Compensation cost is amortized into expense over the performance period, which is generally three years, and is based on the probability of meeting performance targets. The fair value of each performance share award is based on the closing stock price on the date of grant.
A summary of the performance-based restricted stock unit awards activity for the three months ended December 31, 2021 presented at target was as follows:
|
|
Number
of Shares
|
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and unvested at October 1, 2021
|
|
|
111,804
|
|
|
$
|
|
35.00
|
|
Granted
|
|
|
115,608
|
|
|
|
|
41.21
|
|
Vested
|
|
|
—
|
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
|
—
|
|
Outstanding and unvested at December 31, 2021
|
|
|
227,412
|
|
|
$
|
|
38.16
|
|
Restricted Stock Units
A summary of the service-based restricted stock unit awards activity for the three months ended December 31, 2021 was as follows:
|
|
Number
of Shares
|
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and unvested at October 1, 2021
|
|
|
366,852
|
|
|
$
|
|
30.42
|
|
Granted
|
|
|
170,203
|
|
|
|
|
40.71
|
|
Vested
|
|
|
(38,298
|
)
|
|
|
|
34.45
|
|
Forfeited
|
|
|
(8,221
|
)
|
|
|
|
28.06
|
|
Outstanding and unvested at December 31, 2021
|
|
|
490,536
|
|
|
$
|
|
33.83
|
|
15. EARNINGS PER SHARE
The Company computes earnings per common share (“EPS”) under the two-class method which requires the allocation of all distributed and undistributed earnings attributable to the Company to common stock and other participating securities based on their respective rights to receive distributions of earnings or losses. The Company’s Class A common stock and Class B common stock equally share in distributed and undistributed earnings, therefore, no allocation to participating securities or dilutive securities is performed.
Basic EPS attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding. Diluted EPS is calculated by adjusting weighted average shares outstanding for the dilutive effect of potential common shares, determined using the treasury-stock method. For purposes of the diluted EPS calculation, restricted stock awards, restricted stock units and options to purchase shares of common stock are considered
20
to be potential common shares. The following table sets forth the computation of the Company’s basic and diluted EPS attributable to common stockholders (in thousands, except share and per share amounts):
|
Three Months Ended December 31,
|
|
|
2021
|
|
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
16,707
|
|
|
|
$
|
10,148
|
|
Net income (loss) attributable to common
stockholders- basic and diluted
|
$
|
16,707
|
|
|
|
$
|
10,148
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock
|
|
|
|
|
|
|
|
|
Basic
|
|
154,407,244
|
|
|
|
|
153,226,378
|
|
Diluted
|
|
156,854,925
|
|
|
|
|
156,018,731
|
|
Net income (loss) per share attributable to common
stockholders:
|
|
|
|
|
|
|
|
|
Net income (loss) per common share - basic
|
$
|
0.11
|
|
|
|
$
|
0.07
|
|
Net income (loss) per common share - diluted
|
$
|
0.11
|
|
|
|
$
|
0.07
|
|
The following table includes the number of shares that may be dilutive common shares in the future, and were not included in the computation of diluted net income (loss) per share because the effect was anti-dilutive:
|
Three Months Ended December 31,
|
|
|
2021
|
|
|
|
2020
|
|
Restricted Stock Awards
|
|
—
|
|
|
|
|
—
|
|
Stock Options
|
|
254,208
|
|
|
|
|
35,910
|
|
Restricted Stock Units
|
|
117,835
|
|
|
|
|
—
|
|
16. INCOME TAXES
The Company calculates the interim tax provision in accordance with the provisions of ASC 740-270, Income Taxes; Interim Reporting, specifically ASC-740-270-25-2. For interim periods, the Company estimates the annual effective income tax rate and applies the estimated rate to the year-to-date income or loss before income taxes. The effective income tax rates for the three months ended December 31, 2021 and 2020 were 21.5% and 24.9%, respectively. The decrease in the effective income tax rate for the three months ended December 31, 2021, as compared to the three months ended December 31, 2020, is primarily driven by the impact of discrete tax benefits on the Company’s year to date earnings.
21
17. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
During the year ended September 30, 2019, the Company was made aware of a worker’s compensation case that became reasonably possible to give rise to a liability. The case is in discovery as the nature and extent of the Company’s exposure is currently being determined. The Company expects a range of loss of $0.4 million to $0.5 million.
In the normal course of the Company’s business, it is at times subject to various other legal actions, in some cases for which the relief or damages sought may be substantial. Although the Company is not able to predict the outcome of such actions, after reviewing all pending and threatened actions with counsel and based on information currently available, management believes that the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the Company’s results of operations or financial position. However, it is possible that the ultimate resolution of such matters, if unfavorable, may be material to the Company’s results of operations in a particular future period as the time and amount of any resolution of such actions and its relationship to the future results of operations are not currently known. The Company accrues for losses when they are probable of occurrence and such losses are reasonably estimable. Legal costs expected to be incurred are accounted for as they are incurred.
18. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
The AZEK Company Inc. (parent company only)
Balance Sheets
(In thousands of U.S. dollars, except for share and per share amounts)
|
|
December 31,
2021
|
|
|
September 30,
2021
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
$
|
1,451,151
|
|
|
$
|
1,427,164
|
|
Total non-current assets
|
|
|
1,451,151
|
|
|
|
1,427,164
|
|
Total assets
|
|
$
|
1,451,151
|
|
|
$
|
1,427,164
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 1,000,000 shares authorized and no shares issued and
outstanding at December 31, 2021 and at September 30, 2021, respectively
|
|
|
—
|
|
|
|
—
|
|
Class A common stock, $0.001 par value; 1,100,000,000 shares authorized,
155,032,377 shares issued and outstanding at December 31, 2021 and
154,866,313 shares issued and outstanding at September 30, 2021
|
|
|
155
|
|
|
|
155
|
|
Class B common stock, $0.001 par value; 100,000,000 shares authorized,
100 shares issued and outstanding at December 31, 2021 and at September 30, 2021, respectively
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
1,622,516
|
|
|
|
1,615,236
|
|
Accumulated deficit
|
|
|
(171,520
|
)
|
|
|
(188,227
|
)
|
Total stockholders’ equity
|
|
|
1,451,151
|
|
|
|
1,427,164
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,451,151
|
|
|
$
|
1,427,164
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Net income (loss) of subsidiaries
|
|
$
|
16,707
|
|
|
$
|
10,148
|
|
Net income (loss) of subsidiaries
|
|
$
|
16,707
|
|
|
$
|
10,148
|
|
Comprehensive income (loss)
|
|
$
|
16,707
|
|
|
$
|
10,148
|
|
The AZEK Company Inc. did not have any cash as of December 31, 2021 or September 30, 2021, accordingly a Condensed Statement of Cash Flows has not been presented.
22
Basis of Presentation
The parent company financial statements should be read in conjunction with the Company’s Consolidated Financial Statements and the accompanying notes thereto. For purposes of this condensed financial information, the Company’s wholly owned and majority owned subsidiaries are recorded based upon its proportionate share of the subsidiaries’ net assets (similar to presenting them on the equity method).
Since the restricted net assets of The AZEK Company Inc. and its subsidiaries exceed 25% of the consolidated net assets of the Company and its subsidiaries, the accompanying condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule 1 of Regulation S-X. This information should be read in conjunction with the accompanying Condensed Consolidated Financial Statements.
Dividends from Subsidiaries
There were no cash dividends paid to The AZEK Company Inc. from the Company’s consolidated subsidiaries during each of the three months ended December 31, 2021 and 2020.
Restricted Payments
CPG International LLC is party to the Revolving Credit Facility and the Term Loan Agreement originally executed on September 30, 2013, both of which have been amended and extended from time to time. The obligations under the Revolving Credit Facility and Term Loan Agreement are secured by substantially all of the present and future assets of the borrowers and guarantors, including equity interests of their domestic subsidiaries, subject to certain exceptions.
The obligations under the Revolving Credit Facility and Term Loan Agreement are guaranteed by the Company and its wholly owned domestic subsidiaries other than certain immaterial subsidiaries and other excluded subsidiaries. CPG International LLC is not permitted to make certain payments unless those payments are consistent with exceptions outlined in the agreements. These payments include repurchase of equity interests, fees associated with a public offering, income taxes due in other applicable payments. Further, the payments are only permitted if certain conditions are met related to availability and fixed charge coverage as defined in the Revolving Credit Facility and described in Note 8 “Debt” to these Condensed Consolidated Financial Statements.
23