The AZEK Company(AZEK) - 2025 Q2 - Quarterly Report

PART I. Financial Information This section presents the unaudited condensed consolidated financial statements and related notes, covering financial position, performance, cash flows, and significant accounting policies Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, income, equity, and cash flows, with detailed notes on accounting policies and key financial items Condensed Consolidated Balance Sheets This table provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific dates | in thousands | March 31, 2025 | September 30, 2024 | | :------------- | :------------- | :----------------- | | ASSETS: | | | | Cash and cash equivalents | $146,719 | $164,025 | | Trade receivables, net | $136,905 | $49,922 | | Inventories | $224,052 | $223,682 | | Total current assets | $560,565 | $471,377 | | Property, plant and equipment - net | $488,604 | $462,201 | | Goodwill | $974,385 | $967,816 | | Intangible assets - net | $138,028 | $154,518 | | Total assets | $2,299,253 | $2,167,711 | | LIABILITIES AND STOCKHOLDERS' EQUITY: | | | | Accounts payable | $60,780 | $57,909 | | Accrued rebates | $81,951 | $68,211 | | Total current liabilities | $228,472 | $217,038 | | Long-term debt—less current portion | $427,970 | $429,668 | | Total liabilities | $845,080 | $810,846 | | Total stockholders' equity | $1,454,173 | $1,356,865 | | Total liabilities and stockholders' equity | $2,299,253 | $2,167,711 | Condensed Consolidated Statements of Comprehensive Income This table presents the company's revenues, expenses, and net income over specific periods | in thousands | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net sales | $452,231 | $418,408 | $737,660 | $658,852 | | Gross profit | $167,693 | $157,073 | $271,244 | $247,723 | | Operating income | $79,394 | $73,962 | $106,644 | $85,181 | | Net income | $54,285 | $49,758 | $72,409 | $74,906 | | Basic EPS | $0.38 | $0.34 | $0.50 | $0.51 | | Diluted EPS | $0.37 | $0.34 | $0.50 | $0.51 | Condensed Consolidated Statements of Stockholders' Equity This table details changes in the company's equity from net income, stock-based compensation, and other transactions over a period | (in thousands) | Balance – September 30, 2024 | Net income (6 months) | Other comprehensive income (loss) (6 months) | Stock-based compensation (6 months) | Exercise of vested stock options (6 months) | Issuance of common stock under employee stock plan, net of shares withheld for taxes (6 months) | Treasury stock purchases (6 months) | Balance – March 31, 2025 | | :------------- | :--------------------------- | :-------------------- | :--------------------------------- | :-------------------------------- | :--------------------------------- | :------------------------------------------------------------------------------------------------ | :----------------------- | :----------------------- | | Total Stockholders' Equity | $1,356,865 | $72,409 | $1,230 | $9,606 | $19,573 | $(5,424) | $(86) | $1,454,173 | Condensed Consolidated Statements of Cash Flows This table summarizes the cash inflows and outflows from operating, investing, and financing activities over specific periods | (in thousands) | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :------------- | :------------------------------ | :------------------------------ | | Net cash provided by (used in) operating activities | $60,619 | $(31,094) | | Net cash provided by (used in) investing activities | $(85,862) | $95,167 | | Net cash provided by (used in) financing activities | $7,937 | $(114,988) | | Net decrease in cash and cash equivalents | $(17,306) | $(50,915) | | Cash and cash equivalents – End of period | $146,719 | $227,399 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements 1. Organization and Summary of Significant Accounting Policies The AZEK Company Inc. is a Delaware corporation specializing in low-maintenance, environmentally sustainable building products. The company has entered into a merger agreement with James Hardie Industries plc, expected to close in the second half of calendar year 2025, where AZEK will become an indirect wholly-owned subsidiary. Merger-related costs of $5.0 million were recognized in Q1 2025. The financial statements are prepared in accordance with U.S. GAAP, with no material changes in accounting policies from the 2024 Form 10-K, except for updates on recently issued accounting pronouncements - The AZEK Company Inc. is an industry-leading designer and manufacturer of beautiful, low-maintenance and environmentally sustainable building products for residential, commercial and industrial markets[20] - On March 23, 2025, the Company entered into a Merger Agreement with James Hardie Industries plc, under which AZEK will become an indirect wholly owned subsidiary of James Hardie. Former AZEK stockholders are expected to own approximately 26% of the combined company[21][22] - The transaction is expected to close in the second half of calendar year 2025, subject to stockholder and regulatory approvals[23] - The Company recognized $5.0 million in costs related to the proposed Merger with James Hardie in 'Selling, general and administrative expenses' for the three and six months ended March 31, 2025[24] | Research and Development Expenses (in millions) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :-------------------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total R&D Expenses | $4.0 | $3.7 | $8.1 | $6.8 | 2. Revenue The Company recognizes revenue when control of promised goods is transferred to customers upon shipping. Customer rebates are recorded in 'Net sales' and 'Accrued rebates'/'Trade receivables'. Accrued rebates increased to $82.0 million as of March 31, 2025, from $46.4 million as of March 31, 2024 - Revenue is recognized when control of promised goods is transferred to customers at the point of shipping[35] | Rebate Activity (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :----------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Beginning balance | $79,664 | $72,393 | $74,796 | $66,958 | | Rebate expense | $44,618 | $35,930 | $65,337 | $58,168 | | Rebate payments | $(22,884) | $(53,328) | $(38,735) | $(70,131) | | Ending balance | $101,398 | $54,995 | $101,398 | $54,995 | 3. Divestiture On November 1, 2023, the Company completed the sale of its Vycom business within the Commercial segment for approximately $131.8 million in net proceeds. This divestiture allowed the Company to focus on higher-value business portions and provided cash for capital allocation priorities, resulting in a $37.7 million pre-tax gain on sale recognized in fiscal year 2024 - The Company sold its Vycom business (Commercial segment) on November 1, 2023, for net proceeds of approximately $131.8 million[38] - The divestiture resulted in a pre-tax gain on sale of $37.7 million, recognized in 'Gain on sale of business' for the year ended September 30, 2024[38] 4. Inventories Inventories are valued at the lower of cost or net realizable value, using the FIFO method, and are reduced for slow-moving and obsolete items. Total inventories remained stable at $224.1 million as of March 31, 2025, compared to $223.7 million as of September 30, 2024 | Inventories (in thousands) | March 31, 2025 | September 30, 2024 | | :------------------------- | :------------- | :----------------- | | Raw materials | $51,104 | $52,370 | | Work in process | $26,634 | $25,650 | | Finished goods | $146,314 | $145,662 | | Total inventories | $224,052 | $223,682 | 5. Property, Plant and Equipment—Net Net property, plant and equipment increased to $488.6 million as of March 31, 2025, from $462.2 million as of September 30, 2024. This increase was primarily driven by additions to buildings and improvements and manufacturing equipment. Depreciation expense for the six months ended March 31, 2025, was $45.6 million, up from $41.5 million in the prior year | Property, Plant and Equipment – Net (in thousands) | March 31, 2025 | September 30, 2024 | | :----------------------------------------------- | :------------- | :----------------- | | Land | $5,560 | $3,209 | | Buildings and improvements | $153,429 | $115,828 | | Manufacturing equipment | $700,616 | $668,044 | | Total property, plant and equipment | $907,249 | $831,987 | | Construction in progress | $54,484 | $59,006 | | Accumulated depreciation | $(473,129) | $(428,792) | | Total property, plant and equipment – net | $488,604 | $462,201 | - Depreciation expense was approximately $45.6 million for the six months ended March 31, 2025, compared to $41.5 million for the six months ended March 31, 2024[41] 6. Goodwill and Intangible Assets—Net Goodwill increased to $974.4 million as of March 31, 2025, primarily due to acquisitions within the Residential segment. Finite-lived intangible assets, including proprietary knowledge, trademarks, and customer relationships, decreased to $138.0 million, with a weighted-average amortization period of 10.3 years | Goodwill (in thousands) | Residential | Commercial | Total | | :---------------------- | :---------- | :--------- | :---- | | Goodwill, net as of September 30, 2024 | $953,882 | $13,934 | $967,816 | | Acquisition | $6,569 | — | $6,569 | | Goodwill, net as of March 31, 2025 | $960,451 | $13,934 | $974,385 | - During the six months ended March 31, 2025, the Company acquired two businesses for a total of $18.5 million, which are included in the Residential segment[42] | Finite-Lived Intangible Assets (in thousands) | March 31, 2025 Net Carrying Value | September 30, 2024 Net Carrying Value | | :-------------------------------------------- | :-------------------------------- | :-------------------------------- | | Proprietary knowledge | $26,087 | $32,132 | | Trademarks | $45,513 | $50,715 | | Customer relationships | $64,955 | $69,852 | | Patents | $1,446 | $1,785 | | Other intangibles | $27 | $34 | | Total intangible assets | $138,028 | $154,518 | - Amortization expense was $17.3 million for the six months ended March 31, 2025, down from $20.0 million in the prior year. The remaining weighted-average amortization period for acquired intangible assets was 10.3 years as of March 31, 2025[43] 7. Composition of Certain Balance Sheet Accounts The allowance for doubtful accounts increased slightly to $1.039 million as of March 31, 2025. Accrued expenses and other liabilities decreased to $81.3 million from $87.6 million, primarily due to lower employee-related liabilities and taxes, partially offset by increases in marketing and freight | Allowance for Doubtful Accounts (in thousands) | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :--------------------------------------------- | :------------------------------ | :------------------------------ | | Beginning balance | $941 | $1,773 | | Provision (release) | $98 | $(493) | | Divestiture | — | $(32) | | Ending balance | $1,039 | $1,248 | | Accrued Expenses and Other Liabilities (in thousands) | March 31, 2025 | September 30, 2024 | | :---------------------------------------------------- | :------------- | :----------------- | | Employee related liabilities | $35,557 | $45,099 | | Marketing | $6,168 | $3,465 | | Professional fees | $3,058 | $4,674 | | Taxes | $2,226 | $3,707 | | Total accrued expenses and other current liabilities | $81,341 | $87,618 | 8. Debt The AZEK Group LLC refinanced its credit facilities on September 26, 2024, entering into a new $440.0 million 2024 Term Loan Facility and a $375.0 million 2024 Revolving Credit Facility. As of March 31, 2025, $438.9 million was outstanding under the Term Loan Facility, with no outstanding borrowings on the Revolving Credit Facility, which had $372.7 million available. Interest expense, net, decreased by $1.6 million for the six months ended March 31, 2025, compared to the prior year | Debt (in thousands) | March 31, 2025 | September 30, 2024 | | :------------------ | :------------- | :----------------- | | 2024 Term Loan Facility | $438,900 | $440,000 | | Total | $438,900 | $440,000 | | Long-term debt—less current portion and unamortized deferred financing costs | $427,970 | $429,668 | - On September 26, 2024, The AZEK Group LLC entered into a new $440.0 million 2024 Term Loan Facility and a new $375.0 million 2024 Revolving Credit Facility, replacing previous credit facilities[47][48][50] - As of March 31, 2025, $438.9 million was outstanding under the 2024 Term Loan Facility, and there were no outstanding borrowings under the 2024 Revolving Credit Facility, with $372.7 million available for future borrowings[56][57] | Interest Expense, Net (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Interest expense, net | $7,353 | $8,680 | $15,016 | $16,590 | 9. Product Warranties The Company provides product warranties ranging from 5 years to lifetime. The warranty reserve balance as of March 31, 2025, was $19.0 million, with $5.2 million classified as current. Adjustments to the reserve for the six months ended March 31, 2025, were $2.8 million, and warranty claims payments were $2.1 million | Warranty Reserve Activity (in thousands) | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :------------------------------------- | :------------------------------ | :------------------------------ | | Beginning balance | $18,291 | $17,012 | | Adjustments to reserve | $2,811 | $151 | | Warranty claims payment | $(2,086) | $(1,538) | | Ending balance | $19,016 | $15,625 | | Current portion of accrued warranty | $(5,182) | $(3,699) | | Accrued warranty – less current portion | $13,834 | $11,926 | 10. Leases The Company leases various assets under operating and finance leases. Total lease assets increased to $128.6 million as of March 31, 2025, from $102.8 million, and total lease liabilities increased to $140.9 million from $114.4 million. Total lease expense for the six months ended March 31, 2025, was $10.0 million, up from $7.9 million in the prior year | Leases (in thousands) | March 31, 2025 | September 30, 2024 | | :-------------------- | :------------- | :----------------- | | ROU operating lease assets | $39,027 | $22,881 | | ROU finance lease assets | $89,545 | $79,916 | | Total lease assets | $128,572 | $102,797 | | Total lease liabilities | $140,889 | $114,357 | | Lease Expense (in thousands) | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :--------------------------- | :------------------------------ | :------------------------------ | | Operating lease expense | $3,392 | $2,874 | | Finance lease amortization of assets | $3,564 | $2,583 | | Finance lease interest on lease liabilities | $2,876 | $2,206 | | Total lease expense | $10,002 | $7,897 | | Weighted-Average Lease Terms/Rates | March 31, 2025 | September 30, 2024 | | :--------------------------------- | :------------- | :----------------- | | Operating leases (years) | 9.8 | 8.6 | | Finance leases (years) | 21.8 | 23.2 | | Operating leases discount rate | 6.4% | 6.5% | | Finance leases discount rate | 5.9% | 6.2% | 11. Fair Value of Financial Instruments The Company uses interest rate derivative instruments (swaps) to hedge against interest rate volatility on its Senior Secured Credit Facilities, converting a portion of floating-rate debt to fixed-rate. As of March 31, 2025, the fair value of interest rate swaps was a liability of $0.6 million, classified as Level 2. The Company expects to reclassify approximately $0.6 million as an increase to interest expense in the next 12 months - The Company uses interest rate swap agreements to hedge against interest rate volatility on its Senior Secured Credit Facilities, converting $300 million notional amount of variable interest to fixed rates (4.39% and 4.48%) until October 31, 2025[65] | Fair Value of Interest Rate Derivative Instruments (in thousands) | March 31, 2025 | September 30, 2024 | | :------------------------------------------------ | :------------- | :----------------- | | Interest rate swaps (Other current liabilities) | $601 | $1,902 | | Interest rate swaps (Other non-current liabilities) | — | $335 | - The Company expects to reclassify approximately $0.6 million ($0.4 million after-tax) as an increase to interest expense in the next 12 months from accumulated other comprehensive income (loss)[67] 12. Segments The Company operates in two reportable segments: Residential and Commercial. The Residential segment, driven by home repair and remodel activity, saw net sales increase by 13.3% and Adjusted EBITDA by 15.1% for the six months ended March 31, 2025. The Commercial segment, impacted by the Vycom divestiture and weaker demand, experienced a 14.1% decrease in net sales and a 41.6% decrease in Adjusted EBITDA for the same period - The Company has two reportable segments: Residential (decking, rail, trim, etc.) and Commercial (lockers, bathroom partitions)[72][73] | Segment Net Sales (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Residential | $437,041 | $402,541 | $709,040 | $625,541 | | Commercial | $15,190 | $15,867 | $28,620 | $33,311 | | Total | $452,231 | $418,408 | $737,660 | $658,852 | | Segment Adjusted EBITDA (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Residential | $122,474 | $110,386 | $186,854 | $162,365 | | Commercial | $1,899 | $2,897 | $3,387 | $5,802 | | Total Adjusted EBITDA for reporting segments | $124,373 | $113,283 | $190,241 | $168,167 | 13. Capital Stock The Board of Directors authorized a Share Repurchase Program of up to $600 million, in addition to the remaining $76 million from a prior authorization. For the six months ended March 31, 2025, the Company repurchased 159 thousand shares for $85 thousand, at an average price of $53.87 per share. As of March 31, 2025, $557.0 million remained available under the program - The Board of Directors authorized a Share Repurchase Program of up to $600 million on June 12, 2024, in addition to approximately $76 million remaining from a prior authorization[75][76] | Share Repurchases (in thousands, except per share) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total number of shares repurchased | — | 961 | 159 | 3,252 | | Reacquisition cost | $— | $25,415 | $85 | $126,215 | | Average price per share | $— | $44.32 | $53.87 | $38.81 | - As of March 31, 2025, approximately $557.0 million was available for repurchases under the Share Repurchase Program[78] 14. Stock-Based Compensation The Company grants stock-based awards under the 2020 Omnibus Incentive Compensation Plan. Stock-based compensation expense for the six months ended March 31, 2025, was $9.6 million, down from $14.8 million in the prior year. As of March 31, 2025, $30.3 million of unrecognized compensation cost remained, with a weighted-average recognition period of 2.0 years | Stock-Based Compensation Expense (in millions) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :--------------------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Stock-based compensation expense | $4.7 | $6.3 | $9.6 | $14.8 | | Income tax benefit | $1.2 | $1.3 | $2.4 | $3.0 | - As of March 31, 2025, the Company had $30.3 million of unrecognized compensation cost on unvested stock-based awards, with a weighted average remaining recognition period of 2.0 years[84] | Stock Option Activity (Six Months Ended March 31, 2025) | Performance-Based | Service-Based | | :---------------------------------------------------- | :---------------- | :------------ | | Outstanding at October 1, 2024 (shares) | 849,348 | 2,879,532 | | Exercised (shares) | (278,826) | (490,532) | | Outstanding at March 31, 2025 (shares) | 570,522 | 2,441,497 | | Vested and exercisable at March 31, 2025 (shares) | 570,522 | 2,209,356 | | Restricted Stock Unit Activity (Six Months Ended March 31, 2025) | Performance-Based | Service-Based | | :------------------------------------------------------------- | :---------------- | :------------ | | Outstanding and unvested at October 1, 2024 (shares) | 590,072 | 677,024 | | Granted (shares) | 151,284 | 235,986 | | Vested (shares) | (55,859) | (277,567) | | Forfeited (shares) | (83,539) | (39,577) | | Outstanding and unvested at March 31, 2025 (shares) | 549,176 | 595,866 | 15. Earnings Per Share Basic EPS for the three months ended March 31, 2025, was $0.38, up from $0.34 in the prior year, while diluted EPS was $0.37, also up from $0.34. For the six months, basic and diluted EPS were $0.50, slightly down from $0.51 in the prior year. Certain stock options and restricted stock units were anti-dilutive and excluded from diluted EPS calculations | Net Income Per Common Share | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :-------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income | $54,285 | $49,758 | $72,409 | $74,906 | | Basic EPS | $0.38 | $0.34 | $0.50 | $0.51 | | Diluted EPS | $0.37 | $0.34 | $0.50 | $0.51 | | Anti-Dilutive Shares | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Stock Options | 129,202 | 425,571 | 96,846 | 499,300 | | Restricted Stock Units | 123,533 | 6,958 | 72,343 | 4,075 | 16. Income Taxes The effective income tax rate for the three months ended March 31, 2025, increased to 24.6% from 23.5% in the prior year, primarily due to lower tax benefits from stock-based compensation and higher taxable income. For the six months, the rate decreased to 21.0% from 29.9%, mainly due to the removal of tax effects related to the Vycom business sale | Effective Income Tax Rate | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :------------------------ | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Effective income tax rate | 24.6% | 23.5% | 21.0% | 29.9% | - The increase in the effective income tax rate for the three months ended March 31, 2025, was primarily driven by lower tax benefits related to stock-based compensation and higher taxable income[93] - The decrease in the effective income tax rate for the six months ended March 31, 2025, was primarily driven by tax benefits related to stock-based compensation and the removal of the tax effects related to the sale of the Vycom business[93] 17. Commitments and Contingencies The Company is subject to various legal actions in the normal course of business. Management believes the outcome of current actions will not have a material adverse effect on financial results, though ultimate resolution could be material in a future period. Losses are accrued when probable and estimable - The Company is subject to various legal actions, but management believes the outcome of current actions will not have a material adverse effect on the Company's results of operations or financial position[94] 18. Condensed Financial Information of Registrant (Parent Company Only) The AZEK Company Inc. operates as a holding company, with its financial position primarily consisting of investments in subsidiaries. Total assets and stockholders' equity for the parent company were $1,454.2 million as of March 31, 2025. No cash dividends were paid from subsidiaries to the parent company during the three and six months ended March 31, 2025, compared to $25.0 million and $125.0 million in the prior year, respectively. Restricted payment covenants in the Senior Secured Credit Facilities limit dividend payments from subsidiaries | Parent Company Balance Sheet (in thousands) | March 31, 2025 | September 30, 2024 | | :------------------------------------------ | :------------- | :----------------- | | Investments in subsidiaries | $1,454,173 | $1,356,865 | | Total assets | $1,454,173 | $1,356,865 | | Total stockholders' equity | $1,454,173 | $1,356,865 | - No cash dividends were paid to The AZEK Company Inc. from its consolidated subsidiaries during the three and six months ended March 31, 2025. In contrast, $25.0 million and $125.0 million were paid during the three and six months ended March 31, 2024, respectively[100][102] - The Senior Secured Credit Facilities contain covenants restricting dividend payments by The AZEK Group LLC unless certain conditions are met, including a Total Net Leverage Ratio no greater than 3.75:1.00[104][175] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, highlighting the proposed merger with James Hardie, the recent divestiture of the Vycom business, and a detailed analysis of financial performance for the three and six months ended March 31, 2025, compared to the prior year. It also discusses segment results, non-GAAP financial measures, liquidity, capital resources, critical accounting policies, and recently issued accounting pronouncements Overview This section provides a high-level summary of the Company's business, recent strategic developments, and key financial highlights - The AZEK Company is a leading designer and manufacturer of low-maintenance, environmentally sustainable outdoor living products, operating in Residential and Commercial segments[108] - The Company entered into a Merger Agreement with James Hardie Industries plc on March 23, 2025, expecting to close in the second half of calendar year 2025, with AZEK becoming an indirect wholly-owned subsidiary[110][112] - The Vycom business within the Commercial segment was divested on November 1, 2023, for approximately $131.8 million, allowing focus on higher-value business portions and providing cash for capital allocation[113] Results of Operations This section analyzes the Company's financial performance, including net sales, gross profit, operating income, and net income, for the current and prior periods | (U.S. dollars in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | $ Variance | % Variance | | :-------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Net sales | $452,231 | $418,408 | $33,823 | 8.1% | | Cost of sales | $284,538 | $261,335 | $23,203 | 8.9% | | Gross profit | $167,693 | $157,073 | $10,620 | 6.8% | | Selling, general and administrative expenses | $88,267 | $83,198 | $5,069 | 6.1% | | Operating income | $79,394 | $73,962 | $5,432 | 7.3% | | Interest expense, net | $7,353 | $8,680 | $(1,327) | (15.3)% | | Income tax expense | $17,756 | $15,309 | $2,447 | 16.0% | | Net income | $54,285 | $49,758 | $4,527 | 9.1% | - Net sales for the three months ended March 31, 2025, increased by 8.1% primarily due to higher sales volume in the Residential segment, expanded channel presence, and new products[117] - Gross profit margin decreased to 37.1% for the three months ended March 31, 2025, from 37.5% in the prior year, due to increased freight costs and lower plant utilization, partially offset by higher net sales[119] | (U.S. dollars in thousands) | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | $ Variance | % Variance | | :-------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Net sales | $737,660 | $658,852 | $78,808 | 12.0% | | Cost of sales | $466,416 | $411,129 | $55,287 | 13.4% | | Gross profit | $271,244 | $247,723 | $23,521 | 9.5% | | Selling, general and administrative expenses | $163,154 | $160,444 | $2,710 | 1.7% | | Operating income | $106,644 | $85,181 | $21,463 | 25.2% | | Interest expense, net | $15,016 | $16,590 | $(1,574) | (9.5)% | | Gain on sale of business | — | $(38,300) | $38,300 | 100.0% | | Income tax expense | $19,219 | $31,985 | $(12,766) | (39.9)% | | Net income | $72,409 | $74,906 | $(2,497) | (3.3)% | - Net sales for the six months ended March 31, 2025, increased by 12.0% due to higher sales volume in the Residential segment, partially offset by the Vycom divestiture and weaker demand in the Commercial segment[126] - Net income decreased by 3.3% for the six months ended March 31, 2025, primarily reflecting the impact from the Vycom divestiture gain on sale in the prior year[135] Segment Results of Operations This section analyzes the financial performance of the Company's Residential and Commercial segments, including net sales and Adjusted EBITDA | Residential Segment (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net sales | $437,041 | $402,541 | $709,040 | $625,541 | | Segment Adjusted EBITDA | $122,474 | $110,386 | $186,854 | $162,365 | | Segment Adjusted EBITDA Margin | 28.0% | 27.4% | 26.4% | 26.0% | - Residential segment net sales increased by 8.6% for the three months and 13.3% for the six months ended March 31, 2025, driven by Deck, Rail & Accessories and Exteriors businesses[139][140] - Residential Segment Adjusted EBITDA increased by 11.0% for the three months and 15.1% for the six months ended March 31, 2025, mainly due to higher net sales[141] | Commercial Segment (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net sales | $15,190 | $15,867 | $28,620 | $33,311 | | Segment Adjusted EBITDA | $1,899 | $2,897 | $3,387 | $5,802 | | Segment Adjusted EBITDA Margin | 12.5% | 18.3% | 11.8% | 17.4% | - Commercial segment net sales decreased by 4.3% for the three months and 14.1% for the six months ended March 31, 2025, due to weaker demand in Scranton Products and the Vycom divestiture[144][145] - Commercial Segment Adjusted EBITDA decreased by 34.4% for the three months and 41.6% for the six months ended March 31, 2025, driven by lower net sales and higher purchased material costs[146][147] Non-GAAP Financial Measures This section provides reconciliations and explanations for non-GAAP financial measures used by management to assess the Company's performance - The Company uses non-GAAP financial measures such as Adjusted Gross Profit, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA, and Free Cash Flow to provide additional insights into financial performance, excluding certain expenses not indicative of core operations[148][151] | Non-GAAP Financial Measures (in thousands, except per share) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Six Months Ended March 31, 2025 | Six Months Ended March 31, 2024 | | :--------------------------------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Adjusted Gross Profit | $170,940 | $160,865 | $277,623 | $255,384 | | Adjusted Gross Profit Margin | 37.8% | 38.4% | 37.6% | 38.8% | | Adjusted Net Income | $65,602 | $58,320 | $90,698 | $73,352 | | Adjusted Diluted EPS | $0.45 | $0.39 | $0.62 | $0.49 | | Adjusted EBITDA | $124,373 | $113,283 | $190,241 | $168,167 | | Adjusted EBITDA Margin | 27.5% | 27.1% | 25.8% | 25.5% | | Free Cash Flow | $653 | $(34,004) | $(7,378) | $(67,973) | - Adjusted EBITDA for the six months ended March 31, 2025, increased to $190.2 million from $168.2 million in the prior year, with Adjusted EBITDA Margin increasing to 25.8% from 25.5%[150][167] - Free Cash Flow for the six months ended March 31, 2025, improved to $(7.4) million from $(68.0) million in the prior year, reflecting improved operating cash flows[150][170] Liquidity and Capital Resources This section discusses the Company's ability to generate and manage cash flows, including cash balances, debt, credit facilities, and capital allocation strategies - As of March 31, 2025, the Company had cash and cash equivalents of $146.7 million and total indebtedness of $438.9 million[171] - The AZEK Group LLC had approximately $372.7 million available under its 2024 Revolving Credit Facility for future borrowings as of March 31, 2025[171][178] - Net cash provided by operating activities increased by $91.7 million to $60.6 million for the six months ended March 31, 2025, primarily due to a slower inventory build and timing of rebate payments[181] - Net cash used in investing activities was $(85.9) million for the six months ended March 31, 2025, primarily for property, plant and equipment purchases ($68.0 million) and acquisitions ($18.2 million)[182] - Net cash provided by financing activities was $7.9 million for the six months ended March 31, 2025, mainly from stock option exercises, partially offset by debt principal payments and excise taxes for share repurchases[183] - As of March 31, 2025, $557.0 million remained available for repurchases under the Share Repurchase Program[186] Critical Accounting Policies and Estimates This section describes the accounting policies that require significant judgment and estimates, which could materially affect the Company's financial results - There have been no material changes to the Company's critical accounting policies compared to those disclosed in the 2024 Form 10-K, except as updated in Note 1 of the Condensed Consolidated Financial Statements[200] Recently Issued Accounting Pronouncements This section outlines new accounting standards that the Company has adopted or plans to adopt, and their potential impact on financial disclosures - The Company intends to adopt ASU 2023-07 (Segment Reporting) for the annual reporting period beginning October 1, 2024, and does not expect a material impact on disclosures[201] - The Company intends to adopt ASU 2023-09 (Income Taxes) for the annual reporting period beginning October 1, 2025, and does not expect a material impact on disclosures[202] - The Company intends to adopt ASU 2024-03 (Expense Disaggregation Disclosures) for the annual reporting period beginning October 1, 2027, and is currently evaluating its impact[203][204] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the Company's exposure to various market risks, including interest rate risk, credit risk, foreign currency risk, inflation, and raw material price volatility. The Company uses interest rate swaps to hedge against variable interest rates on its debt and manages raw material costs through supplier relationships and short-term contracts, but cannot guarantee offsetting future price increases - The Company is subject to interest rate risk on its variable-rate Senior Secured Credit Facilities, with a 100 basis point change impacting annual cash interest by approximately $1.4 million as of March 31, 2025[205] - Interest rate swaps are used to hedge against interest rate volatility, converting $300 million notional amount of floating-rate debt to fixed rates[206] - The Company faces inflationary pressures and price fluctuations for raw materials (petrochemical resins, reclaimed materials, waste wood fiber, aluminum, additives), which are managed through sales price increases and production efficiencies, but future offsets are not guaranteed[209][210][211] - Credit risk is minimal as cash and equivalents are held at major financial institutions. Foreign currency risk is not material as substantially all business is conducted in U.S. dollars[207][208] Item 4. Controls and Procedures Management, including the principal executive and financial officers, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2025. Previously disclosed material weaknesses in internal control over financial reporting have been remediated through redesigned and enhanced controls, including improved segregation of duties, training, and monitoring - The Company's disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2025[212] - Previously identified material weaknesses in internal control over financial reporting have been remediated as of March 31, 2025, following the completion of testing on redesigned and enhanced controls[213][214] - Redesigned and implemented internal controls with external consultant assistance[215] - Enhanced controls for appropriate segregation of duties in IT environment and business processes[215] - Provided training on manual journal entry controls and prompt internal reporting[215] - Enhanced design of inventory reconciliation controls and monitoring level controls for variances[215] - There were no changes in internal control over financial reporting during the quarter ended March 31, 2025, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[214] PART II. Other Information This section provides additional disclosures beyond the financial statements, including legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits Item 1. Legal Proceedings The Company is routinely involved in various legal actions arising from its operations. Currently, management believes no claims or proceedings will have a material adverse effect on the business, financial condition, results of operations, or cash flows, though litigation outcomes are inherently uncertain - The Company is involved in various legal actions, but currently, there are no claims or proceedings believed to have a material adverse effect on its business, financial condition, results of operations, or cash flows[217] Item 1A. Risk Factors This section updates the risk factors from the 2024 Form 10-K, focusing on new risks related to the proposed merger with James Hardie, including uncertainty of merger consideration value due to stock price fluctuations, potential delays or adverse conditions from regulatory approvals, the risk of merger termination and associated costs, business uncertainties and contractual restrictions during the pending merger, and the reduced ownership and influence of AZEK stockholders in the combined company - New risk factors primarily relate to the proposed merger with James Hardie, including uncertainty of the market value of merger consideration due to James Hardie ordinary share price fluctuations[220][221][222] - Risks include potential delays or failure to receive required regulatory approval, which could impose unanticipated conditions or adversely affect the combined company[223][224] - The Merger Agreement may be terminated, leading to adverse consequences such as stock price decline, payment of a $272 million termination fee in certain circumstances, and inability to pursue alternative acquisitions[225][231] - During the pending merger, the Company is subject to business uncertainties and contractual restrictions that could harm business relationships, impair ability to retain key personnel, and divert management resources[226][227][228] - AZEK stockholders will have a reduced ownership (approximately 26%) and voting interest in the combined company after the merger, exercising less influence over management[233] - Changes in trade policies, including tariffs, could negatively impact the Company's business by increasing raw material costs or depressing demand, despite a U.S.-based supply chain[219] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report during the period Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report during the period Item 4. Mine Safety Disclosures There were no mine safety disclosures to report during the period Item 5. Other Information There was no other information to report during the period Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including the Merger Agreement, corporate organizational documents, registration rights agreement, officer certifications, and XBRL interactive data files