AZEK Co Inc. - Quarter Report: 2024 March (Form 10-Q)

Acquisitions, net of cash acquired()— — ()Net cash used in investing activities()— — ()Financing activities:Payments on Term Loan Agreement()— — ()Proceeds under revolving credit facility — — Payments under revolving credit facility()— — ()Principal payments of finance lease obligations()— — ()Payments of INTEX contingent consideration — ()()Exercise of vested stock options — — Cash paid for shares withheld for taxes()— — ()Purchases of treasury stock()— — ()Net cash used in financing activities()— ()()Net increase in cash and cash equivalents — — Cash and cash equivalents – Beginning of period — — Cash and cash equivalents – End of period — —

Supplemental cash flow disclosure:

Cash paid for interest, net of amounts capitalized$ $— $— $ Cash paid for income taxes, net — —

Supplemental non-cash investing and financing disclosure:

Capital expenditures in accounts payable at end of period$ $— $— $ Right-of-use operating and finance lease assets obtained in exchange for lease liabilities — —

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million and $ million as of March 31, 2024 and 2023, respectively, and contra trade receivables of $ million and $ million as of March 31, 2024 and 2023, respectively. $ $ $ Rebate expense Rebate payments()()()()Ending balance$ $ $ $

million. The divestiture allows the Company to focus on the highest value portions of its business and provides additional cash to finance its capital allocation priorities. The gain on sale of $ million was recognized in "Gain on sale of business" within the Condensed Consolidated Statements of Comprehensive Income (Loss) for the six months ended March 31, 2024. The Company did not report the sale in discontinued operations as it was not a strategic shift that would have a major effect on the Company's operations and financial results.

See Note 12 for more information on the Commercial segment.

$ Work in process Finished goods Total inventories$ $

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$ Buildings and improvements Manufacturing equipment Computer equipment Furniture and fixtures Vehicles Total property, plant and equipment Construction in progress Accumulated depreciation()()Total property, plant and equipment – net$ $

million and $ million in the three months ended March 31, 2024 and 2023, respectively, and $ million and $ million in the six months ended March 31, 2024 and 2023, respectively. During the three months ended March 31, 2024 and 2023, $ million and $ million of interest was capitalized, respectively, and during the six months ended March 31, 2024 and 2023, $ million and $ million of interest was capitalized, respectively.

$ $ Accumulated impairment losses as of September 30, 2023 ()()Goodwill, net as of September 30, 2023$ $ $ DivestitureGoodwill disposal before impairment$ $()$()Accumulated impairment losses Goodwill, net disposal$ $()$()Goodwill before impairment as of March 31, 2024$ $ $ Accumulated impairment losses as of March 31, 2024 Goodwill, net as of March 31, 2024$ $ $

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have any indefinite lived intangible assets other than goodwill as of March 31, 2024 and September 30, 2023. — $ $()$ Trademarks

—

() Customer relationships

—

() Patents

—

() Other intangibles

—

() Total intangible assets $ $()$

September 30, 2023

Lives in

Years

Gross

Carrying

Value

Accumulated

Amortization

Net

Carrying

Value

Propriety knowledge

—

()

Trademarks

—

()

Customer relationships

—

()

Patents

—

()

Other intangible assets

—

()

Total intangible assets

()

million and $ million in the three months ended March 31, 2024 and 2023, respectively and $ million and $ million in the six months ended March 31, 2024 and 2023, respectively. As of March 31, 2024, the remaining weighted-average amortization period for acquired intangible assets was years.

$ $ $ Provision() () Bad debt write-offs () ()Divestiture () Ending balance$ $ $ $

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$ Marketing Customer deposits Lease liability - operating Taxes Warranty Lease liability - finance Freight Utilities Professional fees Construction in progress Commissions Other Total accrued expenses and other current liabilities$ $

% + % (% at March 31, 2024 and % at September 30, 2023)$ $

Revolving Credit Facility through March 31, 2026 - SOFR + %

Total Less unamortized deferred financing costs()()Less unamortized original issue discount()()Less current portion()()Long-term debt—less current portion and unamortized deferred financing costs$ $

Term Loan Agreement

The Term Loan Agreement is a first lien term loan and will mature on April 28, 2029, subject to acceleration or prepayment. The Term Loan Agreement will amortize in equal quarterly installments of % of the aggregate principal amount of the loans outstanding as of the amendment date of April 28, 2022, subject to reduction for certain prepayments. The loans thereunder bear an interest rate equal to (i) in the case of alternative base rate, or ABR, borrowings, the highest of (a) the Federal Funds Rate plus %, (b) the Prime Rate as in effect on such day and (c) the one-month Term Secured Overnight Financing Rate ("SOFR") plus % per annum, provided that in no event will the alternative base rate be less than % per annum, plus an applicable margin of % 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 %. As of March 31, 2024 and September 30, 2023, The AZEK Group LLC had $ million and $ million outstanding under the Term Loan Agreement.

The obligations under the Term Loan Agreement are secured by a first priority security interest in the membership interests of The AZEK Group LLC owned by the Company, the equity interests of 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, The AZEK Group LLC and the subsidiaries of The AZEK Group LLC that are guarantors under the Term Loan Agreement (the “Term Loan Priority Collateral”), and a second priority security interest in the Revolver Priority Collateral. The obligations under the Term Loan Agreement are guaranteed by the Company and the

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million and $ million, respectively.

Revolving Credit Facility

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 $ 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.

The AZEK Group LLC had outstanding borrowings under the Revolving Credit Facility as of March 31, 2024 and September 30, 2023, respectively. In addition, The AZEK Group LLC had $ million and $ million of outstanding letters of credit held against the Revolving Credit Facility as of March 31, 2024 and September 30, 2023, respectively. The AZEK Group LLC had approximately $ million available under the borrowing base for future borrowings as of March 31, 2024. The AZEK Group LLC also has the option to increase the commitments under the Revolving Credit Facility by up to $ million, subject to certain conditions.

On January 26, 2023, The AZEK Group LLC 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 %.

As of March 31, 2024, outstanding revolving loans under the Revolving Credit Facility bore interest at a rate which equaled, at the Company's option, either (i) for ABR borrowings, the highest of (a) the Federal Funds Rate plus basis points, (b) the prime rate and (c) the Adjusted Term SOFR as of such date for a deposit in U.S. dollars with a maturity of one month plus basis points, plus, in each case, a spread of to basis points, based on average historical availability, or (ii) for SOFR borrowings, the Adjusted Term SOFR plus a spread of to basis points, based on average historical availability. The maturity date for 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.

Deferred financing costs, net of accumulated amortization, related to the Revolving Credit Facility at March 31, 2024 and September 30, 2023 were $ million and $ 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 basis points, and if the average daily used percentage is less than or equal to 50%, the commitment fee equals basis points. The commitment fees were $ million and $ million for the three months ended March 31, 2024 and 2023, respectively, and $ million and $ million for the six months ended March 31, 2024 and 2023, 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, The AZEK Group LLC and the subsidiaries of 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. 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

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million and (ii) % of the lesser of (x) $ 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) % of the lesser of the aggregate commitments under the Revolving Credit Facility and the borrowing base, and (ii) $ million. In such circumstances, 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 to 1.0; subject to 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 March 31, 2024, 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. On May 22, 2024, as a result of the Company's delayed filing of its Form 10-Q for the quarter ended March 31, 2024, The AZEK Group LLC was not in compliance with the financial reporting requirements in the Revolving Credit Facility, which non-compliance was subject to a 30-day grace period. Because the Company is filing this Form 10-Q on June 14, 2024, which is within the grace period, The AZEK Group LLC has regained compliance and no event of default occurred.

$ $ $ Revolving Credit Facility Other Amortization - Deferred financing costsTerm Loan Agreement Revolving Credit Facility Amortization - Original issue discountTerm Loan Agreement Capitalized interest()()()()Interest expense Interest income() () Interest expense, net$ $ $ $

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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. $ $ $ Adjustments to reserve Warranty claims payment()()()()Ending balance Current portion of accrued warranty()()()()Accrued warranty – less current portion$ $ $ $

10.

year to years. $ ROU finance lease assetsOther assets Total lease assets$ $ LiabilitiesCurrentOperatingAccrued expenses and other liabilities$ $ FinanceAccrued expenses and other liabilities Non-currentOperatingOther non-current liabilities FinanceOther non-current liabilities Total lease liabilities$ $

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$ $ $ Finance lease amortization of assets Finance lease interest on lease liabilities Short term Sublease income()()()()Total lease expense$ $ $ $

Finance leasesWeighted-average discount rateOperating leases % %Finance leases % %

$ $ 2025 2026 2027 2028 Thereafter Total lease payments Less: interest()()()Present value of lease liability$ $ $

11.

interest rate swap agreements with Barclays Bank PLC to manage interest rate risk related to Term Loan. Each agreement has a notional amount of $ million and will expire on October 31, 2025. One agreement swaps variable interest at a rate based on SOFR with a fixed rate of % and the second with a fixed rate of %.

At the inceptions of the swap agreements and as of March 31, 2024, both swaps were designated and qualified as cash flow hedges in accordance with ASC 815. The 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 March 31, 2024, the Company expects to reclass approximately $ million ($ million after-tax) as a reduction to interest expense in the next 12 months.

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$ LiabilitiesInterest rate swapsLevel 2Other non-current liabilities$ $

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.

)$()$()Amount of gain recognized in other comprehensive income (loss) Amount of gain reclassified from accumulated other comprehensive income (loss) into net income (loss)()()()Balance - March 31, 2024$ $ $ Balance - September 30, 2023$ $ $ Amount of gain recognized in other comprehensive income (loss)()()()Amount of gain reclassified from accumulated other comprehensive income (loss) into net income (loss)()()()Balance - March 31, 2024$ $ $

Before-tax Amount

Income Tax Expense

Net of Tax Amount

Balance - December 31, 2022

()

Amount of loss recognized in other comprehensive income (loss)

()

Amount of gain reclassified from accumulated other comprehensive income (loss) into net income (loss)

()

Balance - March 31, 2023

()

Balance - September 30, 2022

Amount of loss recognized in other comprehensive income (loss)

()

Amount of loss reclassified from accumulated other comprehensive income (loss) into net income (loss)

Balance - March 31, 2023

()

Other Financial Instruments

$ $ $

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to $ million. At the date of acquisition, the fair value was estimated to be $ million. As of March 31, 2023, the fair value was increased to $ million based on the actual EBITDA amount for StruXure. Compensation expense of $ million was recognized for the year ended September 30, 2022 and $ million was recognized for the year ended September 30, 2023. The Company paid $ million as settlement of the contingent 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 to $ million. At the date of the acquisition, the fair value was estimated to be $ million. As of December 31, 2022, the fair value was increased to $ million. Contingent payment of $ million was included in the acquisition purchase price at the date of acquisition and the change in fair value of $ million was recognized in Selling, general and administrative expense for the year ended September 30, 2023. The Company paid $ million as settlement of this contingent liability in fiscal year 2023.

12.

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, pergolas, outdoor structures, exterior trim, siding 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. Regional recyclers provides full-service recycled PVC material processing, sourcing, logistical support, and scrap management programs that are utilized in our finished goods manufacturing processes. This segment is impacted by trends in and the strength of home repair and remodel activity.

•Commercial—The Commercial segment manufactures, fabricates and distributes lockers and bathroom partitions. This segment is impacted by trends in and the strength of the repair and remodel sector. This segment also previously included the Company’s Vycom business, which manufactured resin-based extruded sheeting products for a variety of commercial and industrial applications. The Company sold the Vycom business on November 1, 2023. See Note 3 for additional information on the divestiture.

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$ $ $ Commercial Total$ $ $ $ Adjusted EBITDA

Residential(1)

$ $ $ $ Commercial Total Adjusted EBITDA for reporting segments$ $ $ $ Adjustments to Income before income tax provisionDepreciation and amortization()()()()Stock-based compensation costs()()()()

Acquisition and divestiture costs (2)

()()()()

Gain (loss) on sale of business(3)

()

Other costs(4)

()()()()Interest expense, net()()()()Income (loss) before income tax provision$ $ $ $()

(1)Effective as of December 31, 2023, Residential segment Adjusted EBITDA includes all corporate expenses, such as selling, general and administrative costs related to our corporate offices, including payroll and other professional fees. The prior periods have been recast to reflect the change.

(2)Acquisition and divestiture costs reflect costs related to acquisitions of $ million in the three and six months ended March 31, 2024, and $ million and $ million in the three and six months ended March 31, 2023, respectively, and costs related to divestiture of $ million and $ million for the three months ended March 31, 2024 and 2023, respectively, and $ million and $ million for the six months ended March 31, 2024 and 2023, respectively.

(3)Gain (loss) on sale of business relates to the sale of the Vycom business.

(4)Other costs include costs related to the removal of dispensable equipment resulting from a modification of the Company's manufacturing process of $ million in the six months ended March 31, 2024, costs related to a reduction in workforce of $ million in the six months ended March 31, 2024 and $ million in the three and six months ended March 31, 2023, costs for legal expenses of $ million in the three months ended March 31, 2024, and $ million and $ million in the six months ended March 31, 2024 and 2023, respectively, and other costs of $ million for the three and six months ended March 31, 2024 and $ million for the three and six months ended March 31, 2023.

13.

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 December 4, 2023, the Company entered into a $ million accelerated share repurchase agreement, or the “ASR” with Goldman Sachs & Co. LLC, or “Goldman Sachs”. Goldman Sachs delivered initial shares to the Company on December 6, 2023, based on the closing price of the Company’s Class A common stock of $ on December 4, 2023. The total value of the initial shares represents % of the ASR. Goldman Sachs terminated the ASR on February 5, 2024 and delivered additional shares of Class A common stock to the Company on February 7, 2024 upon final settlement for no additional consideration. The average purchase price per share for shares purchased by the Company pursuant to the ASR was $.

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shares of its Class A common stock on the open market at an average price of $ per share, totaling an approximately $ million reacquisition cost. During the six months ended March 31, 2023, the Company repurchased shares of its Class A common stock on the open market at an average price of $ per share, totaling an approximately $ million reacquisition cost.

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. The Company recognized $ million and $ million excise tax as reacquisition cost of share repurchases for the three and six months ended March 31, 2024, respectively.

million available for repurchases under the Share Repurchase Program.

14.

shares with shares remaining in the reserve. The total aggregate number of shares may be adjusted as determined by the Board of Directors.

On December 11, 2023, the Compensation Committee of the Board of Directors authorized certain changes to a former employee’s stock-based awards which were effective in connection with his retirement. These changes allow certain awards to continue to vest in due course following retirement and extend the exercisability of certain outstanding and exercisable stock options to the end of the contractual term of the options. This resulted in a Type III Modification (improbable to probable) as defined in accounting guidance, accounted for as a cancellation of the original award and an issuance of a new grant, as well as, a Type I Modification (probable to probable), accounted for as an exchange of the original award for a new grant under the revised terms. The modifications resulted in $ million of stock-based compensation expense in the six months ended March 31, 2024.

Stock-based compensation expense for the three months ended March 31, 2024 and 2023 was $ million and $ million, respectively, and for the six months ended March 31, 2024 and 2023 was $ million and $ million, respectively, recognized in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Comprehensive Income (Loss). Total income tax benefit for the three months ended March 31, 2024 and 2023 was $ million and $ million, respectively, and for the six months ended March 31, 2024 and 2023 was $ million and $ million, respectively. As of March 31, 2024, the Company had not yet recognized compensation cost on unvested stock-based awards of $ million, with a weighted average remaining recognition period of 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 years of the grant date.

% %Expected volatility % %Expected term (in years)Expected dividend yield % %

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$ Granted Exercised() Cancelled/Forfeited Outstanding at March 31, 2024 Vested and exercisable at March 31, 2024$

The following table summarizes the service-based stock option activity for the six months ended March 31, 2024:

Number

of Shares

Weighted

Average

Exercise

Price Per

Weighted

Average

Remaining

Contract

Term

Aggregate

Intrinsic

Value

(in years)

(in thousands)

Outstanding at October 1, 2023

Granted

Exercised

()

Cancelled/Forfeited

()

Outstanding at March 31, 2024

Vested and exercisable at March 31, 2024

Restricted Stock Awards

$ Granted Vested() Forfeited Outstanding and unvested at March 31, 2024$

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 performance period. Compensation cost is amortized into expense over the performance period, which is generally , 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.

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$ Granted Vested() Forfeited() Outstanding and unvested at March 31, 2024$

Restricted Stock Units

$ Granted Vested() Forfeited() Outstanding and unvested at March 31, 2024$

15.

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$ $ $()Net income (loss) attributable to common stockholders - basic and diluted$ $ $ $()Denominator:Weighted-average shares of common stockBasicDilutedNet income (loss) per share attributable to common stockholders:Net income (loss) per common share - basic$ $ $ $()Net income (loss) per common share - diluted$ $ $ $()Restricted Stock Units

16.

% and %, respectively, and for the six months ended March 31, 2024 and 2023 were % and %, respectively. The decrease in the effective income tax rate for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, was primarily driven by increased earnings and tax benefit related to stock-based compensation. The increase in the effective income tax rate for the six months ended March 31, 2024, as compared to the six months ended March 31, 2023, was primarily driven by the tax effects related to the sale of the Vycom business partially offset by increased earnings and tax benefit related to stock-based compensation.

17.

million in total, with the Company’s insurance to directly cover the $ million attributable to the Company and all remaining liabilities expected to be borne by a co-defendant, resulting in no costs expected to be borne by the Company.

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$ Total non-current assets Total assets$ $ LIABILITIES AND STOCKHOLDERS’ EQUITY:Total liabilities$ $ Stockholders’ equity:

Preferred stock, $ par value; shares authorized and shares issued or outstanding at March 31, 2024 and September 30, 2023, respectively

Class A common stock, $ par value; shares authorized, shares issued at March 31, 2024 and shares issued at September 30, 2023, respectively

Class B common stock, $ par value; shares authorized, and shares issued and outstanding at March 31, 2024 and at September 30, 2023, respectively

Additional paid‑in capital Retained earnings (accumulated deficit) ()Accumulated other comprehensive income (loss)

Treasury stock, at cost, and shares at March 31, 2024 and September 30, 2023, respectively

()()Total stockholders’ equity Total liabilities and stockholders’ equity$ $ $ $ $()Net income (loss) of subsidiaries$ $ $ $()Comprehensive income (loss)$ $ $ $()

The AZEK Company Inc. did not have any cash as of March 31, 2024 or September 30, 2023. 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% 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.

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million and $ million in cash dividends paid to The AZEK Company Inc. from the Company’s consolidated subsidiaries during the three and six months ended March 31, 2024, respectively, and $ million in cash dividends paid to The AZEK Company Inc. from the Company’s consolidated subsidiaries during the six months ended March 31, 2023. Cash dividends of $ million were used to fund the $ million ASR during the six months ended March 31, 2024, and $ million share repurchases on the open market during the three and six months ended March 31, 2024. Cash dividends of $ million were used to fund share repurchases on the open market during the six months ended March 31, 2023.

Restricted Payments

The AZEK Group LLC is party to the Revolving Credit Facility and the Term Loan Agreement. The obligations under the Revolving Credit Facility and 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.

19.

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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 Amendment No. 1 in our 2023 Annual Report on Form 10-K/A filed with the U.S. Securities and Exchange Commission, or the SEC, on June 14, 2024, or our 2023 Form 10-K/A, 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 climate change and extreme weather events, global health pandemics or geopolitical conflicts, such as the conflict between Russia and Ukraine and the conflict in the Middle East, statements about the markets in which we operate and the economy more generally, including inflation and interest rates, 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, statements about our material weaknesses and our plans to remediate such material weaknesses, statements about potential share repurchases, 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 2023 Form 10-K/A. 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.

Restatement of Previously Filed Financial Statements

As described in Note 1A to our unaudited Condensed Consolidated Financial Statements, we have restated our unaudited Condensed Consolidated Financial Statements as of March 31, 2023 and for the three and six months ended March 31, 2023 contained in this Quarterly Report on Form 10-Q. As a result, the previously reported financial information as of and for the three and six months ended March 31, 2023 in this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects the relevant restatements. See Note 1A, Restatement of Previously Filed Financial Statements to our unaudited Condensed Consolidated Financial Statements for additional information related to the restatement, including descriptions of the adjustments and the impacts on our unaudited Condensed Consolidated Financial Statements.

Overview

We are an industry-leading designer and manufacturer of beautiful, low-maintenance and environmentally sustainable outdoor living products, including TimberTech® decking, Versatex® and AZEK® Trim, and StruXure® pergolas. Homeowners continue to invest in their homes and outdoor spaces and we believe are increasingly recognizing the significant advantages of engineered, long-lasting products, which convert 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 products, including decking, railing, trim, siding, cladding, pergolas and cabanas and accessories, inspires consumers to design outdoor spaces tailored to their unique lifestyle needs. In addition to our leading suite of outdoor living products, we sell a broad range of highly engineered products that are sold in commercial markets, including partitions,

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lockers and storage solutions. One of our core values is to “always do the right thing”. 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. In our Residential segment, our primary consumer brands, TimberTech and AZEK, are recognized by contractors and consumers for their premium aesthetics, uncompromising quality and performance, and diversity of style and design options. Prior to our divestiture of our Vycom business on November 1, 2023, our Commercial segment manufactured engineered sheet products and high-quality bathroom partitions and lockers. Following the divestiture of our Vycom business, our Commercial segment will continue to manufacture high-quality bathroom partitions and lockers. 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.

Economic Environment; Global Events

Our business and financial performance may be affected by the macroeconomic and geopolitical environment, including increased inflation, elevated interest rates and geopolitical conflicts. For example, elevated interest rates and inflation levels may negatively impact the ability of consumers to purchase our products and may increase our raw material costs. Our business, financial condition and results of operations could be adversely affected if we are not able to pass any associated costs on to our customers or otherwise mitigate the impact of these pressures on us or our consumers. In addition, our business may be impacted by the direct and indirect effects of geopolitical conflicts, including possible disruptions to global supply chains generally and our supply chain in particular and an increased threat of cyberattacks against U.S. companies, which 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.

We are unable to fully predict the impact that the above events and conditions will have on the global economy, our industry or our business, financial condition, results of operations or cash flows. See also Part I, Item 3 “Quantitative and Qualitative Disclosures About Market Risk” of this Quarterly Report on Form 10-Q and Part 1, Item 1A “Risk Factors” of our 2023 Form 10-K/A.

Recent Divestiture

On November 1, 2023, we completed the sale of our Vycom business within the Commercial segment for net proceeds of approximately $131.8 million. The divestiture allows us to focus on the highest value portions of our business and provides additional cash to finance our capital allocation priorities. As a result of the divestiture, we recognized a pre-tax gain on sale of $38.3 million during the six months ended March 31, 2024.

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Results of Operations

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

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 March 31, 2024 and 2023.


	Three Months Ended March 31,				$ Variance		% Variance
(U.S. dollars in thousands)	2024		2023
			(As Restated)
Net sales	$	418,408	$	377,692	$	40,716	10.8	%
Cost of sales	261,335		266,818		(5,483)		(2.1)	%
Gross profit	157,073		110,874		46,199		41.7	%
Selling, general and administrative expenses	83,198		74,211		8,987		12.1	%
Loss (gain) on disposal of property, plant and equipment	(87)		249		(336)		(134.9)	%
Operating income	73,962		36,414		37,548		103.1	%
Interest expense, net	8,680		10,774		(2,094)		(19.4)	%
Loss on sale of business	215		—		215		N/M
Income tax expense	15,309		7,415		7,894		106.5	%
Net income	$	49,758	$	18,225	$	31,533	173.0	%

“N/M” indicates the variance as a percentage is not meaningful.

Net Sales

Net sales for the three months ended March 31, 2024 increased by $40.7 million, or 10.8%, to $418.4 million from $377.7 million for the three months ended March 31, 2023. The increase was primarily due to an increase in volume in our Residential segment attributable to key growth initiatives driving demand for our products, partially offset by the sale of our Vycom business in our Commercial segment. Net sales for the three months ended March 31, 2024 increased for our Residential segment by 17.7% and decreased for our Commercial segment by 55.4%, respectively, as compared to the prior year period.

Cost of Sales

Cost of sales for the three months ended March 31, 2024 decreased by $5.5 million, or 2.1%, to $261.3 million from $266.8 million for the three months ended March 31, 2023, primarily due to lower raw material costs driven by certain commodity deflation and higher utilization of manufacturing capacity.

Gross Profit

Gross profit for the three months ended March 31, 2024 increased by $46.2 million, or 41.7%, to $157.1 million from $110.9 million for the three months ended March 31, 2023. The increase in gross profit was primarily driven by higher net sales, lower raw material costs and higher plant utilization. Gross profit as a percent of net sales increased to 37.5% for the three months ended March 31, 2024 compared to 29.4% for the three months ended March 31, 2023.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $9.0 million, or 12.1%, to $83.2 million, or 19.9% of net sales, for the three months ended March 31, 2024 from $74.2 million, or 19.6% of net sales, for the three months ended March 31, 2023. The increase was primarily due to higher marketing, personnel and selling costs.

Loss (Gain) on Disposal of Property, Plant and Equipment

Loss (Gain) on disposal of property, plant and equipment decreased by $0.3 million to a gain of $0.1 million in the three months ended March 31, 2024 compared to a loss of $0.2 million in the three months ended March 31, 2023, primarily due to the proceeds received from the disposition of property, plant and equipment in the normal course of business.

Interest Expense, net

Interest expense, net decreased by $2.1 million, or 19.4%, to $8.7 million for the three months ended March 31, 2024 from $10.8 million for the three months ended March 31, 2023. Interest expense, net decreased due to interest income, partially offset by lower capitalized interest and a higher interest rate on outstanding debt during the three months ended March 31, 2024, when compared to the three months ended March 31, 2023.

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Loss On Sale Of Business

Loss on sale of business was $0.2 million during the three months ended March 31, 2024, which related to normal post-closing adjustments of the divestiture of our Vycom business within the Commercial segment.

Income Tax Expense

Income tax expense increased by $7.9 million to $15.3 million for the three months ended March 31, 2024 compared to $7.4 million for the three months ended March 31, 2023. The increase in our income tax expense was primarily driven by our higher pre-tax income.

Net Income

Net income increased by $31.5 million to $49.8 million for the three months ended March 31, 2024 compared to $18.2 million for the three months ended March 31, 2023, due to the factors described above.

Six Months Ended March 31, 2024 Compared to Six Months Ended March 31, 2023

The following tables summarizes certain financial information relating to our operating results that have been derived from our unaudited Consolidated Financial Statements for the six months ended March 31, 2024 and 2023.


	Six Months Ended March 31,				$ Variance		% Variance
(U.S. dollars in thousands)	2024		2023
			(As Restated)
Net sales	$	658,852	$	593,951	$	64,901	10.9	%
Cost of sales	411,129		440,890		(29,761)		(6.8)	%
Gross profit	247,723		153,061		94,662		61.8	%
Selling, general and administrative expenses	160,444		147,721		12,723		8.6	%
Loss on disposal of property, plant and equipment	2,098		183		1,915		1046.4	%
Operating income	85,181		5,157		80,024		1551.8	%
Interest expense, net	16,590		20,073		(3,483)		(17.4)	%
Gain on sale of business	(38,300)		—		(38,300)		N/M
Income tax expense (benefit)	31,985		(3,406)		35,391		1039.1	%
Net income (loss)	$	74,906	$	(11,510)	$	86,416	750.8	%

“N/M” indicates the variance as a percentage is not meaningful.

Net Sales

Net sales for the six months ended March 31, 2024 increased by $64.9 million, or 10.9%, to $658.9 million from $594.0 million for the six months ended March 31, 2023. The increase was primarily due to an increase in volume in our Residential segment attributable to key growth initiatives driving demand for AZEK products, partially offset by the sale of our Vycom business in our Commercial segment. Net sales for the six months ended March 31, 2024 increased for our Residential segment by 19.9% and decreased for our Commercial segment by 54.0%, respectively, as compared to the prior year period.

Cost of Sales

Cost of sales for the six months ended March 31, 2024 decreased by $29.8 million, or 6.8%, to $411.1 million from $440.9 million for the six months ended March 31, 2023, primarily due to lower raw material costs driven by certain commodity deflation and higher utilization of manufacturing capacity.

Gross Profit

Gross profit for the six months ended March 31, 2024 increased by $94.7 million, or 61.8%, to $247.7 million from $153.1 million for the six months ended March 31, 2023. The increase in gross profit was primarily driven by higher net sales, lower raw material costs and higher plant utilization. Gross profit as a percent of net sales increased to 37.6% for the six months ended March 31, 2024 compared to 25.8% for the six months ended March 31, 2023.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $12.7 million, or 8.6%, to $160.4 million, or 24.4% of net sales, for the six months ended March 31, 2024 from $147.7 million, or 24.9% of net sales, for the six months ended March 31, 2023. The increase was primarily due to the higher marketing, stock-based compensation and selling costs.

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Loss on Disposal of Property, Plant and Equipment

Loss on disposal of property, plant and equipment increased by $1.9 million to $2.1 million for the six months ended March 31, 2024 compared to $0.2 million for the six months ended March 31, 2023, primarily related to the removal of dispensable equipment resulting from a modification of our manufacturing process.

Interest Expense, net

Interest expense, net decreased by $3.5 million, or 17.4%, to $16.6 million for the six months ended March 31, 2024 from $20.1 million for the six months ended March 31, 2023. Interest expense, net decreased due to interest income, partially offset by a higher interest rate on outstanding debt and lower capitalized interest during the six months ended March 31, 2024, when compared to the six months ended March 31, 2023.

Gain On Sale Of Business

Gain on sale of business was $38.3 million for the six months ended March 31, 2024, which related to the divestiture of our Vycom business within the Commercial segment.

Income Tax Expense (Benefit)

Income tax expense increased by $35.4 million to $32.0 million for the six months ended March 31, 2024 compared to income tax benefit of $3.4 million for the six months ended March 31, 2023. The increase in our income tax expense was primarily driven by our higher pre-tax income as well as the gain from the sale of our Vycom business.

Net Income (Loss)

Net income increased by $86.4 million to $74.9 million for the six months ended March 31, 2024 compared to net loss of $11.5 million for the six months ended March 31, 2023, 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.

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 six months ended March 31, 2024 and 2023.


	Three Months Ended March 31,										Six Months Ended March 31,
(U.S. dollars in thousands)	2024			2023			$ Variance		% Variance		2024			2023			$ Variance		% Variance
				(As Restated)										(As Restated)
Net sales	$	402,541		$	342,116		$	60,425	17.7	%	$	625,541		$	521,600		$	103,941	19.9	%
Segment Adjusted EBITDA(1)	110,386			68,483			41,903		61.2	%	162,365			72,237			90,128		124.8	%
Segment Adjusted EBITDA Margin	27.4		%	20.0		%	N/A		N/A		26.0		%	13.8		%	N/A		N/A

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Net Sales

Net sales for the three months ended March 31, 2024 increased by $60.4 million, or 17.7%, to $402.5 million from $342.1 million for the three months ended March 31, 2023. The increase was attributable to higher net sales related to our Deck, Rail & Accessories business.

Net sales for the six months ended March 31, 2024 increased by $103.9 million, or 19.9%, to $625.5 million from $521.6 million for the six months ended March 31, 2023. The increase was attributable to higher net sales related to our Deck, Rail & Accessories business.

Segment Adjusted EBITDA

Segment Adjusted EBITDA for the three months ended March 31, 2024 increased by $41.9 million, or 61.2%, to $110.4 million from $68.5 million for the three months ended March 31, 2023. The increase was mainly driven by higher net sales, lower raw material costs and higher plant utilization, partially offset by higher marketing and selling expenses.

Segment Adjusted EBITDA for the six months ended March 31, 2024 increased by $90.1 million, or 124.8%, to $162.4 million from $72.2 million for the six months ended March 31, 2023. The increase was mainly driven by higher net sales, lower raw material costs and higher plant utilization, partially offset by higher marketing and selling expenses.

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 six months ended March 31, 2024 and 2023.


	Three Months Ended March 31,										Six Months Ended March 31,
(U.S. dollars in thousands)	2024			2023					% Variance		2024			2023					% Variance
Net sales	$	15,867		$	35,576		$	(19,709)	(55.4)	%	$	33,311		$	72,351		$	(39,040)	(54.0)	%
Segment Adjusted EBITDA	2,897			7,829			(4,932)		(63.0)	%	5,802			12,983			(7,181)		(55.3)	%
Segment Adjusted EBITDA Margin	18.3		%	22.0		%	N/A		N/A		17.4		%	17.9		%	N/A		N/A

Net Sales

Net sales for the three months ended March 31, 2024 decreased by $19.7 million, or 55.4%, to $15.9 million from $35.6 million for the three months ended March 31, 2023, primarily due to the sale of our Vycom business.

Net sales for the six months ended March 31, 2024 decreased by $39.0 million, or 54.0%, to $33.3 million from $72.4 million for the six months ended March 31, 2023, primarily due to the sale of our Vycom business.

Segment Adjusted EBITDA

Segment Adjusted EBITDA of the Commercial segment was $2.9 million for the three months ended March 31, 2024, compared to $7.8 million for the three months ended March 31, 2023. The decrease was primarily driven by lower net sales due to the sale of our Vycom business, partially offset by lower material costs.

Segment Adjusted EBITDA of the Commercial segment was $5.8 million for the six months ended March 31, 2024, compared to $13.0 million for the six months ended March 31, 2023. The decrease was primarily driven by lower net sales due to the sale of our Vycom business, partially offset by lower material costs.

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.

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	Three Months Ended March 31,				Six Months Ended March 31,
(U.S. dollars in thousands, except per share amounts)	2024		2023		2024		2023
			(As Restated)				(As Restated)
GAAP Financial Measures:
Gross Profit	$	157,073	$	110,874	$	247,723	$	153,061
Gross Profit Margin	37.5%		29.4%		37.6%		25.8%
Net Income (Loss)	$	49,758	$	18,225	$	74,906	$	(11,510)
Net Income (Loss) Per Common Share - Diluted	$	0.34	$	0.12	$	0.51	$	(0.08)
Net Profit Margin	11.9%		4.8%		11.4%		(1.9)%
Net Cash Provided By (Used In) Operating Activities	$	(14,806)	$	57,733	$	(31,094)	$	64,142
Net Cash Provided By (Used In) Investing Activities	$	(20,363)	$	(17,083)	$	95,167	$	(47,346)
Net Cash Used In Financing Activities	$	(12,191)	$	(1,256)	$	(114,988)	$	(11,354)


	Three Months Ended March 31,				Six Months Ended March 31,
(U.S. dollars in thousands, except per share amounts)	2024		2023		2024		2023
			(As Restated)				(As Restated)
Non-GAAP Financial Measures:
Adjusted Gross Profit	$	160,865	$	115,606	$	255,384	$	162,399
Adjusted Gross Profit Margin	38.4%		30.6%		38.8%		27.3%
Adjusted Net Income	$	58,320	$	28,944	$	73,352	$	11,193
Adjusted Diluted EPS	$	0.39	$	0.19	$	0.49	$	0.07
Adjusted EBITDA	$	113,283	$	76,312	$	168,167	$	85,220
Adjusted EBITDA Margin	27.1%		20.2%		25.5%		14.3%
Free Cash Flow	$	(34,004)	$	40,777	$	(67,973)	$	16,858

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

Beginning at December 31, 2023, we define Adjusted Gross Profit as gross profit before amortization, business transformation costs, acquisition costs and certain other costs as described below. Prior to December 31, 2023, depreciation was also excluded from Adjusted Gross Profit. We believe that including depreciation expense in our Adjusted Gross Profit definition will result in easier comparability to our peers. Adjusted Gross Profit Margin is equal to Adjusted Gross Profit divided by net sales. Presentations of Adjusted Gross Profit and Adjusted Gross Profit Margin for prior periods have been recast to conform to the current period presentation for comparability. 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 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. For example, we add back amortization and certain stock-based compensation costs when calculating Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net Income and Adjusted Diluted EPS because we do not consider them indicative of our core operating performance. We believe their exclusion, and the exclusion of certain other expenses as described herein, 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.

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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 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.

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:

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Adjusted Gross Profit and Adjusted Gross Profit Margin Reconciliation


	Three Months Ended March 31,						Six Months Ended March 31,
(U.S. dollars in thousands)	2024			2023			2024			2023
				(As Restated)						(As Restated)
Gross Profit	$	157,073		$	110,874		$	247,723		$	153,061
Amortization(1)	3,792			4,616			7,661			9,222
Other costs(2)	—			116			—			116
Adjusted Gross Profit	$	160,865		$	115,606		$	255,384		$	162,399

	Three Months Ended March 31,						Six Months Ended March 31,
	2024			2023			2024			2023
				(As Restated)						(As Restated)
Gross Margin	37.5		%	29.4		%	37.6		%	25.8		%
Amortization	0.9		%	1.2		%	1.2		%	1.5		%
Other costs	0.0		%	0.0		%	0.0		%	0.0		%
Adjusted Gross Profit Margin	38.4		%	30.6		%	38.8		%	27.3		%

_______________________________________________________

(1)Effective as of December 31, 2023, we revised the definition of Adjusted Gross Profit to no longer exclude depreciation expense. The prior periods have been recast to reflect the change.

(2)Other costs include costs related to a reduction in workforce of $0.1 million in the three and six months ended March 31, 2023.

Adjusted Net Income and Adjusted Diluted EPS Reconciliation


	Three Months Ended March 31,				Six Months Ended March 31,
(U.S. dollars in thousands, except per share amounts)	2024		2023		2024		2023
			(As Restated)				(As Restated)
Net Income (Loss)	$	49,758	$	18,225	$	74,906	$	(11,510)
Amortization	9,872		11,620		20,036		23,457
Stock-based compensation costs(1)	787		1,101		3,712		2,360
Acquisition and divestiture costs(2)	156		1,581		648		4,535
Loss (gain) on sale of business(3)	215		—		(38,300)		—
Other costs(4)	662		255		3,430		469
Tax impact of adjustments(5)	(3,130)		(3,838)		8,920		(8,118)
Adjusted Net Income	$	58,320	$	28,944	$	73,352	$	11,193

	Three Months Ended March 31,				Six Months Ended March 31,
	2024		2023		2024		2023
			(As Restated)				(As Restated)
Net Income (Loss)	$	0.34	$	0.12	$	0.51	$	(0.08)
Amortization	0.06		0.08		0.13		0.15
Stock-based compensation costs	0.01		0.01		0.03		0.02
Acquisition and divestiture costs	—		0.01		—		0.03
Loss (gain) on sale of business	—		—		(0.26)		—
Other costs	—		—		0.02		—
Tax impact of adjustments	(0.02)		(0.03)		0.06		(0.05)
Adjusted Diluted EPS(6)	$	0.39	$	0.19	$	0.49	$	0.07

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(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 and divestiture costs reflect costs related to acquisitions of $0.1 million in the three and six months ended March 31, 2024, and $1.4 million and $3.9 million in the three and six months ended March 31, 2023, respectively, and costs related to divestiture of $0.1 million and $0.2 million for the three months ended March 31, 2024 and 2023, respectively, and $0.5 million and $0.7 million for the six months ended March 31, 2024 and 2023, respectively.

(3)Loss (gain) on sale of business relates to the sale of the Vycom business.

(4)Other costs include costs related to the removal of dispensable equipment resulting from a modification of our manufacturing process of $2.4 million in the six months ended March 31, 2024, costs related to a reduction in workforce of $0.3 million in the six months ended March 31, 2024 and $0.2 million in the three and six months ended March 31, 2023, costs for legal expenses of $0.3 million in the three months ended March 31, 2024, and $0.3 million and $0.2 million in the six months ended March 31, 2024 and 2023, respectively, and other costs of $0.4 million for the three and six months ended March 31, 2024 and $0.1 million for the three and six months ended March 31, 2023.

(5)Tax impact of adjustments, except for loss (gain) on sale of business, are based on applying a combined U.S. federal and state statutory tax rate of 26.5% for the three and six months ended March 31, 2024 and 2023, respectively. Tax impact of adjustment for loss (gain) on sale of business is based on applying a combined U.S. federal and state statutory tax rate of 42.1% for the three and six months ended March 31, 2024, respectively.

(6)Weighted average common shares outstanding used in computing diluted net income per common share of 147,738,277 and 151,268,535 for the three months ended March 31, 2024 and 2023, respectively, and 148,231,866 and 151,185,650 for the six months ended March 31, 2024 and 2023, respectively.

Adjusted EBITDA and Adjusted EBITDA Margin Reconciliation


	Three Months Ended March 31,						Six Months Ended March 31,
(U.S. dollars in thousands)	2024			2023			2024			2023
				(As Restated)						(As Restated)
Net Income (Loss)	$	49,758		$	18,225		$	74,906		$	(11,510)
Interest expense, net	8,680			10,774			16,590			20,073
Depreciation and amortization	32,204			32,436			64,141			65,476
Income tax expense (benefit)	15,309			7,415			31,985			(3,406)
Stock-based compensation costs	6,299			5,626			14,767			9,583
Acquisition and divestiture costs(1)	156			1,581			648			4,535
Loss (gain) on sale of business(2)	215			—			(38,300)			—
Other costs(3)	662			255			3,430			469
Total adjustments	63,525			58,087			93,261			96,730
Adjusted EBITDA	$	113,283		$	76,312		$	168,167		$	85,220

	Three Months Ended March 31,						Six Months Ended March 31,
	2024			2023			2024			2023
				(As Restated)						(As Restated)
Net Profit Margin	11.9		%	4.8		%	11.4		%	(1.9)		%
Interest expense, net	2.1		%	2.9		%	2.5		%	3.4		%
Depreciation and amortization	7.6		%	8.5		%	9.7		%	10.9		%
Income tax expense (benefit)	3.7		%	2.0		%	4.9		%	(0.6)		%
Stock-based compensation costs	1.5		%	1.5		%	2.2		%	1.6		%
Acquisition and divestiture costs	—		%	0.4		%	0.1		%	0.8		%
Loss (gain) on sale of business	0.1		%	—		%	(5.8)		%	—		%
Other costs	0.2		%	0.1		%	0.5		%	0.1		%
Total adjustments	15.2		%	15.4		%	14.1		%	16.2		%
Adjusted EBITDA Margin	27.1		%	20.2		%	25.5		%	14.3		%

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(1)Acquisition and divestiture costs reflect costs related to acquisitions of $0.1 million in the three and six months ended March 31, 2024, and $1.4 million and $3.9 million in the three and six months ended March 31, 2023, respectively, and costs related to divestiture of $0.1 million and $0.2 million for the three months ended March 31, 2024 and 2023, respectively, and $0.5 million and $0.7 million for the six months ended March 31, 2024 and 2023, respectively.

(2)Loss (gain) on sale of business relates to the sale of the Vycom business.

(3)Other costs include costs related to the removal of dispensable equipment resulting from a modification of our manufacturing process of $2.4 million in the six months ended March 31, 2024, costs related to a reduction in workforce of $0.3 million in the six months ended March 31, 2024 and $0.2 million in the three and six months ended March 31, 2023, costs for legal expenses of $0.3 million in the three months ended March 31, 2024, and $0.3 million and $0.2 million in the six months ended March 31, 2024 and 2023, respectively, and other costs of $0.4 million for the three and six months ended March 31, 2024 and $0.1 million for the three and six months ended March 31, 2023.

Free Cash Flow Reconciliation


	Three Months Ended March 31,				Six Months Ended March 31,
(U.S. dollars in thousands)	2024		2023		2024		2023
			(As Restated)				(As Restated)
Net cash provided by (used in) operating activities	$	(14,806)	$	57,733	$	(31,094)	$	64,142
Less: Purchases of property, plant and equipment	(19,198)		(16,956)		(36,879)		(47,284)
Free Cash Flow	$	(34,004)	$	40,777	$	(67,973)	$	16,858
Net cash provided by (used in) investing activities	$	(20,363)	$	(17,083)	$	95,167	$	(47,346)
Net cash used in financing activities	$	(12,191)	$	(1,256)	$	(114,988)	$	(11,354)

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 March 31, 2024, we had cash and cash equivalents of $227.4 million and total indebtedness of $591.0 million. The AZEK Group LLC (f/k/a CPG International LLC), our direct, wholly owned subsidiary, had approximately $147.8 million available under the borrowing base for future borrowings as of March 31, 2024. 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.

The AZEK Group LLC is party to the Revolving Credit Facility and the 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 us and the wholly owned domestic subsidiaries of 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 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 Term Loan Agreement generally prohibit the payment of dividends unless the Total Net Leverage Ratio (as defined in the Term Loan Agreement) of 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.

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Since our and our subsidiaries’ restricted net assets 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 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, The AZEK Group LLC (as successor-in-interest to CPG Merger Sub LLC, a limited liability company formed to effect the acquisition of 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 March 31, 2024 and September 30, 2023, The AZEK Group LLC had no outstanding borrowings under the Revolving Credit Facility and had $2.2 million and $2.8 million of outstanding letters of credit held against the Revolving Credit Facility, respectively. As of March 31, 2024 and September 30, 2023, The AZEK Group LLC had approximately $147.8 million and $147.2 million, respectively available under the borrowing base for future borrowings in addition to cash and cash equivalents on hand of $227.4 million and $278.3 million, respectively. As 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 six months ended March 31, 2024 and 2023.

Cash Flows


	Six Months Ended March 31,				$ Variance		% Variance
(U.S. dollars in thousands)	2024		2023
			(As Restated)
Net cash provided by (used in) operating activities	$	(31,094)	$	64,142	$	(95,236)	(148.5)	%
Net cash provided by (used in) investing activities	95,167		(47,346)		142,513		301.0	%
Net cash used in financing activities	(114,988)		(11,354)		(103,634)		(912.8)	%
Net increase (decrease) in cash and cash equivalents	$	(50,915)	$	5,442	$	(56,357)	(1035.6)	%

Operating Activities

Net cash provided by (used in) operating activities was $(31.1) million and $64.1 million for the six months ended March 31, 2024 and 2023, respectively. The $95.2 million decrease in cash provided by (used in) operating activities is primarily related to the increase in inventory, higher trade receivables and the timing of our annual rebate payments, partially offset by increased profitability due to higher net sales and lower raw material costs.

Investing Activities

Net cash provided by (used in) investing activities was $95.2 million and $(47.3) million for the six months ended March 31, 2024 and 2023, respectively. Net cash provided by investing activities for the six months ended March 31, 2024 primarily consisted of $(36.9) million for purchases of property, plant and equipment in the normal course of business and $131.8 million net proceeds from the sale of the Vycom business, while net cash used in investing activities for the six months ended March 31, 2023, consisted of $(47.3) million for purchases of property, plant and equipment in the normal course of business.

Financing Activities

Net cash used in financing activities was $115.0 million and $11.4 million for the six months ended March 31, 2024 and 2023, respectively. Net cash used in financing activities for the six months ended March 31, 2024 primarily consisted of $125.0 million of treasury stock repurchases and $3.0 million of debt principal payments offset by $18.6 million of exercise of vested stock options, while net cash used in financing activities for the six months ended March 31, 2023, consisted of $7.5 million of treasury stock repurchases and $3.0 million of debt principal payments.

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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 December 4, 2023, we entered into a $100 million accelerated share repurchase agreement, or the “ASR” with Goldman Sachs & Co. LLC, or “Goldman Sachs”. Goldman Sachs delivered 2,291,607 initial shares to us on December 6, 2023, based on the closing price of our Class A common stock of $34.91 on December 4, 2023. The total value of the initial shares represents 80% of the ASR. Goldman Sachs terminated the ASR on February 5, 2024 and delivered 434,100 additional shares of Class A common stock to us on February 7, 2024 upon final settlement for no additional consideration. The average purchase price per share for shares purchased by us pursuant to the ASR was $36.69.

During the three and six months ended March 31, 2024, we repurchased 526,718 shares of our Class A common stock on the open market at an average price of $47.93 per share, totaling an approximately $25.2 million reacquisition cost. During the six months ended March 31, 2023, we repurchased 352,760 shares of our Class A common stock on the open market at an average price of $21.23 per share, totaling an approximately $7.5 million reacquisition cost.

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. We recognized $0.4 million and $1.2 million excise tax as reacquisition cost of share repurchases for the three and six months ended March 31, 2024, respectively.

As of March 31, 2024, we had approximately $75.7 million available for repurchases under the Share Repurchase Program.

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

Revolving Credit Facility

On January 26, 2023, The AZEK Group LLC 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%.

The Revolving Credit Facility provides for maximum aggregate borrowings of up to $150.0 million, subject to an asset-based borrowing base. As of March 31, 2024, outstanding revolving loans under the Revolving Credit Facility bore interest at a rate which 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 Adjusted Term SOFR, 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 SOFR borrowings, the Adjusted Term SOFR 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.

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, The AZEK Group LLC and the subsidiaries of 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 us and the wholly owned domestic subsidiaries of 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. 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.

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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 March 31, 2024 and September 30, 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. On May 22, 2024, as a result of our delayed filing of its Form 10-Q for the quarter ended March 31, 2024, The AZEK Group LLC was not in compliance with the financial reporting requirements in the Revolving Credit Facility, which non-compliance was subject to a 30-day grace period. Because we are filing this Form 10-Q on June 14, 2024, which is within the grace period, The AZEK Group LLC has regained compliance and no event of default occurred.

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 obligations under the Term Loan Agreement are secured by a first priority security interest in the membership interests of The AZEK Group LLC owned by us, the equity interests of 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, The AZEK Group LLC and the subsidiaries of The AZEK Group LLC that are guarantors under the Term Loan Agreement, and a second priority security interest in the Revolver Priority Collateral. The obligations under the Term Loan Agreement are guaranteed by us and the wholly owned domestic subsidiaries of The AZEK Group LLC other than certain immaterial subsidiaries and other excluded subsidiaries.

The interest rate applicable to the outstanding principal under the 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 Term Loan Agreement) plus 0.50%, (b) the Prime Rate (as defined in the Term Loan Agreement) as in effect on such day and (c) the one-month Term SOFR (as defined in the 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%.

Loans under the Term Loan Agreement may be voluntarily prepaid in whole, or in part, in each case without premium or penalty, subject to certain customary conditions. The Term Loan Agreement also requires mandatory prepayments of loans under the 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 ending September 30, 2023, a percentage of excess cash flow (subject to step-downs upon The AZEK Group LLC achieving certain leverage ratios and other reductions in connection with other debt prepayments).

The 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 Term Loan Agreement does not have any financial maintenance covenants. The Term Loan Agreement also includes customary events of default, including the occurrence of a change of control. On May 22, 2024, as a result of our delayed filing of its Form 10-Q for the quarter ended March 31, 2024, The AZEK Group LLC was not in compliance with the financial reporting requirements in the Term Loan Agreement, which non-compliance was subject to a 30-day grace period. Because we are filing this Form 10-Q on June 14, 2024, which is within the grace period, The AZEK Group LLC has regained compliance and no event of default occurred.

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 Term Loan Agreement, and (ii) the Ratio Amount, as defined in the 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 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

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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.

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 2023 Form 10-K/A, except as updated in Note 1 of our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Recently Issued Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, Segment Reporting (Topic 280) : Improvements to Reportable Segment Disclosures. This standard requires all public entities that are subject to segment reporting requirements to disclose additional information, including significant segment expenses and other segment items on an annual and interim basis. It also requires the disclosure of the title and the position of the chief operating decision maker and how the reported measures are used for making business decisions. This standard is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We intend to adopt the updated standard during the fiscal year beginning October 1, 2024. We are currently evaluating the impact the adoption of this standard will have on our disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This standard expands the disclosure requirements primarily on the rate reconciliation and income tax paid. For public entities, this standard is effective for annual reporting periods beginning after December 15, 2024, with early adoption permitted. We intend to adopt the updated standard during the fiscal year beginning October 1, 2025. We are currently evaluating the impact the adoption of this standard will have on our disclosures.

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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 March 31, 2024 and September 30, 2023, we had $591.0 million and $594.0 million outstanding under the Term Loan Agreement, respectively, and no outstanding amounts under the Revolving Credit Facility, respectively. The 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 March 31, 2024 and 2023, would have increased or decreased annual cash interest by approximately $2.9 million and $3.0 million, respectively.

We have entered into and 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 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.

Credit Risk

As of March 31, 2024 and September 30, 2023, 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.

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. Geopolitical tensions and other economic uncertainties may increase 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. Sustained or increased 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.

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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. Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits 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 the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2024 because of the material weaknesses in our internal control over financial reporting described in Part II, Item 9A of our 2023 Form 10-K/A for the year ended September 30, 2023.

Management’s Plan to Remediate the Material Weaknesses

As it relates to the material weaknesses that exist as of March 31, 2024, we are currently in the process of designing and implementing remediation plans and taking steps to address the root cause of the material weaknesses described above. Such plans include, but may not be limited to, the following:

•We have hired an external consultant to assist us in an evaluation of the design and implementation of certain internal controls impacted by the material weaknesses.

•We are enhancing controls, both within our information technology environment and business process controls, to establish and maintain appropriate segregation of duties.

•We will provide training over the execution and review of manual journal entry controls.

•We will provide additional training regarding prompt internal reporting of identified issues and concerns.

•We will provide technical accounting training to individuals involved in the process to reconcile inventory on a monthly basis.

•We will enhance the design of the inventory reconciliation controls to standardize the review to improve the reliability of information used by accounting personnel.

•We are enhancing our monitoring level controls to detect material and unusual variances in inventory account balances and cost of sales activity.

While we believe these efforts will improve our internal controls and address the root cause of the material weaknesses, such material weaknesses will not be remediated until our remediation plan has been fully implemented and we have concluded, through testing, that our controls are operating effectively for a sufficient period of time.

Changes in Internal Control Over Financial Reporting

There were no 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 March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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.

Item 1A. Risk Factors.

There have been no material changes to the risk factors previously disclosed under the heading “Risk Factors” in our 2023 Form 10-K/A. You should carefully consider the risk factors in our 2023 Form 10-K/A 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 March 31, 2024:


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), (4)	Maximum approximate dollar value of shares that may yet be purchased under the plans or programs(1), (2), (3), (4)
January 1, 2024 – January 31, 2024	—	$	—	—	$	101,138,443
February 1, 2024 – February 29, 2024	630,558	41.91		630,558	91,877,767
March 1, 2024 – March 31, 2024	330,260	48.92		330,260	75,723,021
Total	960,818	$	44.32	960,818

(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 December 4, 2023, we entered into the ASR with Goldman Sachs. Goldman Sachs delivered 2,291,607 initial shares to us on December 6, 2023, based on the closing price of our Class A common stock of $34.91 on December 4, 2023. The total value of the initial shares represents 80% of the ASR. Goldman Sachs terminated the ASR on February 5, 2024 and delivered 434,100 additional shares of Class A common stock to us on February 7, 2024 upon final settlement for no additional consideration. The average purchase price per share for shares of Class A common stock purchased by us pursuant to the ASR was $36.69.

(3)During the three months ended March 31, 2024, we repurchased 526,718 shares of our Class A common stock on the open market at an average price of $47.93 per share, totaling an approximately $25.2 million reacquisition cost.

(4)We recognized $0.4 million excise tax as reacquisition cost of share repurchases for the three months ended March 31, 2024.

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

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

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Item 5. Other Information

Amended and Restated Bylaws

On June 12, 2024, our Board of Directors approved and adopted amendments to our Amended and Restated Bylaws (as amended and restated, the “Amended Bylaws”), effective as of such date. The amendments:

•align the Amended Bylaws with developments in Delaware law and jurisprudence;

•revise the Amended Bylaws’ advance notice provisions regarding procedural and disclosure requirements for stockholder-nominated director nominees and stockholders intending to nominate directors or propose other business at annual or special meetings of stockholders;

•clarify the rules and regulations for the conduct of a stockholders’ meeting;

•revise the indemnification provisions to (i) clarify the group of officers entitled to indemnification and advancement and (ii) remove provisions regarding the priority of indemnification liability for representatives of our former private equity sponsors; and

•implement non-substantive, technical, or conforming changes, including removing obsolete provisions related to our former private equity sponsors, such as references to the Stockholders Agreement, dated as of June 11, 2020 (which is no longer in effect).

The foregoing description does not purport to be complete and is qualified in its entirety by reference to the full text of the Amended Bylaws, a copy of which is attached as Exhibit 3.2 hereto and is incorporated by reference herein.

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Item 6. Exhibits

Incorporated by Reference

Exhibit

No.

Description

Form

Exhibit

Filing Date

File No.

3.1

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. (Effective June 12, 2024)*

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

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.+

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.+

101.INS

Inline XBRL Instance Document*

101.SCH

Inline XBRL Taxonomy Extension Schema with Embedded Linkbase Documents*

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.

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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: June 14, 2024	By:		/s/ Peter Clifford
			Peter Clifford Senior Vice President and Chief Financial Officer (Principal Financial Officer)

AZEK Co Inc. - Quarter Report: 2024 March (Form 10-Q)

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