The AZEK Company(AZEK) - 2023 Q3 - Quarterly Report

PART I Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for The AZEK Company Inc. as of June 30, 2023 Condensed Consolidated Balance Sheets As of June 30, 2023, total assets slightly decreased to $2.36 billion, with cash doubling to $244.6 million and inventories significantly decreasing Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $244,597 | $120,817 | | Inventories | $221,281 | $299,905 | | Total current assets | $569,647 | $530,594 | | Total assets | $2,358,866 | $2,383,091 | | Liabilities & Equity | | | | Total current liabilities | $167,092 | $182,491 | | Long-term debt—less current portion | $581,418 | $584,879 | | Total liabilities | $921,051 | $938,648 | | Total stockholders' equity | $1,437,815 | $1,444,443 | Condensed Consolidated Statements of Comprehensive Income Net sales decreased 1.9% to $387.6 million for Q3 2023, while net income increased 26.9% to $34.9 million, but nine-month net income fell 68.4% to $25.3 million Statement of Comprehensive Income Summary (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Nine Months Ended June 30, 2023 | Nine Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $387,553 | $394,991 | $981,504 | $1,050,954 | | Gross profit | $132,200 | $126,387 | $287,952 | $337,456 | | Operating income | $58,550 | $47,650 | $66,398 | $124,728 | | Net income | $34,875 | $27,476 | $25,312 | $80,001 | | Diluted EPS | $0.23 | $0.18 | $0.17 | $0.51 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities significantly increased to $230.0 million for the nine months ended June 30, 2023, driven by inventory reduction Cash Flow Summary (in thousands) | Activity | Nine Months Ended June 30, 2023 | Nine Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $230,043 | $65,700 | | Net cash used in investing activities | $(54,047) | $(225,809) | | Net cash provided by (used in) financing activities | $(52,216) | $69,194 | | Net increase (decrease) in cash | $123,780 | $(90,915) | | Cash and cash equivalents – End of period | $244,597 | $159,621 | Notes to Unaudited Condensed Consolidated Financial Statements This section details accounting policies, including revenue recognition, business combinations, debt structure, segment performance, and share repurchase activities - In Q3 2023, the company completed a secondary offering where selling stockholders sold 16.1 million shares, and the company repurchased 1.48 million shares for approximately $36.0 million as part of the offering[22] - On August 1, 2022, the company acquired INTEX Millwork Solutions for a total purchase price of approximately $25.9 million, which included $20.1 million in cash and $5.8 million in contingent consideration[34] - As of June 30, 2023, the company had $595.5 million outstanding under its 2022 Term Loan Agreement and no outstanding borrowings under its $150.0 million Revolving Credit Facility[53][54][56] - In November 2022, the company entered into two interest rate swap agreements, each with a notional amount of $150 million, to hedge against interest rate volatility on its term loan[69] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 and nine-month fiscal 2023 financial results, highlighting sales declines due to volume, segment performance, non-GAAP measures, and liquidity Results of Operations Q3 2023 net sales decreased 1.9% to $387.6 million due to volume declines, while nine-month net sales fell 6.6% to $981.5 million with net income down 68.4% Q3 2023 vs Q3 2022 Performance (in thousands) | Metric | Q3 2023 | Q3 2022 | $ Variance | % Variance | | :--- | :--- | :--- | :--- | :--- | | Net sales | $387,553 | $394,991 | $(7,438) | (1.9)% | | Gross profit | $132,200 | $126,387 | $5,813 | 4.6% | | Operating income | $58,550 | $47,650 | $10,900 | 22.9% | | Net income | $34,875 | $27,476 | $7,399 | 26.9% | Nine Months 2023 vs 2022 Performance (in thousands) | Metric | 9M 2023 | 9M 2022 | $ Variance | % Variance | | :--- | :--- | :--- | :--- | :--- | | Net sales | $981,504 | $1,050,954 | $(69,450) | (6.6)% | | Gross profit | $287,952 | $337,456 | $(49,504) | (14.7)% | | Operating income | $66,398 | $124,728 | $(58,330) | (46.8)% | | Net income | $25,312 | $80,001 | $(54,689) | (68.4)% | - The decrease in nine-month net sales was primarily due to a 16% decline in volume, resulting from channel inventory reductions in the first part of the fiscal year[125] Segment Results of Operations The Residential segment saw 2.5% Q3 sales growth, while the Commercial segment experienced a significant 30.8% Q3 sales drop due to channel inventory drawdowns Residential Segment Performance (in thousands) | Metric | Q3 2023 | Q3 2022 | % Variance | 9M 2023 | 9M 2022 | % Variance | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $351,608 | $343,064 | 2.5% | $873,208 | $914,555 | (4.5)% | | Segment Adjusted EBITDA | $105,503 | $91,093 | 15.8% | $211,885 | $258,874 | (18.2)% | Commercial Segment Performance (in thousands) | Metric | Q3 2023 | Q3 2022 | % Variance | 9M 2023 | 9M 2022 | % Variance | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $35,945 | $51,927 | (30.8)% | $108,296 | $136,399 | (20.6)% | | Segment Adjusted EBITDA | $8,780 | $12,271 | (28.4)% | $21,763 | $25,693 | (15.3)% | Non-GAAP Financial Measures Non-GAAP measures show Q3 2023 Adjusted EBITDA at $97.0 million and nine-month Free Cash Flow significantly improved to $176.0 million Non-GAAP Performance Summary (in thousands) | Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :--- | :--- | :--- | :--- | :--- | | Adjusted Gross Profit | $156,183 | $147,554 | $358,784 | $398,398 | | Adjusted Net Income | $45,046 | $45,241 | $58,187 | $124,781 | | Adjusted EBITDA | $96,955 | $86,524 | $184,865 | $235,964 | | Free Cash Flow | $160,126 | $107,747 | $175,984 | $(73,791) | Liquidity and Capital Resources As of June 30, 2023, the company had $244.6 million in cash and $147.2 million available credit, with operating cash flow increasing to $230.0 million for the nine months - The company's liquidity position as of June 30, 2023, includes $244.6 million in cash and cash equivalents and $147.2 million available under its Revolving Credit Facility[155] - Net cash from operating activities increased by $164.3 million to $230.0 million for the nine months ended June 30, 2023, primarily due to a decrease in inventory[161] - Under its Share Repurchase Program, the company repurchased 1.95 million shares for $48.5 million in Q3 2023, with approximately $262.5 million remaining available for future repurchases as of June 30, 2023[164][165] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations, inflation, and raw material price volatility, with a 100-basis-point interest rate change impacting annual cash interest by $3.0 million - A 100 basis point increase or decrease in floating interest rates would change annual cash interest by approximately $3.0 million as of June 30, 2023[174] - The company has entered into interest rate swaps on a notional amount of $300 million to convert variable-rate debt to a fixed rate, hedging against interest rate volatility[174] - The company faces inflationary pressures and price fluctuations for key raw materials such as polyethylene, PVC resins, and wood fiber, which it attempts to offset through price increases and production efficiencies[177][178] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[180] - No changes occurred during the quarter ended June 30, 2023, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[181] PART II. Other Information Legal Proceedings The company is involved in various legal actions but does not expect any material adverse effects on its financial condition or operations - The company states that there are no current legal claims or proceedings that are expected to have a material adverse effect on its business, financial condition, or cash flows[183] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's 2022 Form 10-K - No material changes have been made to the risk factors disclosed in the company's 2022 Form 10-K since September 30, 2022[184] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2023, the company repurchased 1,946,747 shares of Class A common stock at an average price of $24.90 per share Issuer Purchases of Equity Securities (Q3 2023) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Value of Shares Remaining for Repurchase | | :--- | :--- | :--- | :--- | | May 2023 | 1,603,307 | $25.39 (calculated) | $271,637,771 | | June 2023 | 343,440 | $26.46 (calculated) | $262,548,740 | | Total | 1,946,747 | $24.90 (reported) | N/A | - The repurchases in Q3 2023 included 1,477,832 shares bought from the underwriter in the secondary offering for ~$36.0 million and 468,915 shares bought on the open market for ~$12.0 million[187] Other Information CEO Jesse Singh established a Rule 10b5-1 trading plan for the potential sale of up to 143,000 Class A common shares - CEO Jesse Singh established a Rule 10b5-1 trading plan on May 10, 2023, for the sale of up to 143,000 shares of Class A common stock over a one-year period starting September 11, 2023[189] Exhibits This section lists exhibits filed with the report, including certifications and XBRL data files - The report includes standard filings such as CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906, and Inline XBRL documents[191]