The AZEK Company(AZEK) - 2021 Q3 - Quarterly Report

PART I. Financial Information This section provides the unaudited financial statements, management's discussion, market risk disclosures, and controls and procedures Item 1. Financial Statements (Unaudited) The AZEK Company Inc.'s unaudited condensed consolidated financial statements for the three and nine months ended June 30, 2021, are presented Condensed Consolidated Balance Sheets Total assets increased to $2.04 billion from $1.93 billion, driven by inventory and PPE growth, while liabilities and equity also rose Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 | September 30, 2020 | | :--- | :--- | :--- | | Total current assets | $494,146 | $424,695 | | Total assets | $2,043,975 | $1,931,856 | | Total current liabilities | $137,569 | $124,040 | | Total liabilities | $661,802 | $627,968 | | Total stockholders' equity | $1,382,173 | $1,303,888 | Condensed Consolidated Statements of Comprehensive Income (Loss) Net sales grew 46.4% to $327.5 million in Q3 2021, leading to a net income of $21.8 million compared to a prior-year net loss Income Statement Summary (in thousands, except per share data) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $327,454 | $223,711 | $832,854 | $635,339 | | Gross profit | $106,867 | $75,123 | $277,707 | $205,786 | | Operating income (loss) | $34,799 | $7,970 | $91,265 | $40,346 | | Net income (loss) | $21,769 | $(52,116) | $54,609 | $(57,874) | | Diluted EPS | $0.14 | $(0.44) | $0.35 | $(0.51) | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $1.38 billion by June 30, 2021, primarily due to $54.6 million in net income and $19.3 million in stock-based compensation for the nine-month period - The increase in total stockholders' equity to $1.38 billion by June 30, 2021, was mainly due to the $54.6 million in net income and $19.3 million in stock-based compensation for the nine-month period[16] Condensed Consolidated Statements of Cash Flows Net cash from operating activities surged to $118.7 million, while investing activities increased to $116.0 million for capacity expansion, and financing activities significantly decreased Cash Flow Summary (in thousands) | Activity | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $118,728 | $11,286 | | Net cash used in investing activities | $(115,999) | $(72,998) | | Net cash from financing activities | $2,723 | $170,876 | | Net increase in cash | $5,452 | $109,164 | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail accounting policies, secondary offerings with no proceeds, debt amendments for reduced interest, and strong 37.2% sales growth in the Residential segment - The company completed secondary offerings in January and June 2021, where shares were sold by existing stockholders. The company did not receive any proceeds from these sales but incurred approximately $2.3 million in related expenses[26][28] Segment Net Sales (in thousands) | Segment | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | YoY Change | | :--- | :--- | :--- | :--- | | Residential | $739,048 | $538,514 | +37.2% | | Commercial | $93,806 | $96,825 | -3.1% | | Total | $832,854 | $635,339 | +31.1% | - As of June 30, 2021, total long-term debt was $464.4 million, primarily consisting of the Term Loan due 2024. The company amended its Term Loan Agreement in February 2021 and its Revolving Credit Facility in March 2021, resulting in reduced interest rates[56][57][59] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong financial performance, driven by the Residential segment, addressing raw material inflation, supply chain disruptions, and expanded capital expenditure plans Results of Operations Q3 2021 net sales increased 46.4% YoY to $327.5 million, leading to a net income of $21.8 million, despite gross margin contraction due to higher costs Q3 2021 vs. Q3 2020 Performance (in thousands) | Metric | Q3 2021 | Q3 2020 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $327,454 | $223,711 | 46.4% | | Gross profit | $106,867 | $75,123 | 42.3% | | Operating income | $34,799 | $7,970 | 336.6% | | Net income (loss) | $21,769 | $(52,116) | N/M | - For the nine months ended June 30, 2021, net sales grew 31.1% YoY to $832.9 million, and net income reached $54.6 million compared to a net loss of $57.9 million in the prior year[127][136] Segment Results of Operations The Residential segment drove growth with 51.2% net sales increase to $291.2 million and 32.4% Adjusted EBITDA growth, while Commercial also saw sales and EBITDA increases Residential Segment Performance (in thousands) | Metric | Q3 2021 | Q3 2020 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $291,209 | $192,599 | 51.2% | | Segment Adjusted EBITDA | $82,525 | $62,326 | 32.4% | Commercial Segment Performance (in thousands) | Metric | Q3 2021 | Q3 2020 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $36,245 | $31,112 | 16.5% | | Segment Adjusted EBITDA | $6,273 | $5,024 | 24.9% | Non-GAAP Financial Measures Adjusted EBITDA for Q3 2021 was $72.7 million, with a margin of 22.2%, and Adjusted Net Income was $40.5 million, providing additional insight into core performance Non-GAAP Performance Summary (in thousands) | Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 | | :--- | :--- | :--- | :--- | :--- | | Adjusted Gross Profit | $124,121 | $91,234 | $327,559 | $252,989 | | Adjusted Net Income | $40,533 | $6,249 | $102,822 | $28,278 | | Adjusted EBITDA | $72,716 | $57,820 | $192,680 | $147,444 | Liquidity and Capital Resources The company maintains strong liquidity with $220.5 million in cash and has expanded its capacity investment program to $180.0 million, with additional fiscal 2021 plans - The company's liquidity as of June 30, 2021, consisted of $220.5 million in cash and $145.6 million available under its revolving credit facility[160] - The company has expanded its capital investment for capacity from $100.0 million to $180.0 million, with an additional $50-$60 million planned for fiscal year 2021[161] Item 3. Quantitative and Qualitative Disclosures About Market Risk Primary market risks include interest rate risk on variable-rate debt, customer concentration, and raw material price volatility, with a $4.7 million impact for a 100 basis point interest rate change - A 100 basis point increase or decrease in floating interest rates would change annual cash interest by approximately $4.7 million[180] - As of June 30, 2021, two customers accounted for 13.7% and 12.8% of gross trade accounts receivable, indicating customer concentration risk[181] - The company faces significant price volatility for primary raw materials like polyethylene and PVC resins and has recently been negatively impacted by supply chain disruptions and cost increases[184][207] Item 4. Controls and Procedures Disclosure controls were ineffective due to material weaknesses in the control environment and IT general controls, with a remediation plan underway - Management concluded that disclosure controls and procedures were not effective as of June 30, 2021, due to material weaknesses in internal control over financial reporting[186] - Two material weaknesses existed as of June 30, 2021: (1) an ineffective control environment lacking sufficient resources with appropriate accounting knowledge, and (2) ineffective IT general controls, specifically regarding user access and segregation of duties[189] - The company is implementing a remediation plan that includes hiring experienced finance personnel and enhancing IT controls, but the weaknesses will not be considered remediated until the new controls operate effectively for a sufficient period[196][197][198] PART II. Other Information This section covers legal proceedings, updated risk factors, and other required disclosures, including certifications Item 1. Legal Proceedings The company is involved in routine litigation, but management does not anticipate a material adverse effect on financial condition or operations - The company is subject to ordinary course litigation but does not expect it to have a material adverse effect on its business or financial results[202] Item 1A. Risk Factors Key risk factors include an ownership change limiting NOL use, raw material shortages and price increases, and uncertainty from LIBOR discontinuation potentially raising financing costs - A recent sale of Class A common stock by certain stockholders resulted in an "ownership change" under Section 382 of the tax code, which will impose an annual limit on the company's ability to use its $113.7 million in Net Operating Loss (NOL) carryforwards[204] - The company faces risks from raw material supply shortages, price volatility, and reliance on a single supplier for certain critical compounds. Recent supply chain disruptions have already resulted in increased costs for resin polyethylene and PVC material[205][207] - The planned discontinuation of LIBOR after 2021 creates uncertainty for the company's variable-rate debt under its Revolving Credit Facility and Term Loan Agreement, potentially leading to increased financing costs[209] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities were reported for the period - No unregistered sales of equity securities were reported for the period[212] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - No defaults upon senior securities were reported for the period[212] Item 4. Mine Safety Disclosures No mine safety disclosures were reported for the period - No mine safety disclosures were reported for the period[212] Item 5. Other Information No other information was reported for the period - No other information was reported for the period[212] Item 6. Exhibits This section lists filed exhibits, including certifications by the Principal Executive Officer and Principal Financial Officer, and interactive data files - The report includes certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[214][215][216]