The AZEK Company(AZEK) - 2021 Q4 - Annual Report

PART I Business Overview AZEK is a leading designer and manufacturer of low-maintenance, environmentally sustainable residential and commercial building products, driven by innovation, sustainability, and a comprehensive ESG strategy - AZEK is an industry-leading designer and manufacturer of beautiful, low-maintenance, and environmentally sustainable residential and commercial building products, committed to innovation, sustainability, and R&D[7] - The company's FULL-CIRCLE ESG strategy focuses on positively impacting products, people, and the planet, with a core value of 'always do the right thing'[8] - AZEK aims to use one billion pounds of waste and scrap annually in manufacturing by the end of 2026, having diverted approximately 500 million pounds in fiscal year 2021[8][13] - The company operates in two reportable segments: Residential (89% of FY2021 net sales) and Commercial (11% of FY2021 net sales)[14][15][23] General AZEK, formed in 2013 and incorporated in Delaware in 2020, operates automated manufacturing and recycling facilities across multiple states, with a new Idaho facility planned for 2021 - The AZEK Company Inc. was formed on August 15, 2013, and became a Delaware corporation on June 11, 2020, in connection with its IPO[7] - AZEK operates highly automated manufacturing and recycling facilities in Ohio, Pennsylvania, and Minnesota, with plans to open a new facility in Boise, Idaho in 2021[7] Environmental and Social Responsibility; Corporate Governance AZEK's FULL-CIRCLE ESG strategy, overseen by its governance committee, emphasizes sustainability, waste diversion, increased recycled content, and board diversity, aligning with the UN Global Compact - AZEK's FULL-CIRCLE ESG strategy is overseen by the Nominating and Corporate Governance Committee and an internal ESG Steering Committee[8] - The company is a signatory to the United Nations Global Compact, focusing on human rights, labor, environment, and anti-corruption[8] - In fiscal year 2021, approximately 500 million pounds of scrap and waste were diverted from landfills, and 56% of extruded materials were manufactured from recycled content (up from 54% in FY2020)[8] - AZEK aims to use one billion pounds of waste and scrap annually in manufacturing by the end of 2026[8] - The board of directors includes 10 out of 11 independent directors, with 3 women and 4 diverse ethnicity/race directors (36% board diversity)[9] Business and Growth Strategies AZEK leads the Outdoor Living market by converting from traditional wood to sustainable engineered materials, employing strategies like market acceleration, brand building, innovation, margin expansion, and strategic acquisitions - AZEK is a leader in the Outdoor Living market, driven by material conversion from traditional wood to sustainable, low-maintenance engineered materials[12][13] - Key growth strategies include accelerating market conversion, building a leading consumer brand, introducing innovative products, expanding margins through recycling and productivity, and executing strategic acquisitions[13] - The company's TimberTech PRO and EDGE decking lines are made from approximately 80% recycled material[13][16] Our Brands and Products AZEK's product portfolio spans Residential (TimberTech, AZEK Exteriors, VERSATEX, ULTRALOX) and Commercial (Vycom, Scranton Products) segments - AZEK operates in two segments: Residential (TimberTech, AZEK Exteriors, VERSATEX, ULTRALOX brands) and Commercial (Vycom, Scranton Products brands)[14] Residential Segment The Residential segment, accounting for 89% of FY2021 net sales driven by repair and remodel activity, offers premium decking, railing, and PVC trim products under various brands with strong warranties - Residential segment net sales were $1,044.1 million in fiscal year 2021, representing approximately 89% of total net sales[15] - Demand for Residential products is largely driven by repair and remodel activity (estimated 80% of segment net sales in FY2021)[15] - AZEK offers three primary decking lines: TimberTech AZEK (premium capped polymer), TimberTech PRO (premium capped composite, up to 80% recycled content), and TimberTech EDGE (entry-level capped composite, up to 80% recycled content)[16] - Decking products are backed by industry-leading warranties, from 25-year limited to lifetime limited and 50-year fade and stain warranties[16] - Railing solutions are offered under TimberTech and ULTRALOX brands, including composite and aluminum options, with ULTRALOX enabling on-site customized railing systems[18][19] - PVC trim and moulding products are sold under AZEK Exteriors and VERSATEX brands, offering aesthetic versatility and superior durability compared to wood[20][22] Commercial Segment The Commercial segment, with $134.8 million in FY2021 net sales (11% of total), offers highly engineered polymer materials via Vycom and low-maintenance bathroom partitions and lockers through Scranton Products - Commercial segment net sales were $134.8 million in fiscal year 2021, approximately 11% of total net sales[23] - Vycom manufactures highly engineered polymer materials for various commercial and industrial markets, designed to replace traditional materials like wood and metal[23][24][25] - Scranton Products provides low-maintenance bathroom partitions, shower/dressing stalls, and lockers under brands like Aria, Eclipse, Hiny Hiders, TuffTec, and Duralife, primarily for schools and commercial facilities[23][26] Product Research and Development AZEK's 30-year R&D history, supported by over 30 team members, focuses on material science and production processes, including proprietary color technology and new product development for various price points - AZEK has a 30-year history in R&D, with over 30 team members (including ~20 engineers) as of September 30, 2021, focused on material science and production process technologies[27] - R&D efforts include leveraging proprietary color pigmentation technology for new decking trends and developing products like TimberTech EDGE for entry-level price points[27] Distribution AZEK distributes Residential products through over 4,200 dealers and 35+ distributors, Commercial products via a widespread network and OEMs, with Parksite Inc. accounting for 23% of FY2021 net sales - Residential products are sold through a network of over 4,200 professional dealers and thousands of home improvement retail outlets, served by more than 35 distributors[28][30] - Commercial products are sold through a widespread distribution network and directly to OEMs[28][31] - Parksite Inc. accounted for approximately 23% of AZEK's net sales for the year ended September 30, 2021[30] Operations and Manufacturing AZEK is a vertically-integrated, U.S.-based manufacturer, with approximately 90% of gross sales from extrusion processes, operating nine facilities across six locations, and expanding capabilities through recycling acquisitions and a new Idaho facility - AZEK is a vertically-integrated, U.S.-based manufacturer, with approximately 90% of gross sales from extrusion processes using virgin polymers and recycled materials[32] - The company's manufacturing footprint includes nine facilities across six locations (2.4 million sq ft), with a new facility in Boise, Idaho expected to begin production in fiscal year 2022[32][34] - AZEK expanded its vertical manufacturing capabilities through the acquisition of PVC recycling operation Return Polymers in 2020 and a polyethylene recycling facility in 2019[13][32][34] Sales and Marketing Residential sales and marketing focus on downstream demand and brand building for TimberTech, while Commercial sales target engineered polymer solutions for Vycom and facility managers for Scranton Products - Residential sales focus on generating downstream demand with contractors, architects, and builders, and strengthening relationships with dealers and retailers[35] - The TimberTech brand unifies decking and railing products, supported by 'Go Against the Grain' and 'Better Tech, Better Deck' campaigns[35] - Commercial sales for Vycom focus on engineered polymer solutions for various industries, while Scranton Products targets architects and facility managers for bathroom partitions and lockers[37] Raw Materials and Suppliers AZEK's primary raw materials, including petrochemical resins and recycled content, face significant price volatility, and the company relies on a single supplier for certain critical capped compounds without hedging these costs - Primary raw materials include petrochemical resins (polyethylene, polypropylene, PVC), reclaimed polyethylene and PVC, waste wood fiber, and aluminum[38] - Raw material costs are subject to significant price volatility, influenced by supply/demand and crude oil prices; AZEK does not currently hedge these costs[38] - AZEK relies on a single supplier for certain critical capped compounds used in decking and railing products[38][57] Competition AZEK faces competition in the residential segment from traditional and engineered product manufacturers like Trex and Fiberon, while the commercial segment is highly fragmented with specialized competitors - AZEK competes with manufacturers of wood, aluminum, engineered wood, and other engineered products like Trex Company Inc., Fiberon, LLC, and Deckorators in the residential segment[41] - Commercial segment competition is highly fragmented, with Vycom competing against specialized manufacturers and Scranton Products against other partition and locker system providers[42] Seasonality Residential product sales typically peak in the second fiscal quarter due to 'early buy' sales and are lower in the first quarter due to winter weather, while commercial sales are higher in the second half, aligning with summer remodels - Sales of residential products typically peak in the second fiscal quarter due to 'early buy' sales and extended payment terms, leading to seasonal peaks in accounts receivable[43] - Lower residential sales are common in the first fiscal quarter due to adverse winter weather conditions[43] - Commercial bathroom partition and locker sales are higher in the second half of the fiscal year, aligning with school remodel activities during summer[43] Intellectual Property AZEK protects its brands with approximately 350 trademark registrations and leverages unpatented know-how, trade secrets, and 146 issued patents and pending applications globally - AZEK relies on trademark and service mark protection for brands like AZEK, TimberTech, and VERSATEX, holding approximately 350 trademark registrations[44] - The company also uses unpatented proprietary know-how, trade secrets, and patents, with 146 issued patents and pending applications globally (104 issued U.S. patents)[44] Employees and Human Capital As of September 30, 2021, AZEK had 2,072 non-unionized full-time employees and focuses on diversity, equity, and inclusion through engagement surveys and performance-based stock grants - As of September 30, 2021, AZEK had 2,072 full-time employees; the workforce is not unionized[48] - The company focuses on diversity, equity, and inclusion, conducting annual employee engagement surveys and offering performance-based stock grants[9][46][47] Environmental Laws and Regulations; Health and Safety AZEK's operations are subject to extensive federal, state, and local environmental, health, and safety regulations, and the company believes it complies with all material laws and possesses necessary permits - AZEK's operations are subject to extensive federal, state, and local environmental, health, and safety laws and regulations, including permitting requirements[49] - The company believes it complies with all material environmental laws and regulations and possesses necessary permits[49] Risk Factors Investing in AZEK's Class A common stock involves significant risks, including those from the COVID-19 pandemic, economic conditions, raw material supply, competition, seasonality, innovation, manufacturing, and financial factors like indebtedness - The COVID-19 pandemic continues to adversely affect AZEK's business through supply chain disruptions, increased raw material and freight costs, potential operational disruptions from outbreaks, and reduced consumer demand[54] - Demand for products is significantly influenced by general economic conditions, consumer spending on outdoor living and home exteriors, repair and remodel activity, and new construction[55][56] - Risks include shortages, price increases, or quality deviations of raw materials (petrochemical resins, recycled materials, wood fiber, aluminum), with reliance on single suppliers for certain critical compounds[57][58] - AZEK operates in a competitive environment, facing competition from wood, metal, and other engineered product manufacturers, and relies on continued material conversion from traditional products[59] - Quarterly operating results may fluctuate due to seasonality (higher residential sales in Q2, lower in Q1), adverse weather conditions, and changes in product mix affecting margins[61][62] - Failure to successfully develop and introduce new products, or manage manufacturing changes (e.g., new facilities, recycling initiatives), could adversely affect the business[63][65] - The company's indebtedness ($467.7 million as of Sep 30, 2021) could limit financial flexibility, increase vulnerability to economic conditions, and expose it to interest rate risk[101][102][112] - The market price of Class A common stock may be volatile due to various factors, including operating results, analyst expectations, stock sales, and economic trends[115][117] Summary Risk Factors Key risks encompass the COVID-19 pandemic, economic conditions, raw material supply, competition, seasonality, product development, manufacturing, distributor relations, management, acquisitions, product quality, internal controls, intellectual property, IT, cybersecurity, and indebtedness - Key risks include the COVID-19 pandemic, general economic conditions, raw material supply and price, competition, seasonality, product development, manufacturing changes, distributor relationships, management retention, acquisitions, product quality, internal controls, intellectual property, IT systems, cybersecurity, and indebtedness[52] Risks Relating to Our Business and Industry Business and industry risks include COVID-19 impacts on supply chains and demand, sensitivity to economic factors, single-supplier reliance, intense competition, seasonality, manufacturing change management, distributor dependency, operational disruptions, labor costs, internal control effectiveness, and limitations on NOL carryforwards - The COVID-19 pandemic has caused global supply chain disruptions, increased raw material and freight costs, and potential reductions in product demand[54] - Demand for AZEK's products is highly sensitive to economic factors such as interest rates, consumer confidence, home equity, and construction activity[55][56] - Reliance on a single supplier for critical capped compounds in decking and railing products poses a supply chain risk[57] - The company faces competition from traditional materials (wood, metal) and other engineered product manufacturers, requiring continuous innovation and effective pricing strategies[59] - Seasonal fluctuations in sales, particularly lower residential sales in Q1 due to weather, can impact operating results[61] - Failure to effectively manage manufacturing changes, including capacity expansion (e.g., Boise, Idaho facility) and integration of new recycling capabilities, could lead to production delays and increased costs[65] - The loss of key distributors, such as Parksite Inc. (23% of FY2021 net sales), or an inability to forecast demand and make timely deliveries, could significantly reduce sales[66] - Disruption at manufacturing facilities due to accidents, natural disasters, or pandemics could severely impact production capabilities[68] - Inability to attract and retain skilled labor, or increases in labor costs, could adversely affect operations[78] - Failure to maintain an effective system of internal controls could impair timely and accurate financial reporting[80] - The company experienced an 'ownership change' in FY2021, limiting the use of net operating loss carryforwards (NOLs) under Section 382 of the Internal Revenue Code[95][96] Risks Relating to Our Indebtedness AZEK's $467.7 million indebtedness as of September 30, 2021, under variable-rate facilities, poses risks including limited financing, substantial debt service, economic vulnerability, interest rate exposure (a 100 basis point change impacts annual interest by $4.7 million), restrictive covenants, and LIBOR transition uncertainty - As of September 30, 2021, total indebtedness was $467.7 million under the Term Loan Agreement[101] - Indebtedness could limit additional financing, require substantial cash flow for debt service, increase vulnerability to economic conditions, and expose the company to interest rate risk[102] - The Senior Secured Credit Facilities contain restrictive covenants that limit the company's ability to incur additional debt, pay dividends, make investments, or sell assets[108] - Borrowings under the Senior Secured Credit Facilities are at variable interest rates, making the company subject to interest rate risk. A 100 basis point change would result in a $4.7 million change in annual interest expense[112] - Uncertainty regarding LIBOR's phasing out and replacement with SOFR could affect financing costs[114] Risks Relating to Ownership of Our Class A Common Stock The market price of Class A common stock may be volatile due to operating results, analyst expectations, and economic trends, while corporate governance provisions and significant ownership by Sponsors could influence corporate affairs and hinder mergers - The market price of Class A common stock may be volatile and decline due to factors like operating results, analyst expectations, stock sales, and economic trends[115][117] - Provisions in the certificate of incorporation and bylaws, such as a classified board and restrictions on stockholder actions, could make a merger or tender offer difficult[119][120] - The Sponsors (Ares Management Corporation and Ontario Teachers' Pension Plan Board) beneficially own a significant portion of common stock and can influence affairs, potentially conflicting with other stockholders' interests[124][126] Unresolved Staff Comments No unresolved staff comments are reported - No unresolved staff comments[127] Properties AZEK owns and leases manufacturing and recycling facilities across the U.S., headquartered in Chicago, and is investing $230 million in a multi-year capital program to expand capacity, including a new Boise, Idaho facility - AZEK operates nine manufacturing and recycling facilities in the United States, with its corporate office in Chicago, Illinois, located in a LEED-Certified building[127] - Residential segment products are primarily produced in Scranton, PA; Wilmington, OH; Aliquippa, PA; Boise, ID; and Eagan, MN. Commercial segment products are primarily produced in Scranton, PA[34][127] Properties as of September 30, 2021 (Square Feet) | Location | Owned Square Feet | Leased Square Feet | |:---|:---|:---| | Scranton, PA | 617,760 | 286,458 | | Wilmington, OH | 500,000 | 100,000 | | Jeffersonville, OH | — | 202,567 | | Aliquippa, PA | 134,153 | 48,000 | | Ashland, OH | — | 97,650 | | Eagan, MN | — | 134,203 | | Chicago, IL | — | 20,981 | | Boise, ID | — | 355,426 | - AZEK is implementing a multi-year $230 million capital investment program to support future growth, including a new manufacturing facility in Boise, Idaho, expected to begin production in fiscal year 2022[128][237] Legal Proceedings AZEK is periodically involved in litigation but believes no pending or threatened actions will materially adversely affect its business, financial condition, results of operations, or cash flows, despite inherent uncertainties - AZEK is subject to pending and threatened legal actions, including contract, employment, personal injury, product liability, and warranty claims[129] - Management believes no current or future litigation will have a material adverse effect on the company's business, financial condition, results of operations, or cash flows[129] Mine Safety Disclosures This item is not applicable to The AZEK Company Inc. - Not applicable[129] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities AZEK's Class A common stock has traded on the NYSE under 'AZEK' since June 2020, with approximately 49 stockholders of record as of October 2021, and the company retains earnings for growth, not paying dividends - AZEK's Class A common stock has been listed on the New York Stock Exchange under the symbol 'AZEK' since June 12, 2020[131] - As of October 29, 2021, there were approximately 49 stockholders of record for Class A common stock and one for Class B common stock[132] - The company did not pay any dividends on its common stock during the years ended September 30, 2021 and 2020, and intends to retain earnings for business growth[133] Cumulative Total Return (June 12, 2020 = $100) | Index | June 12, 2020 | June 30, 2020 | September 30, 2020 | December 31, 2020 | March 31, 2021 | June 30, 2021 | September 30, 2021 | |:---|:---|:---|:---|:---|:---|:---|:---| | The AZEK Company Inc. | $100.00 | $117.35 | $128.21 | $141.62 | $154.88 | $156.39 | $135.76 | | Russel 3000 Index | 100.00 | 102.16 | 111.12 | 111.51 | 125.38 | 130.46 | 125.65 | | S&P Composite 1500 Building Products Index | 100.00 | 103.85 | 125.90 | 142.65 | 167.72 | 181.14 | 174.68 | Selected Financial Data No disclosure is required by Item 301 of Regulation S-K for this annual report - No disclosure required by Item 301 of Regulation S-K[137] Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes AZEK's financial condition and results of operations for fiscal years 2021-2019, covering net sales, gross profit, net income, segment performance, non-GAAP measures, liquidity, capital resources, and critical accounting policies, with emphasis on COVID-19 impacts and strategic investments - AZEK is an industry-leading designer and manufacturer of low-maintenance, environmentally sustainable products for the Outdoor Living market, leveraging shared technology and U.S.-based manufacturing[141] - The company reports in two segments: Residential (TimberTech and AZEK brands) and Commercial (engineered sheet products, bathroom partitions, and lockers)[142] - Net sales increased by 31.1% to $1,179.0 million in FY2021, driven by higher sales in both Residential (35.4% increase) and Commercial (5.3% increase) segments[163] - Gross profit increased by 31.7% to $390.0 million in FY2021, with gross margin increasing to 33.1% from 32.9% in FY2020, despite higher raw material and manufacturing costs[165] - Net income for FY2021 was $93.2 million, a significant increase from a net loss of $122.2 million in FY2020, primarily due to higher sales, reduced interest expense, and lower stock-based compensation[170] - AZEK is undertaking a multi-year $230 million capital investment program through 2022 to increase decking, recycling, railing, and exteriors capacity by approximately 85% relative to FY2019 decking capacity[237] Forward-Looking Statements This report includes forward-looking statements about future operations, products, market growth, and financial performance, which are subject to risks and uncertainties detailed in the 'Risk Factors' section - The report contains forward-looking statements regarding future operations, new products, market growth, raw material sourcing, pricing, cost management, ESG targets, and financial performance[140] - These statements are subject to risks, uncertainties, and assumptions, including those detailed in the 'Risk Factors' section, and actual results may differ materially[140] Overview AZEK is a leading manufacturer of low-maintenance, sustainable Outdoor Living products, driven by consumer trends and material conversion, operating with core values of sustainability across Residential and Commercial segments - AZEK is a leading designer and manufacturer of low-maintenance, environmentally sustainable products for the Outdoor Living market, driven by consumer investment in outdoor spaces and conversion from traditional materials[141] - The company's core values include 'always do the right thing' and a focus on sustainability across operations[141] - AZEK reports in two segments: Residential (TimberTech and AZEK brands) and Commercial (engineered sheet products, bathroom partitions, and lockers)[142] Basis of Presentation Consolidated Financial Statements, based on a fiscal year ending September 30, include AZEK and its subsidiaries, with the Return Polymers acquisition from January 2020 integrated into the Residential segment - Consolidated Financial Statements are based on a fiscal year ending September 30 and include the accounts of AZEK and its wholly-owned subsidiaries[144] - The acquisition of Return Polymers in January 2020 is included in the Residential segment's results[144] Initial Public Offering AZEK completed its IPO on June 16, 2020, selling 38,237,500 Class A shares at $23.00 per share for $819.7 million in net proceeds, primarily used for debt reduction - AZEK completed its IPO on June 16, 2020, selling 38,237,500 shares of Class A common stock at $23.00 per share, generating net proceeds of approximately $819.7 million[145] - Proceeds were used to redeem $350.0 million of 2025 Senior Notes, $70.0 million from the Revolving Credit Facility, and a $337.7 million prepayment of the Term Loan Agreement[145] Secondary Offerings AZEK completed secondary offerings in September 2020, January 2021, and June 2021, where existing stockholders sold shares, with the company incurring expenses but receiving no proceeds, and the September 2020 offering accelerating stock-based compensation vesting - AZEK completed secondary offerings in September 2020, January 2021, and June 2021, where existing stockholders sold shares. The company did not receive proceeds from these sales but incurred related expenses[146][147][148] - The September 2020 secondary offering triggered accelerated vesting of certain performance-vested stock-based compensation[146][332] Key Factors Affecting Our Results of Operations Key operational factors include product volume driven by economic conditions and innovation, pricing strategies, volatile raw material costs exacerbated by supply chain disruptions, product mix impacting margins, seasonality, ongoing COVID-19 impacts, and strategic acquisitions - Volume of products sold is influenced by economic conditions (home repair/remodeling, new construction, interest rates), material conversion trends, product innovation, and marketing/distribution efforts[150][151] - Pricing strategy involves premium pricing for residential products, adjusted for input costs and market dynamics, while commercial products are often custom-priced[152] - Raw material costs (petrochemical resins, recycled materials, wood fiber, aluminum) are a majority of cost of sales and are subject to significant price volatility, exacerbated by supply chain disruptions and extreme weather in FY2021[153][154] - Product mix impacts average selling price, cost of sales, and gross margins, with Residential segment gross margins significantly exceeding Commercial[155] - Seasonality affects sales, with higher residential sales in Q2 ('early buy') and lower in Q1 (winter weather), and higher commercial partition/locker sales in the second half (summer school remodels)[156] - The COVID-19 pandemic has impacted operations, supply chains, and demand, with ongoing effects expected[157][158] - AZEK expects to continue strategic acquisitions to enhance market position and product portfolios[160] Results of Operations This section details AZEK's consolidated financial performance for fiscal years 2021, 2020, and 2019, highlighting net sales, gross profit, operating income, interest expense, and net income, along with their key drivers Consolidated Financial Performance (in thousands USD) | Metric | 2021 | 2020 | 2019 | |:---|:---|:---|:---| | Net sales | $1,178,974 | $899,259 | $794,203 | | Cost of sales | 789,023 | 603,209 | 541,006 | | Gross profit | 389,951 | 296,050 | 253,197 | | Selling, general and administrative expenses | 244,205 | 308,275 | 183,572 | | Operating income (loss) | 142,129 | (21,745) | 59,054 | | Interest expense, net | 20,311 | 71,179 | 83,205 | | Loss on extinguishment of debt | — | 37,587 | — | | Income tax expense (benefit) | 28,668 | (8,278) | (3,955) | | Net income (loss) | $93,150 | $(122,233) | $(20,196) | - FY2021 net sales increased by $279.7 million (31.1%) YoY, driven by Residential (35.4%) and Commercial (5.3%) segments[163] - FY2021 gross profit increased by $93.9 million (31.7%) YoY, with gross margin rising to 33.1% from 32.9%, due to higher sales, pricing, and manufacturing productivity, partially offset by higher costs[165] - FY2021 selling, general and administrative expenses decreased by $64.1 million (20.8%) YoY, primarily due to lower stock-based compensation, despite higher personnel, professional fees, and marketing costs[166] - FY2021 interest expense, net, decreased by $50.9 million (71.5%) YoY, due to reduced principal debt and lower average interest rates[168] - FY2020 net sales increased by $105.1 million (13.2%) YoY, primarily from the Residential segment (17.7% increase), while the Commercial segment decreased by 7.7%[171] - FY2020 net loss increased by $102.0 million to $122.2 million, mainly due to $120.5 million in stock-based compensation expense and $37.6 million in debt extinguishment losses[179] Segment Results of Operations This section analyzes the financial performance of AZEK's Residential and Commercial segments for fiscal years 2021-2019, utilizing Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin as key evaluation metrics - Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin are key measures for evaluating segment performance and allocating resources[180] Residential Segment Performance (in thousands USD) | Metric | 2021 | 2020 | 2019 | |:---|:---|:---|:---| | Net sales | $1,044,126 | $771,167 | $655,445 | | Segment Adjusted EBITDA | 314,563 | 238,060 | 188,742 | | Segment Adjusted EBITDA Margin | 30.1% | 30.9% | 28.8% | - Residential segment net sales increased by 35.4% in FY2021, driven by Deck, Rail & Accessories and Exteriors businesses[184] - Residential Segment Adjusted EBITDA increased by 32.1% in FY2021, due to higher sales, pricing, and manufacturing productivity, partially offset by higher raw material and manufacturing costs[185] Commercial Segment Performance (in thousands USD) | Metric | 2021 | 2020 | 2019 | |:---|:---|:---|:---| | Net sales | $134,848 | $128,092 | $138,758 | | Segment Adjusted EBITDA | 19,323 | 15,051 | 21,493 | | Segment Adjusted EBITDA Margin | 14.3% | 11.8% | 15.5% | - Commercial segment net sales increased by 5.3% in FY2021, primarily due to higher sales in the Vycom business, partially offset by decreased sales in Scranton Products[188] - Commercial Segment Adjusted EBITDA increased by 28.4% in FY2021, driven by higher Vycom sales, pricing, and manufacturing productivity, offset by higher raw material costs[189] Non-GAAP Financial Measures AZEK utilizes non-GAAP financial measures, including Adjusted Gross Profit, Adjusted Net Income, Adjusted Diluted EPS, and Adjusted EBITDA, to offer additional insights into financial performance by excluding specific non-recurring or non-cash expenses - AZEK uses non-GAAP financial measures (Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA, and Adjusted EBITDA Margin) to provide additional insights into financial performance, excluding certain non-recurring or non-cash expenses[191][193] Non-GAAP Financial Measures (in thousands USD, except per share) | Metric | 2021 | 2020 | 2019 | |:---|:---|:---|:---| | Adjusted Gross Profit | $457,926 | $359,066 | $314,858 | | Adjusted Gross Profit Margin | 38.8% | 39.9% | 39.6% | | Adjusted Net Income | $152,933 | $72,632 | $46,663 | | Adjusted Diluted EPS | $0.98 | $0.59 | $0.43 | | Adjusted EBITDA | $274,187 | $213,513 | $179,566 | | Adjusted EBITDA Margin | 23.3% | 23.7% | 22.6% | - Adjusted Gross Profit Margin decreased from 39.9% in FY2020 to 38.8% in FY2021[198] - Adjusted Diluted EPS increased from $0.59 in FY2020 to $0.98 in FY2021[193] - Adjusted EBITDA Margin decreased from 23.7% in FY2020 to 23.3% in FY2021[203] Liquidity and Capital Resources As of September 30, 2021, AZEK reported $250.5 million in cash and $467.7 million in total indebtedness, with $146.7 million available under its Revolving Credit Facility, and plans a $230 million capital investment for capacity expansion through 2022 - As of September 30, 2021, AZEK had $250.5 million in cash and cash equivalents and total indebtedness of $467.7 million[205] - CPG International LLC had approximately $146.7 million available under the Revolving Credit Facility's borrowing base as of September 30, 2021[205][211] - The company is a holding company, dependent on cash distributions from subsidiaries, which are subject to restrictions under debt agreements[207][208] Cash Flows (in thousands USD) | Cash Flow Activity | 2021 | 2020 | 2019 | |:---|:---|:---|:---| | Net cash provided by (used in) operating activities | $207,679 | $98,361 | $94,872 | | Net cash provided by (used in) investing activities | (175,073) | (113,794) | (62,935) | | Net cash provided by (used in) financing activities | 2,918 | 124,498 | (8,273) | | Net increase (decrease) in cash | $35,524 | $109,065 | $23,664 | - Net cash provided by operating activities increased by $109.3 million in FY2021, primarily due to increased net income[216] - Net cash used in investing activities increased to $175.1 million in FY2021, mainly for purchases of property, plant, and equipment to support capacity expansion[217] - The Term Loan Agreement has $467.7 million outstanding as of September 30, 2021, maturing on May 5, 2024, with quarterly principal payments prepaid through maturity due to IPO proceeds[230][233] - AZEK plans to invest approximately $230 million through 2022 for capacity expansion, including a new Boise, Idaho facility, aiming for 85% incremental decking capacity relative to FY2019[237] Critical Accounting Policies, Estimates and Assumptions This section outlines AZEK's critical accounting policies, estimates, and assumptions, including revenue recognition, goodwill impairment, product warranty reserves, stock-based compensation, and income tax accounting, highlighting the significant judgments involved - Revenue is recognized when control of goods is transferred to customers, typically at shipment, with sales incentives and payment discounts estimated and reflected as part of net revenue[240][242] - Goodwill is evaluated for impairment annually (or more frequently if triggered) using a quantitative assessment (discounted cash flow method) for reporting units, with no impairments recorded in FY2021[244][245][246] - Product warranty reserves are estimated based on historical costs, anticipated claim rates, and other factors, with recent changes including increased use of reclaimed materials and new labor cost coverage[247][76] - Stock-based compensation expense is determined by estimating fair value using Monte Carlo (performance-based) and Black Scholes (service-based) models, recognized over the requisite service period[253][254] - Stock-based compensation expense was $22.7 million in FY2021, $120.5 million in FY2020 (due to IPO and secondary offering vesting), and $3.3 million in FY2019[255] - Income tax accounting involves assessing deferred tax assets and liabilities, with a valuation allowance established if realization is not probable, requiring significant judgment on future taxable income[256][257] Recently Adopted Accounting Pronouncements AZEK ceased EGC qualification on September 30, 2021, necessitating an internal control attestation, and adopted ASC 842 (Leases) on October 1, 2020, recording $15.2 million in lease assets and $18.7 million in lease liabilities, with other pronouncements having no material impact - AZEK ceased to qualify as an Emerging Growth Company (EGC) effective September 30, 2021, requiring an attestation report on internal control over financial reporting under Section 404(b) of Sarbanes-Oxley Act[260] - Adopted ASC 842 (Leases) on October 1, 2020, resulting in recording lease assets of $15.2 million and lease liabilities of $18.7 million, with a $2.1 million decrease in accumulated deficit[261] - Other adoptions on October 1, 2020, included ASU No. 2018-13 (Fair Value Measurement), ASU No. 2016-13 (Credit Losses), ASU No. 2018-15 (Internal-Use Software), and ASU No. 2020-04 (Reference Rate Reform), none of which had a material impact[261][263] Recently Issued Accounting Pronouncements ASU No. 2019-12 (Income Taxes) is effective for AZEK for annual periods beginning after December 15, 2021, and its impact is currently under evaluation - ASU No. 2019-12 (Income Taxes—Simplifying the Accounting for Income Taxes) is effective for AZEK for annual periods beginning after December 15, 2021, and is currently being evaluated for impact[264] Quantitative and Qualitative Disclosures About Market Risk AZEK faces interest rate risk from variable-rate debt (a 100 basis point change impacts annual interest by $4.7 million), manages credit risk with three customers exceeding 10% of receivables, has minimal foreign currency risk, and addresses raw material price volatility through diversification and recycled content, without hedging - AZEK is subject to interest rate risk from its variable-rate Senior Secured Credit Facilities. A 100 basis point change in floating rates would increase or decrease annual cash interest by approximately $4.7 million (based on FY2021 outstanding amounts)[265] - Credit risk for accounts receivable is mitigated by ongoing customer financial evaluations. As of September 30, 2021, three customers (A, B, C) each represented over 10% of gross trade receivables (11.2%, 12.4%, 13.7% respectively)[267] - Substantially all business is conducted in U.S. dollars, resulting in no material foreign currency risk[268] - Raw material costs are subject to inflationary pressures and price volatility, managed by broadening the supplier base, increasing recycled material use, and exploring substitutions, but without fixed-price contracts or hedges[269][270][271] Financial Statements and Supplementary Data This section refers to the audited consolidated financial statements and supplementary data, including the independent auditor's report, balance sheets, income statements, equity statements, cash flow statements, and comprehensive notes, located starting on page F-1 (page 69) - The financial statements required by this Item are located beginning on page F-1 of this report[272] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants regarding accounting and financial disclosure - None[272] Controls and Procedures Management concluded that AZEK's disclosure controls and internal control over financial reporting were effective as of September 30, 2021, having successfully remediated two material weaknesses identified in FY2020 through personnel hires and stronger IT general controls - Management concluded that AZEK's disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2021[274] - Management assessed and concluded that internal control over financial reporting was effective as of September 30, 2021, based on COSO criteria[276] - Two material weaknesses in internal control over financial reporting as of September 30, 2020 (control environment and IT general controls) were remediated during fiscal year 2021[277] - Remediation efforts included hiring experienced finance and accounting personnel (CFO, Chief Accounting Officer) and designing/implementing IT general controls for user access and security[277] - No changes in internal control over financial reporting during the three months ended September 30, 2021, materially affected or are reasonably likely to materially affect internal control[278] Item 9B. Other Information The 2022 annual meeting of stockholders is scheduled for March 8, 2022, with a deadline of December 15, 2021, for stockholder proposals due to a change in the meeting date - The 2022 annual meeting of stockholders is scheduled for March 8, 2022[280] - The deadline for stockholders to submit proposals for inclusion in the 2022 Annual Meeting proxy statement is December 15, 2021[280] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance, including the Code of Ethics for Senior Officers and a Code of Conduct for all employees, will be provided in the definitive Proxy Statement for the 2022 Annual Meeting - Information on directors, executive officers, and corporate governance will be included in the definitive Proxy Statement for the 2022 Annual Meeting[282] - AZEK has adopted a Code of Ethics for Senior Officers and a Code of Conduct and Ethics for all officers, directors, and employees, available on its investor relations website[283] Executive Compensation Information regarding executive compensation will be included in the definitive Proxy Statement for the 2022 Annual Meeting - Information on executive compensation will be included in the definitive Proxy Statement for the 2022 Annual Meeting[284] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of certain beneficial owners and management, and related stockholder matters, will be included in the definitive Proxy Statement for the 2022 Annual Meeting - Information on security ownership and related stockholder matters will be included in the definitive Proxy Statement for the 2022 Annual Meeting[285] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence will be included in the definitive Proxy Statement for the 2022 Annual Meeting - Information on certain relationships, related transactions, and director independence will be included in the definitive Proxy Statement for the 2022 Annual Meeting[286] Principal Accounting Fees and Services Information on principal accounting fees and services will be included in the definitive Proxy Statement for the 2022 Annual Meeting - Information on principal accounting fees and services will be included in the definitive Proxy Statement for the 2022 Annual Meeting[287] PART IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, with all schedules omitted as information is disclosed in the audited consolidated financial statements or notes - The report includes financial statements and notes, with all financial statement schedules omitted as the information is disclosed elsewhere[289] - An Exhibit Index details various documents, including the Certificate of Incorporation, Bylaws, Stockholders Agreement, Registration Rights Agreement, credit agreements, employment agreements, and stock-based compensation plans[291][292][293] Form 10-K Summary No Form 10-K Summary is provided in this report - None[290] Financial Statements Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion on AZEK's consolidated financial statements and internal control over financial reporting as of September 30, 2021, identifying the quantitative goodwill impairment assessment as a critical audit matter due to significant judgment - PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements for the three years ended September 30, 2021, and on the effectiveness of internal control over financial reporting as of September 30, 2021[307] - The quantitative goodwill impairment assessment was identified as a critical audit matter due to significant management judgment in determining fair value and high auditor judgment in evaluating assumptions like revenue growth rates and profit margins[311] Consolidated Balance Sheets The consolidated balance sheets as of September 30, 2021, and 2020, show increases in total assets, driven by property, plant, and equipment, and total liabilities, primarily from deferred income taxes, alongside a significant increase in stockholders' equity Consolidated Balance Sheet Highlights (in thousands USD) | Metric | Sep 30, 2021 | Sep 30, 2020 | |:---|:---|:---| | Total current assets | $532,398 | $424,695 | | Property, plant and equipment, net | 391,012 | 261,774 | | Goodwill | 951,390 | 951,390 | | Intangible assets, net | 242,572 | 292,374 | | Total assets | $2,187,834 | $1,931,856 | | Total current liabilities | $170,407 | $124,040 | | Deferred income taxes | 46,371 | 21,260 | | Long-term debt — less current portion | 464,715 | 462,982 | | Other non-current liabilities | 79,177 | 19,686 | | Total liabilities | $760,670 | $627,968 | | Total stockholders' equity | $1,427,164 | $1,303,888 | - Total assets increased by $255.9 million from $1,931.9 million in 2020 to $2,187.8 million in 2021[315] - Total liabilities increased by $132.7 million from $628.0 million in 2020 to $760.7 million in 2021[315] - Total stockholders' equity increased by $123.3 million from $1,303.9 million in 2020 to $1,427.2 million in 2021[316] Consolidated Statements of Comprehensive Income (Loss) The consolidated statements of comprehensive income (loss) for 2021, 2020, and 2019 show AZEK reported a net income of $93.2 million in 2021, a significant improvement from prior net losses, driven by increased net sales, gross profit, and reduced interest expense Consolidated Statements of Comprehensive Income (Loss) (in thousands USD) | Metric | 2021 | 2020 | 2019 | |:---|:---|:---|:---| | Net sales | $1,178,974 | $899,259 | $794,203 | | Gross profit | 389,951 | 296,050 | 253,197 | | Operating income (loss) | 142,129 | (21,745) | 59,054 | | Interest expense | 20,311 | 71,179 | 83,205 | | Loss on extinguishment of debt | — | 37,587 | — | | Income (loss) before income taxes | 121,818 | (130,511) | (24,151) | | Income tax expense (benefit) | 28,668 | (8,278) | (3,955) | | Net income (loss) | $93,150 | $(122,233) | $(20,196) | | Net income (loss) per common share: Basic | $0.61 | $(1.01) | $(0.19) | | Net income (loss) per common share: Diluted | $0.59 | $(1.01) | $(0.19) | - Net sales increased from $899.3 million in 2020 to $1,179.0 million in 2021, a 31.1% increase[319] - The company reported a net income of $93.2 million in 2021, compared to a net loss of $122.2 million in 2020[319] - Diluted EPS was $0.59 in 2021, a significant improvement from $(1.01) in 2020[319] Consolidated Statements of Stockholders' Equity The consolidated statements of stockholders' equity detail changes for 2021, 2020, and 2019, reflecting the impact of the IPO, secondary offerings, Class B to Class A common stock conversion, and significant stock-based compensation, resulting in increased total stockholders' equity Consolidated Statements of Stockholders' Equity Highlights (in thousands USD) | Metric | Sep 30, 2021 | Sep 30, 2020 | Sep 30, 2019 | |:---|:---|:---|:---| | Class A Common Stock (shares) | 154,866,313 | 154,637,240 | 75,093,778 | | Class B Common Stock (shares) | 100 | 100 | 33,068,963 | | Additional Paid-In Capital | $1,615,236 | $1,587,208 | $652,493 | | Accumulated Deficit | $(188,227) | $(283,475) | $(162,578) | | Total Stockholders' Equity | $1,427,164 | $1,303,888 | $490,023 | - Total stockholders' equity increased from $1,303.9 million in 2020 to $1,427.2 million in 2021[323] - The IPO in 2020 generated $819.7 million in net proceeds, significantly increasing additional paid-in capital[322] - Stock-based compensation expense recognized was $117.1 million in 2020 and $22.3 million in 2021[323] Consolidated Statements of Cash Flows The consolidated statements of cash flows for 2021, 2020, and 2019 show a significant increase in net cash from operating activities in 2021, higher cash used in investing activities due to capital expenditures, and a substantial decrease in cash from financing activities compared to 2020's IPO proceeds Consolidated Statements of Cash Flows (in thousands USD) | Cash Flow Activity | 2021 | 2020 | 2019 | |:---|:---|:---|:---| | Net cash provided by (used in) operating activities | $207,679 | $98,361 | $94,872 | | Net cash provided by (used in) investing activities | (175,073) | (113,794) | (62,935) | | Net cash provided by (used in) financing activities | 2,918 | 124,498 | (8,273) | | Net increase (decrease) in cash | $35,524 | $109,065 | $23,664 | | Cash and cash equivalents at end of period | $250,536 | $215,012 | $105,947 | - Net cash provided by operating activities increased by $109.3 million (111.1%) in FY2021, primarily due to increased net income[216][326] - Net cash used in investing activities increased by $61.3 million (53.9%) in FY2021, mainly due to higher purchases of property, plant, and equipment for capacity expansion[217][326] - Net cash provided by financing activities decreased by $121.6 million (97.7%) in FY2021, as FY2020 included significant IPO proceeds[218][326] Notes to Consolidated Financial Statements The Notes to Consolidated Financial Statements provide detailed information on AZEK's accounting policies, estimates, and assumptions, covering organization, revenue, inventories, PP&E, goodwill, intangibles, debt, warranties, leases, fair value, segments, capital stock, stock-based compensation, employee benefits, EPS, income taxes, commitments, contingencies, and quarterly data Note 1. Organization and Summary of Significant Accounting Policies AZEK, a Delaware corporation and leading building product manufacturer, completed its IPO in June 2020 to reduce debt, followed by secondary offerings, and ceased EGC qualification in September 2021, while adopting ASC 842 (Leases) in October 2020 - AZEK is a Delaware corporation and leading manufacturer of premium, low-maintenance building products for residential, commercial, and industrial markets, operating on a fiscal year ending September 30[329][333] - The company completed its IPO on June 16, 2020, raising $819.7 million, used to reduce debt[330] - Secondary offerings in September 2020, January 2021, and June 2021 involved sales by existing stockholders, with AZEK incurring related expenses but receiving no proceeds[332] - Key accounting estimates include revenue recognition, inventory reserves, product warranties, stock-based compensation, litigation, income taxes, goodwill, and intangible asset valuation[335] - AZEK ceased to qualify as an Emerging Growth Company (EGC) effective September 30, 2021, requiring an attestation report on internal control over financial reporting[371] - Adopted ASC 842 (Leases) on October 1, 2020, recording $15.2 million in ROU assets and $18.7 million in lease liabilities, with a $2.1 million decrease in accumulated deficit[371] Note 2. Revenue Revenue is recognized upon transfer of goods control, typically at shipment, with estimated sales incentives and payment discounts reducing net revenue - Revenue is recognized when control of promised goods is transferred to customers, typically at shipment, for both Residential and Commercial segments[375] - Sales incentive programs and payment discounts are estimated using the most-likely-amount method and reflected as a reduction in net revenue[376] Customer Rebate Activity (in thousands USD) | Metric | 2021 | 2020 | 2019 | |:---|:---|:---|:---| | Beginning balance | $32,679 | $24,858 | $21,914 | | Rebate expense | 76,763 | 54,083 | 50,847 | | Rebate payments | (61,794) | (46,262) | (47,903) | | Ending balance | $47,648 | $32,679 | $24,858 | - Total sales incentives were $92.5 million in 2021, $63.1 million in 2020, and $50.8 million in 2019[341] Note 3. Inventories Inventories are valued at the lower of cost or net realizable value, reduced for slow-moving items, and recorded at standard cost on a FIFO basis - Inventories are valued at the lower of cost or net realizable value, reduced for slow-moving and obsolete items, and recorded at standard cost (approximating actual cost) on a FIFO basis[350] Inventories (in thousands USD) | Category | Sep 30, 2021 | Sep 30, 2020 | |:---|:---|:---| | Raw materials | $46,046 | $33,850 | | Work in process | 27,278 | 19,935 | | Finished goods | 115,564 | 76,285 | | Total inventories | $188,888 | $130,070 | Note 4. Property, Plant and Equipment — Net Property, plant, and equipment (PP&E) is recorded at cost, net of accumulated depreciation, with depreciation calculated using the straight-line method over estimated useful lives - Property, plant and equipment (PP&E) is recorded at cost, net of accumulated depreciation, with depreciation computed using the straight-line method over estimated useful lives[354] Property, Plant and Equipment — Net (in thousands USD) | Category | Sep 30, 2021 | Sep 30, 2020 | |:---|:---|:---| | Total property, plant and equipment | $512,187 | $417,763 | | Construction in progress | 129,886 | 54,412 | | Accumulated depreciation | (251,061) | (210,401) | | Total property, plant and equipment – net | $391,012 | $261,774 | - Depreciation expense was $50.6 million in 2021, $44.6 million in 2020, and $33.7 million