UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2022~~2023


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number: 001-39322

The AZEK Company Inc.

(Exact name of registrant as specified in its charter)


Delaware	90-1017663
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1330 W Fulton Street, Suite 350, Chicago, Illinois	60607
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: ~~(877)~~ (877) 275-2935

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange

on which registered

Class A Common Stock, par value $0.001 per share

AZEK

The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July ~~29, 2022,~~31, 2023, the registrant had ~~152,139,674~~149,359,773 shares of Class A Common Stock, $0.001 par value per share, and 100 shares of Class B Common Stock, $0.001 par value per share, outstanding.


		Page
PART I.	Financial Information	3
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Statements of Stockholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2426
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3840
Item 4.	Controls and Procedures	3941
PART II.	Other Information	4042
Item 1.	Legal Proceedings	4042
Item 1A.	Risk Factors	4042
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4042
Item 3.	Defaults Upon Senior Securities	4042
Item 4.	Mine Safety Disclosures	4042
Item 5.	Other Information	4043
Item 6.	Exhibits	4144
Signatures		4245

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

The AZEK Company Inc.

Condensed Consolidated Balance Sheets

(In thousands of U.S. dollars, except for share and per share amounts)

(Unaudited)


in thousands	June 30, 2022			September 30, 2021			June 30, 2023			September 30, 2022
ASSETS:
Current assets:
Cash and cash equivalents	$	159,621		$	250,536		$	244,597		$	120,817
Trade receivables, net of allowances		101,513			77,316			72,918			90,159
Inventories		322,117			188,888			221,281			299,905
Prepaid expenses		20,522			14,212			13,668			17,212
Other current assets		2,727			1,446			17,183			2,501
Total current assets		606,500			532,398			569,647			530,594
Property, plant and equipment - net		495,961			391,012			494,895			517,913
Goodwill		987,440			951,390			994,155			993,995
Intangible assets - net		247,606			242,572			210,800			245,835
Other assets		83,041			70,462			89,369			94,754
Total assets	$	2,420,548		$	2,187,834		$	2,358,866		$	2,383,091
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable	$	83,034		$	69,474		$	53,010		$	48,987
Accrued rebates		44,491			44,339			49,371			50,479
Accrued interest		4,367			72			130			4,436
Current portion of long-term debt obligations		4,500			—			6,000			6,000
Accrued expenses and other liabilities		68,660			56,522			58,581			72,589
Total current liabilities		205,052			170,407			167,092			182,491
Deferred income taxes		67,892			46,371			67,056			65,195
Long-term debt—less current portion		586,033			464,715			581,418			584,879
Other non-current liabilities		93,601			79,177			105,485			106,083
Total liabilities		952,578			760,670			921,051			938,648
Commitments and contingencies (See Note 17)
Stockholders' equity:
Preferred stock, $0.001 par value; 1,000,000 shares authorized and 0 shares issued or outstanding at June 30, 2022 and September 30, 2021, respectively		—		—
Class A common stock, $0.001 par value; 1,100,000,000 shares authorized, 155,153,226 shares issued at June 30, 2022 and 154,866,313 shares issued at September 30, 2021		155			155
Class B common stock, $0.001 par value; 100,000,000 shares authorized, 100 shares issued and outstanding at June 30, 2022 and at September 30, 2021, respectively		—			—
Preferred stock, $0.001 par value; 1,000,000 shares authorized and no shares issued or outstanding at June 30, 2023 and September 30, 2022, respectively								—			—
Class A common stock, $0.001 par value; 1,100,000,000 shares authorized, 155,769,041 shares issued at June 30, 2023 and 155,157,220 shares issued at September 30, 2022								156			155
Class B common stock, $0.001 par value; 100,000,000 shares authorized, 100 shares issued and outstanding at June 30, 2023 and at September 30, 2022, respectively								—			—
Additional paid‑in capital		1,626,115			1,615,236			1,653,714			1,630,378
Accumulated deficit		(108,227	)		(188,227	)		(87,690	)		(113,002	)
Treasury stock, at cost, 3,013,575 shares at June 30, 2022 and 0 shares at September 30, 2021		(50,073	)	��	—
Accumulated other comprehensive income (loss)								691			—
Treasury stock, at cost, 6,416,077 and 4,116,570 shares at June 30, 2023 and September 30, 2022, respectively								(129,056	)		(73,088	)
Total stockholders' equity		1,467,970			1,427,164			1,437,815			1,444,443
Total liabilities and stockholders' equity	$	2,420,548		$	2,187,834		$	2,358,866		$	2,383,091

See Notes to Condensed Consolidated Financial Statements (Unaudited).

The AZEK Company Inc.

Condensed Consolidated Statements of Comprehensive Income

(In thousands of U.S. dollars, except for share and per share amounts)

(Unaudited)


	Three Months Ended June 30,				Nine Months Ended June 30,				Three Months Ended June 30,				Nine Months Ended June 30,
in thousands	2022		2021		2022		2021		2023		2022		2023		2022
Net sales	$	394,991	$	327,454	$	1,050,954	$	832,854	$	387,553	$	394,991	$	981,504	$	1,050,954
Cost of sales		268,604		220,617		713,498		555,190		255,353		268,604		693,552		713,498
Gross profit		126,387		106,837		337,456		277,664		132,200		126,387		287,952		337,456
Selling, general and administrative expenses		78,737		70,760		212,728		184,362		73,650		78,737		221,554		212,728
Other general expenses		—		1,443		—		2,592
Operating income		47,650		34,634		124,728		90,710		58,550		47,650		66,398		124,728
Other expenses:
Interest expense, net										10,408		10,618		30,481		18,776
Total other expenses										10,408		10,618		30,481		18,776
Income before income taxes										48,142		37,032		35,917		105,952
Income tax expense										13,267		9,556		10,605		25,951
Net income									$	34,875	$	27,476	$	25,312	$	80,001
Other comprehensive income:
Unrealized gain due to change in fair value of derivatives, net of tax									$	3,953	$	—	$	691	$	—
Total other comprehensive income										3,953		—		691		—
Comprehensive income									$	38,828	$	27,476	$	26,003	$	80,001

Other expenses:
Interest expense		10,618		4,054		18,776		16,428
Total other expenses		10,618		4,054		18,776		16,428

Income before income taxes		37,032		30,580		105,952		74,282
Income tax expense (benefit)		9,556		8,811		25,951		19,725
Net income	$	27,476	$	21,769	$	80,001	$	54,557

Net income per common share - basic	$	0.18	$	0.14	$	0.52	$	0.36
Net income per common share - diluted		0.18		0.14		0.51		0.35

Comprehensive income	$	27,476	$	21,769	$	80,001	$	54,557
Weighted-average common shares outstanding - basic and diluted
Net income per common share:
Basic		153,493,355		153,854,313		154,199,158		153,623,579	$	0.23	$	0.18	$	0.17	$	0.52
Diluted		153,891,090		157,022,043		155,631,884		156,658,640		0.23		0.18		0.17		0.51

Weighted-average common shares outstanding:
Basic										150,140,392		153,493,355		150,610,890		154,199,158
Diluted										151,069,954		153,891,090		151,056,199		155,631,884

See Notes to Condensed Consolidated Financial Statements (Unaudited).

The AZEK Company Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands of U.S. dollars, except for share amounts)

(Unaudited)


																														Common Stock											Treasury Stock							Additional								Accumulated Other				Total
																														Class A						Class B												Paid-In				Accumulated				Comprehensive				Stockholders'
																														Shares				Amount		Shares			Amount		Shares			Amount				Capital				Deficit				Income (Loss)				Equity
Balance – March 31, 2023																															155,303,433		$	155		100		$		—		4,469,330	$		(80,576	)	$		1,641,321		$		(122,565	)	$		(3,262	)	$		1,435,073
Net income																															—				—		—			—		—			—				—				34,875				—				34,875
Other comprehensive income																															—				—		—			—		—			—				—				—				3,953				3,953
Stock-based compensation																															—				—		—			—		—			—				4,105				—				—				4,105
Exercise of vested stock options																															400,428				1		—			—		—			—				9,209				—				—				9,210
Cancellation of restricted stock awards																															(978	)			—		—			—		—			—				—				—				—				—
Issuance of common stock under employee stock plan, net of shares withheld for taxes																															66,158				—		—			—		—			—				(921	)			—				—				(921	)
Treasury stock purchases																															—				—		—			—		1,946,747			(48,480	)			—				—				—				(48,480	)
Balance – June 30, 2023																															155,769,041		$		156		100	$		—		6,416,077	$		(129,056	)	$		1,653,714		$		(87,690	)	$		691		$		1,437,815

Balance – September 30, 2022																															155,157,220		$	155		100		$		—		4,116,570	$		(73,088	)	$		1,630,378		$		(113,002	)	$		—		$		1,444,443
Net income																															—				—		—			—		—			—				—				25,312				—				25,312
Other comprehensive income																															—				—		—			—		—			—				—				—				691				691
Stock-based compensation																															—				—		—			—		—			—				13,607				—				—				13,607
Exercise of vested stock options																															483,074				1		—			—		—			—				11,110				—				—				11,111
Cancellation of restricted stock awards																															(19,306	)			—		—			—		—			—				—				—				—				—
Issuance of common stock under employee stock plan, net of shares withheld for taxes																															148,053				—		—			—		—			—				(1,381	)			—				—				(1,381	)
Treasury stock purchases																															—				—		—			—		2,299,507			(55,968	)			—				—				—				(55,968	)
Balance – June 30, 2023																															155,769,041		$		156		100	$		—		6,416,077	$		(129,056	)	$		1,653,714		$		(87,690	)	$		691		$		1,437,815

	Common Stock											Treasury Stock							Additional								Total			Common Stock											Treasury Stock							Additional								Accumulated Other				Total
	Class A						Class B												Paid-In				Accumulated				Stockholders'			Class A						Class B												Paid-In				Accumulated				Comprehensive				Stockholders'
	Shares				Amount		Shares			Amount		Shares			Amount				Capital				Deficit				Equity			Shares				Amount		Shares			Amount		Shares			Amount				Capital				Deficit				Income (Loss)				Equity
Balance – March 31, 2022		155,108,627		$	155		100		$		—		—	$		—		$		1,628,581		$		(135,702	)	$		1,493,034			155,108,627		$	155			100	$		—		—	$		—		$		1,628,581		$		(135,702	)	$		—		$		1,493,034
Net income		—				—		—			—		—			—				—				27,476				27,476			—				—		—			—		—			—				—				27,476				—				27,476
Stock-based compensation		—				—		—			—		—			—				4,856				—				4,856			—				—		—			—		—			—				4,856				—				—				4,856
Exercise of stock options		46,608				—		—			—		—			—				1,072				—				1,072
Exercise of vested stock options																															46,608				—		—			—		—			—				1,072				—				—				1,072
Cancellation of restricted stock awards		(3,897	)			—		—			—		—			—				—				—				—			(3,897	)			—		—			—		—			—				—				—				—				—
Issuance of common stock under employee stock plan, net of shares withheld for taxes		1,888				—		—			—		—			—				—				—				—			1,888				—		—			—		—			—				—				—				—				—
Treasury stock purchases						—		—			—		3,013,575			(50,073	)			(8,395	)			—				(58,468	)		—				—		—			—		3,013,575			(50,073	)			(8,395	)			—				—				(58,468	)
Balance – June 30, 2022		155,153,226		$		155		100	$		—		3,013,575	$		(50,073	)	$		1,626,114		$		(108,226	)	$		1,467,970			155,153,226		$		155		100	$		—		3,013,575	$		(50,073	)	$		1,626,114		$		(108,226	)	$		—		$		1,467,970

Balance – September 30, 2021		154,866,313		$	155		100		$		—		—	$		—		$		1,615,236		$		(188,227	)	$		1,427,164			154,866,313		$	155			100	$		—		—	$		—		$		1,615,236		$		(188,227	)	$		—		$		1,427,164
Net income		—				—		—			—		—			—				—				80,001				80,001			—				—		—			—		—			—				—				80,001				—				80,001
Stock-based compensation		—				—		—			—		—			—				13,707				—				13,707			—				—		—			—		—			—				13,707				—				—				13,707
Exercise of vested stock options		260,649				—		—			—		—			—				5,995				—				5,995			260,649				—		—			—		—			—				5,995				—				—				5,995
Cancellation of restricted stock awards		(14,470	)			—		—			—		—			—				—				—				—			(14,470	)			—		—			—		—			—				—				—				—				—
Issuance of common stock under employee stock plan, net of shares withheld for taxes		40,734				—		—			—		—			—				(429	)			—				(429	)		40,734				—		—			—		—			—				(429	)			—				—				(429	)
Treasury stock purchases						—		—			—		3,013,575			(50,073	)			(8,395	)			—				(58,468	)		—				—		—			—		3,013,575			(50,073	)			(8,395	)											(58,468	)
Balance – June 30, 2022		155,153,226		$		155		100	$		—		3,013,575	$		(50,073	)	$		1,626,114		$		(108,226	)	$		1,467,970			155,153,226		$		155		100	$		—		3,013,575	$		(50,073	)	$		1,626,114		$		(108,226	)	$		—		$		1,467,970


	Common Stock											Treasury Stock							Additional								Total
	Class A						Class B												Paid-In				Accumulated				Stockholders'
	Shares				Amount		Shares			Amount		Shares			Amount				Capital				Deficit				Equity
Balance – March 31, 2021		154,739,238		$	155			100	$		—		—	$		—		$		1,599,882		$		(248,589	)	$		1,351,448
Net income		—				—		—			—		—			—				—				21,769				21,769
Stock-based compensation		—				—		—			—		—			—				9,341				—				9,341
Exercise of stock options		89,915				—		—			—		—			—				1,661				—				1,661
Cancellation of restricted stock awards		—				—		—			—		—			—				—				—				—
Balance – June 30, 2021		154,829,153		$		155		100	$		—		—	$		—		$		1,610,884		$		(226,820	)	$		1,384,219

Balance – September 30, 2020		154,637,240		$	155			100	$		—		—	$		—		$		1,587,208		$		(283,475	)	$		1,303,888
Net income		—				—		—			—		—			—				—				54,557				54,557
Stock-based compensation		—				—		—			—		—			—				19,272				—				19,272
Exercise of vested stock options		213,908				—		—			—		—			—				4,614				—				4,614
Cancellation of restricted stock awards		(21,995	)			—		—			—		—			—				—				—				—
IPO costs		—				—		—			—		—			—				(210	)			—				(210	)
Adoption of ASU 2016-02		—				—		—			—		—			—				—				2,098				2,098
Balance – June 30, 2021		154,829,153		$		155		100	$		—		—	$		—		$		1,610,884		$		(226,820	)	$		1,384,219

See Notes to Condensed Consolidated Financial Statements (Unaudited).

The AZEK Company Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands of U.S. dollars)

(Unaudited)


	Nine Months Ended June 30,						Nine Months Ended June 30,
	2022			2021			2023			2022
Operating activities:
Net income	$	80,001		$	54,557		$	25,312		$	80,001
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:
Depreciation		48,764			37,654			63,504			48,764
Amortization of intangibles		37,966			37,666			35,035			37,966
Non-cash interest expense		4,194			2,550			1,236			4,194
Non-cash lease expense		(218	)		(17	)		(188	)		(218	)
Deferred income tax (benefit) provision		21,520			17,385
Deferred income tax provision								1,599			21,520
Non-cash compensation expense		19,550			19,272			13,608			19,550
Loss (gain) on disposition of property		317			624
Fair value adjustment for contingent consideration								400			—
Loss on disposition of property, plant and equipment								278			317
Changes in certain assets and liabilities:
Trade receivables		(20,399	)		(19,287	)		17,241			(20,399	)
Inventories		(121,574	)		(42,721	)		78,624			(121,574	)
Prepaid expenses and other currents assets		(7,732	)		(1,324	)		(8,795	)		(7,732	)
Accounts payable		4,512			6,911			11,308			4,512
Accrued expenses and interest		(3,733	)		4,877			(11,803	)		(3,733	)
Other assets and liabilities		2,532			1,901			2,684			2,532
Net cash provided by (used in) operating activities		65,700			120,048
Net cash provided by operating activities								230,043			65,700
Investing activities:
Purchases of property, plant and equipment		(139,491	)		(116,715	)		(54,059	)		(139,491	)
Proceeds from disposition of fixed assets		617			38			173			617
Acquisitions, net of cash acquired		(86,935	)		—			(161	)		(86,935	)
Net cash provided by (used in) investing activities		(225,809	)		(116,677	)
Net cash used in investing activities								(54,047	)		(225,809	)
Financing activities:
Proceeds from 2022 Term Loan Agreement								—			595,500
Payments on 2022 Term Loan Agreement								(4,500	)		—
Payment of debt issuance costs								—			(3,442	)
Repayments of Term Loan Agreement								—			(467,654	)
Proceeds under revolving credit facility		40,000			—			25,000			40,000
Payments under revolving credit facility		(40,000	)					(25,000	)		(40,000	)
Proceeds from 2022 Term Loan Agreement		595,500			—
Payment of debt issuance costs		(3,442	)		(938	)
Repayments of Term Loan Agreement		(467,654	)		—
Repayments of finance lease obligations		(2,308	)		(1,385	)		(1,958	)		(2,308	)
Exercise of vested stock options		5,995			4,614			11,111			5,995
Payments of initial public offering related costs		—			(210	)
Cash paid for shares withheld for taxes		(429	)		—			(1,381	)		(429	)
Purchases of treasury stock		(58,468	)		—			(55,488	)		(58,468	)
Net cash provided by (used in) financing activities		69,194			2,081			(52,216	)		69,194
Net increase (decrease) in cash and cash equivalents		(90,915	)		5,452			123,780			(90,915	)
Cash and cash equivalents – Beginning of period		250,536			215,012			120,817			250,536
Cash and cash equivalents – End of period	$	159,621		$	220,464		$	244,597		$	159,621
Supplemental cash flow disclosure:
Cash paid for interest, net of amounts capitalized	$	10,269		$	14,871		$	33,516		$	10,269
Cash paid for income taxes, net		5,608			2,458			21,003			5,608
Supplemental non-cash investing and financing disclosure:
Capital expenditures in accounts payable at end of period	$	24,321		$	3,780		$	14,299		$	24,321
Right-of-use operating and finance lease assets obtained in exchange for lease liabilities		18,705			11,861			2,828			18,705

See Notes to Condensed Consolidated Financial Statements (Unaudited).

The AZEK Company Inc.

Notes to Condensed Consolidated Financial Statements

(In thousands of U.S. dollars, unless otherwise specified)

(Unaudited)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Organization

The AZEK Company Inc. (the “Company”, “we”, “us” or “our”) is a Delaware corporation that holds all of the limited liability company interests in The AZEK Group LLC (f/k/a CPG International ~~LLC,~~LLC), the entity which directly and indirectly holds all of the equity interests in the operating ~~subsidiaries.~~subsidiaries and which changed its name from CPG International LLC to The AZEK Group LLC on August 1, 2023. The Company is an industry-leading designer and manufacturer of beautiful, low-maintenance and environmentally sustainable building products for residential, commercial and industrial markets. The Company’s products include decking, railing, trim, porch, moulding, ~~pavers,~~pergolas, outdoor furniture, bathroom and locker systems, as well as extruded plastic sheet products and other non-fabricated products for special applications in industrial markets. The Company operates in various locations throughout the United States. The Company’s residential products are primarily branded under the brand names AZEK®, TimberTech®, VERSATEX®, ULTRALOX®, StruXure™ and ~~StruXure,~~INTEX®, while the commercial products are branded under the Vycom®brand names Celtec®, Playboard®, Seaboard®, Flametec®, Designboard ~~Cortec, Sanatec,~~®, Corrtec™, Timberline®, and Scranton Products® brand names including Aria Partitions®, Eclipse Partitions®, Hiny Hiders® partitions, Tufftec Lockers® and Duralife ~~Lockers.~~

~~Secondary Offerings~~Lockers®.

~~On January 26, 2021,~~Secondary Offering

During the three months ended June 30, 2023, the Company completed an offering of ~~23,000,000~~16,100,000 shares of Class A common stock, par value ~~$0.001~~$0.001 per share, including the exercise in full by the ~~underwriters~~underwriter of ~~their~~its option to purchase up to ~~3,000,000~~2,100,000 additional shares of Class A common ~~stock, at a public offering price~~stock. All of ~~$40.00 per share. The~~the shares were sold by certain of the ~~Selling Stockholders.~~Company's stockholders (the "Selling Stockholders") to the underwriter at a price of $24.36 per share which the underwriter was then permitted to sell at variable prices to the public. The Company did not receive any of the proceeds from the sale of the shares by those Selling Stockholders. In connection with the secondary offering, the Company incurred approximately ~~$1.2~~$1.1 million in expenses.

~~On June 1, 2021,~~In connection with the secondary offering, the Company ~~completed an offering~~purchased from the underwriter 1,477,832 shares of ~~17,250,000 shares of~~its Class A common stock par value $0.001 per share, including the exercise in full by the underwriters of their option to purchase up to 2,250,000 additional shares of Class A common stock, at a public offering price of $43.50 per share. The sharesthat were sold by ~~certain of~~ the Selling ~~Stockholders.~~Stockholders to the underwriter at a price per share of $24.36, which is equal to the price paid by the underwriter to the Selling Stockholders, resulting in an aggregate purchase price of approximately $36.0 million. The ~~Company did not receive any of~~repurchase was made pursuant to the ~~proceeds from the sale of the shares by those Selling Stockholders. In connection with the offering the Company incurred approximately $1.1 million~~Company’s Share Repurchase Program (as defined in ~~expenses.~~Note 13).

b. Summary of Significant Accounting Policies

Basis of Presentation

The Company operates on a fiscal year ending September 30. The accompanying unaudited Condensed Consolidated Financial Statements and notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and in management’s opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position, its results of operations and cash flows for the interim periods presented. The results of operations for the three and nine months ended June 30, ~~2022~~2023 and the cash flows for the nine months ended June 30, ~~2022~~2023 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.

Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year. These reclassifications had no impact on net income, stockholder’s equity or cash flows as previously reported.

The unaudited consolidated results of operations for the three months ended June 30, 2023, are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2023. The Company’s financial condition and results of operations are ~~being, and are expected to continue to be~~ affected by a number of factors, including, but not limited to, the ~~current COVID-19 public health pandemic. The economic effects~~cost to manufacture and distribute products, cost of the COVID-19 pandemic will likely continue to affect demand for the Company’s products in the foreseeable future. Although management has implemented measures to mitigate any impact of the COVID-19 pandemic on the Company’s business, financial conditionraw materials, inflation, consumer spending and ~~results of operations, these measures may not fully mitigate~~preferences, interest rates, the impact of ~~the COVID-19 pandemic on~~any supply chain disruptions, economic conditions, and/or any adverse effects from global health pandemics, geopolitical conflicts and other factors beyond the Company’s ~~business, financial condition and results of operations.~~control. Management cannot predict the degree to, or the period over, which the Company ~~will~~may be affected by ~~the COVID-19 pandemic and resulting governmental and other measures.~~such factors.

The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s ~~2021~~2022 Form 10-K. The Condensed Consolidated Balance Sheet as of September 30, ~~2021~~2022 was derived from the audited financial statements at that date. There have been no material changes in the Company’s significant accounting policies from those that were disclosed in the ~~2021~~2022 Form 10-K, except as noted below.

~~Revision of Previously Reported Financial Information~~

In connection with our retroactive adoption of ASC 842 as of October 1, 2020, quarterly amounts presented in our prior Form 10-Q were revised. The impact of the adjustments was immaterial to the Consolidated Financial Statements.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Significant estimates include revenue recognition, reserves for excess inventory, inventory obsolescence, inventory valuation, product warranties, customer rebates, stock-based compensation, litigation, income taxes, contingent consideration, goodwill and intangible asset valuation and accounting for long-lived assets. Management’s estimates and assumptions are evaluated on an ongoing basis and are based on historical experience, current conditions and available information. Actual results may differ from estimated amounts. Estimates are revised as additional information becomes available.

Accounting Policies

Refer to the Company’s ~~2021~~2022 Form 10-K for a discussion of the Company’s accounting policies, as updated below and for recently adopted accounting standards.

Derivatives

The Company uses interest rate swap agreements to hedge its exposure to interest rate risk on its senior secured credit facilities. The Company designates derivatives that meet specific accounting criteria as qualifying hedges at inception. These criteria require the Company to have the expectation that the derivative will be highly effective at offsetting changes in the fair value or expected cash flows of the hedged exposure, both at inception of the hedging relationship and on an ongoing basis.

The Company recognizes all derivative instruments at fair value and classifies them on the balance sheet as either Other current assets, Other assets, Accrued expenses and other liabilities or Other non-current liabilities. The interest rate swap agreements are designated as cash flow hedges. For cash flow hedges, the Company records the effective portion of the change in fair value of the derivative as part of Accumulated other comprehensive income and recognizes those changes in earnings in the period the hedged transaction affects earnings. The Company recognizes any ineffective portion of the change in the fair value of the derivative immediately in earnings.

See Note 11 for additional information.

Research and Development Costs

Research and development costs primarily relate to new product development, product claims support and manufacturing process improvements. Such costs are expensed as incurred and are included in “Selling, general and administrative expenses” within the Condensed Consolidated Statements of Comprehensive Income. Total research and development expenses were ~~$2.6~~$2.1 million and ~~$1.9~~$2.6 million, respectively, for the three months ended June 30, 2023 and 2022, and ~~2021, and $6.9~~$6.2 million and ~~$5.5~~$6.9 million, respectively, for the nine months ended June 30, ~~2022~~2023 and ~~2021.~~2022.

Recently Adopted Accounting Pronouncements

~~On October 1, 2020, the Company adopted ASU No. 2016-02,~~ ~~Leases (Topic 842)~~ and the subsequent amendments. Adoption of the new standard resulted in the recording of lease assets and lease liabilities of approximately $15.2 million and $18.7 million, respectively, as of October 1, 2020. The difference between the lease assets and lease liabilities primarily relates to accrued rent and unamortized lease incentives recorded in accordance with the previous leasing guidance. As of the adoption date, accumulated deficit within shareholder's equity on the Company’s consolidated balance sheet decreased by $2.1 million, primarily related to the derecognition of build-to-suit leasing arrangements. The new standard did not materially impact the Company’s consolidated statements of income or cash flows.

On October 1, 2021, the Company adopted ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by removing certain exceptions to general principles in Topic 740 and clarifying and amending existing guidance. The adoption of the standard did not have a material impact on the Company’s Consolidated Financial Statements.

2. REVENUE

The Company recognizes revenues when control of the promised goods is transferred to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods, at a point in time, when shipping occurs.

The Company also engages in customer rebates, which are recorded in “Net sales” in the Condensed Consolidated Statements of Comprehensive Income and in “Accrued rebates” and “Trade receivables” in the Condensed Consolidated Balance Sheets. The Company recorded accrued rebates of ~~$44.5~~$49.4 million and ~~$32.8~~$44.5 million as of June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, and contra trade

receivables of ~~$4.9~~$3.8 million and ~~$3.4~~$4.9 million as of June 30, 2023 and 2022, ~~and 2021,~~ respectively. The rebate activity was as follows (in thousands):

Three Months Ended June 30,

Nine Months Ended June 30,

2022

2021

2022

2021

Beginning balance

$
40,146

$
27,791

$
47,648

$
32,679

Rebate expense

23,631

20,645

70,184

54,857

Rebate payments

(14,380
)

(12,257
)

(68,435
)

(51,357
)
Ending balance

$
49,397

$
36,179

$
49,397

$
36,179


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Beginning balance	$	72,741		$	40,146		$	56,542		$	47,648
Rebate expense		28,328			23,631			73,747			70,184
Rebate payments		(47,936	)		(14,380	)		(77,156	)		(68,435	)
Ending balance	$	53,133		$	49,397		$	53,133		$	49,397

The Company records deferred revenue when cash payments are received or due in advance of the Company’s performance.

3. BUSINESS COMBINATIONS

On ~~November 30, 2021,~~August 1, 2022, the Company acquired ~~100% of~~INTEX Millwork Solutions, LLC, a ~~regional recycler in the Midwest,~~New Jersey LLC, or INTEX, for a total purchase price of approximately ~~$4.2~~$25.9 million, which consisted of $20.1 million in cash and $5.8 million in contingent consideration, subject to customary post-closing working capital adjustments. ~~The regional recycler~~INTEX is ~~a provider of full-service recycled material processing, sourcing, logistical support~~located in Mays Landing, New Jersey and ~~scrap management programs. The Company financed~~manufactures high-quality railing solutions, column wraps and pergolas. We funded the acquisition with cash on hand.

On December 29, 2021, the Company acquired 100% of StruXure Outdoor, LLC, a Georgia limited liability company (“StruXure”), for a total purchase price of approximately $84.1 million, subject to customary post-closing working capital adjustments. StruXure is located in Dahlonega, Georgia and manufactures customizable outdoor pergolas and cabanas. The ~~Company financed the~~ acquisition ~~with cash on hand.~~

~~The acquisitions were~~was accounted for as a business ~~combinations~~combination under Accounting Standards Codification (“ASC”) 805 Business Combinations. Tangible and identifiable intangible assets acquired and liabilities assumed were recorded at their respective fair values. The excess of the consideration transferred over the fair value of the net assets received has been recorded ~~for both acquisitions~~ as goodwill in the Residential segment. The factors that contributed to the recognition of goodwill primarily relate to future economic benefits arising from expected ~~sales as well as consumption of the recycled~~sales.

~~PVC materials in current products.~~

The following table represents the preliminary allocation of assets acquired and liabilities assumed on the acquisition date ~~for both acquisitions~~ as of June 30, ~~2022~~2023 (in thousands):


(US dollars in thousands)	Total			Total
Cash and cash equivalents	$	1,410		$	4,279
Trade receivables		3,798			790
Inventories		11,655			1,902
Other current assets		60			52
Property and equipment		4,618			3,612
Intangible assets		43,000			9,300
ROU assets		2,881			580
Accounts payable		(3,110	)		(250	)
Accrued expenses		(9,171	)		(510	)
Current lease liabilities		(740	)		(114	)
Noncurrent lease liabilities		(2,106	)		(466	)
Total identifiable assets		52,295			19,175
Goodwill		36,050			6,717
Net assets acquired/total consideration		88,345			25,892
Less: cash acquired		(1,410	)		(4,279	)
Total consideration net of cash acquired	$	86,935		$	21,613

As of the acquisition ~~dates,~~date, total intangible assets and goodwill amounted to ~~$79.1~~$16.0 million, comprised of ~~$23.0~~$7.3 million related to customer relationships, ~~$10.0~~$1.1 million related to proprietary knowledge and ~~$10.0~~$0.9 million related to trademarks, as well as ~~$36.1~~$6.7 million in goodwill. ~~It is expected that $36.1~~Goodwill of $2.6 million ~~of the goodwill is~~was deductible for tax purposes. The estimated useful life for customer relationships ~~and trademarks~~ is 1512 years, and proprietary knowledge and trademarks is 10 years. The intangible assets weighted average useful life at the date of acquisition was ~~14.2~~11.6 years.

4. INVENTORIES

Inventories are valued at the lower of cost or net realizable value, and are reduced for slow-moving and obsolete inventory. The inventories cost is recorded at standard cost, which approximates actual cost, on a first-in first-out ~~“FIFO”~~(“FIFO”) basis. Inventories consisted of the following (in thousands):

in thousands

June 30,
2022

September 30,
2021

Raw materials

$
82,548

$
46,046

Work in process

38,925

27,278

Finished goods

200,644

115,564

Total inventories

$
322,117

$
188,888


in thousands	June 30, 2023		September 30, 2022
Raw materials	$	66,378	$	72,464
Work in process		35,258		39,829
Finished goods		119,645		187,612
Total inventories	$	221,281	$	299,905

5. PROPERTY, PLANT AND EQUIPMENT—NET

Property, plant and equipment – net consisted of the following (in thousands):

	June 30, 2022			September 30, 2021
Land and improvements	$	3,222		$	2,812
							June 30, 2023			September 30, 2022
Land							$	4,829		$	3,350
Buildings and improvements		101,181			73,227			126,931			110,300
Manufacturing equipment		515,381			405,611			608,058			540,536
Computer equipment		25,978			23,915			31,677			28,198
Furniture and fixtures		6,731			6,018			7,022			6,867
Vehicles		906			604			1,092			941
Total property and equipment		653,399			512,187			779,609			690,192
Construction in progress		137,698			129,886			87,004			140,566
		791,097			642,073			866,613			830,758
Accumulated depreciation		(295,136	)		(251,061	)		(371,718	)		(312,845	)
Total property and equipment – net	$	495,961		$	391,012		$	494,895		$	517,913

Depreciation expense was approximately ~~$17.1~~$20.2 million and ~~$13.3~~$16.2 million in the three months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~$48.8~~$59.7 million and ~~$37.7~~$46.4 million in the nine months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. During the three months ended June 30, 2023 and 2022, ~~and 2021, $1.6~~$1.3 million and ~~$0.5~~$1.6 million of interest was capitalized, respectively, and during the nine months ended June 30, 2023 and 2022, ~~and 2021, $3.9~~$4.2 million and ~~$1.4~~$3.9 million of interest was capitalized, respectively.

6. GOODWILL AND INTANGIBLE ASSETS—NET

Goodwill

Goodwill consisted of the following (in thousands):

Residential

Commercial

Total

Goodwill as of September 30, 2021

$
911,001

$
40,389

$
951,390

Acquisitions

36,050

0

36,050

Goodwill as of June 30, 2022

$
947,051

$
40,389

$
987,440

Accumulated impairment losses as of September 30, 2021

—

32,200

32,200

Accumulated impairment losses as of June 30, 2022

$
—

$
32,200

$
32,200


	Residential		Commercial		Total
Goodwill as of September 30, 2022	$	953,606	$	40,389	$	993,995
Acquisitions		160		—		160
Goodwill as of June 30, 2023	$	953,766	$	40,389	$	994,155
Accumulated impairment losses as of September 30, 2022		—		32,200		32,200
Accumulated impairment losses as of June 30, 2023	$	—	$	32,200	$	32,200

Intangible assets, net

The Company did 0tnot have any indefinite lived intangible assets other than goodwill as of June 30, ~~2022~~2023 and September 30, ~~2021.~~ 2022. Finite-lived intangible assets consisted of the following (in thousands):


		June 30, 2023
	Lives in Years	Gross Carrying Value		Accumulated Amortization			Net Carrying Value
Proprietary knowledge	10 — 15	$	300,400	$	(249,301	)	$	51,099
Trademarks	5 — 20		230,240		(161,442	)		68,798
Customer relationships	12 — 19		176,852		(88,824	)		88,028
Patents	9 — 10		8,500		(5,684	)		2,816
Other intangibles	3 — 15		4,076		(4,017	)		59
Total intangible assets		$	720,068	$	(509,268	)	$	210,800

June 30, 2022

Lives in
Years

Gross
Carrying
Value

Accumulated
Amortization

Net
Carrying
Value

Proprietary knowledge

10 — 15

$
299,300

$
(231,025
)

$
68,275

Trademarks

5 — 20

229,340

(147,597
)

81,743

Customer relationships

15 — 19

169,552

(74,367
)

95,185

Patents

10

7,000

(4,709
)

2,291

Other intangibles

3 — 15

4,076

(3,964
)

112

Total intangible assets

$
709,268

$
(461,662
)

$
247,606


		September 30, 2022
	Lives in Years	Gross Carrying Value		Accumulated Amortization			Net Carrying Value
Propriety knowledge	10 — 15	$	300,400	$	(236,024	)	$	64,376
Trademarks	5 — 20		230,240		(151,259	)		78,981
Customer relationships	12 — 19		176,852		(78,015	)		98,837
Patents	9 — 10		8,500		(4,950	)		3,550
Other intangible assets	3 — 15		4,076		(3,985	)		91
Total intangible assets		$	720,068	$	(474,233	)	$	245,835

September 30, 2021

Lives in
Years

Gross
Carrying
Value

Accumulated
Amortization

Net
Carrying
Value

Propriety knowledge

10 — 15

$
289,300

$
(216,283
)

$
73,017

Trademarks

5 — 20

223,840

(139,631
)

84,209

Customer relationships

15 — 19

146,670

(64,412
)

82,258

Patents

10

7,000

(4,105
)

2,895

Other intangible assets

3 — 15

4,076

(3,883
)

193

Total intangible assets

$
670,886

$
(428,314
)

$
242,572

Amortization expense was ~~$12.5~~$11.6 million and ~~$12.5~~$12.5 million in the three months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively and ~~$38.0~~$35.0 million and ~~$37.7~~$38.0 million in the nine months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. As of June 30, ~~2022,~~2023, the remaining weighted-average amortization period for acquired intangible assets was ~~12.1~~ 11.4 years.

7. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS

Allowance for Doubtful Accounts

Allowance for doubtful accounts consisted of the following (in thousands):


	Three Months Ended June 30,						Nine Months Ended June 30,						Three Months Ended June 30,						Nine Months Ended June 30,
	2022			2021			2022			2021			2023			2022			2023			2022
Beginning balance	$	1,172		$	1,487		$	1,109		$	1,332		$	1,807		$	1,172		$	1,397		$	1,109
Provision		4			116			67			271			136			4			647			67
Bad debt write-offs		(1	)		(540	)		(1	)		(540	)		(1	)		(1	)		(102	)		(1	)
Ending balance	$	1,175		$	1,063		$	1,175		$	1,063		$	1,942		$	1,175		$	1,942		$	1,175

Accrued Expenses and Other Liabilities

Accrued expenses consisted of the following (in thousands):


	June 30, 2023		September 30, 2022
Employee related liabilities	$	26,844	$	36,866
Lease liability - operating		4,445		5,223
Customer deposits		4,312		2,494
Marketing		4,292		4,272
Lease liability - finance		2,622		2,366
Warranty		2,531		2,900
Freight		2,363		1,821
Utilities		2,172		794
Commissions		1,583		1,032
Professional fees		1,314		2,089
Construction in progress		1,176		9,032
Other		4,927		3,700
Total accrued expenses and other current liabilities	$	58,581	$	72,589

June 30, 2022

September 30, 2021

Employee related liabilities

$
30,492

$
32,996

Customer deposits

7,232

—

Lease liability - operating

5,481

3,906

Marketing

4,352

3,421

Warranty

3,170

2,992

Construction in progress

6,274

4,068

Professional fees

1,363

2,296

Freight

2,386

2,292

Lease liability - finance

1,597

71

Other

6,313

4,480

Total accrued expenses and other current liabilities

$
68,660

$
56,522

8. DEBT

Debt consisted of the following (in thousands):

	June 30, 2022			September 30, 2021
2022 Term Loan due April 28, 2029 — SOFR + 2.50% + 0.1% (4.09% at June 30, 2022)	$	600,000		$	—
Term Loan due May 5, 2024 — LIBOR + 2.50% (3.25% at September 30, 2021)		—			467,654
Revolving Credit Facility through March 31, 2026 - LIBOR + 1.25%		—			—
							June 30, 2023			September 30, 2022
2022 Term Loan due April 28, 2029 — SOFR + 2.50% + 0.1% (7.70% at June 30, 2023 and 4.09% at September 30, 2022)							$	595,500		$	600,000
Revolving Credit Facility through March 31, 2026 - SOFR + 0.1%								—			—
Total		600,000			467,654			595,500			600,000
Less unamortized deferred financing costs		(4,891	)		(2,625	)		(4,176	)		(4,712	)
Less unamortized original issue discount		(4,576	)		(314	)		(3,906	)		(4,409	)
Less current portion		(4,500	)		—			(6,000	)		(6,000	)
Long-term debt—less current portion and unamortized deferred financing costs	$	586,033		$	464,715		$	581,418		$	584,879

Term Loan Agreements

The term loan agreement, as amended and restated from time to time (the “Term Loan Agreement”), was a first lien term loan originally entered into on September 30, 2013 by the Company’s wholly-owned subsidiary, ~~CPG International~~The AZEK Group LLC (as successor-in-interest to CPG Merger Sub LLC), as the initial borrower with a syndicate of lenders party thereto. ~~As of September 30, 2021, CPG International LLC had $467.7 million outstanding under the Term Loan Agreement and o~~nOn April 28, 2022, the obligations under the Term Loan Agreement were paid off in full and the Term Loan Agreement was ~~terminated~~terminated..

~~As of June 30, 2022, and September 30, 2021, unamortized deferred financing fees related to the Term Loan Agreement were $0.0 million and $2.6 million, respectively.~~

On April 28, 2022, ~~the Company~~The AZEK Group LLC entered into a new ~~$600.0~~$600.0 million first lien term loan credit agreement (the “2022 Term Loan Agreement”), the proceeds of which were applied, among other uses, to prepay the obligations of the Term Loan Agreement in full. The 2022 Term Loan Agreement is a first lien term loan and will mature on April 28, 2029, subject to acceleration or prepayment. ~~Commencing on December 31, 2022, the~~The 2022 Term Loan Agreement will amortize in equal quarterly installments of ~~0.25%~~0.25% of the aggregate principal amount of the loans outstanding, subject to reduction for certain prepayments. The loans thereunder bear an interest rate equal to (i) in the case of ABR borrowings, the highest of (a) the Federal Funds Rate plus ~~0.50%~~0.50%, (b) the Prime Rate as in effect on such day and (c) the one-month Term ~~SOFR rate~~Secured Overnight Financing Rate ("SOFR") plus ~~1.00%~~1.00% per annum, provided that in no event will the alternative base rate be less than ~~1.50%~~1.50% per annum, plus an applicable margin of ~~1.50%~~1.50% and (ii) in the case of SOFR borrowings, the Term SOFR rate for the applicable interest period, in each case, plus an applicable margin of ~~2.50%~~2.50%. As of June 30, 2023 and September 30, 2022, The AZEK Group LLC had $595.5 million and $600.0 million outstanding under the 2022 Term Loan Agreement.

The obligations under the 2022 Term Loan Agreement are secured by a first priority security interest in the membership interests of ~~CPG International~~The AZEK Group LLC owned by the Company, the equity interests of ~~CPG International~~The AZEK Group LLC’s domestic subsidiaries, other than certain immaterial subsidiaries and other excluded subsidiaries, and all remaining assets not constituting Revolver Priority Collateral (as defined below and subject to certain exceptions) of the Company, ~~CPG International~~The AZEK Group LLC and the subsidiaries of ~~CPG International~~The AZEK Group LLC that are guarantors under the 2022 Term Loan Agreement (the “Term Loan Priority Collateral”), and a second priority security interest in the Revolver Priority Collateral. The obligations under the 2022 Term Loan Agreement are guaranteed by the Company and the wholly owned domestic subsidiaries of ~~CPG International~~The AZEK Group LLC other than certain immaterial subsidiaries and other excluded subsidiaries.

Loans under the 2022 Term Loan Agreement may be voluntarily prepaid in whole, or in part, in each case without premium or penalty,~~(other than the Prepayment Premium, as defined in~~ ~~the 2022 Term Loan Agreement, if applicable)~~, subject to certain customary conditions. The 2022 Term Loan Agreement also requires mandatory prepayments of loans under the 2022 Term Loan Agreement from the proceeds of certain debt issuances and certain asset dispositions (subject to certain reinvestment rights) and, commencing with the fiscal year ~~ended~~ending September 30, 2023, a percentage of excess cash flow (subject to step-downs upon ~~CPG International~~The AZEK Group LLC achieving certain leverage ratios and other reductions in connection with other debt prepayments).

The 2022 Term Loan Agreement contains affirmative covenants, negative covenants and events of default, which are broadly consistent with those in the Revolving Credit Facility (with certain differences consistent with the differences between a revolving loan and term loan) and that are customary for facilities of this type. The 2022 Term Loan Agreement does not have any financial maintenance covenants. The 2022 Term Loan Agreement also includes customary events of default, including the occurrence of a change of control.

As of June 30, 2023 and September 30, 2022, unamortized deferred financing fees related to the 2022 Term Loan Agreement were ~~$4.9 million.~~$4.2 million and $4.7 million, respectively.

1213

Revolving Credit Facility

~~CPG International~~The AZEK Group LLC has also entered into a revolving credit facility, as amended and restated from time to time (the “Revolving Credit Facility”), with certain of our direct and indirect subsidiaries and certain lenders party thereto. The Revolving Credit Facility provides for maximum aggregate borrowings of up to ~~$150.0~~$150.0 million, subject to an asset-based borrowing base. The borrowing base is limited to a set percentage of eligible accounts receivable and inventory, less reserves that may be established by the administrative agent and the collateral agent in the exercise of their reasonable credit judgment.

~~CPG International~~The AZEK Group LLC had 0no outstanding borrowings under the Revolving Credit Facility as of June 30, ~~2022~~2023 and September 30, ~~2021,~~2022, respectively. In addition, ~~CPG International~~The AZEK Group LLC had ~~$2.8 million and $3.3~~$2.8 million of outstanding letters of credit held against the Revolving Credit Facility as of both June 30, ~~2022~~2023 and September 30, ~~2021, respectively. CPG International~~2022. The AZEK Group LLC had approximately ~~$147.2~~$147.2 million available under the borrowing base for future borrowings as of June 30, ~~2022. CPG International~~2023. The AZEK Group LLC also has the option to increase the commitments under the Revolving Credit Facility by up to ~~$100.0~~$100.0 million, subject to certain conditions.

On March 31, 2021, ~~CPG International~~The AZEK Group LLC amended the Revolving Credit Facility, resulting in a repricing and extension thereof. Pursuant to such amendment, the interest rate has been reduced by 25 basis points to (i) for ABR borrowings, the highest of (a) the Federal Funds Rate plus 50 basis points, (b) the prime rate and (c) the LIBOR as of such date for a deposit in U.S. dollars with a maturity of one month plus 100 basis points, plus, in each case, a spread of 25 to 75 basis points, based on average historical availability, or (ii) for Eurocurrency borrowings, adjusted LIBOR plus a spread of 125 to 175 basis points, based on average historical ~~availability.~~availability. The maturity date for the Revolving Credit Facility was extended from May 9, 2022 to the earlier of March 31, 2026 and the date that is 91 days prior to the maturity of the Term Loan Agreement or any permitted refinancing thereof.

On January 26, 2023, The AZEK Group LLC further amended the Revolving Credit Facility, replacing all LIBOR-based provisions with provisions reflecting SOFR, including, without limitation, the use of a new Adjusted Term SOFR benchmark rate equal to Term SOFR (as defined in the Revolving Credit Agreement) plus 0.10%.

Deferred financing costs, net of accumulated amortization, related to the Revolving Credit Facility at June 30, ~~2022~~2023 and September 30, ~~2021~~2022 were ~~$1.0~~$0.7 million and ~~$1.2~~$0.9 million, respectively.

A “commitment fee” accrues on any unused portion of the commitments under the Revolving Credit Facility during the preceding three calendar month period. If the average daily used percentage is greater than 50%, the commitment fee equals 25 basis points, and if the average daily used percentage is less than or equal to 50%, the commitment fee equals 37.5 basis points. The commitment fees were ~~$0.1~~$0.1 million and ~~$0.1~~$0.1 million for the three months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~$0.3~~$0.4 million and ~~$0.4~~$0.3 million infor the nine months ended June 30, 2023 and 2022, ~~and 2021,~~ respectively.

The obligations under the Revolving Credit Facility are guaranteed by the Company and its wholly owned domestic subsidiaries other than certain immaterial subsidiaries and other excluded subsidiaries. The obligations under the Revolving Credit Facility are secured by a first priority security interest in substantially all of the accounts receivable, inventory, deposit accounts, securities accounts and cash assets of the Company, ~~CPG International~~The AZEK Group LLC and the subsidiaries of ~~CPG International~~The AZEK Group LLC that are guarantors under the Revolving Credit Facility, and the proceeds thereof (subject to certain exceptions) (the “Revolver Priority Collateral”), plus a second priority security interest in all of the Term Loan Priority Collateral. The Revolving Credit Facility may be voluntarily prepaid in whole, or in part, in each case without premium or penalty. ~~CPG International~~The AZEK Group LLC is also required to make mandatory prepayments (i) when aggregate borrowings exceed commitments or the applicable borrowing base and (ii) during “cash dominion,” which occurs if (a) the availability under the Revolving Credit Facility is less than the greater of (i) $12.5 million and (ii) 10% of the lesser of (x) $150.0 million and (y) the borrowing base, for five consecutive business days or (b) certain events of default have occurred and are continuing.

The Revolving Credit Facility contains affirmative covenants that are customary for financings of this type, including allowing the Revolver Administrative Agent to perform periodic field exams and appraisals to evaluate the borrowing base. The Revolving Credit Facility contains various negative covenants, including limitations on, subject to certain exceptions, the incurrence of indebtedness, the incurrence of liens, dispositions, investments, acquisitions, restricted payments, transactions with affiliates, as well as other negative covenants customary for financings of this type. The Revolving Credit Facility also includes a financial maintenance covenant, applicable only when the excess availability is less than the greater of (i) 10% of the lesser of the aggregate commitments under the Revolving Credit Facility and the borrowing base, and (ii) $12.5 million. In such circumstances, ~~CPG International~~The AZEK Group LLC would be required to maintain a minimum fixed charge coverage ratio (as defined in the Revolving Credit Facility) for the trailing four quarters equal to at least 1.0 to ~~1.0;~~1.0; subject to ~~CPG International~~The AZEK Group LLC’s ability to make an equity cure (no more than twice in any four quarter period and up to five times over the life of the facility). As of June 30, ~~2022, CPG International~~2023, The AZEK Group LLC was in compliance with the financial and nonfinancial covenants imposed by the Revolving Credit Facility. The Revolving Credit Facility also includes customary events of default, including the occurrence of a change of control.

Interest expense consisted of the following (in thousands):

	Three Months Ended June 30,						Nine Months Ended June 30,
	2022			2021			2022			2021			Three Months Ended June 30,						Nine Months Ended June 30,
Interest Expense
													2023			2022			2023			2022
Interest expense:
2022 Term Loan Agreement	$	4,365		$	—		$	4,365		$	—		$	11,098		$	4,365		$	30,605		$	4,365
Term Loan Agreement		1,140			3,842			8,824			13,942			—			1,140			—			8,824
Revolving Credit Facility		276			156			693			473			149			276			567			693
Other		910			198			2,595			606			1,120			910			3,329			2,595
Amortization - Debt issue costs
Amortization - Deferred financing costs
2022 Term Loan Agreement		4,713			—			4,713			—			179			4,713			537			4,713
Term Loan Agreement		548			254			1,056			2,243			—			548			—			1,056
Revolving Credit Facility		66			65			196			429			66			66			197			196
2022 Term Loan OID		112			—			112			—
Term Loan OID		65			30			126			162
Amortization - Original issue discount
2022 Term Loan														167			112			502			112
Term Loan														—			65			—			126
Capitalized interest		(1,577	)		(491	)		(3,904	)		(1,427	)		(1,306	)		(1,577	)		(4,191	)		(3,904	)
Interest expense	$	10,618		$	4,054		$	18,776		$	16,428			11,473			10,618			31,546			18,776
Interest income														(1,065	)		—			(1,065	)		—
Interest expense, net													$	10,408		$	10,618		$	30,481		$	18,776

See Note 11 for the fair value of the Company’s debt as of June 30, ~~2022~~2023 and September 30, ~~2021.~~2022.

9. PRODUCT WARRANTIES

The Company provides product assurance warranties of various lengths ranging from 5 years to lifetime for limited coverage for a variety of material and workmanship defects based on standard terms and conditions between the Company and its customers.Warranty coverage depends on the product involved. The warranty reserve activity consisted of the following (in thousands):

Three Months Ended June 30,

Nine Months Ended June 30,

2022

2021

2022

2021

Beginning balance

$
13,948

$
12,065

$
12,699

$
10,913

Adjustments to reserve

2,341

1,720

4,618

4,270

Warranty claims payment

(801
)

(843
)

(1,829
)

(2,269
)
Accretion - purchase accounting valuation

—

—

—

28

Ending balance

15,488

12,942

15,488

12,942

Current portion of accrued warranty

(3,170
)

(2,977
)

(3,170
)

(2,977
)
Accrued warranty – less current portion

$
12,318

$
9,965

$
12,318

$
9,965


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Beginning balance	$	14,381		$	13,948		$	15,023		$	12,699
Adjustments to reserve		1,656			2,341			1,822			4,618
Warranty claims payment		(751	)		(801	)		(1,559	)		(1,829	)
Ending balance		15,286			15,488			15,286			15,488
Current portion of accrued warranty		(2,531	)		(3,170	)		(2,531	)		(3,170	)
Accrued warranty – less current portion	$	12,755		$	12,318		$	12,755		$	12,318

10. LEASES

~~As discussed in Note 1, on October 1, 2020, the Company adopted ASU No. 2016-02,~~ ~~Leases (Topic 842), and the related amendments (collectively "ASC 842").~~ The Company leases vehicles, machinery, manufacturing facilities, office space, land, and equipment under both operating and finance leases. We sublease excess office real estate to a third-party tenant. The Company determines if an arrangement is a lease at inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. As of June 30, ~~2022~~2023 and September 30, ~~2021,~~2022, amounts associated with leases are included in Other assets, Accrued expense and other liabilities and Other non-current liabilities in the Company’s Condensed Consolidated Balance Sheet.

For leases with initial terms greater than 12 months, the Company considers these right-of-use assets and records the related asset and obligation at the present value of lease payments over the term. For leases with initial terms equal to or less than 12 months, the Company does not consider them as right-of-use assets and instead considers them short-term lease costs that are recognized on a straight-line basis over the lease term. The Company’s leases may include escalation clauses, renewal options and/or termination options that are factored into the determination of lease term and lease payments when it is reasonably certain the option will be exercised. Renewal options range from 1 year to 20 years.

1415

Lease assets and lease liabilities as of June 30, ~~2022~~2023 and September 30, ~~2021~~2022 were as follows (in thousands):



Leases	Classification on Balance Sheet	June 30, 2023		September 30, 2022
Assets
ROU operating lease assets	Other assets	$	16,383	$	19,724
Finance lease assets	Other assets		72,085		73,541
Total lease assets		$	88,468	$	93,265
Liabilities
Current
Operating	Accrued expenses and other liabilities	$	4,445	$	5,223
Finance	Accrued expenses and other liabilities		2,622		2,366
Non-Current
Operating	Other non-current liabilities		14,509		17,261
Finance	Other non-current liabilities		75,818		75,706
Total lease liabilities		$	97,394	$	100,556

Leases
Classification on Balance Sheet

June 30, 2022

September 30, 2021

Assets

ROU operating lease assets
Other assets

$
21,138

$
19,431

Finance lease assets
Other assets

60,310

49,084

Total lease assets

$
81,448

$
68,515

Liabilities

Current

Operating
Accrued expenses and other liabilities

$
5,481

$
3,906

Finance
Accrued expenses and other liabilities

1,597

71

Non-Current

Operating
Other non-current liabilities

18,444

18,585

Finance
Other non-current liabilities

62,702

50,590

Total lease liabilities

$
88,224

$
73,152

The components of lease expense for the three and nine months ended June 30, ~~2022~~2023 and ~~2021~~2022 were as follows:


	Three Months Ended June 30,						Nine Months Ended June 30,
(in thousands)	2023			2022			2023			2022
Operating lease expense	$	1,473		$	1,497		$	4,477		$	4,121
Finance lease amortization of assets		1,262			877			3,783			2,390
Finance lease interest on lease liabilities		1,098			911			3,293			2,584
Short term		96			188			297			406
Sublease income		(75	)		(71	)		(218	)		(277	)
Total lease expense	$	3,854		$	3,402		$	11,632		$	9,224

Three Months Ended June 30,

Nine Months Ended June 30,

(in thousands)
2022

2021

2022

2021

Operating lease expense
$
1,497

$
1,056

$
4,121

$
2,839

Finance lease amortization of assets

877

316

2,390

841

Finance lease interest on lease liabilities

911

204

2,584

610

Short term

188

32

406

84

Sublease income

(71
)

(119
)

(277
)

(308
)
Total lease expense
$
3,402

$
1,489

$
9,224

$
4,066

The tables below present supplemental information related to leases as of June 30, ~~2022~~2023 andSeptember 30, ~~2021:~~2022:


Weighted-average remaining lease term (years)	June 30, 2022			September 30, 2021			June 30, 2023			September 30, 2022
Operating leases		6.8			7.8			6.8			6.9
Finance leases		28.8			32.2			25.7			26.5
Weighted-average discount rate
Operating leases		4.1	%		4.3	%		4.3	%		4.1	%
Finance leases		6.1	%		6.5	%		5.8	%		5.9	%

The following table summarizes the maturities of lease liabilities at June 30, ~~2022:~~2023:


(in thousands)	Operating Leases			Finance Leases			Total
2023	$	1,494		$	1,737		$	3,231
2024		4,720			6,904			11,624
2025		3,863			6,795			10,658
2026		2,545			6,632			9,177
2027		1,905			6,168			8,073
Thereafter		7,711			122,231			129,942
Total lease payments		22,238			150,467			172,705
Less: interest		(3,284	)		(72,027	)		(75,311	)
Present value of lease liability	$	18,954		$	78,440		$	97,394

(in thousands)

Operating Leases

Finance Leases

Total

2022

$
1,598

$
1,307

$
2,905

2023

6,236

5,282

11,518

2024

4,757

5,016

9,773

2025

3,640

4,833

8,473

2026

2,386

4,624

7,010

Thereafter

9,360

112,647

122,007

Total lease payments

27,977

133,709

161,686

Less: Interest

(4,052
)

(69,410
)

(73,462
)
Present Value of lease liability

$
23,925

$
64,299

$
88,224

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB Accounting Standards Codification (“ASC”) requirements for Fair Value Measurements and Disclosures establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels. Level 1 inputs, the highest priority, are quoted prices in active markets for identical assets or liabilities. Level 2 inputs reflect other than quoted prices included in Level 1 that are either observable directly or through corroboration with observable market data. Level 3 inputs are unobservable inputs, due to little or no market activity for the asset or liability, such as internally-developed valuation models. We do not have any assets or liabilities measured at fair value on a recurring basis that are Level 3.

Derivative Instruments

The Company’s objective in using interest rate derivative instruments is to hedge against interest rate volatility associated with its senior secured credit facilities by converting a portion of its floating rate debt to fixed rate debt. In November 2022, the Company entered into two interest rate swap agreements with Barclays Bank PLC (“Barclays”) to manage interest rate risk related to 2022 Term Loan. Each agreement has a notional amount of $150 million and will expire on October 31, 2025. One agreement swaps variable interest at a rate based on SOFR with a fixed rate of 4.39% and the second with a fixed rate of 4.48%.

At the inceptions of the swap agreements and as of June 30, 2023, both swaps were designated and qualified as cash flow hedges in accordance with ASC 815. Their gain (loss) is recorded in Accumulated other comprehensive income (loss) and then reclassified into Interest expense in the same period in which the hedged transaction affects earnings. As of June 30, 2023, the Company expects to reclass approximately $2.3 million ($1.7 million after-tax) as a reduction to interest expense in the next 12 months.

The following table provides the fair values of the interest rate derivative instruments as well as their classification on the Balance Sheet as of June 30, 2023 and September 30, 2022 (in thousands):

Fair Value as of

Fair Value Hierarchy

Balance Sheet Location

June 30, 2023

September 30, 2022

Assets

Interest rate swaps

Level 2

Other current assets

2,344

—

Liabilities

Interest rate swaps

Level 2

Other non-current liabilities

1,391

—

The Company estimates the fair value of interest rate swaps using a valuation model based on observable market data, such as yield curves. Both swaps are classified as Level 2 measurement in the fair value hierarchy.

The following table summarizes the effects of the interest rate derivative instruments in Statements of Income and on Accumulated other comprehensive income (loss) in the three and nine months ended June 30, 2023 and 2022 (in thousands):


	Cash Flow Hedge - Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss)				Location of Gain (Loss) Reclassified from Accumulated Other	Cash Flow Hedge - Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss)
	Three Months Ended June 30,				Comprehensive Income (Loss)	Three Months Ended June 30,
	2023		2022		into Income	2023		2022
Interest rate swaps	$	3,952	$	—	Interest expense, net	$	303	$	—


	Cash Flow Hedge - Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss)				Location of Gain (Loss) Reclassified from Accumulated Other	Cash Flow Hedge - Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss)
	Nine Months Ended June 30,				Comprehensive Income (Loss)	Nine Months Ended June 30,
	2023		2022		into Income	2023		2022
Interest rate swaps	$	691	$	—	Interest expense, net	$	263	$	—

Other Financial Instruments

The carrying values and the estimated fair values of the debt financial instruments (Level 2 measurements) consisted of the following (in thousands):

June 30, 2022

September 30, 2021

Carrying
Value

Estimated
Fair Value

Carrying
Value

Estimated
Fair Value

2022 Term Loan due April 28, 2029

$
600,000

$
564,000

$
—

$
—

Term Loan due May 5, 2024

—

—

467,654

467,420


	June 30, 2023				September 30, 2022
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
2022 Term Loan due April 28, 2029	$	595,500	$	596,244	$	600,000	$	586,500

Financial instruments remeasure at fair value on a recurring basis – During the ~~nine months~~year ended ~~June~~September 30, 2022, the Company entered into an arrangement for a contingent payment to the former owner and employee of StruXure. The contingent payment is based on achievement of a minimum EBITDA amount and a multiple of EBITDA, for EBITDA exceeding a higher threshold for calendar year 2022. Based on the formula, the potential contingent payout can range from 0zero to ~~$13.9~~$13.9 million. At the date of acquisition, the fair value was estimated to be ~~$9.5~~$9.5 million. As of ~~June 30, 2022,~~March 31, 2023, the fair value was increased to ~~$11.7~~$12.7 million based on the actual EBITDA amount for StruXure. Compensation expense of ~~$2.9~~$9.5 million ~~and $5.8 million were~~was recognized for the ~~three~~year ended September 30, 2022 and $3.2 million was recognized for the nine months ended June 30, ~~2022.~~2023. The ~~remaining amount~~Company paid $12.7 million as settlement of the contingent ~~payment will~~liability in April, 2023.

In connection with the acquisition of INTEX on August 1, 2022, the Company entered into a contingent consideration arrangement with the former owner of INTEX. The contingent consideration is based on achievement of a minimum gross profit amount for calendar year 2022. Based on the formula, the potential contingent consideration can range from zero to $6.2 million. At the date of the acquisition, the fair value was estimated to be ~~recognized as compensation expense through~~$5.8 million. As of December 31, ~~2022.~~2022, the fair value was increased to $6.2 million. Contingent payment of $5.8 million was included in the acquisition purchase price at the date of acquisition and the change in fair value of $0.4 million was recognized in selling, general and administrative expense for the nine months ended June 30, 2023. The Company paid $6.0 million of this contingent liability as of June 30, 2023 and will settle the remainder of the contingent liability in the fourth quarter of fiscal year 2023.

12. SEGMENTS

~~12. SEGMENTS~~

Operating segments for the Company are determined based on information used by the chief operating decision maker (“CODM”) in deciding how to evaluate performance and allocate resources to each of the segments. The CODM reviews Adjusted EBITDA and Adjusted EBITDA Margin as the key segment measures of performance. Adjusted EBITDA is defined as segment operating income (loss) plus depreciation and amortization, adjusted by adding thereto or subtracting therefrom stock-based compensation costs, business transformation costs, acquisition costs, capital structure transaction costs, and certain other costs. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by net sales.

The Company has 2two reportable segments, Residential and Commercial. The reportable segments were determined primarily based on products and end markets as follows:

• Residential—The Residential segment manufactures and distributes decking, rail, trim and accessories through a national network of dealers and distributors and multiple home improvement retailers providing extensive geographic coverage and enabling the Company to effectively serve contractors. The addition of StruXure expands our product offerings in the Residential segment. The addition of regional recyclers provides full-service recycled PVC material processing, sourcing, logistical support, and scrap management programs. This segment is impacted by trends in and the strength of home repair and remodel activity.

• Commercial—The Commercial segment manufactures, fabricates and distributes resin based extruded sheeting products for a variety of commercial and industrial applications through a widespread distribution network as well as directly to original equipment manufacturers. This segment includes Scranton Products which manufactures lockers and partitions and Vycom which manufactures resin based sheeting products. This segment is impacted by trends in and the strength of the ~~new construction~~repair and remodel sector.

The segment data below includes data for Residential and Commercial for the three and nine months ended June 30, 2023 and 2022 (in thousands).


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Net sales to customers
Residential	$	351,608		$	343,064		$	873,208		$	914,555
Commercial		35,945			51,927			108,296			136,399
Total	$	387,553		$	394,991		$	981,504		$	1,050,954
Adjusted EBITDA
Residential	$	105,503		$	91,093		$	211,885		$	258,874
Commercial		8,780			12,271			21,763			25,693
Total Adjusted EBITDA for reporting segments	$	114,283		$	103,364		$	233,648		$	284,567
Unallocated net expenses		(17,328	)		(16,839	)		(48,783	)		(48,603	)
Adjustments to Income before income tax provision
Depreciation and amortization		(33,064	)		(29,606	)		(98,539	)		(86,730	)
Stock-based compensation costs		(4,164	)		(4,903	)		(13,747	)		(13,846	)
Acquisition costs (1)		—			(3,228	)		(3,856	)		(8,861	)
Secondary offering costs		(1,065	)		—			(1,065	)		—
Other costs (2)		(112	)		(1,138	)		(1,260	)		(1,799	)
Interest expense, net		(10,408	)		(10,618	)		(30,481	)		(18,776	)
Income before income tax provision	$	48,142		$	37,032		$	35,917		$	105,952

(1)

Acquisition costs reflect costs directly related to completed acquisitions of $3.2 million in the three months ended June 30, 2022, and ~~2021 (in thousands).~~

$3.9 million and $7.7 million in the nine months ended June 30, 2023 and 2022, respectively, and inventory step-up adjustments related to recording inventory of acquired businesses at fair value on the date of acquisition of $1.2 million for the nine months ended June 30, 2022.

Three Months Ended
June 30,

Nine Months Ended
June 30,

2022

2021

2022

2021

Net sales to customers

Residential
$
343,064

$
291,209

$
914,555

$
739,048

Commercial

51,927

36,245

136,399

93,806

Total
$
394,991

$
327,454

$
1,050,954

$
832,854

Adjusted EBITDA

Residential
$
91,093

$
82,525

$
258,874

$
222,999

Commercial

12,271

6,273

25,693

13,304

Total Adjusted EBITDA for reporting segments
$
103,364

$
88,798

$
284,567

$
236,303

Unallocated net expenses

(16,839
)

(16,082
)

(48,603
)

(43,623
)
Adjustments to Income before income tax provision

Depreciation and amortization

(29,606
)

(25,771
)

(86,730
)

(75,321
)
Stock-based compensation costs

(4,903
)

(9,510
)

(13,846
)

(19,646
)
Acquisition costs (1)

(3,228
)

—

(8,861
)

—

Initial public offering costs and secondary offering costs

-

(1,443
)

—

(2,592
)
Other costs (2)

(1,138
)

(1,358
)

(1,799
)

(4,411
)
Interest expense, net

(10,618
)

(4,054
)

(18,776
)

(16,428
)
Income before income tax provision
$
37,032

$
30,580

$
105,952

$
74,282

(2)

Other costs include costs related to a reduction in workforce of $0.1 million and $0.8 million in the three months ended June 30, 2023 and 2022, respectively, and $0.3 million and $0.8 million in the nine months ended June 30, 2023 and 2022, respectively, costs for legal expense of $0.2 million in the three months ended June 30, 2022, and $0.2 million and $0.6 million in the nine months ended June 30, 2023 and 2022, respectively, costs related to an incentive plan and other ancillary expenses associated with the initial public offering of $0.1 million for the nine months ended June 30, 2022, and other costs of $0.1 million for the three months ended June 30, 2022, and $0.8 million and $0.3 million for the nine months ended June 30, 2023 and 2022, respectively.

~~(1)~~19

Acquisition costs reflect costs directly related to completed acquisitions of $3.2 million and $7.7 million in the three and nine months ended June 30, 2022, respectively, and inventory step-up adjustments related to recording inventory of acquired businesses at fair value on the date of acquisition of $1.2 million for the nine months ended June 30, 2022.

~~(2)~~

Other costs include costs for legal expense of $0.2 million and $0.8 million in the three months ended June 30, 2022 and 2021, respectively, costs related to reduction in workforce of $0.8 million in the three months ended June 30, 2022, costs related to an incentive plan and other ancillary expenses associated with the initial public offering of $0.4 million for the three months ended June 30, 2021, other costs of $0.1 million for the three months ended June 30, 2022, and the impact of retroactive adoption of ASC 842 of $0.2 million for the three months ended June 30, 2021. Other costs include costs for legal expense of $0.6 million and $1.8 million in the nine months ended June 30, 2022 and 2021, respectively, costs related to reduction in workforce of $0.8 million in the nine months ended June 30, 2022, costs related to an incentive plan and other ancillary expenses associated with the initial public offering of $0.1 million and $2.1 million in the nine months ended June 30, 2022 and 2021, respectively, other costs of $0.3 million for the nine months ended June 30, 2022, and the impact of retroactive adoption of ASC 842 of $0.5 million for the nine months ended June 30, 2021.

13. CAPITAL STOCK

The Company completed its IPO on June 16, 2020, in which it sold 38,237,500 shares of its Class A common stock, including 4,987,500 shares pursuant to the underwriters’ over-allotment option. The shares were sold at an IPO price of $23.00 per share for net proceeds to the Company of approximately $819.7 million, after deducting underwriting discounts and commissions of $50.6 million and offering expenses of approximately $9.2 million payable by the Company.

Immediately prior to the completion of the IPO, the Company converted to a Delaware corporation from a limited liability company. The Company’s certificate of incorporation provides for two classes of common stock: Class A common stock and Class B common stock. In addition, the certificate of incorporation authorizes shares of undesignated preferred stock, the rights, preferences and privileges of which may be designated from time to time by the board of directors. The Company is authorized to issue up to 1.1 billion shares of Class A common stock, up to ~~1 hundred~~ million shares of Class B common stock and up to 1 million shares of preferred stock, each par value $0.001 per share, in one or more series. The Class A common stock and Class B common stock provide identical economic rights, but holders of Class B common stock have limited voting rights, specifically that such holders have no right to vote, solely with respect to their shares of Class B common stock, with respect to the election, replacement or removal of directors. Holders of Class A common stock and Class B common stock are not entitled to preemptive rights. Holders of Class B common stock may convert their shares of Class B common stock into shares of Class A common stock on a one-for-one basis, in whole or in part, at any time and from time to time at their option. The Company’s Class A common stock is traded on the New York Stock Exchange under the symbol “AZEK.”

In conjunction with the Corporate Conversion and prior to the closing of the IPO, the Company effected a unit split of its then-outstanding unit, resulting in an aggregate of 108,162,741 units, including 75,093,778 Class A units and 33,068,963 Class B units. Concurrently with the Corporate Conversion, the units were converted to an aggregate of 108,162,741 shares of common stock, including 75,093,778 shares of Class A common stock and 33,068,963 shares of Class B common stock. In addition, a class of the Company’s former indirect parent’s partnership interests referred to as “Profits Interests” were exchanged for an aggregate of 2,703,243 shares of Class A common stock and 5,532,057 shares of Class A restricted stock, and 3,477,413 shares of Class A common stock reserved for issuance upon the exercise of stock options.

~~On January 26, 2021,~~Secondary Offering

During the three months ended June 30, 2023, the Company completed an offering of ~~23,000,000~~16,100,000 shares of Class A common stock, par value ~~$0.001~~$0.001 per share, including the exercise in full by the ~~underwriters~~underwriter of ~~their~~its option to purchase up to ~~3,000,000~~2,100,000 additional shares of Class A common ~~stock, at a public offering price~~stock. All of ~~$40.00 per share. The~~the shares were sold by ~~certain of~~ the Selling ~~Stockholders.~~Stockholders to the underwriter at a price of $24.36 per share which the underwriter was then permitted to sell at variable prices to the public. The Company did not receive any of the proceeds from the sale of the shares by those Selling Stockholders. In connection with the secondary offering, the Company incurred approximately ~~$1.2~~$1.1 million in expenses.

~~On June 1, 2021,~~In connection with the secondary offering, the Company ~~completed an offering~~purchased from the underwriter 1,477,832 shares of ~~17,250,000 shares of~~its Class A common stock par value $0.001 per share, including the exercise in full by the underwriters of their option to purchase up to 2,250,000 additional shares of Class A common stock, at a public offering price of $43.50 per share. The sharesthat were sold by ~~certain of~~ the Selling ~~Stockholders.~~Stockholders to the underwriter at a price per share of $24.36, which is equal to the price paid by the underwriter to the Selling Stockholders, resulting in an aggregate purchase price of approximately $36.0 million. The ~~Company did not receive any of~~repurchase was made pursuant to the ~~proceeds from the sale of the shares by those Selling Stockholders. In connection with the offering the Company incurred approximately $1.1 million in expenses.~~Company’s Share Repurchase Program (as defined below).

Share Repurchase Program

On May 5, 2022, the Board of Directors authorized the Company to repurchase up to ~~$400~~$400 million of the Company’s Class A common stock (the “Share Repurchase Program”). The Share Repurchase Program allows the Company to repurchase its shares opportunistically from time to time. Purchases may be effected through one or more open market transactions, privately negotiated transactions, transactions structured through investment banking institutions, accelerated share repurchases or tender offers, some of which may be effected through Rule 10b5-1 plans, or a combination of the foregoing. The timing of repurchases will depend upon several factors, including market and business conditions, and repurchases may be discontinued at any time.

~~On May 11, 2022,~~The table below summaries the Company entered into a $50 million accelerated share repurchase agreement (the “ASR”) with JPMorgan Chase Bank, National Association (“JPMorgan”). JPMorgan delivered 2,422,774 initial shares to the Company on May 13, 2022, based on the closing priceCompany's repurchases of ~~the Company’s~~its Class A common stock during the three and nine months ended June 30, 2023 and 2022 (in thousands, except per share amount):


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Total number of shares repurchased		1,947		3,014		2,300		3,014
Reacquisition cost (1), (2), (3)	$	48,480	$	58,468	$	55,968	$	58,468
Average price per share	$	24.90	$	19.40	$	24.34	$	19.40

(1)

Reacquisition cost in the three and nine months ended June 30, 2023 includes the $36.0 million repurchase from the underwriter upon the completion of ~~$16.51~~the secondary offering. The remaining repurchases in the three and nine months ended June 30, 2023 were made through open market transactions.

(2)

On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”), that includes, among other provisions, a one percent excise tax on ~~May 11,~~net repurchases of stock after December 31, 2022. ~~JPMorgan terminated the ASR on~~As of June ~~14, 2022 and delivered 86,132 additional shares to~~30, 2023, the Company ~~upon final settlement for no additional consideration. The average purchase price per~~recognized $0.5 million excise tax as reacquisition cost of share ~~for shares purchased by the Company pursuant to the ASR was $19.93.~~repurchases.

(3)

During the three and nine months ended June 30, 2022, the Company ~~also~~ repurchased ~~504,669~~$50 million of shares under an accelerated share repurchase agreement ("ASR") and $8.5 million of ~~its Class A common stock~~shares on the open ~~market at an average price of $16.76 per share, totaling an approximately $8.5 million reacquisition cost.~~market.

As of June 30, ~~2022,~~2023, the Company had approximately ~~$341.5~~$262.5 million available for repurchases under the Share Repurchase Program.

14. STOCK-BASED COMPENSATION

The Company grants stock-based awards to attract, retain and motivate key employees and directors.

The 2020 Omnibus Incentive Compensation Plan (“2020 Plan”), provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and performance-based or other equity-related awards to the Company’s employees and directors. The maximum aggregate number of shares that may be issued under the 2020 Plan is 15,852,319 shares with ~~3,842,901~~2,745,034 shares remaining in the reserve. The total aggregate number of shares may be adjusted as determined by the Board of Directors.

Stock-based compensation expense for the three months ended June 30, 2023 and 2022 ~~and 2021~~ was ~~$4.9~~$4.2 million and ~~$9.5~~$4.9 million, respectively, and for the nine months ended June 30, 2023 and 2022 ~~and 2021was $13.8~~was $13.7 million and ~~$19.6~~$13.8 million, respectively, recognized in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Comprehensive Income. Total income tax benefit for the three months ended June 30, 2023 and 2022 ~~and 2021~~ was ~~$1.0~~$0.9 million and ~~$1.2~~$1.0 million, respectively, and for the nine months ended June 30, 2023 and 2022 ~~and 2021~~ was ~~$2.9~~$2.9 million and ~~$2.0 million.~~$2.9 million, respectively. As of June 30, ~~2022,~~2023, the Company had not yet

recognized compensation cost on unvested stock-based awards of ~~$31.4~~$28.2 million, with a weighted average remaining recognition period of ~~2.1~~1.8 years.

The Company uses the Black Scholes pricing model to estimate the fair value of its service-based awards as of the grant date. Under the terms of the 2020 Plan, all stock options will expire if not exercised within ten years of the grant date.

The following table sets forth the significant assumptions used for the calculation of stock-based compensation expense for the nine months ended June 30, ~~2022~~2023 and ~~2021:~~2022:

November 19,
2021
Grant Date

December 4,
2020
Grant Date

Risk-free interest rate

1.34
%

0.56
%
Expected volatility

40.00
%

35.00
%
Expected term (in years)

6.00

6.00

Expected dividend yield

0.00
%

0.00
%


	December 12, 2022 Grant Date			November 19, 2021 Grant Date
Risk-free interest rate		3.77	%		1.34	%
Expected volatility		40.00	%		40.00	%
Expected term (in years)		6.00			6.00
Expected dividend yield		0.00	%		0.00	%

Stock Options

The following table summarizes the performance-based stock option activity for the nine months ended June 30, ~~2022:~~2023:


	Number of Shares				Weighted Average Exercise Price Per Share		Weighted Average Remaining Contract Term		Aggregate Intrinsic Value
							(in years)		(in thousands)
Outstanding at October 1, 2022		1,410,653		$		23.00
Granted		—				—
Exercised		(228,282	)			23.00
Cancelled/Forfeited		(2,174	)			23.00
Outstanding at June 30, 2023		1,180,197				23.00		7.0		8,604
Vested and exercisable at June 30, 2023		1,180,197		$		23.00		7.0		8,604

Number
of Shares

Weighted
Average
Exercise
Price Per
Share

Weighted
Average
Remaining
Contract
Term

Aggregate
Intrinsic
Value

(in years)

(in thousands)

Outstanding at October 1, 2021

1,556,489

$

23.00

Granted

—

0

Exercised

(123,008
)

23.00

Cancelled/Forfeited

(5,436
)

23.00

Outstanding at June 30, 2022

1,428,045

23.00

7.9

—

Vested and exercisable at June 30, 2022

1,428,045

$

23.00

7.9

—

The following table summarizes the service-based stock option activity for the nine months ended June 30, ~~2022:~~2023:

	Number of Shares				Weighted Average Exercise Price Per Share		Weighted Average Remaining Contract Term		Aggregate Intrinsic Value
							(in years)		(in thousands)		Number of Shares				Weighted Average Exercise Price Per Share		Weighted Average Remaining Contract Term		Aggregate Intrinsic Value
Outstanding at October 1, 2021		3,434,221		$		23.82
																	(in years)		(in thousands)
Outstanding at October 1, 2022												3,557,194		$		25.57
Granted		333,234				42.23						250,477				20.18
Exercised		(137,641	)			23.00						(261,601	)			23.00
Cancelled/Forfeited		(48,150	)			24.49						(75,339	)			24.08
Outstanding at June 30, 2022		3,581,664				25.55		8.1		—
Vested and exercisable at June 30, 2022		2,050,502		$		23.20		7.9		—
Outstanding at June 30, 2023												3,470,731				25.40		7.3		22,132
Vested and exercisable at June 30, 2023												2,445,254		$		24.41		7.0		16,251

Restricted Stock Awards

A summary of the service-based restricted stock awards activity during the nine months ended June 30, ~~2022~~2023 was as follows:

	Number of Shares				Weighted Average Grant Date Fair Value
							Number of Shares				Weighted Average Grant Date Fair Value
Outstanding and unvested at October 1, 2021		717,580		$		23.00

Outstanding and unvested at October 1, 2022								275,628		$		23.00
Granted		—				—		—				—
Vested		(326,084	)			23.00		(146,595	)			23.00
Forfeited		(14,470	)			23.00		(19,306	)			23.00
Outstanding and unvested at June 30, 2022		377,026		$		23.00
Outstanding and unvested at June 30, 2023								109,727		$		23.00

Performance Restricted Stock Units

Performance restricted stock units were granted to officers and certain employees of the Company and represent the right to earn shares of Company common stock based on the achievement of company-wide non-GAAP performance conditions, including cumulative net sales, average return on net tangible assets and cumulative EBITDA during the three-year performance period. Compensation cost is amortized into expense over the performance period, which is generally three years, and is based on the probability of meeting performance targets. The fair value of each performance share award is based on the closing stock price on the date of grant.

A summary of the performance-based restricted stock unit awards activity for the nine months ended June 30, ~~2022~~2023 presented at target was as follows:

	Number of Shares				Weighted Average Grant Date Fair Value
							Number of Shares				Weighted Average Grant Date Fair Value
Outstanding and unvested at October 1, 2021		111,804		$		35.00

Outstanding and unvested at October 1, 2022								221,469		$		37.51
Granted		122,865				40.00		319,263				20.18
Vested		—				—		—				—
Forfeited		(9,578	)			35.47		(27,261	)			35.09
Outstanding and unvested at June 30, 2022		225,091		$		37.73
Outstanding and unvested at June 30, 2023								513,471		$		26.86

Restricted Stock Units

A summary of the service-based restricted stock unit awards activity for the nine months ended June 30, ~~2022~~2023 was as follows:


	Number of Shares				Weighted Average Grant Date Fair Value

Outstanding and unvested at October 1, 2022		574,499		$		31.14
Granted		476,957				20.54
Vested		(210,228	)			29.68
Forfeited		(32,921	)			29.29
Outstanding and unvested at June 30, 2023		808,307		$		25.34

Number
of Shares

Weighted
Average
Grant Date
Fair Value

Outstanding and unvested at October 1, 2021

366,852

$

30.42

Granted

245,077

36.66

Vested

(53,868
)

36.60

Forfeited

(35,856
)

31.33

Outstanding and unvested at June 30, 2022

522,205

$

32.75

15. EARNINGS PER SHARE

The Company computes earnings per common share (“EPS”) under the two-class method which requires the allocation of all distributed and undistributed earnings attributable to the Company to common stock and other participating securities based on their respective rights to receive distributions of earnings or losses. The Company’s Class A common stock and Class B common stock equally share in distributed and undistributed earnings, and, therefore, no allocation to participating securities or dilutive securities is performed.

2022

Basic EPS attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding. Diluted EPS is calculated by adjusting weighted average shares outstanding for the dilutive effect of potential common shares, determined using the treasury-stock method. For purposes of the diluted EPS calculation, restricted stock awards, restricted stock units and options to purchase shares of common stock are considered to be potential common shares. The following table sets forth the computation of the Company’s basic and diluted EPS attributable to common stockholders (in thousands, except share and per share amounts):


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Numerator:
Net income	$	34,875	$	27,476	$	25,312	$	80,001
Net income attributable to common stockholders - basic and diluted	$	34,875	$	27,476	$	25,312	$	80,001
Denominator:
Weighted-average shares of common stock
Basic		150,140,392		153,493,355		150,610,890		154,199,158
Diluted		151,069,954		153,891,090		151,056,199		155,631,884
Net income per share attributable to common stockholders:
Net income per common share - basic	$	0.23	$	0.18	$	0.17	$	0.52
Net income per common share - diluted	$	0.23	$	0.18	$	0.17	$	0.51

Three Months Ended June 30,

Nine Months Ended June 30,

2022

2021

2022

2021

Numerator:

Net income
$
27,476

$
21,769

$
80,001

$
54,557

Net income attributable to
  common stockholders
  - basic and diluted
$
27,476

$
21,769

$
80,001

$
54,557

Denominator:

Weighted-average shares of common stock

Basic

153,493,355

153,854,313

154,199,158

153,623,579

Diluted

153,891,090

157,022,043

155,631,884

156,658,640

Net income per share attributable
  to common stockholders:

Net income per common share - basic
$
0.18

$
0.14

$
0.52

$
0.36

Net income per common share - diluted
$
0.18

$
0.14

$
0.51

$
0.35

The following table includes the number of shares that may be dilutive common shares in the future, and were not included in the computation of diluted net income per share because the effect was anti-dilutive:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Stock Options		819,718		5,014,206		4,999,267		446,175
Restricted Stock Units		98,732		422,466		281,145		243,480

Three Months Ended June 30,

Nine Months Ended June 30,

2022

2021

2022

2021

Stock Options

5,014,206

—

446,175

83,412

Restricted Stock Units

422,466

5,207

243,480

5,160

16. INCOME TAXES

The Company calculates the interim tax provision in accordance with the provisions of ASC 740-270, Income Taxes; Interim Reporting, specifically ASC-740-270-25-2. For interim periods, the Company estimates the annual effective income tax rate and applies the estimated rate to the year-to-date income or loss before income taxes. The effective income tax rates for the three months ended June 30, 2023 and 2022 were 27.6% and ~~2021 were 25.8% and 28.8%~~25.8%, respectively, and for the nine months ended June 30, 2023 and 2022 were 29.5% and ~~2021 were 24.5% and 26.6%~~24.5%. The ~~decrease~~increase in the effective income tax rate for the three and nine months ended June 30, ~~2022,~~2023, as compared to the three and nine months ended June 30, ~~2021, is~~2022, was primarily driven by ~~the impact~~increased estimates of ~~forecasted permanent items related to employee~~state taxes and non deductible compensation ~~on the Company’s year to date earnings.~~costs.

17. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

During the year ended September 30, 2019, the Company was made aware of a worker’s compensation case that became reasonably possible to give rise to a liability. ~~The case is in discovery~~Discovery has been completed, and the ~~nature and extent of the Company’s exposure is currently being determined.~~ Company filed motions for summary judgment in April 2023. A trial date has been set for May 2024. The Company expects ~~a range of~~any loss ~~of $0.4 million~~would be immaterial to ~~$0.5 million.~~the financial statements.

In the normal course of the Company’s business, it is at times subject to various other legal actions, in some cases for which the relief or damages sought may be substantial. Although the Company is not able to predict the outcome of such actions, after reviewing all pending and threatened actions with counsel and based on information currently available, management believes that the outcome of such actions ~~individually or in the aggregate,~~ will not have a material adverse effect on the Company’s results of operations or financial position. However, it is possible that the ultimate resolution of such matters, if unfavorable, may be material to the Company’s results of operations in a particular future period as the time and amount of any resolution of such actions and its relationship to the future results of operations are not currently known. The Company accrues for losses when they are probable of occurrence and such losses are reasonably estimable. Legal costs expected to be incurred are accounted for as they are incurred.

18. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)

The AZEK Company Inc. (parent company only)

Balance Sheets

(In thousands of U.S. dollars, except for share and per share amounts)


	June 30, 2022			September 30, 2021			June 30, 2023			September 30, 2022
ASSETS:
Non-current assets:
Investments in subsidiaries	$	1,467,970		$	1,427,164		$	1,437,815		$	1,444,443
Total non-current assets		1,467,970			1,427,164			1,437,815			1,444,443
Total assets	$	1,467,970		$	1,427,164		$	1,437,815		$	1,444,443
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Total liabilities	$	—		$	—		$	—		$	—

Stockholders’ equity:
Preferred stock, $0.001 par value; 1,000,000 shares authorized and 0 shares issued or outstanding at June 30, 2022 and September 30, 2021, respectively		—			—
Class A common stock, $0.001 par value; 1,100,000,000 shares authorized, 155,153,226 shares issued at June 30, 2022 and 154,866,313 shares issued at September 30, 2021		155			155
Class B common stock, $0.001 par value; 100,000,000 shares authorized, 100 shares issued and outstanding at June 30, 2022 and at September 30, 2021, respectively		—			—
Additional paid-in capital		1,626,115			1,615,236
Preferred stock, $0.001 par value; 1,000,000 shares authorized and no shares issued or outstanding at June 30, 2023 and September 30, 2022, respectively								—			—
Class A common stock, $0.001 par value; 1,100,000,000 shares authorized, 155,769,041 shares issued at June 30, 2023 and 155,157,220 shares issued at September 30, 2022								156			155
Class B common stock, $0.001 par value; 100,000,000 shares authorized, 100 shares issued and outstanding at June 30, 2023 and at September 30, 2022, respectively								—			—
Additional paid‑in capital								1,653,714			1,630,378
Accumulated deficit		(108,227	)		(188,227	)		(87,690	)		(113,002	)
Treasury stock, at cost, 3,013,575 shares at June 30, 2022 and 0 shares at September 30, 2021		(50,073	)		—
Accumulated other comprehensive income (loss)								691			—
Treasury stock, at cost, 6,416,077 and 4,116,570 shares at June 30, 2023 and September 30, 2022, respectively								(129,056	)		(73,088	)
Total stockholders’ equity		1,467,970			1,427,164			1,437,815			1,444,443
Total liabilities and stockholders’ equity	$	1,467,970		$	1,427,164		$	1,437,815		$	1,444,443


	Three Months Ended June 30,				Nine Months Ended June 30,				Three Months Ended June 30,				Nine Months Ended June 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Net income of subsidiaries	$	27,476	$	21,769	$	80,001	$	54,557	$	34,875	$	27,476	$	25,312	$	80,001
Net income of subsidiaries	$	27,476	$	21,769	$	80,001	$	54,557	$	34,875	$	27,476	$	25,312	$	80,001
Comprehensive income	$	27,476	$	21,769	$	80,001	$	54,557	$	38,828	$	27,476	$	26,003	$	80,001

The AZEK Company Inc. did not have any cash as of June 30, ~~2022~~2023 or September 30, ~~2021, accordingly~~2022. Accordingly a Condensed Statement of Cash Flows has not been presented.

Basis of Presentation

The parent company financial statements should be read in conjunction with the Company’s Consolidated Financial Statements and the accompanying notes thereto. For purposes of this condensed financial information, the Company’s wholly owned and majority owned subsidiaries are recorded based upon its proportionate share of the subsidiaries’ net assets (similar to presenting them on the equity method).

Since the restricted net assets of The AZEK Company Inc. and its subsidiaries exceed ~~25%~~25% of the consolidated net assets of the Company and its subsidiaries, the accompanying condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule 1 of Regulation S-X. This information should be read in conjunction with the accompanying Condensed Consolidated Financial Statements.

Dividends from Subsidiaries

There were ~~$50.0~~$48.0 million and ~~$0.0~~$55.5 million in cash dividends paid to The AZEK Company Inc. from the Company’s consolidated subsidiaries during the three and nine months ended June 30, ~~2022~~2023, respectively, and $50.0 million in cash dividends paid to The AZEK Company Inc. from the Company’s consolidated subsidiaries during both the three and nine months ended June 30, ~~2021, respectively. The $50.0~~

2022. Cash dividends of $36.0 million were used to repurchase shares from the underwriter upon completion of the secondary offering during both the three and nine months ended June 30, 2023, $12.0 million and $19.5 million in cash dividends were used to fund share repurchases on the open market during the three and nine months ended June 30, 2023, respectively, and $50.0 million of cash dividends were used to fund the ASR ~~with JPMorgan~~ during the three and nine months ended June 30, 2022.

Restricted Payments

~~CPG International~~The AZEK Group LLC is party to the Revolving Credit Facility and the 2022 Term Loan Agreement. The obligations under the Revolving Credit Facility and 2022 Term Loan Agreement are secured by substantially all of the present and future assets of the borrowers and guarantors, including equity interests of their domestic subsidiaries, subject to certain exceptions.

The obligations under the Revolving Credit Facility and 2022 Term Loan Agreement are guaranteed by the Company and its wholly owned domestic subsidiaries other than certain immaterial subsidiaries and other excluded subsidiaries. ~~CPG International~~The AZEK Group LLC is not permitted to make certain payments unless those payments are consistent with exceptions ~~outlined~~set forth in the agreements. These payments include repurchase of equity interests, fees associated with a public offering, income taxes due in other applicable payments. Further, the payments are only permitted if certain conditions are met related to availability and fixed charge coverage as defined in the Revolving Credit Facility and described in Note ~~8 “Debt” to these Condensed Consolidated Financial Statements.~~8.

~~19. SUBSEQUENT EVENTS~~25

On August 1, 2022, CPG International LLC (“Buyer”), a Delaware limited liability company and wholly-owned subsidiary of the Company, acquired all of the membership interests of INTEX Millwork Solutions, LLC (“Target”), a New Jersey limited liability company, pursuant to an Equity Purchase Agreement dated as of June 10, 2022 (the “Purchase Agreement”) by and among, Buyer, JFU III #1, LLC, JU #1, LLC and Joseph F. Umosella, III. The acquisition was funded with cash on hand. The Purchase Agreement contains customary representations, warranties and covenants of the parties. As a result of the closing of the transactions contemplated by the Purchase Agreement, Target became an indirect, wholly-owned subsidiary of the Company.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our annual consolidated financial statements and related notes and our discussion and analysis of financial condition and results of operations, which were included in our ~~2021~~2022 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, or the SEC, on November ~~23, 2021,~~29, 2022, or our ~~2021~~2022 Form 10-K, as well as Item 1. Financial Statements in this Form 10-Q.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding future operations, cash flows, expansion plans, capital investments, capacity targets and other strategic initiatives, are forward-looking statements. In some cases, forward looking statements may be identified by words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “expect,” “objective,” “plan,” “potential,” “seek,” “grow,” “target,” “if,” or the negative of these terms and similar expressions intended to identify forward-looking statements. In particular, statements about potential new products and product innovation, statements regarding the potential impact of ~~the COVID-19 pandemic~~climate change and extreme weather events, global health pandemics or geopolitical conflicts, such as the conflict between Russia and Ukraine, statements about the markets in which we operate and the economy more generally, including inflation and interest rates, supply and demand balance, growth of our various markets and growth in the use of engineered products as well as our ability to share in such growth, statements about our ability to source our raw materials in line with our expectations, future pricing for our products or our raw materials and our ability to successfully manage market and interest rate risks and control or reduce costs, statements with respect to our ability to meet future goals and targets, including our environmental, social and governance targets, and our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance contained in the Quarterly Report on Form 10-Q are forward-looking statements. We have based these forward-looking statements primarily on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section titled “Risk Factors” set forth in Part I, Item 1A of our ~~2021~~2022 Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results may differ materially and adversely from those anticipated or implied in the forward-looking statements. You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that such information provides a reasonable basis for these statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

Overview

We are an industry-leading designer and manufacturer of beautiful, low-maintenance and environmentally sustainable outdoor living products, ~~focused on the highly attractive, large~~including TimberTech® decking, Versatex® and ~~fast-growing Outdoor Living market.~~AZEK® Trim, and StruXure™ pergolas. Homeowners are ~~continuing to invest~~investing in their outdoor spaces and are increasingly recognizing the significant advantages of engineered, long-lasting products, which are converting demand away from traditional materials, particularly wood. Our products transform those outdoor spaces by combining highly appealing aesthetics with significantly lower maintenance costs compared to traditional materials. Our innovative portfolio of ~~Outdoor Living~~outdoor living products, including decking, railing, trim, siding, pergolas, outdoor furniture, cladding and accessories, inspires consumers to design outdoor spaces tailored to their unique lifestyle needs. In addition to our leading suite of ~~Outdoor Living~~outdoor living products, we sell a broad range of highly engineered products that are sold in commercial markets, including partitions, lockers and storage solutions. One of our core values is to “always do the right thing”. We make decisions according to what is right, not what is the cheapest, fastest or easiest, and we strive to always operate with integrity, transparency and with the customer in mind. In furtherance of that value, we are focused on sustainability across our operations and have adopted strategies to enable us to meet the growing demand for environmentally-friendly products.

We report our results in two segments: Residential and Commercial. We leverage a shared technology and U.S.-based manufacturing platform to create an extensive range of long-lasting and low-maintenance products that convert demand away from traditional ~~materials~~. materials. Our Residential segment serves the high-growth ~~Outdoor Living~~outdoor living market by offering products that inspire consumers to design outdoor spaces tailored to their individual lifestyles. Our innovative portfolio of ~~Outdoor Living~~outdoor living products, including decking, railing, exterior trim, siding, outdoor furniture, pergolas and cabanas and accessories, are sold under our TimberTech®, AZEK ~~Exteriors,~~Exteriors™, VERSATEX®, ULTRALOX®, StruXure and ~~StruXure~~INTEX® brands. Our Commercial segment addresses

demand for low-maintenance, highly engineered products in a variety of commercial and industrial markets, including the outdoor, graphic displays and signage, educational and recreational markets, as well as the ~~food processing~~industrial and chemical industries. Products sold by our Commercial segment include highly engineered

polymer sheeting as well as partitions, lockers and storage solutions. Over our history we have developed a reputation as a leading innovator in our markets by leveraging our differentiated manufacturing capabilities, material science expertise and product management proficiency to consistently introduce new products into the market. This long-standing commitment has been critical to our ability to stay at the forefront of evolving industry trends and consumer demands, which in turn has allowed us to become a market leader across our core product categories.

~~COVID-19~~Economic Environment; Global Events

~~Since~~Our business and financial performance may be affected by the ~~onset~~macroeconomic environment, including increased inflation and rising interest rates. During the first quarter of fiscal 2023, our Residential channel partners met demand partially through inventory drawdowns causing us to experience a recalibration of channel inventory and negatively impacting sales for the ~~COVID-19 pandemic,~~period. Our Commercial channel partners underwent a similar inventory drawdown during the third quarter of fiscal 2023, albeit at a much smaller magnitude. We believe the recalibration in our Residential segment is complete and will better position us and our channel partners to drive continued expansion of our market position through the remainder of fiscal year 2023 and beyond. While inflation remains at elevated levels, we have ~~been focused on protecting our employees’ health~~begun to see inflationary trends moderate and ~~safety, meeting our customers’ needs as they navigate an uncertain financial and operating environment, working closely with our suppliers~~the steep interest rate hikes which began in 2022 have given way to ~~protect our ongoing business operations and rapidly~~more measured rate movements. Looking ahead, we will continue proactively adjusting our ~~short-, medium~~operating plans, capital expenditures and ~~long-term operational plans to proactively~~expenses as necessary and ~~effectively respond to the current~~appropriate and ~~potential future public health crises.~~

Although we believe that we have adapted and are continuing to adapt well to the wide-ranging changes to the global economy and our industry, we may not be able to fully mitigate the impact of the COVID-19 pandemicexecuting on our long-term strategy.

Other global events may also affect our business and financial ~~condition~~performance, including the direct and ~~results of operations. We expect that the economic~~indirect adverse effects ~~of the COVID-19 pandemic will likely~~from global health pandemics and geopolitical conflicts. Supply chains continue to ~~affect demand for our products~~recover from global disruptions experienced over the balance of fiscal 2022 in ways that may be difficult to predict. The global impact of the COVID-19 pandemic continues to evolve, and we continue to monitor the situation closely. As the COVID-19 pandemic continues, it may also have the effect of heightening many of the risks described in “Risk Factors” in our 2021 Form 10-K.

~~Conflict in Ukraine~~

last few years. The current conflict between Russia and Ukraine ~~and the related sanctions and other penalties imposed by countries around the world against Russia continue~~also continues to create substantial uncertainty in the global political and economic landscapes. While our operations are primarily within North America and we have no operations in Russia or Ukraine, and we do not have direct exposure to customers and vendors in Russia and Ukraine, ~~we are actively monitoring the broader economic impact of the crisis, especially the potential impact of any further~~our business may be impacted by disruptions to global supply chains generally and our supply chain in particular, ~~rising~~increases to commodity and fuel prices, and, in turn, prices of our raw ~~materials, and the impact of an extended economic downturn on our direct and indirect customers. In addition, the U.S. government has reported that U.S. sanctions against Russia in response to the~~materials. This conflict could also lead to an increased threat of cyberattacks against U.S. companies. These increased threats could pose risks to the security of our information technology systems, as well as the confidentiality, availability and integrity of our or our customers’ data. ~~As the conflict in Ukraine continues, it may also have the effect of heightening many of the other risks described in “Risk Factors” in our 2021 Form 10-K.~~

We are unable to fully predict the impact that ~~current~~the above events and ~~future governmental actions~~conditions will have on the global economy, our industry or our business, financial condition, results of operations or cash ~~flows~~.

~~Economic Environment~~

We expect the macroeconomic environment, including increased inflation and rising interest rates, will continue to be a critical factor affecting the overall business climate as well as our business. While our performance has remained strong and demonstrates the desirability of our products, we have seen some signs of demand moderation following very strong growth in comparative periods. Improvement in our service levels and lower lead times are also expected to contribute to a recalibration of channel inventory and we are working with our dealer and distributor partners to reduce their inventory levels. We believe this will better position us and our channel partners to drive continued expansion of our market position in fiscal year 2023. Looking ahead, we will continue proactively adjusting our operating plans, capital expenditures and expenses as necessary and appropriate and to execute on our long-term strategy.flows. See also Part I, Item 23 “Quantitative and Qualitative Disclosures About Market Risk” of this Quarterly Report on Form 10-Q and Part 1, Item 1A “Risk Factors” of our ~~2021~~2022 Form 10-K.

Recent ~~Acquisitions~~Acquisition

On August 1, 2022, we acquired INTEX Millwork Solutions, LLC, a New Jersey LLC, or INTEX, for a total purchase price of approximately ~~$15~~$25.9 million, which consisted of $20.1 million in cash and $5.8 million in contingent consideration, subject to customary post-closing working capital adjustments. INTEX is located in Mays Landing, New Jersey and manufactures high-quality railing solutions, column wraps, and pergolas. We ~~financed~~funded the acquisition with cash on hand.

On December 29, 2021, we acquired StruXure Outdoor, LLC, a Georgia limited liability company, or StruXure, for a total purchase price of approximately $84.1 million, subject to customary post-closing working capital adjustments. StruXure is located in Dahlonega, Georgia and manufactures customizable outdoor pergolas and cabanas. We financed the acquisition with cash on hand.27

Results of Operations

Three Months Ended June 30, ~~2022~~2023 Compared to Three Months Ended June 30, ~~2021~~2022

The following table summarizes certain financial information relating to our operating results that have been derived from our unaudited Consolidated Financial Statements for the three months ended June 30, ~~2022~~2023 and ~~2021.~~2022.


	Three Months Ended June 30,
(U.S. dollars in thousands)	2023		2022		$ Variance			% Variance
Net sales	$	387,553	$	394,991	$	(7,438	)		(1.9	)%
Cost of sales		255,353		268,604		(13,251	)		(4.9	)%
Gross profit		132,200		126,387		5,813			4.6	%
Selling, general and administrative expenses		73,650		78,737		(5,087	)		(6.5	)%
Operating income		58,550		47,650		10,900			22.9	%
Interest expense, net		10,408		10,618		(210	)		(2.0	)%
Income tax expense		13,267		9,556		3,711			38.8	%
Net income	$	34,875	$	27,476	$	7,399			26.9	%

Three Months Ended June 30,

(U.S. dollars in thousands)

2022

2021

$
Variance

%
Variance

Net sales

$
394,991

$
327,454

$
67,537

20.6
%
Cost of sales

268,604

220,617

47,987

21.8
%
Gross profit

126,387

106,837

19,550

18.3
%
Selling, general and administrative expenses

78,737

70,760

7,977

11.3
%
Other general expenses

—

1,443

(1,443
)

-100.0
%
Operating income

47,650

34,634

13,016

37.6
%
Interest expense, net

10,618

4,054

6,564

161.9
%
Income tax expense (benefit)

9,556

8,811

745

8.5
%
Net income

$
27,476

$
21,769

$
5,707

26.2
%

Net Sales

Net sales for the three months ended June 30, ~~2022 increased~~2023 decreased by ~~$67.5~~$7.4 million, or ~~20.6%~~1.9%, to ~~$395.0~~$387.6 million from ~~$327.5~~$395.0 million for the three months ended June 30, ~~2021.~~2022. The ~~increase~~decrease was primarily due to an approximately 5% decline in volume, largely in our Commercial segment, partially offset by positive pricing contribution and a $6.7 million net sales contribution from an acquisition. As expected, the volume declines were primarily attributable to ~~higher sales growth in both~~ our ~~Residential and~~ Commercial ~~segments.~~segment as some of our channel partners met demand partially through inventory drawdown which negatively impacted net sales. Net sales for the three months ended June 30, ~~2022~~2023 increased for our Residential segment by ~~17.8%~~2.5% and decreased for our Commercial segment by ~~43.3%~~30.8%, in each case as compared to the prior year period.

Cost of Sales

Cost of sales for the three months ended June 30, ~~2022 increased~~2023 decreased by ~~$48.0~~$13.3 million, or ~~21.8%~~4.9%, to ~~$268.6~~$255.4 million from ~~$220.6~~$268.6 million for the three months ended June 30, ~~2021~~2022 primarily due to ~~increased~~decreased costs on ~~higher~~lower sales volumes and ~~higher~~lower raw material costs ~~of raw materials.~~driven by certain commodity deflation.

Gross Profit

Gross profit for the three months ended June 30, ~~2022~~2023 increased by ~~$19.6~~$5.8 million, or ~~18.3%~~4.6%, to ~~$126.4~~$132.2 million from ~~$106.8~~$126.4 million for the three months ended June 30, ~~2021.~~2022. The increase in gross profit was primarily driven by ~~the strong sales results in the Residential and Commercial segments, including positive pricing, partially offset by higher costs.~~lower cost of sales. Gross profit as a percent of net sales ~~decreased~~increased to 34.1% for the three months ended June 30, 2023 compared to 32.0% for the three months ended June 30, ~~2022 compared~~2022.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $5.1 million, or 6.5%, to ~~32.6%~~$73.7 million, or 19.0% of net sales, for the three months ended June 30, ~~2021.~~

~~Selling, General and Administrative Expenses~~

~~Selling, general and administrative expenses increased by $8.0 million, or 11.3%, to~~2023 from $78.7 million, or 19.9% of net sales, for the three months ended June 30, ~~2022 from $70.8~~2022. The decrease was primarily due to lower acquisition costs and lower marketing expenses.

Interest Expense, net

Interest expense, net, decreased by $0.2 million, or ~~21.6% of net sales,~~2.0%, to $10.4 million for the three months ended June 30, ~~2021. The increase was primarily attributable to higher marketing expenses and employee related expenses, partially offset by lower stock-based compensation expense.~~

~~Interest Expense, net~~

~~Interest expense, net, increased by $6.6 million, or 161.9%, to~~2023 from $10.6 million for the three months ended June 30, ~~2022 from $4.1 million for the three months ended June 30, 2021.~~2022. Interest expense, net ~~increased~~decreased due to refinancing fees related to our ~~2022~~ Term Loan Agreement ~~higher principle balance outstanding~~in prior year and interest ~~rate, partially~~income earned during the current year, mostly offset by a higher ~~capitalized~~ interest rate on outstanding debt during the three months ended June 30, ~~2022,~~2023, when compared to the three months ended June 30, ~~2021.~~2022.

Income Tax Expense ~~(Benefit)~~

Income tax expense increased by ~~$0.7~~$3.7 million to $13.3 million for the three months ended June 30, 2023 compared to $9.6 million for the three months ended June 30, ~~2022 compared to $8.8 million for the three months ended June 30, 2021.~~2022. The increase in our income tax expense was primarily driven by ~~the increase in~~ our higher pre-tax ~~operating earnings.~~income.

2628

Net Income

Net income increased by ~~$5.7~~$7.4 million to $34.9 million for the three months ended June 30, 2023 compared to $27.5 million for the three months ended June 30, 2022, ~~compared to $21.8 million for the three months ended June 30, 2021,~~ due to the factors described above.

Nine Months Ended June 30, ~~2022~~2023 Compared to Nine Months Ended June 30, ~~2021~~2022

The following ~~table~~tables summarizes certain financial information relating to our operating results that have been derived from our unaudited Consolidated Financial Statements for the nine months ended June 30, ~~2022~~2023 and ~~2021.~~2022.


	Nine Months Ended June 30,										Nine Months Ended June 30,
(U.S. dollars in thousands)	2022		2021		$ Variance			% Variance			2023		2022		$ Variance			% Variance
Net sales	$	1,050,954	$	832,854	$	218,100			26.2	%	$	981,504	$	1,050,954	$	(69,450	)		(6.6	)%
Cost of sales		713,498		555,190		158,308			28.5	%		693,552		713,498		(19,946	)		(2.8	)%
Gross profit		337,456		277,664		59,792			21.5	%		287,952		337,456		(49,504	)		(14.7	)%
Selling, general and administrative expenses		212,728		184,362		28,366			15.4	%		221,554		212,728		8,826			4.1	%
Other general expenses		—		2,592		(2,592	)		-100.0	%
Operating income		124,728		90,710		34,018			37.5	%		66,398		124,728		(58,330	)		(46.8	)%
Interest expense, net		18,776		16,428		2,348			14.3	%		30,481		18,776		11,705			62.3	%
Income tax expense (benefit)		25,951		19,725		6,226			31.6	%
Income tax expense												10,605		25,951		(15,346	)		(59.1	)%
Net income	$	80,001	$	54,557	$	25,444			46.6	%	$	25,312	$	80,001	$	(54,689	)		(68.4	)%

Net Sales

Net sales for the nine months ended June 30, ~~2022 increased~~2023 decreased by ~~$218.1~~$69.5 million, or ~~26.2%~~6.6%, to ~~$1,051.0~~$981.5 million from ~~$832.9~~$1,051.0 million for the nine months ended June 30, ~~2021.~~2022. The ~~increase~~decrease was ~~attributable~~primarily due to ~~higher sales growth~~an approximately 16% decline in ~~our Residential segment, including~~volume, primarily as a result of the channel inventory reductions in the first part of the fiscal year to better calibrate inventory to historical average levels discussed above, partially offset by positive pricing and a $35.1 million net sales contribution from recent ~~acquisitions, as well as sales growth in our Commercial segment.~~acquisitions. Net sales for the nine months ended June 30, ~~2022 increased~~2023 decreased for our Residential segment by ~~23.7%~~4.5% and for our Commercial segment by ~~45.4%~~20.6%, in each case as compared to the prior year period.

Cost of Sales

Cost of sales for the nine months ended June 30, ~~2022 increased~~2023 decreased by ~~$158.3~~$19.9 million, or ~~28.5%~~2.8%, to ~~$713.5~~$693.6 million from ~~$555.2~~$713.5 million for the nine months ended June 30, ~~2021~~2022 primarily due to ~~increased~~decreased costs on ~~higher~~lower sales volumes and ~~higher~~lower raw material costs driven by certain commodity deflation, partially offset by underutilization of ~~raw materials and manufacturing.~~manufacturing capacity.

Gross Profit

Gross profit for the nine months ended June 30, ~~2022 increased~~2023 decreased by ~~$59.8~~$49.5 million, or ~~21.5%~~14.7%, to ~~$337.5~~$288.0 million from ~~$277.7~~$337.5 million for the nine months ended June 30, ~~2021.~~2022. The ~~increase~~decrease in gross profit was primarily driven by ~~the strong sales results in the Residential and Commercial segments, including positive pricing, partially offset by higher costs.~~lower net sales. Gross profit as a percent of net sales decreased to 29.3% for the nine months ended June 30, 2023 compared to 32.1% for the nine months ended June 30, ~~2022 compared~~2022.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $8.8 million, or 4.1%, to ~~33.3%~~$221.6 million, or 22.6% of net sales, for the nine months ended June 30, ~~2021.~~

~~Selling, General and Administrative Expenses~~

~~Selling, general and administrative expenses increased by $28.4 million, or 15.4%, to~~2023 from $212.7 million, or 20.2% of net sales, for the nine months ended June 30, ~~2022~~2022. The increase was primarily due to the contribution from ~~$184.4~~acquisitions and higher marketing and selling expenses, partially offset by lower acquisition costs.

Interest Expense, net

Interest expense, net, increased by $11.7 million, or ~~22.1% of net sales,~~62.3%, to $30.5 million for the nine months ended June 30, ~~2021. The increase was primarily attributable to higher employee related expenses and marketing expenses, partially offset by lower stock-based compensation expense.~~

~~Interest Expense, net~~

~~Interest expense, net, increased by $2.3 million, or 14.3%, to~~2023 from $18.8 million for the nine months ended June 30, ~~2022 from $16.4 million for the nine months ended June 30, 2021.~~2022. Interest expense, net increased due to ~~refinancing fees related to our 2022 Term Loan Agreement and~~a higher ~~finance lease interest, partially offset by a lower~~ interest rate on ~~our Term Loan Agreement~~outstanding debt and a higher ~~capitalized interest, partially offset by higher finance lease interest~~principal balance outstanding during the nine months ended June 30, ~~2022,~~2023, when compared to the nine months ended June 30, ~~2021, as well as refinancing costs incurred during~~2022.

Income Tax Expense

Income tax expense decreased by $15.3 million to $10.6 million for the nine months ended June 30, ~~2021.~~

~~Income Tax Expense (Benefit)~~

~~Income tax expense increased by $6.2 million~~2023 compared to $26.0 million for the nine months ended June 30, ~~2022 compared to $19.7 million for the nine months ended June 30, 2021.~~2022. The ~~increase~~decrease in our income tax expense was primarily driven by the ~~increase~~lower pre-tax income in ~~our~~the nine months ended June 30, 2023 as compared to pre-tax ~~operating earnings.~~income for the nine months ended June 30, 2022.

Net Income

Net income ~~increased~~decreased by ~~$25.4~~$54.7 million to $25.3 million for the nine months ended June 30, 2023 compared to $80.0 million for the nine months ended June 30, 2022, ~~compared to $54.6 million for the nine months ended June 30, 2021,~~ due to the factors described above.

Segment Results of Operations

We report our results in two segments: Residential and Commercial. The key segment measures used by our chief operating decision maker in deciding how to evaluate performance and allocate resources to each of the segments are Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin. Depending on certain circumstances, Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin may be calculated differently, from time to time, than our Adjusted EBITDA and Adjusted EBITDA Margin, which are further discussed under the heading “Non-GAAP Financial Measures.” Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin represent measures of segment profit reported to our chief operating decision maker for the purpose of making decisions about allocating resources to a segment and assessing its performance and are determined as disclosed in our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q consistent with the requirements of the Financial Accounting Standards Board’s, or FASB, Accounting Standards Codification, or ASC 280, Segment Reporting. We define Segment Adjusted EBITDA as a segment’s net income (loss) before income tax (benefit) expense and by adding to or subtracting therefrom interest expense, net, depreciation and amortization, share-based compensation costs, asset impairment and inventory revaluation costs, business transformation costs, capital structure transaction costs, acquisition costs, initial public offering costs and certain other costs. Segment Adjusted EBITDA Margin is equal to a segment’s Segment Adjusted EBITDA divided by such segment’s net sales. Corporate expenses, which include selling, general and administrative costs related to our corporate offices, including payroll and other professional fees, are not included in computing Segment Adjusted EBITDA. Such corporate expenses increased by ~~$0.7~~$0.1 million to ~~$16.8~~$22.7 million for the three months ended June 30, 2023, from $22.6 million for the three months ended June 30, 2022, ~~from $16.1~~and remained flat at $65.6 million for ~~the three months ended June 30, 2021, and increased by $5.0 million to $48.6 million for the~~both nine months ended June 30, ~~2022, from $43.6 million for the nine months ended June 30, 2021.~~2023 and 2022.

Residential

The following table summarizes certain financial information relating to the Residential segment results that have been derived from our unaudited Condensed Consolidated Financial Statements for the three and nine months ended June 30, ~~2022~~2023 and ~~2021.~~2022.


	Three Months Ended June 30,											Nine Months Ended June 30,											Three Months Ended June 30,											Nine Months Ended June 30,
(U.S. dollars in thousands)	2022			2021			$ Variance		% Variance			2022			2021			$ Variance		% Variance			2023			2022			$ Variance		% Variance			2023			2022			$ Variance			% Variance
Net sales	$	343,064		$	291,209		$	51,855		17.8	%	$	914,555		$	739,048		$	175,507		23.7	%	$	351,608		$	343,064		$	8,544		2.5	%	$	873,208		$	914,555		$	(41,347	)		(4.5	)%
Segment Adjusted EBITDA		91,093			82,525			8,568		10.4	%		258,874			222,999			35,875		16.1	%		105,503			91,093			14,410		15.8	%		211,885			258,874			(46,989	)		(18.2	)%
Segment Adjusted EBITDA Margin		26.6	%		28.3	%	N/A		N/A				28.3	%		30.2	%	N/A		N/A				30.0	%		26.6	%	N/A		N/A				24.3	%		28.3	%	N/A			N/A

Net Sales

Net sales for the three months ended June 30, ~~2022~~2023 increased by ~~$51.9~~$8.5 million, or ~~17.8%~~2.5%, to ~~$343.1~~$351.6 million from ~~$291.2~~$343.1 million for the three months ended June 30, ~~2021.~~2022. The increase was attributable to higher net sales related to our Deck, Rail & Accessories and our Exteriors ~~businesses, along with a $23.7 million increase related to the acquisition of StruXure.~~businesses.

Net sales for the nine months ended June 30, ~~2022 increased~~2023 decreased by ~~$175.5~~$41.3 million, or ~~23.7%~~4.5%, to ~~$914.6~~$873.2 million from ~~$739.0~~$914.6 million for the nine months ended June 30, ~~2021.~~2022. The ~~increase~~decrease was ~~primarily~~ attributable to ~~higher~~lower net sales related to our Deck, Rail & Accessories businesses as a result of channel inventory reductions in the first part of the fiscal year to better calibrate inventory to historical average levels as discussed above, partially offset by $35.1 million in net sales contribution from recent acquisitions and positive growth in our Exteriors ~~businesses, along with a $39.7 million increase related to the acquisition of StruXure.~~business.

Segment Adjusted EBITDA

Segment Adjusted EBITDA for the three months ended June 30, ~~2022~~2023 increased by ~~$8.6~~$14.4 million, or ~~10.4%~~15.8%, to ~~$91.1~~$105.5 million from ~~$82.5~~$91.1 million for the three months ended June 30, ~~2021.~~2022. The increase was mainly driven by higher net sales, ~~partially offset by higher~~lower raw material costs ~~selling~~ and lower marketing ~~expenses and manufacturing costs.~~expenses.

Segment Adjusted EBITDA for the nine months ended June 30, ~~2022 increased~~2023 decreased by ~~$35.9~~$47.0 million, or ~~16.1%~~18.2%, to ~~$258.9~~$211.9 million from ~~$223.0~~$258.9 million for the nine months ended June 30, ~~2021.~~2022. The ~~increase~~decrease was mainly driven by ~~higher~~lower net sales ~~partially offset by~~and higher ~~raw material costs,~~ selling and marketing ~~expenses and manufacturing costs.~~expenses.

~~Commercial~~30

Commercial

The following table summarizes certain financial information relating to the Commercial segment results that have been derived from our unaudited Condensed Consolidated Financial Statements for the three and nine months ended June 30, ~~2022~~2023 and ~~2021.~~2022.


	Three Months Ended June 30,											Nine Months Ended June 30,											Three Months Ended June 30,												Nine Months Ended June 30,
(U.S. dollars in thousands)	2022			2021			$ Variance		% Variance			2022			2021			$ Variance		% Variance			2023			2022			$ Variance			% Variance			2023			2022			$ Variance			% Variance
Net sales	$	51,927		$	36,245		$	15,682		43.3	%	$	136,399		$	93,806		$	42,593		45.4	%	$	35,945		$	51,927		$	(15,982	)		(30.8	)%	$	108,296		$	136,399		$	(28,103	)		(20.6	)%
Segment Adjusted EBITDA		12,271			6,273			5,998		95.6	%		25,693			13,304			12,389		93.1	%		8,780			12,271			(3,491	)		(28.4	)%		21,763			25,693			(3,930	)		(15.3	)%
Segment Adjusted EBITDA Margin		23.6	%		17.3	%	N/A		N/A				18.8	%		14.2	%	N/A		N/A				24.4	%		23.6	%	N/A			N/A				20.1	%		18.8	%	N/A			N/A

Net Sales

Net sales for the three months ended June 30, ~~2022 increased~~2023 decreased by ~~$15.7~~$16.0 million, or ~~43.3%~~30.8%, to ~~$51.9~~$35.9 million from ~~$36.2~~$51.9 million for the three months ended June 30, ~~2021.~~2022. The ~~increase~~decrease was ~~primarily~~ attributable to ~~higher~~lower net sales in our Vycom and Scranton Products ~~businesses.~~businesses as some of our channel partners met demand partially through inventory drawdowns which negatively impacted net sales.

Net sales for the nine months ended June 30, ~~2022 increased~~2023 decreased by ~~$42.6~~$28.1 million, or ~~45.4%~~20.6%, to ~~$136.4~~$108.3 million from ~~$93.8~~$136.4 million for the nine months ended June 30, ~~2021.~~2022. The ~~increase~~decrease was ~~primarily~~ attributable to ~~higher~~lower net sales in our Vycom and Scranton Products ~~businesses.~~businesses as some of our channel partners met demand partially through inventory drawdowns which negatively impacted net sales.

Segment Adjusted EBITDA

Segment Adjusted EBITDA of the Commercial segment was $8.8 million for the three months ended June 30, 2023, compared to $12.3 million for the three months ended June 30, ~~2022, compared to $6.3 million for the three months ended June 30, 2021.~~2022. The ~~increase~~decrease was primarily driven by~~higher~~ lower net sales, ~~in the Vycom business and net manufacturing productivity.~~partially offset by lower material costs.

Segment Adjusted EBITDA of the Commercial segment was $21.8 million for the nine months ended June 30, 2023, compared to $25.7 million for the nine months ended June 30, ~~2022, compared to $13.3 million for the nine months ended June 30, 2021.~~2022. The ~~increase~~decrease was primarily driven by~~higher~~ lower net sales, ~~in the Vycom business~~partially offset by lower material costs and net manufacturing productivity.

Non-GAAP Financial Measures

To supplement our Condensed Consolidated Financial Statements prepared and presented in accordance with generally accepted accounting principles in the United States, or GAAP, we use certain non-GAAP performance financial measures, as described below, to provide investors with additional useful information about our financial performance, to enhance the overall understanding of our past performance and future prospects and to allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We are presenting these non-GAAP financial measures to assist investors in seeing our financial performance from management’s view and because we believe they provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry. Our GAAP financial results include significant expenses that may not be indicative of our ongoing operations as detailed in the tables below.

However, non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. In addition, non-GAAP financial measures may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. As a result, non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, our Condensed Consolidated Financial Statements prepared and presented in accordance with GAAP.


	Three Months Ended June 30,						Nine Months Ended June 30,						Three Months Ended June 30,						Nine Months Ended June 30,
(U.S. dollars in thousands, except per share amounts)	2022			2021			2022			2021			2023			2022			2023			2022
Adjusted Gross Profit	$	147,554		$	124,117		$	398,398		$	327,555		$	156,183		$	147,554		$	358,784		$	398,398
Adjusted Gross Profit Margin		37.4	%		37.9	%		37.9	%		39.3	%		40.3	%		37.4	%		36.5	%		37.9	%
Adjusted Net Income	$	45,241		$	40,631		$	124,781		$	103,140		$	45,046		$	45,241		$	58,187		$	124,781
Adjusted Diluted EPS	$	0.29		$	0.26		$	0.80		$	0.66		$	0.30		$	0.29		$	0.39		$	0.80
Adjusted EBITDA	$	86,524		$	72,716		$	235,964		$	192,680		$	96,955		$	86,524		$	184,865		$	235,964
Adjusted EBITDA Margin		21.9	%		22.2	%		22.5	%		23.1	%		25.0	%		21.9	%		18.8	%		22.5	%
Free Cash Flow													$	160,126		$	107,747		$	175,984		$	(73,791	)

Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA, ~~and~~ Adjusted EBITDA Margin and Free Cash Flow

We define Adjusted Gross Profit as gross profit before depreciation and amortization, business transformation costs and acquisition costs as described below. Adjusted Gross Profit Margin is equal to Adjusted Gross Profit divided by net sales. We define Adjusted Net Income as net income (loss) before amortization, stock-based compensation costs, business transformation costs, acquisition costs, initial public offering and secondary offering costs, capital structure transaction costs and certain other costs as described below. We define Adjusted Diluted EPS as Adjusted Net Income divided by weighted average common shares outstanding—diluted, to reflect the conversion or exercise, as applicable, of all outstanding shares of restricted stock awards, restricted stock units and options to purchase shares of our common stock. We define Adjusted EBITDA as net income (loss) before interest expense, net, income tax (benefit) expense and depreciation and amortization and by adding to or subtracting therefrom items of expense and income as described ~~above.~~below. Adjusted EBITDA Margin is equal to Adjusted EBITDA divided by net sales. We believe Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA and Adjusted EBITDA Margin are useful to investors because they help identify underlying trends in our business that could otherwise be masked by certain expenses that can vary from company to company depending on, among other things, its financing, capital structure and the method by which its assets were acquired, and can also vary significantly from period to period. ~~We also~~For example, we add back depreciation and amortization and stock-based compensation because we do not consider them indicative of our core operating performance. We believe their exclusion facilitates comparisons of our operating performance on a period-to-period basis. Therefore, we believe that showing gross profit and net income, as adjusted to remove the impact of these expenses, is helpful to investors in assessing our gross profit and net income performance in a way that is similar to the way management assesses our performance. Additionally, EBITDA and EBITDA margin are common measures of operating performance in our industry, and we believe they facilitate operating comparisons. Our management also uses Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted EBITDA and Adjusted EBITDA Margin in conjunction with other GAAP financial measures for planning purposes, including as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance. Management considers Adjusted Gross Profit and Adjusted Net Income and Adjusted Diluted EPS as useful measures because our cost of sales includes the depreciation of property, plant and equipment used in the production of products and the amortization of various intangibles related to our manufacturing processes.

Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA and Adjusted EBITDA Margin have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

•

These measures do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;

•

These measures do not reflect changes in, or cash requirements for, our working capital needs;

•

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

•

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect our income tax expense or the cash requirements to pay our taxes;

•

Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA and Adjusted EBITDA Margin exclude the expense of amortization of our assets, and Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted EBITDA and Adjusted EBITDA Margin also exclude the expense of depreciation of our assets, and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future;

•

Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA and Adjusted EBITDA Margin exclude the expense associated with our equity compensation plan, although equity compensation has been, and will continue to be, an important part of our compensation strategy;

•

Adjusted Gross Profit, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA and Adjusted EBITDA Margin exclude certain business transformation costs, acquisition costs and other costs, each of which can affect our current and future cash requirements; and

•

Other companies in our industry may calculate Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA and Adjusted EBITDA Margin differently than we do, limiting their usefulness as comparative measures.

•

~~These measures do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;~~

•

~~These measures do not reflect changes in, or cash requirements for, our working capital needs;~~

•

~~Adjusted EBITDA and Adjusted EBITDA Margin do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;~~

•

~~Adjusted EBITDA and Adjusted EBITDA Margin do not reflect our income tax expense or the cash requirements to pay our taxes;~~

•

Adjusted Gross Profit, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA exclude the expense of depreciation, in the case of Adjusted Gross Profit and Adjusted EBITDA, and amortization, in each case, of our assets, and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future;

•

Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA exclude the expense associated with our equity compensation plan, although equity compensation has been, and will continue to be, an important part of our compensation strategy;

•

Adjusted Gross Profit, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA exclude certain business transformation costs, acquisition costs and other costs, each of which can affect our current and future cash requirements; and

•

Because of these limitations, none of these metrics should be considered indicative of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

In addition, we provide Free Cash Flow, which is a non-GAAP financial measure that we define as net cash provided by (used in) operating activities less purchases of property, plant and equipment. We believe Free Cash Flow is useful to investors as an important liquidity measure of the cash that is available to us after capital expenditures. Free Cash Flow is used by our management as

a measure of our ability to generate and use cash, including in order to invest in future growth, fund acquisitions, return capital to our stockholders and repay indebtedness. Our use of Free Cash Flow has limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results under GAAP. Some of these limitations are:

•

Free Cash Flow is not a substitute for net cash provided by (used in) operating activities, including because our capital expenditures as a manufacturing company can be significant and can vary from period to period;

•

Free Cash Flow does not reflect our future contractual commitments or mandatory debt repayments and accordingly does not represent residual cash flow available for discretionary expenditures or the total increase or decrease in our cash balance for a given period; and

•

Other companies in our industry may calculate Free Cash Flow differently than we do, limiting its usefulness as a comparative measure.

The following table presents reconciliations of the most comparable financial measures calculated in accordance with GAAP to these non-GAAP financial measures for the periods indicated:

Adjusted Gross Profit and Adjusted Gross Profit Margin Reconciliation


	Three Months Ended June 30,				Nine Months Ended June 30,
(U.S. dollars in thousands)	2023		2022		2023		2022
Gross Profit	$	132,200	$	126,387	$	287,952	$	337,456
Depreciation and amortization (1)		23,983		20,843		70,716		59,410
Acquisitions costs (2)		—		—		—		1,208
Other costs (3)		—		324		116		324
Adjusted Gross Profit	$	156,183	$	147,554	$	358,784	$	398,398


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Gross Margin		34.1	%		32.0	%		29.3	%		32.1	%
Depreciation and amortization		6.2	%		5.3	%		7.2	%		5.7	%
Acquisitions costs		0.0	%		0.0	%		0.0	%		0.1	%
Other costs		0.0	%		0.1	%		0.0	%		0.0	%
Adjusted Gross Profit Margin		40.3	%		37.4	%		36.5	%		37.9	%

Three Months Ended June 30,

Nine Months Ended June 30,

(U.S. dollars in thousands)

2022

2021

2022

2021

Gross Profit

$
126,387

$
106,837

$
337,456

$
277,664

  Depreciation and amortization (1)

20,843

17,280

59,410

49,891

  Acquisitions costs (2)

—

—

1,208

—

  Other costs (3)

324

—

324

—

Adjusted Gross Profit

$
147,554

$
124,117

$
398,398

$
327,555

(1)

Depreciation and amortization for the three months ended June 30, 2023 and 2022 consists of $19.5 million and $15.6 million, respectively, of depreciation and $4.5 million and $5.2 million, respectively, of amortization of intangible assets relating to our manufacturing process. Depreciation and amortization for the nine months ended June 30, 2023 and 2022 consists of $57.0 million and $44.0 million, respectively, of depreciation and $13.7 million and $15.4 million, respectively, of amortization of intangible assets relating to our manufacturing process.

(2)

Acquisition costs reflect inventory step-up adjustments related to recording the inventory of acquired businesses at fair value on the date of acquisition.

(3)

Other costs include costs related to a reduction in workforce of $0.1 million in the nine months ended June 30, 2023 and $0.3 million in the three and nine months ended June 30, 2022.

Three Months Ended June 30,

Nine Months Ended June 30,

2022

2021

2022

2021

Gross Margin

32.0
%

32.6
%

32.1
%

33.3
%
  Depreciation and amortization

5.3
%

5.3
%

5.7
%

6.0
%
  Acquisitions costs

0.0
%

0.0
%

0.1
%

0.0
%
  Other costs

0.1
%

0.0
%

0.0
%

0.0
%
Adjusted Gross Profit Margin

37.4
%

37.9
%

37.9
%

39.3
%

~~(1)~~

Depreciation and amortization for the three months ended June 30, 2022 and 2021 consists of $15.6 million and $11.8 million, respectively, of depreciation and $5.2 million and $5.5 million, respectively, of amortization of intangible assets relating to our manufacturing process. Depreciation and amortization for the nine months ended June 30, 2022 and 2021 consists of $44.0 million and $33.4 million, respectively, of depreciation and $15.4 million and $16.5 million, respectively, of amortization of intangible assets relating to our manufacturing process.

~~(2)~~

~~Acquisition costs reflect inventory step-up adjustments related to recording the inventory of acquired businesses at fair value on the date of acquisition.~~

~~(3)~~

~~Other costs include costs related to a reduction in workforce of $0.3 million in the three and nine months ended June 30, 2022.~~

Adjusted Net Income and Adjusted Diluted EPS Reconciliation


	Three Months Ended June 30,						Nine Months Ended June 30,
(U.S. dollars in thousands, except per share amounts)	2023			2022			2023			2022
Net income	$	34,875		$	27,476		$	25,312		$	80,001
Amortization		11,578			12,522			35,035			37,966
Stock-based compensation costs (1)		1,062			1,460			3,423			5,224
Acquisition costs (2)		—			3,227			3,856			8,861
Capital structure transaction costs (3)		—			5,112			—			5,112
Secondary offering costs		1,065			—			1,065			—
Other costs (4)		112			1,138			1,260			1,799
Tax impact of adjustments (5)		(3,646	)		(5,694	)		(11,764	)		(14,182	)
Adjusted Net Income	$	45,046		$	45,241		$	58,187		$	124,781


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Net income	$	0.23		$	0.18		$	0.17		$	0.51
Amortization		0.07			0.08			0.23			0.24
Stock-based compensation costs		0.01			0.01			0.02			0.04
Acquisition costs		—			0.02			0.03			0.06
Capital structure transaction costs		—			0.03			—			0.03
Secondary offering costs		0.01			—			0.01			—
Other costs		—			0.01			0.01			0.01
Tax impact of adjustments		(0.02	)		(0.04	)		(0.08	)		(0.09	)
Adjusted Diluted EPS (6)	$	0.30		$	0.29		$	0.39		$	0.80

Three Months Ended June 30,

Nine Months Ended June 30,

(U.S. dollars in thousands, except per share amounts)

2022

2021

2022

2021

Net income

$
27,476

$
21,769

$
80,001

$
54,557

Amortization

12,522

12,483

37,966

37,666

Stock-based compensation (1)

1,460

8,167

5,224

16,940

Acquisition costs (2)

3,227

—

8,861

—

Capital structure transaction costs (3)

5,112

—

5,112

—

Initial public offering and secondary offering costs

—

1,443

—

2,592

Other costs (4)

1,138

1,358

1,799

4,411

Tax impact of adjustments (5)

(5,694
)

(4,589
)

(14,182
)

(13,026
)
Adjusted Net Income

$
45,241

$
40,631

$
124,781

$
103,140

(1)

Stock-based compensation costs reflect expenses related to our initial public offering. Expenses related to our recurring awards granted each fiscal year are excluded from the Adjusted Net Income reconciliation.

(2)

Acquisition costs reflect costs directly related to completed acquisitions of $3.2 million in the three months ended June 30, 2022, and $3.9 million and $7.7 million in the nine months ended June 30, 2023 and 2022, respectively, and inventory step-up adjustments related to recording inventory of acquired businesses at fair value on the date of acquisition of $1.2 million for the nine months ended June 30, 2022.

(3)

Capital structure transaction costs include third party costs related to the 2022 Term Loan Agreement.

(4)

(5)

Tax impact of adjustments are based on applying a combined U.S. federal and state statutory tax rate of 26.5% for the three and nine months ended June 30, 2023 and 24.5% for the three and nine months ended June 30, 2022.

(6)

Weighted average common shares outstanding used in computing diluted net income per common share of 151,069,954 and 153,891,090 for the three months ended June 30, 2023 and 2022, respectively, and 151,056,199 and 155,631,884 for the nine months ended June 30, 2023 and 2022, respectively.

Three Months Ended June 30,

Nine Months Ended June 30,

2022

2021

2022

2021

Net income

$
0.18

$
0.14

$
0.51

$
0.35

Amortization

0.08

0.08

0.24

0.24

Stock-based compensation

0.01

0.05

0.04

0.11

Acquisition costs

0.02

—

0.06

—

Capital structure transaction costs

0.03

—

0.03

—

Initial public offering and secondary offering costs

—

0.01

—

0.02

Other costs

0.01

0.01

0.01

0.03

Tax impact of adjustments

(0.04
)

(0.03
)

(0.09
)

(0.09
)
Adjusted Diluted EPS (6)

$
0.29

$
0.26

$
0.80

$
0.66

~~(1)~~

~~(2)~~

~~(3)~~

~~Capital structure transaction costs include third party costs related to the 2022 Term Loan Agreement.~~

~~(4)~~

Other costs include costs for legal expense of $0.2 million and $0.8 million in the three months ended June 30, 2022 and 2021, respectively, costs related to a reduction in workforce of $0.8 million in the three months ended June 30, 2022, costs related to an incentive plan and other ancillary expenses associated with the initial public offering of $0.4 million for the three months ended June 30, 2021, other costs of $0.1 million for the three months ended June 30, 2022, and the impact of retroactive adoption of ASC 842 of $0.2 million for the three months ended June 30, 2021. Other costs include costs for legal expense of $0.6 million and $1.8 million in the nine months ended June 30, 2022 and 2021, respectively, costs related to a reduction in workforce of $0.8 million in the nine months ended June 30, 2022, costs related to an incentive plan and other ancillary expenses associated with the initial public offering of $0.1 million and $2.1 million in the nine months ended June 30, 2022 and 2021, respectively, other costs of $0.3 million for the nine months ended June 30, 2022, and the impact of retroactive adoption of ASC 842 of $0.5 million for the nine months ended June 30, 2021.

~~(5)~~

~~Tax impact of adjustments are based on applying a combined U.S. federal and state statutory tax rate of 24.5% for both the three and nine months ended June 30, 2022 and 2021.~~

~~(6)~~

Weighted average common shares outstanding used in computing diluted net income per common share of 153,891,090 and 157,022,043 for the three months ended June 30, 2022 and 2021, respectively, and 155,631,884 and 156,658,640 for the nine months ended June 30, 2022 and 2021, respectively.

Adjusted EBITDA and Adjusted EBITDA Margin Reconciliation


	Three Months Ended June 30,				Nine Months Ended June 30,
(U.S. dollars in thousands)	2023		2022		2023		2022
Net income	$	34,875	$	27,476	$	25,312	$	80,001
Interest expense		10,408		10,618		30,481		18,776
Depreciation and amortization		33,064		29,606		98,539		86,730
Income tax expense (benefit)		13,267		9,556		10,605		25,951
Stock-based compensation costs		4,164		4,903		13,747		13,846
Acquisition costs (1)		—		3,227		3,856		8,861
Secondary offering costs		1,065		—		1,065		—
Other costs (2)		112		1,138		1,260		1,799
Total adjustments		62,080		59,048		159,553		155,963
Adjusted EBITDA	$	96,955	$	86,524	$	184,865	$	235,964


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Net income		9.0	%		7.0	%		2.6	%		7.6	%
Interest expense		2.7	%		2.7	%		3.1	%		1.8	%
Depreciation and amortization		8.5	%		7.5	%		10.0	%		8.3	%
Income tax expense (benefit)		3.4	%		2.4	%		1.1	%		2.5	%
Stock-based compensation costs		1.1	%		1.2	%		1.4	%		1.3	%
Acquisition costs		0.0	%		0.8	%		0.4	%		0.8	%
Secondary offering costs		0.3	%		0.0	%		0.1	%		0.0	%
Other costs		0.0	%		0.3	%		0.1	%		0.2	%
Total adjustments		16.0	%		14.9	%		16.2	%		14.9	%
Adjusted EBITDA Margin		25.0	%		21.9	%		18.8	%		22.5	%

Three Months Ended June 30,

Nine Months Ended June 30,

(U.S. dollars in thousands)

2022

2021

2022

2021

Net income

$
27,476

$
21,769

$
80,001

$
54,557

Interest expense

10,618

4,054

18,776

16,428

Depreciation and amortization

29,606

25,771

86,730

75,321

Income tax expense (benefit)

9,556

8,811

25,951

19,725

Stock-based compensation

4,903

9,510

13,846

19,646

Acquisition costs (1)

3,227

—

8,861

—

Initial public offering and secondary offering costs

—

1,443

—

2,592

Other costs (2)

1,138

1,358

1,799

4,411

Total adjustments

59,048

50,947

155,963

138,123

Adjusted EBITDA

$
86,524

$
72,716

$
235,964

$
192,680

(1)

(2)

Three Months Ended June 30,

Nine Months Ended June 30,

2022

2021

2022

2021

Net income

7.0
%

6.6
%

7.6
%

6.6
%
Interest expense

2.7
%

1.3
%

1.8
%

2.0
%
Depreciation and amortization

7.5
%

7.9
%

8.3
%

9.0
%
Income tax expense (benefit)

2.4
%

2.7
%

2.5
%

2.4
%
Stock-based compensation

1.2
%

2.9
%

1.3
%

2.4
%
Acquisition costs

0.8
%

0.0
%

0.8
%

0.0
%
Initial public offering costs

0.0
%

0.4
%

0.0
%

0.3
%
Other costs

0.3
%

0.4
%

0.2
%

0.4
%
Total adjustments

14.9
%

15.6
%

14.9
%

16.5
%
Adjusted EBITDA Margin

21.9
%

22.2
%

22.5
%

23.1
%

Free Cash Flow Reconciliation


	Three Months Ended June 30,						Nine Months Ended June 30,
(U.S. dollars in thousands)	2023			2022			2023			2022
Net cash provided by operating activities	$	166,901			133,243		$	230,043		$	65,700
Less: Purchases of property, plant and equipment		(6,775	)		(25,496	)		(54,059	)		(139,491	)
Free Cash Flow	$	160,126		$	107,747		$	175,984		$	(73,791	)

~~(1)~~

~~(2)~~

Liquidity and Capital Resources

Liquidity Outlook

Our primary cash needs are to fund operations, working capital, capital expenditures, debt service, share repurchases and any acquisitions we may undertake. As of June 30, ~~2022,~~2023, we had cash and cash equivalents of ~~$159.6~~$244.6 million and total indebtedness of ~~$600.0~~$595.5 million. The AZEK Group LLC (f/k/a CPG International ~~LLC,~~LLC), our direct, wholly owned subsidiary, had approximately $147.2 million available under the borrowing base for future borrowings as of June 30, ~~2022. CPG International~~2023. The AZEK Group LLC also has the option to increase the commitments under the Revolving Credit Facility by up to $100.0 million, subject to certain conditions.

We believe we will have adequate liquidity over the next 12 months to operate our business and to meet our cash requirements as a result of cash flows from operating activities, available cash balances and availability under our Revolving Credit Facility after consideration of our debt service and other cash requirements. In the longer term, our liquidity will depend on many factors, including our results of operations, our future growth, the timing and extent of our expenditures to develop new products and improve our

manufacturing capabilities, the expansion of our sales and marketing activities and the extent to which we make acquisitions. Changes

in our operating plans, material changes in anticipated sales, increased expenses, acquisitions or other events may cause us to seek additional equity and/or debt financing in future periods.

Holding Company Status

We are a holding company and do not conduct any business operations of our own. As a result, we are largely dependent upon cash dividends and distributions and other transfers from our subsidiaries to meet our obligations. The agreements governing the indebtedness of our subsidiaries impose restrictions on our subsidiaries’ ability to pay dividends or make other distributions to us.

~~CPG International~~The AZEK Group LLC is party to the Revolving Credit Facility and the 2022 Term Loan Agreement, or, together, the Senior Secured Credit Facilities. The obligations under the Senior Secured Credit Facilities are secured by specified assets. The obligations under the Senior Secured Credit Facilities are guaranteed by ~~the Company~~us and the wholly owned domestic subsidiaries of ~~CPG International~~The AZEK Group LLC other than certain immaterial subsidiaries and other excluded subsidiaries.

The Senior Secured Credit Facilities contain covenants restricting payments of dividends by ~~CPG International~~The AZEK Group LLC unless certain conditions, as provided in the Senior Secured Credit Facilities, are met. The covenants under our Senior Secured Credit Facilities provide for certain exceptions for specific types of payments. However, other than restricted payments under the specified exceptions, the covenants under our 2022 Term Loan Agreement generally prohibit the payment of dividends unless the Total Net Leverage Ratio (as defined in the 2022 Term Loan Agreement) of ~~CPG International~~The AZEK Group LLC, on a pro forma basis, is no greater than 4.25:1.00 and no event of default has occurred and is occurring.

Since ~~the~~our and our subsidiaries’ restricted net assets ~~of the Company and its subsidiaries~~ exceed 25% of our consolidated net assets, in accordance with Rule 12-04, Schedule 1 of Regulation S-X, refer to our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for condensed parent company financial statements of the Company.

Cash Sources

We have historically relied on cash flows from operations generated by ~~CPG International~~The AZEK Group LLC, borrowings under the credit facilities, issuances of notes and other forms of debt financing and capital contributions to fund our cash needs.

On September 30, 2013, our subsidiary, ~~CPG International~~The AZEK Group LLC (as successor-in-interest to CPG Merger Sub LLC, a limited liability company formed to effect the acquisition of ~~CPG International~~The AZEK Group LLC), and the lenders party thereto entered into the Revolving Credit Facility. On March 9, 2017, the Revolving Credit Facility was amended and restated to provide for maximum aggregate borrowings of up to $150.0 million, subject to an asset-based borrowing base. The borrowing base is limited to a specified percentage of eligible accounts receivable and inventory, less reserves that may be established by the Revolver Administrative Agent in the exercise of its reasonable credit judgment. As of both June 30, ~~2022~~2023 and September 30, ~~2021, CPG International~~2022, The AZEK Group LLC had no outstanding borrowings under the Revolving Credit Facility ~~respectively~~ and had $2.8 ~~million and $3.3~~ million of outstanding letters of credit held against the Revolving Credit Facility ~~respectively.~~at both dates. As of both June 30, ~~2022~~2023 and September 30, ~~2021, CPG International~~2022, The AZEK Group LLC had approximately $147.2 ~~million and $146.7~~ million available under the borrowing base for future borrowings in addition to cash and cash equivalents on hand of ~~$159.6~~$244.6 million and ~~$250.5~~$120.8 million, respectively. Because our borrowing capacity under the Revolving Credit Facility depends, in part, on inventory, accounts receivable and other assets that fluctuate from time to time, the amount available under the borrowing base may not reflect actual borrowing capacity under the Revolving Credit Facility.

Cash Uses

Our principal cash requirements have included working capital, capital expenditures, payments of principal and interest on our debt, share repurchases, and, if market conditions warrant, making selected acquisitions. We may elect to use cash from operations, debt proceeds, equity or a combination thereof to finance future acquisition opportunities.

The table below details the total operating, investing and financing activity cash flows for the nine months ended June 30, ~~2022~~2023 and ~~2021.~~2022.

Cash Flows


	Nine Months Ended June 30,												Nine Months Ended June 30,
(U.S. dollars in thousands)	2022			2021			$ Variance			% Variance			2023			2022			$ Variance			% Variance
Net cash provided by (used in) operating activities	$	65,700		$	120,048		$	(54,348	)		(45.3	)%
Net cash provided by (used in) investing activities		(225,809	)		(116,677	)		(109,132	)		93.5	%
Net cash provided by operating activities													$	230,043		$	65,700		$	164,343			250.1	%
Net cash used in investing activities														(54,047	)		(225,809	)		171,762			76.1	%
Net cash provided by (used in) financing activities		69,194			2,081			67,113			3225.0	%		(52,216	)		69,194			(121,410	)		(175.5	)%
Net increase (decrease) in cash	$	(90,915	)	$	5,452		$	(96,367	)		(1767.6	)%	$	123,780		$	(90,915	)	$	214,695			236.1	%

Operating Activities

Net cash provided by ~~(used in)~~ operating activities was ~~$65.7~~$230.0 million and ~~$120.0~~$65.7 million for the nine months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The ~~$54.3~~$164.3 million ~~decrease~~increase in cash provided by operating activities is primarily related to ~~higher trade receivable and~~a decrease in inventory, partially offset by reduced profitability due to a decline in sales volume for the nine months ended June 30, 2023. During the first quarter of fiscal 2023, our channel partners met demand partially through inventory drawdowns causing us to lower production, which resulted in a decrease in inventory at June 30, 2023 as compared to September 30, 2022, while inventory levels ~~compared to~~at June 30, ~~2021. Higher inventory levels are primarily a result of higher raw material and finished goods, higher production for anticipated seasonal demand and the contribution~~2022 increased significantly from ~~acquisitions.~~those at September 30, 2021.

Investing Activities

Net cash ~~provided by (used)~~used in investing activities was ~~$(225.8)~~$(54.0) million and ~~$(116.7)~~$(225.8) million for the nine months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. Net cash ~~provided by (used in)~~used in investing activities for the nine months ended June 30, 2023 primarily consisted of $(54.1) million for purchases of property, plant and equipment in the normal course of business, while net cash used in investing activities for the nine months ended June 30, 2022, ~~primarily~~ consisted of ~~$86.9 million for acquisitions and $139.5~~$(139.5) million for purchases of property, plant and equipment to support our expansion of capacity in our manufacturing facilities ~~as compared to the nine months ended June 30, 2021, which primarily consisted of purchases of property, plant~~ and ~~equipment in the normal course of business.~~$(86.9) million for acquisitions.

Financing Activities

Net cash provided by (used in) financing activities was ~~$69.2~~$(52.2) million and ~~$2.1~~$69.2 million for the nine months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. Net cash ~~provided by (used in)~~used in financing activities for the nine months ended June 30, 2023 primarily consisted of $(55.5) million of treasury stock repurchases and $(4.5) million of debt principal payments offset by $11.1 million of exercise of vested stock options, while net cash provided by financing activities for the nine months ended June 30, 2022, ~~primarily~~ consisted of cash received from the 2022 Term Loan Agreement of $595.5 million offset by ~~debt issuance costs of $3.4 million,~~ repayments for the Term Loan Agreement of ~~$467.7~~$(467.7) million, ~~and~~ treasury stock repurchase of ~~$58.5~~$(58.5) million, ~~as compared to the nine months ended June 30, 2021, which primarily consisted~~and debt issuance costs of ~~cash received from the exercise of stock options partially offset by repayment of finance lease obligations.~~$(3.4) million.

Share Repurchase Program

On May 5, 2022, the Board of Directors authorized us to repurchase up to $400 million of our Class A common stock. The program allows us to repurchase our shares opportunistically from time to time. Purchases may be effected through one or more open market transactions, privately negotiated transactions, transactions structured through investment banking institutions, accelerated share repurchases or tender offers, some of which may be effected through Rule 10b5-1 plans, or a combination of the foregoing. The timing of repurchases will depend upon several factors, including market and business conditions, and repurchases may be discontinued at any time.

On May 11, 2022, we entered into a $50 million accelerated share repurchase agreement, or the ASR, with JPMorgan Chase Bank, National Association, or JPMorgan. JPMorgan delivered 2,422,774 initial shares to us on May 13, 2022, based on the closing priceThe table below summaries our repurchases of our Class A common stock ~~of $16.51 on May 11, 2022. JPMorgan terminated~~during the ~~ASR on~~three and nine months ended June ~~14,~~30, 2023 and 2022 ~~and delivered 86,132 additional shares to us upon final settlement for no additional consideration. The average purchase price per share for shares purchased by us pursuant to the ASR was $19.93.~~(in thousands):


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Total number of shares repurchased		1,947		3,014		2,300		3,014
Reacquisition cost (1), (2), (3)	$	48,480	$	58,468	$	55,968	$	58,468
Average price per share	$	24.90	$	19.40	$	24.34	$	19.40

(1)

Reacquisition cost in the three and nine months ended June 30, 2023 includes the $36.0 million repurchased from the underwriter upon the completion of the secondary offering. The remaining repurchases in the three and nine months ended June 30, 2023 were made through open market transactions.

(2)

On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”), that includes, among other provisions, a one percent excise tax on net repurchases of stock after December 31, 2022. As of June 30, 2023, we recognized $0.5 million excise tax as reacquisition cost of share repurchases.

(3)

During the three and nine months ended June 30, 2022, we ~~also~~ repurchased ~~504,669~~$50 million of shares under an accelerated share repurchase agreement ("ASR") and $8.5 million of ~~our Class A common stock~~shares on the open ~~market at an average price of $16.76 per share, totaling an approximately $8.5 million reacquisition cost.~~

market.

As of June 30, ~~2022,~~2023, we had approximately ~~$341.5~~$262.5 million available for repurchases under the ~~share repurchase program.~~Share Repurchase Program.

See Note 13 in the Notes to Condensed Consolidated Financial Statements for additional information.

Revolving Credit Facility

The Revolving Credit Facility provides for maximum aggregate borrowings of up to $150.0 million, subject to an asset-based borrowing base. ~~Outstanding~~As of June 30, 2023, outstanding revolving loans under the Revolving Credit Facility ~~will bear~~bore interest at a rate which ~~equals,~~equaled, at our option, either (i) for alternative base rate, or ABR, borrowings, the highest of (a) the Federal Funds Rate plus 50 basis

points, (b) the prime rate and (c) the LIBOR, as of such date for a deposit in U.S. dollars with a maturity of one month plus 100 basis points, plus, in each case, a spread of 25 to 75 basis points based on average historical availability, or (ii) for Eurocurrency borrowings, adjusted LIBOR plus a spread of 125 to 175 basis points, based on average historical availability. The maturity of the Revolving Credit Facility is the earlier of March 31, 2026 and the date that is 91 days prior to the maturity of the Term Loan Agreement or any permitted refinancing thereof.

On January 26, 2023, The AZEK Group LLC further amended the Revolving Credit Facility, replacing all LIBOR-based provisions with provisions reflecting the Secured Overnight Financing Rate, or SOFR, including, without limitation, the use of a new Adjusted Term SOFR benchmark rate equal to Term SOFR (as defined in the Revolving Credit Agreement) plus 0.10%.

A “commitment fee” accrues on any unused portion of the revolving commitments under the Revolving Credit Facility during the preceding three calendar month period. If the average daily used percentage is greater than 50%, the commitment fee equals 25 basis points, and if the average daily used percentage is less than or equal to 50%, the commitment fee equals 37.5 basis points.

The obligations under the Revolving Credit Facility are secured by a first priority security interest in certain assets, including substantially all of the accounts receivable, inventory, deposit accounts, securities accounts and cash assets of the Company, ~~CPG International~~The AZEK Group LLC and the subsidiaries of ~~CPG International~~The AZEK Group LLC that are guarantors under the Revolving Credit Facility, and the

proceeds thereof (subject to certain exceptions), or the Revolver Priority Collateral, plus a second priority security interest in all of the Term Loan Priority Collateral (as defined below). The obligations under the Revolving Credit Facility are guaranteed by ~~the Company~~us and the wholly owned domestic subsidiaries of ~~CPG International~~The AZEK Group LLC other than certain immaterial subsidiaries and other excluded subsidiaries.

Revolving loans under the Revolving Credit Facility may be voluntarily prepaid in whole, or in part, in each case without premium or penalty. ~~CPG International~~The AZEK Group LLC is also required to make mandatory prepayments (i) when aggregate borrowings exceed commitments or the applicable borrowing base and (ii) during “cash dominion,” which occurs if (a) the availability under the Revolving Credit Facility is less than the greater of (i) $12.5 million and (ii) 10% of the lesser of (x) $150.0 million and (y) the borrowing base, for five consecutive business days or (b) certain events of default have occurred and are continuing.

The Revolving Credit Facility contains affirmative covenants that are customary for financings of this type, including allowing the Revolver Administrative Agent to perform periodic field exams and appraisals to evaluate the borrowing base. The Revolving Credit Facility contains various negative covenants, including limitations on, subject to certain exceptions, the incurrence of indebtedness, the incurrence of liens, dispositions, investments, acquisitions, restricted payments, transactions with affiliates, as well as other negative covenants customary for financings of this type. The Revolving Credit Facility also includes a financial maintenance covenant, applicable only when the excess availability is less than the greater of (i) 10% of the lesser of the aggregate commitments under the Revolving Credit Facility and the borrowing base, and (ii) $12.5 million. In such circumstances, we would be required to maintain a minimum fixed charge coverage ratio (as defined in the Revolving Credit Facility) for the trailing four quarters equal to at least 1.0 to 1.0; subject to our ability to make an equity cure (no more than twice in any four quarter period and up to five times over the life of the facility). As of June 30, ~~2022~~2023 and September 30, ~~2021, CPG International~~2022, The AZEK Group LLC was in compliance with the financial and nonfinancial covenants imposed by the Revolving Credit Facility. The Revolving Credit Facility also includes customary events of default, including the occurrence of a change of control.

We also have the option to increase the commitments under the Revolving Credit Facility by up to $100.0 million, subject to certain conditions.

~~Term Loan Agreement~~

~~The Term Loan Agreement was a first lien term loan. As of September 30, 2021, CPG International LLC had $467.7 million outstanding under the Term Loan Agreement.~~

~~On April 28, 2022, the Company and CPG International LLC entered into the~~ 2022 Term Loan Agreement ~~the proceeds of which were applied, among other uses, to prepay the obligations of the Term Loan Agreement in full.~~

The 2022 Term Loan Agreement is a first lien term loan and will mature on April 28, 2029, subject to acceleration or prepayment. ~~Commencing on December 31, 2022, the~~The 2022 Term Loan Agreement will amortize in equal quarterly installments of 0.25% of the aggregate principal amount of the loans outstanding, subject to reduction for certain prepayments.

The obligations under the 2022 Term Loan Agreement are secured by a first priority security interest in the membership interests of ~~CPG International~~The AZEK Group LLC owned by ~~the Company,~~us, the equity interests of ~~CPG International~~The AZEK Group LLC’s domestic subsidiaries, other than certain immaterial subsidiaries and other excluded subsidiaries, and all remaining assets not constituting Revolver Priority Collateral (subject to certain exceptions) of the Company, ~~CPG International~~The AZEK Group LLC and the subsidiaries of ~~CPG International~~The AZEK Group LLC that are guarantors under the 2022 Term Loan Agreement, and a second priority security interest in the Revolver Priority Collateral. The obligations under the 2022 Term Loan Agreement are guaranteed by ~~the Company~~us and the wholly owned domestic subsidiaries of ~~CPG International~~The AZEK Group LLC other than certain immaterial subsidiaries and other excluded subsidiaries.

The interest rate applicable to the outstanding principal under the 2022 Term Loan Agreement equals, at our option, (i) in the case of alternative base rate borrowings, the highest of (a) the Federal Funds Rate (as defined in the 2022 Term Loan Agreement) plus 0.50%, (b) the Prime Rate (as defined in the 2022 Term Loan Agreement) as in effect on such day and (c) the one-month Term SOFR (as defined in the 2022 Term Loan Agreement) plus 1.00% per annum, provided that in no event will the alternative base rate be less than 1.50% per annum, plus an applicable margin of 1.50% and (ii) in the case of SOFR borrowings, Term SOFR for the applicable interest period, plus an applicable margin of 2.50%.

We have the right to arrange for incremental term loans under the Credit Agreement in an amount that shall not exceed the sum of (i) the Fixed Incremental Amount, as defined in the 2022 Term Loan Agreement, and (ii) the Ratio Amount, as defined in the 2022 Term Loan Agreement.

Restrictions on Dividends

The Senior Secured Credit Facilities each restrict payments of dividends unless certain conditions, as provided in the Revolving Credit Facility or the 2022 Term Loan Agreement, as applicable, are met.

Contingent Commitments

We have contractual commitments for purchases of certain minimum quantities of raw materials at index-based prices, and non-cancelable capital and operating leases, outstanding letters of credit and fixed asset purchase commitments. For a description of our contractual obligations and commitments, see Notes 8 “Debt”, 10 “Leases” and 17 “Commitments and Contingencies” to our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

~~Other~~

~~We are currently in the process of a multi-phase capacity expansion program including the opening of a new manufacturing facility in Boise, Idaho.~~ We also intend to continue to invest in new capacity in the ordinary course as we execute against the long-term material conversion opportunity and market expansion. As a result, we intend to invest approximately $180 - $200 million of capital expenditures during fiscal 2022 on these and other projects.

Critical Accounting Policies and Estimates

Our unaudited Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. The preparation of these unaudited Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates.

There have been no material changes to our critical accounting policies as compared to the critical accounting policies and significant judgments and estimates disclosed in our ~~2021~~2022 Form 10-K, except as updated in Note 1 of our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

3739

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are subject to interest rate risk in connection with our long-term debt. Our principal interest rate risk relates to the Senior Secured Credit Facilities. To meet our seasonal working capital needs, we borrow periodically on our variable rate revolving line of credit under the Revolving Credit Facility. As of June 30, ~~2022~~2023 and September 30, ~~2021,~~2022, we had $595.5 million and $600.0 million outstanding under the 2022 Term Loan Agreement, ~~and $467.7 million outstanding under the Term Loan Agreement,~~ respectively, and ~~$0.0 million and $0.0 million~~no outstanding amounts under the Revolving Credit Facility, respectively. The 2022 Term Loan Agreement and Revolving Credit Facility bear interest at variable rates. An increase or decrease of 100 basis points in the floating rates on the amounts outstanding under the Senior Secured Credit Facilities, after giving effect to related derivatives, as of June 30, ~~2022~~2023 and ~~2021,~~2022, would have increased or decreased ~~respectively,~~ annual cash interest by approximately $3.0 million and $6.0 million, respectively.

We have entered into and ~~$4.7~~may continue to enter into, agreements such as floating for fixed-rate interest rate swaps and other hedging contracts in order to hedge against interest rate volatility associated with our Senior Secured Credit Facilities. For example, effective November 2022, we entered into interest rate swaps, which swapped interest at a rate based on SOFR on a notional amount of $300 million ~~respectively.~~

for a fixed rate. We do not intend or expect to enter into interest rate swaps or other derivative transactions for speculative purposes. In the future, in order to manage our interest rate risk, we may refinance our existing debt or enter into interest rate swaps or otherwise hedge the risk of changes in the interest rate under the Senior Secured Credit Facilities. However, we do not intend or expect to enter into derivative or interest rate swap transactions for speculative purposes.debt.

Credit Risk

As of June 30, ~~2022~~2023 and September 30, ~~2021,~~2022, our cash and cash equivalents were maintained at major financial institutions in the United States, and our current deposits are likely in excess of insured limits. We believe these institutions have sufficient assets and liquidity to conduct their operations in the ordinary course of business with little or no credit risk to us.

Our accounts receivable primarily relate to revenue from the sale of products primarily to established distributors inside of the United States. To mitigate credit risk, ongoing credit evaluations of customers’ financial condition are performed. As of June 30, 2022, one customer represented more than 10% of gross trade receivables; Customer A was 12.0%. As of September 30, 2021, three customers represented more than 10% of gross trade receivables; Customer A was 11.5%, Customer B was 12.7% and Customer C was 10.3%.

Foreign Currency Risk

Substantially all of our business is currently conducted in U.S. dollars. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar as compared to other currencies would have a material effect on our operating results.

Inflation

Our cost of sales is subject to inflationary pressures and price fluctuations of the raw materials we use and other costs, including freight and labor costs. Global inflation has increased during 2022, and the conflict in Ukraine and other geopolitical tensions and economic uncertainties have exacerbated inflationary pressures, including causing increases in the prices for goods and services and exacerbating global supply chain disruptions, which have resulted in, and may continue to result in, shortages in materials and services and related issues. Historically, we have generally been able over time to offset, in whole or in part, the effects of inflation and price fluctuations through sales price increases and production efficiencies associated with technological enhancements and volume growth; however, we cannot reasonably estimate our ability to offset any increases in raw material prices or freight or labor costs or other inflationary pressures in the future. Such sustained inflationary pressures may have an adverse effect on our business, financial condition and results of operations if the selling prices of our products do not increase with these increased costs, or we cannot identify cost efficiencies.

Raw Materials

We rely upon the supply of certain raw materials in our production processes; however, we do not typically enter into fixed price contracts with our suppliers and currently have no fixed price contracts with our major vendors. The primary raw materials we use in the manufacture of our products are various petrochemical resins, including polyethylene, polypropylene and PVC resins, reclaimed polyethylene and PVC material, waste wood fiber and aluminum. In addition, we utilize a variety of other additives including modifiers, TiO2 and pigments. The exposures associated with these costs are primarily managed through terms of the sales and by maintaining relationships with multiple vendors. Prices for spot market purchases are negotiated on a continuous basis in line with the market at the time. We have not entered into hedges with respect to our raw material costs at this time, but we may choose to enter into such hedges in the future. Other than short term supply contracts for resins with indexed based pricing and occasional strategic purchases of larger quantities of certain raw materials, we generally buy materials on an as-needed basis.

The cost of some of the raw materials we use in the manufacture of our products is subject to significant price volatility. For example, the cost of petrochemical resins used in our manufacturing processes has historically varied significantly and has been affected by changes in supply and demand and in the price of crude oil. Substantially all of our resins are purchased under supply contracts that average approximately one to two years, for which pricing is variable based on an industry benchmark price index. The resin supply contracts are negotiated annually and generally provide that we are obligated to purchase a minimum amount of resins from each supplier. In addition, the price of reclaimed polyethylene material, waste wood fiber, aluminum, other additives (including modifiers, TiO2 and pigments) and other raw materials fluctuates depending on, among other things, overall market supply and demand and general business conditions.

3840

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, ~~2022~~2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising out of our operations and businesses that cover a wide range of matters, including, among others, contract and employment claims, personal injury claims, product liability claims and warranty claims. Currently, there are no claims or proceedings against us that we believe will have a material adverse effect on our business, financial condition, results of operations or cash flows. However, the results of any current or future litigation cannot be predicted with certainty and, regardless of the outcome, we may incur significant costs and experience a diversion of management resources as a result of ~~litigation~~litigation..

Item 1A. Risk Factors.

~~Except as set forth in our Quarterly Report on Form 10-Q for our second fiscal quarter of 2022, since~~Since September 30, ~~2021,~~2022, there have been no material changes to the risk factors previously disclosed under the heading “Risk Factors” in our ~~2021~~2022 Form 10-K. You should carefully consider the risk factors in our ~~2021~~2022 Form 10-K and our other filings made with the SEC. You should be aware that such risk factors and other information may not describe every risk we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The following table provides information with respect to our purchases of our Class A common stock during the three months ended June 30, ~~2022:~~2023:


Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs (1), (2), (3)		Maximum approximate dollar value of shares that may yet be purchased under the plans or programs (1), (2), (3)
April 1, 2023 - April 30, 2023		—	$	—		—	$	311,028,793
May 1, 2023 – May 31, 2023		1,603,307		24.57		1,603,307		271,637,771
June 1, 2023 – June 30, 2023		343,440		26.46		343,440		262,548,740
Total		1,946,747	$	24.90		1,946,747

Period

Total number of shares purchased

Average price paid per share

Total number of shares purchased as part of publicly announced plans or programs (1), (2), (3)

Maximum approximate dollar value of shares that may yet be purchased under the plans or programs (1), (2)

April 1, 2022 – April 30, 2022

—

$
—

—

$
—

May 1, 2022 – May 31, 2022

2,422,774

19.93

2,422,774

350,000,000

June 1, 2022 – June 30, 2022

590,801

17.24

590,801

341,532,108

Total

3,013,575

$
19.40

3,013,575

(1)

On May 5, 2022, the Board of Directors authorized us to repurchase up to $400 million of our Class A common stock.

(2)

During the three months ended June 30, 2023, we repurchased 1,477,832 shares of our Class A common stock from the underwriter upon the completion of the secondary offering, resulting in an aggregate purchase price of approximately $36.0 million and an additional 468,915 shares of our Class A common stock on the open market, totaling an approximately $12.0 million reacquisition cost.

(3)

On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”), that includes, among other provisions, a one percent excise tax on net repurchases of stock after December 31, 2022. As of June 30, 2023, we recognized $0.5 million excise tax as reacquisition cost of share repurchases.

~~(1)~~

~~On May 5, 2022, the Board of Directors authorized us to repurchase up to $400 million of our Class A common stock.~~

~~(2)~~

~~On May 11, 2022, we entered into a $50 million ASR with JPMorgan and 2,422,774 initial shares were delivered to us on May 13, 2022,~~ ~~based on the closing price of our Class A common stock of $16.51 on May 11, 2022. JPMorgan terminated the ASR on June 14, 2022 and delivered 86,132 additional shares to us on June 17, 2022 for no additional consideration.~~

~~(3)~~

~~We repurchased 504,669 shares of our Class A common stock on the open market at an average price of $16.76 per share,~~ ~~totaling an approximately $8.5 million reacquisition cost,~~ ~~during the three months ended June 30, 2022.~~

See Note 13 in the Notes to Condensed Consolidated Financial Statements for additional information on ~~Share Repurchase Program.~~share repurchase program.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information

~~None.~~Rule 10b5-1 Trading Plans

40Jesse Singh, our Chief Executive Officer and member of our Board of Directors, entered into an equity trading plan on May 10, 2023. Mr. Singh’s plan provides for the sale of up to 143,000 shares of Class A common stock between September 11, 2023 and September 10, 2024 at various minimum prices. Mr. Singh’s trading plan was entered into during an open insider trading window and is intended to satisfy the affirmative defense of Rule 10b5-1(c) under the Exchange Act and our policies regarding insider trading.

Item 6. Exhibits

Incorporated by Reference

Exhibit

No.

Description

Form

Exhibit

Filing Date

File No.

Description

Form

Exhibit

Filing Date

File No.

3.1

Restated Certificate of Incorporation of The AZEK Company Inc.

8-K

3.2

03/10/2022

001-39322

Second Restated Certificate of Incorporation of The AZEK Company Inc.

8-K

3.2

03/01/2023

001-39322

3.2

Amended and Restated Bylaws of The AZEK Company Inc.

8-K

3.3

03/10/2022

001-39322

Amended and Restated Bylaws of The AZEK Company Inc.

8-K

3.3

03/10/2022

001-39322

4.1

Stockholders Agreement, by and among The AZEK Company Inc. and the other parties named therein

10-Q

4.1

08/14/2020

001-39322

Stockholders Agreement, by and among The AZEK Company Inc. and the other parties named therein

10-Q

4.1

08/14/2020

001-39322

4.2

Registration Rights Agreement, by and among The AZEK Company Inc. and the other parties named therein

10-Q

4.2

08/14/2020

001-39322

Registration Rights Agreement, by and among The AZEK Company Inc. and the other parties named therein

10-Q

4.2

08/14/2020

001-39322

10.1

Credit Agreement dated as of April 28, 2022, among CPG International LLC, the lenders party hereto and Bank of America, N.A, as administrative and collateral agent.

8-K

10.1

05/03/2022

001-39322

10.2

Term Loan Guarantee and Collateral Agreement, dated as of April 28, 2022, among CPG International LLC, each of CPG International LLC’s subsidiaries identified therein and Bank of America, N.A, as administrative and collateral agent

8-K

10.2

05/03/2022

001-39322

10.3

Intercreditor Agreement, dated as of April 28, 2022, among Deutsche Bank, as ABL Agent, Bank of America, N.A., as Term Loan Agent, CPG International LLC, The AZEK Company Inc., and each of CPG International LLC’s identified therein

8-K

10.3

05/03/2022

001-39322

31.1

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*+

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+

32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*+

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+

101.INS

Inline XBRL Instance Document*

101.SCH

Inline XBRL Taxonomy Extension Schema Document*

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document*

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document*

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

* Filed herewith.

+ Furnished herewith. This certification is deemed furnished and not filed for purpose of Section 18 of the Exchange Act or otherwise subject to the liability of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.

~~Filed herewith.~~

+	This certification is deemed furnished and not filed for purpose of Section 18 of the Exchange Act or otherwise subject to the liability of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.

~~SIGNATURE~~

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		The AZEK Company Inc.

Date: August ~~5, 2022~~9, 2023	By:		/s/ Peter Clifford
			Peter Clifford Senior Vice President and Chief Financial Officer (Principal Financial Officer)

	November 19, 2021 Grant Date			December 4, 2020 Grant Date
Risk-free interest rate		1.34	%		0.56	%
Expected volatility		40.00	%		35.00	%
Expected term (in years)		6.00			6.00
Expected dividend yield		0.00	%		0.00	%