The AZEK Company(AZEK) - 2024 Q4 - Annual Report

Part I Business A leading manufacturer of sustainable outdoor living products, focusing on converting the market from wood to engineered alternatives - The company is a leading designer and manufacturer of sustainable outdoor living products, including decking, railing, trim, and pergolas[9] - A core strategy is accelerating material conversion from wood to its low-maintenance engineered products, driven by investments in brand building, product innovation, and channel expansion[12] - Sustainability is a key pillar, with the company utilizing approximately 520 million pounds of waste and scrap in fiscal 2024; some products are made from up to 85% recycled material[10] Our Brands and Products The company's Residential segment drives 95% of sales with brands like TimberTech, while the Commercial segment focuses on partitions and lockers Fiscal Year 2024 Segment Net Sales | Segment | Net Sales (in millions) | Percentage of Total Net Sales | | :--- | :--- | :--- | | Residential | $1,369 | ~95% | | Commercial | $73 | ~5% | - The Residential segment's sales are primarily driven by repair and remodel activity, which accounted for approximately 80% of its net sales in fiscal 2024[14] - On November 1, 2023, the company divested the Vycom business, which was part of the Commercial segment[13][24] Customers and Distribution The company utilizes a multi-channel distribution network, with a majority of sales flowing through its top ten distributors - The largest distributor accounted for approximately 19% of net sales for the year ended September 30, 2024[28] - The Residential segment's distribution network includes ~50 distributors, over 170 branch locations, and more than 10,000 professional dealers and retail outlets[28] Raw Materials and Suppliers The company relies on petrochemical resins, reclaimed materials, and wood fiber, with some dependency on a single supplier for critical compounds - Key raw materials include various petrochemical resins, reclaimed materials, wood fiber, and aluminum[34] - The company relies on a single supplier for certain critical capped compounds for its decking and railing products, posing a potential supply chain risk[36] Competition AZEK competes with traditional wood products and other wood-alternative manufacturers by emphasizing aesthetics, innovation, and sustainability - Primary competition comes from traditional wood products, which constitute the majority of the decking and railing market[38] - Key competitors in the wood-alternative space include Trex Company Inc., Fiberon, and Deckorators[38] Our FULL-CIRCLE Strategy The company's sustainability strategy focuses on using recycled materials, reducing waste, and fostering a positive social impact - In fiscal 2024, the company utilized approximately 520 million pounds of scrap and waste in its manufacturing processes[44] - As of September 30, 2024, the company had 2,276 full-time, non-unionized employees[44] Risk Factors The company faces risks from economic conditions, supply chain disruptions, raw material costs, and identified material weaknesses in internal controls - Demand is highly sensitive to economic conditions, including inflation, interest rates, and consumer spending on home repair and remodeling[50] - The company faces risks from raw material supply shortages, price volatility, and reliance on single suppliers for critical components[53] - Material weaknesses have been identified in internal control over financial reporting, which resulted in a restatement of prior financial statements[76] - The company's substantial indebtedness could adversely affect its financial condition, limit its flexibility, and expose it to interest rate risk[101] Cybersecurity AZEK manages cybersecurity risk through a formal program based on the NIST Framework, with oversight from the Audit Committee - The company has a cybersecurity risk management program integrated into its enterprise risk management function, based on the NIST Framework[122] - Oversight is provided by the Audit Committee, which receives regular reports on cybersecurity risks and mitigation efforts at least semi-annually[125] - A new Chief Digital and Technology Officer has been hired to oversee technology and cybersecurity, supported by a Chief Information Officer and a third-party CISO consultant[125] Properties The company operates 15 manufacturing and recycling facilities across the United States, with key locations in Pennsylvania, Ohio, and Idaho Principal Physical Properties (as of Sep 30, 2024) | Location | Owned Square Feet | Leased Square Feet | | :--- | :--- | :--- | | Scranton, PA | — | 934,593 | | Wilmington, OH | 500,000 | 272,002 | | Aliquippa, PA | 236,600 | — | | Ashland, OH | — | 200,344 | | Eagan, MN | — | 92,958 | | Chicago, IL | — | 25,722 | | Boise, ID | — | 355,426 | | Dahlonega, GA | — | 76,684 | Legal Proceedings The company is not currently facing any legal claims that are expected to have a material adverse effect on its business or financial condition - Currently, there are no claims or proceedings against the company that are expected to have a material adverse effect[129] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE, and it actively repurchases shares while retaining earnings for growth instead of paying dividends - The company does not expect to pay any cash dividends in the foreseeable future, intending to retain earnings to finance growth[137] - In June 2024, the Board authorized an additional $600 million for share repurchases, on top of the ~$76 million remaining from a prior authorization[135] Issuer Purchases of Equity Securities (Quarter Ended Sep 30, 2024) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 1 - July 31, 2024 | — | $ — | | Aug 1 - Aug 31, 2024 | 1,756,629 | $40.55 | | Sep 1 - Sep 30, 2024 | — | $ — | | Total | 1,756,629 | $40.55 | Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2024 saw higher sales and significantly improved profitability, driven by strong Residential segment performance and lower material costs Key Financial Results (Fiscal Year Ended Sep 30) | Metric (in thousands) | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,441,448 | $1,370,316 | 5.2% | | Gross Profit | $541,793 | $430,268 | 25.9% | | Operating Income | $212,089 | $123,792 | 71.3% | | Net Income | $153,379 | $62,361 | 146.0% | - The increase in FY 2024 net sales was primarily due to higher sales volume in the Residential segment, partially offset by the divestiture of the Vycom business[163] - Gross margin improved to 37.6% in FY 2024 from 31.4% in FY 2023, driven by lower raw material costs, increased use of recycled materials, and higher plant utilization[165] - A gain of $37.7 million was recognized from the sale of the Vycom business on November 1, 2023[170][365] Segment Results of Operations The Residential segment's sales and profit growth offset the Commercial segment's decline, which was caused by the Vycom business divestiture Residential Segment Performance (FY 2024 vs FY 2023) | Metric (in thousands) | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,368,813 | $1,222,866 | 11.9% | | Segment Adjusted EBITDA | $365,273 | $252,830 | 44.5% | Commercial Segment Performance (FY 2024 vs FY 2023) | Metric (in thousands) | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $72,635 | $147,450 | (50.7)% | | Segment Adjusted EBITDA | $14,068 | $31,008 | (54.6)% | Non-GAAP Financial Measures Adjusted EBITDA and Adjusted Net Income increased significantly in fiscal 2024, while Free Cash Flow decreased due to working capital changes Key Non-GAAP Financial Measures (Fiscal Year Ended Sep 30) | Metric (in thousands) | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Adjusted Gross Profit | $557,188 | $448,564 | $440,369 | | Adjusted Net Income | $176,929 | $106,139 | $141,201 | | Adjusted EBITDA | $379,341 | $283,838 | $290,385 | | Free Cash Flow | $147,332 | $273,997 | $(65,103) | Liquidity and Capital Resources The company maintains strong liquidity through cash reserves and a revolving credit facility, having recently refinanced its debt in September 2024 - As of Sep 30, 2024, the company had $164.0 million in cash and $372.8 million available under its 2024 Revolving Credit Facility[216][220] - In September 2024, the company entered into a new Senior Secured Credit Agreement, consisting of a $440.0 million term loan facility and a $375.0 million revolving credit facility[231] Share Repurchases (Fiscal Year Ended Sep 30) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Total shares repurchased (thousands) | 5,866 | 4,152 | | Reacquisition cost (thousands) | $244,828 | $116,578 | | Average price per share | $40.03 | $28.08 | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, credit concentration with large distributors, and volatile raw material prices - A 100 basis point change in interest rates would result in a $1.4 million change in annual interest expense on its unhedged variable rate debt as of September 30, 2024[244] - The company has entered into interest rate swaps on a notional amount of $300 million to hedge against interest rate volatility[246] - Credit risk is concentrated, with one customer accounting for 20.4% of gross trade receivables as of September 30, 2024[247] Controls and Procedures Management concluded that disclosure controls were not effective due to two material weaknesses in internal control over financial reporting - Management concluded that disclosure controls and procedures were not effective as of September 30, 2024[254] - Two material weaknesses were identified in internal control over financial reporting: inadequate oversight to prevent misstatements from improper journal entries, and ineffective controls over the period-end reporting process[255] - Remediation efforts are underway, including redesigning controls, enhancing segregation of duties, and providing additional training to employees[258] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership Detailed information on governance, compensation, and ownership is incorporated by reference from the company's upcoming proxy statement - The company has adopted a Code of Ethics for Senior Officers and a Code of Conduct and Ethics for all employees, which are available on its investor relations website[268] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements and exhibits filed with the Form 10-K, with schedules omitted as they are not applicable Financial Statements Report of Independent Registered Public Accounting Firm The auditor issued a fair opinion on the financial statements but an adverse opinion on internal controls due to identified material weaknesses - The auditor, PricewaterhouseCoopers LLP, issued an adverse opinion on the effectiveness of the company's internal control over financial reporting as of September 30, 2024[299] - The adverse opinion was due to material weaknesses related to inadequate oversight and ineffective controls in the period-end financial reporting process[299] - The audit identified inventory existence and accuracy as a critical audit matter, requiring a high degree of auditor effort[305] Consolidated Financial Statements The statements show total assets of $2.17 billion and a significant increase in net income to $153.4 million for fiscal year 2024 Consolidated Balance Sheet Highlights (As of Sep 30, 2024) | Account (in thousands) | Amount | | :--- | :--- | | Total Current Assets | $471,377 | | Total Assets | $2,167,711 | | Total Current Liabilities | $217,038 | | Total Liabilities | $810,846 | | Total Stockholders' Equity | $1,356,865 | Consolidated Income Statement Highlights (Year Ended Sep 30, 2024) | Account (in thousands) | Amount | | :--- | :--- | | Net Sales | $1,441,448 | | Gross Profit | $541,793 | | Operating Income | $212,089 | | Net Income | $153,379 | Notes to Consolidated Financial Statements The notes detail key events including the Vycom divestiture, debt refinancing, and significant share repurchase activity during fiscal 2024 - On November 1, 2023, the company sold its Vycom business for net proceeds of approximately $131.8 million, recognizing a gain of $37.7 million[365] - As of September 30, 2024, the company had $440.0 million in debt outstanding under its 2024 Term Loan Facility[377] - The company repurchased 5.9 million shares for $244.8 million during fiscal year 2024 under its share repurchase program[408] - Total stock-based compensation expense for fiscal year 2024 was $25.8 million[411]